Nifty’s Earnings Per Share has now risen to 348, derived from it’s P/E ratio of 17.59. This gives us an EPS growth of just 7.9% over the previous year, showing you a massive difference between valuations and reality.
Even if we assume that P/E is for the future and EPS growth is of the past, then if we offset the P/E chart one year back (that is, compare the P/E of 2013 with the actual growth we saw in 2014) we get a picture of stark differences: (We compare the “normalized” P/E versus EPS growth).
No, Watson, we did not have a P/E of 7 last year. In fact even if you look at 5 Year EPS growth (annualized) then the Nifty comes up terribly low:
Even today it’s at a 10% to 11% range with a max of 14% in 2009, which is absolutely horrible considering we’ve given ourselves a P/E of more than 15 for all of the last five years.
Valuation isn’t only about P/E but P/E plays a huge role. When earnings growth recovers, it could just be that the P/E goes back into the 10-12 range and thus, results in no change in the Nifty. A lot about equity markets is sentiment, and the graphs above tell you that we have had high expectations of earnings growth, but substandard actual growth.