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Charts & Analysis

Nifty EPS Growth Continues To Be Sub 15%, P/E Not In Bubble Territory

On popular request, here’s the Nifty Price to Earnings (P/E) ratio chart. Alongside we plot the Earnings growth on a per share basis:

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A few things stand out:

  • EPS Growth at 11.31% is anaemic, really. For a market that’s valued at 21.58x earnings, it’s been consistently below 20% and hasn’t even gone above 15% in the last yaer.
  • EPS is the standalone EPS so the consolidated EPS data might differ substantially. We only get the Nifty EPS as standalone figures, as that’s how the NSE calculates it.
  • Even at 21.58, we are not really at highs on the P/E that were seen in 2008 and 2010, where the P/Es were 25+. So we might still have some way to go. For a 25 P/E, the Nifty needs to be 9643, a good 15% higher than now.

 

We even calculated the five year annualized EPS growth and that comes to only 12.8%. In effect, the top companies in India have grown their profits at less than 13% a year. Of that, one assumes at least 8-9% was provided by inflation alone (since both input and output would have gone up by that much). The excess return isn’t significant, and it’s not like earlier times when EPS growth was 25% (2007).

We’ll have more data on this front, but our feeling for the past few years has been that the Nifty needs to see improvements on the EPS growth front; otherwise the “premium” P/E we are getting will no longer be justifiable. (However, markets can remain irrational longer than you can remain solvent, so please don’t go short because of this!)

Disclosure: Mostly long, but have a few short positions on the Nifty and/or constituents.