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Charts & Analysis

Charts: The P/E of the Nifty 50 Is Close to a Five Year Low

Nifty-PE.jpg

The start of this year has been dramatic for the Nifty 50. The first month of 2020 saw Nifty reaching an all-time high of 12,400 and then from there the fall has been steep. The Novel Coronavirus has hit the markets hard, and 50 as we speak has slumped to 11,100 – a straight 10% fall in just a month and half.

So has the Nifty Valuation come down? The Nifty 50 Price to Earnings, a measure that is the Nifty companies’ market cap as a multiple of their earnings, is the easier one to track. Nifty PE compared along with growth gives a better sense of the Nifty pricing. In this post we look at Nifty 100 companies along with their P/E and earnings growth.

The net market cap of Nifty 100 is at Rs 10.6 Milllion Crs. The consolidated TTM profit earned by all the Nifty 100 firms stands at Rs 0.4 Million Crs.

Effectively Nifty 100 P/E stands at 26.32.

If we break Nifty 100 to Nifty 50 and Nifty Junior it gives us a clearer picture.

Nifty 50 P/E at 21.8

The consolidated market cap of Nifty 50 stands at 84,30,384 Crs. The consolidated Nifty 50 TTM earnings stand at Rs 3,86,629. Nifty 50 is effectively trading at a consolidate P/E multiple of 21.8.

This is much lower than the number given by the NSE as the P/E (they use standalone numbers). We think the consolidated ratio is more meaningful.

 

Charts: The P/E of the Nifty 50 Is Close to a Five Year Low

Note: Seven Companies have been excluded from the above chart.

  • Axis Bank TTM growth shot up by almost 3 times on back of base effect.
  • Bharti Airtel has reported negative profits to the tune of Rs 26,503 Crs on back of AGR dues.
  • Grasim almost tripled its TTM profit. The TTM profit went from RS 1348 Crs in Dec 2018 to Rs 4063 Cr in Dec 2019.
  • ICICI Bank profits went up by almost 2.5 times  on back lower TTM profits in Dec-2018
  • SBIN went from loss making entity to profit making YoY. Currently its TTM profits as of Dec 2019 are Rs 13,696 Cr.
  • Tata Motors has reported a negative profit of Rs 1059 Crs in last twelve months.
  • The chart doesn’t contain Yes bank as it has not reported results for this quarter and also TTM profit of Sep 2019 are negative 1038 Crs.

Nifty 50 P/E at 21.08 seems to be at a good point but still not historically cheap enough to be a blind buy.  The number needs to get much lower say below 17 to start appearing cheap again.

With TTM earnings growth at 13% YoY and Nifty 50 dropping down, the P/E has slightly moderated.

Nifty 50 2019 performance has been better compared to other indices. Nifty 50 has given a 12% return for CY 2019. With outbreak of Corona Virus, Nifty 50 has dragged down negative 7.9% at the end of two months of 2020. Below is the table for monthly returns of Nifty 50 since 1994.

Charts: The P/E of the Nifty 50 Is Close to a Five Year Low

Nifty Next 50: More Expensive

The consolidated market cap of Nifty junior is of Rs 22,45,409 Crs. Consolidated TTM earnings of Nifty Next 50 stands at Rs 18,795.57 Crs. This puts effective P/E of Nifty Next 50 stands at 119.4.

The Nifty Next 50 TTM profit growth is down by almost 66% YoY. Vodafone Idea has reported Rs 67,115 Cr loss in last twelve months. This has skewed the Nifty Next 50 consolidated earnings and hence has a high P/E.

Charts: The P/E of the Nifty 50 Is Close to a Five Year Low

Note: Vodafone idea, Indigo, Bank Baroda, Lupin, PNB

  • Vodafone Idea has seen a huge pay out towards AGR dues. Thus reporting a negative profit of Rs 67,111 Crs.
  • Indigo has gone from loss making entity to profit making entity considering TTM profits YoY. For Dec 2019 Indigo reported TTM profit of Rs 1234 Crs.
  • Bank of Baroda has reported a loss of Rs 1219 Crs in Dec 2019 quarter, thus bringing TTM profit in negative.
  • Lupin has reported Rs 836 Crs as loss for Dec 2019 quarter and hence bringing the TTM profit in red.
  • PNB has reported a massive loss of Rs 4,750 Cr at the in March 2019. This has bought the TTM earnings in negative.

The Nifty Junior PE is higher right now due to Vodafone Idea losses.

Even without that outlier, the P/E would still be around 25, which remains a tad expensive.

If we have a look at Nifty Junior CY 2019 performance, it has barely managed to stay positive with 0.5% returns. The start of 2020 has been bad for overall markets and Nifty Junior is no exception to that. The Corona Virus has bought Nifty Junior down by 6.4% in Feb 2020. Below is the look of Nifty Junior Monthly returns since 1999.

Charts: The P/E of the Nifty 50 Is Close to a Five Year Low

The P/E Ratio chart

The Nifty consolidated P/E is only available by calculation. An alternative is the Sensex 50 – a special index created in 2016 which mimics the Nifty 50 closely as in, it has the same methodology.

If we plot the Sensex 50 P/E and earnings growth , here’s where we stand. The 50 stock P/E is at 21.8 but what’s also interesting is that the earnings growth has now hit 20% again, year on year.

 

Charts: The P/E of the Nifty 50 Is Close to a Five Year Low

 

What this says is:

  • P/E has fallen to levels seen at the IL&FS crisis (2018 October) and demonetization (2016 end)
  • Earnings growth seems to be back though possibly because of constituent changes
  • The standalone P/E of the top 50 shows 26+, but the consolidated number is much better at 21

While the markets are not a bargain, it’s not supremely expensive either, at this point.

With the virus scare, it’s important to understand where we stand; note that earnings can still be hurt badly in the next quarter or so, due to the global travel and supply chain disruptions.