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Charts & Analysis

CNX 500 Chart: P/E at Close To All Time Highs, EPS Growth Falls to 1.64%

After a great response to our post on the Nifty P/E and EPS growth yesterday, we’ve been requested for a similar post on the CNX 500. This is a larger index so it’s more “broad” as a representation.

And it’s even worse on performance. (Remember, the Nifty EPS Growth was 2.77%)

The P/E ratio of the CNX 500 is at 24.3. This is very close to all time highs. And the EPS growth is an abysmal 1.64%.

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The only good thing is that was about this bad last year around March, after which it moved back up substantially till December. Post Jan 2015, as the results of the December quarter trickled in, EPS growth has been falling and now, it’s just looking to fall below zero again.

For the CNX 500, the valuation exercise is futile to trade – firstly, there isn’t a tradeable instrument on the CNX 500, and then, you have ZERO evidence that high valuations and low EPS growth are reasons to short. The only relative metric that says “market is high” is the P/E ratio itself – at 24.29, the P/E ratio is among the highest values it has been in the last 11 years.  (More than 2 standard deviations from the mean)

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The graph of the EPS itself is quite scary:

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We haven’t seen this kind of drop since 2008. And I honestly hope we aren’t getting another 2008.

 

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  • Useful info. One of the main reasons for these elevated P/Es is scarcity of stocks in the market. There is too much money chasing too few stocks. There have been more de-listings than listings in some of the recent years (may be you should do a post on this!) I think. What we need is a flood of IPOs to absorb all the new money that is coming in. A primary reason for lack of IPOs is over-regulation by SEBI in the recent times. This has made listing very unattractive compared to other forms of fund raising. Unless this changes, we will not see a ‘reversal to mean’ and continue have elevated P/Es.

  • Akshay Garg says:

    Great post. Among the sell-siders, all of whom have been tom-tomming Indian stocks so far, HSBC and Credit Suisse have gone underweight on india recently for similar reasons. The market has gotten way too expensive by any fundamental criteria, in their view. CS uses a P/B to RoE ratio to measure expensive/inexpensive stocks. This ratio alone is 90% correlated with subsequent out/underperformance over the next 12 months. As per CS’s most recent analysis published last month, India is now the 2nd most expensive market in Asia, based on the above mentioned ratio.
    With the business cycle in India not bottoming out before at least the end of the year, I think we’re going to see a ton of volatility as valuations come down to more realistic levels in the remainder of the year.
    While the previous poster Chandragupta makes a very interesting point about stock scarcity driving high valuations, I don’t see that as the primary factor supporting these valuations.