The Nifty's reported Price to Earnings Ratio - revealed by the NSE every day - can be compared with the growth in actual underlying Earnings. Earnings growth, which was 16% year-on-year as recently as 31 Jan, has dipped to 11.86%, while the P/E (on a standalone basis) is still 18+.
The October quarter showed some good results (also due to a rejig in index stocks, replacing two weak ones by stronger earning stocks), taking earnings growth to >10%.
However, if you consider that you pay today's P/E for tomorrow's growth, then the P/E one year ago must have reflected today's growth - so was the P/E last year about 12? Let us phase shift the P/E one year back and see where we were.
The P/E last year this time was around 20, but it had risen sharply from the 16+levels in December 2011. In the last five years, the P/E has only accurately indicated growth twice - in 2009 (visible as 2010 above) and late 2011 (visible as last 2012 above).
Otherwise, we've just had exuberance (higher P/E, lower actual growth).
One problem with this analysis is that it does not use consolidated numbers even where those are revealed by stocks. I believe the picture is likely to be the same or similar, but a large acquisition (like Tata Steel or Tata Motors have done) might skew the EPS and P/E numbers substantially. I'll have to leave that for another day.
Tags: Charts
I don’t know why you believe in this so strongly that the PE multiple what you pay is for the earnings growth that you expect?
By this logic in 2008-09 when earnings growth was negative PE should have been negative ? Or in years which saw 30-40% earnings growth the PE should have been 30+ ? And both these times the PE at these levels would have been justified?
02.24.13 at 1:41 AM
You pay a P/E multiple for future growth expectations, and I believe strongly that expectations differ dramatically from reality. PE should have been very low if market expectations were reflected in eventual numbers. Sadly they are not – that’s what I’m saying – and therefore even a low P/E means nothing! The P/E is a useful number to look at for the long run, but it seems to not be so for the index.
02.24.13 at 2:18 AM
It is plain & clear from above chart that EPS growth turns well ahead of major Peak/ Bottom in Index..However, since data is for just 5 yrs, this analysis may not be accurate on longer term. Can you verify this on a longer term data..maybe s&p index data for US market?
02.25.13 at 12:03 PM