Nifty EPS growth at 7%, P/E at 19

2 comments Written on April 29th, 2014 by
Categories: Nifty

After many results have come in, the Nifty EPS (earnings per share) calculated on a standalone basis is at Rs. 355.

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This has moved from a base of Rs. 209 five years ago (after the crisis of 2009-09) at a pace of roughly 10% to 11% per year.

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While this is exciting to see the 5 year growth uptick to 10%+, it remains too low by our own historical standards. Much of the recent uptick has come because of replacing loss making companies (like Ranbaxy) and replacing them with profit making ones (like Tech Mahindra).

The standalone P/E - the Price to Earnings Ratio - of the Nifty is at 19.

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It’s not necessary that the EPS growth should be greater than the P/E (implying a PE to Growth ratio - or PEG - of 1 or less). But in a normal market we might assume that P/E would be close to an estimate of the EPS growth going forward. And if we plot the “Normalized” P/E - or the P/E last year versus EPS growth this year, here’s what we get:

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After showing a close to 1 ratio in August, we stepped back into the zone of “we are not related to each other”.

After May 14 we will have full data of EPS growth, both standalone and consolidated. The consolidated numbers are more important, but sadly, not revealed by the NSE.

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http://www.capitalmind.in
The man behind Capital Mind. Deepak is a co-founder at MarketVision, a financial knowledge company. Deepak also provides data research and consulting services, and now lives in Bangalore. Connect with him at deepakshenoy@capitalmind.in.

2 comments “Nifty EPS growth at 7%, P/E at 19”

Love the data, but what are the implications toward investments?

I wouldn’t directly go into a buy/sell mode on an index P/E ratio. Plus, there’s the fact that consolidated P/E is lower, and consolidated EPS growth may be different.

However it goes to state that the P/E ratio doesn’t really mean investors expect higher growth in EPS. It’s just P/E expansion that is driving the rally. So invest in momentum, not fundamentals, and the money is there to be made. It’s when P/E’s are lower than growth that fundamentals will suddenly make that big difference.

(My 2c)