As we start a new quarter, and a new financial year, let’s go back a little bit and look at the previous two years. The Nifty EPS, calculated from data on the NSE web site, seems to have slowed down dramatically and has indeed stayed in deep negative territory in terms of year-on-year growth.
At the current value of 3211, the Nifty P/E is 15 – for what has been an astoundingly low EPS growth in the last 1.5 years. The Nifty EPS touched a high of 240 in end-July 2008, and has been going down since, to the latest figure of 211.
EPS growth – trailing twelve month EPS that is – peaked in late 2007, and since 2008 has been falling off cliffs each time results are announced. In the Jan 09 results – for Q3 that is – we saw EPS falling 10%.
People say EPS growth is what P/E is all about; in most cases P/E should be around the same as the EXPECTED EPS growth. In 2008, we had already stagnated on the EPS front, and since then have dropped – meaning, price is rarely an indicator of fundamentals or even expectations; it’s an indicator of sentiment.
Going forward, the coming year isn’t expected to be great. Meaning, EPS could drop even more. That might involve a drop in the P/E too – to as low as 10. At that rate, the Nifty could go to 2000.
On the other hand, if the market is right, EPS should go up 15% in this year, to about 240, which then would indicate a price of 3600 on the Nifty.
Which one will it be? Time will tell – but I believe markets overreach on the upside and on the downside. The downside overreaching, in this case, hasn’t yet happened – so I personally expect a move back to where “value” will seem appropriate.
But there’s a rally on, so let’s sit back and enjoy it. Fundamentals are good for blabbering. Price is good for making money. I could blabber short and trade long. Or, I could go for a Taleb approach and buy OTM puts for the next three months. And lastly, I could work with a system that follows the price and live with the whipsaws. Choices, choices.
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