Nifty at 10000 in a year? Before the next budget? Pretty sure most of you must have seen such headlines somewhere. Here is a layman's attempt at trying to figure out if these projections make any sense.
Nifty vs. EPS YoY Growth Rate
First let us look at the way in which Nifty earnings per share (EPS) has grown year on year (YoY). To calculate this, first the EPS is computed (closing price divided by index PE) and then the growth rate is rolled over 1 year intervals.
Notice that the EPS growth rate (right axis) has been quite range bound in the last 5 years. Looking at past growth rates during rallies, it seems to me that the rate at which Nifty has risen in the past 12 months is not as rapid as one would suggest. The rise is a sight for sore eyes, but one cannot trust sore eyes to make sound judgement.
Nifty EPS vs. Nifty PE
The nifty EPS (left axis) has pretty much increased at a steady pace of about 12% per year since Sep. 2002, barring the period during the 2008 crash and recovery. More on this here: State of the Markets – April 2014
So I think one can safely project it for the next 12 months, assuming the same rate of growth (red line).
The EPS on Sep. 16th 2014 is ~ 376.
Projected EPS on Sep. 16th 2015 is ~ 397. Let us make it an even 400.
This corresponds to an EPS growth rate of about 6%.
This is perhaps a little too conservative estimate, but let us run with it.
Now if the Nifty touches 10000 on 16th Sep. 2015 for the first time, the PE corresponding to an EPS of 400, will be 25.
Meaning: close to what experts would call, "extremely high valuations".
Therefore, if the Nifty hits 10000 in the next 12 months with an annual EPS growth rate of less than 10%, the PE will become dangerously high. Meaning the so called 'bull run' will sooner or later come to crashing halt.
If the Nifty has to breach 10000, and stay there for a decent amount of time, the PE will have to be much lesser than 25.
If we assume the PE in a year to be about 22 with Nifty at 10000, the EPS has to be ~ 450.
This means that the EPS has to grow by 20% from what it is today (16th Sep.).
Since the EPS has grown only by 8% in the last year, I am not too optimistic that there would be such a sudden surge in growth.
The current PE is ~ 21 (10Y average ~ 18.9). So even if the Nifty is at 10000, the PE is likely to be much higher than 22 as assumed above.
Let us hope/pray that I am proved wrong and that the Nifty comfortably breaches 10000 in a year and heads further northward 🙂
Install Financial Freedom App! (Google Play Store)
Install Freefincal Retirement Planner App! (Google Play Store)
Buy our New Book!You Can Be Rich With Goal-based Investing A book by P V Subramanyam (subramoney.com) & M Pattabiraman. Hard bound. Price: Rs. 399/- and Kindle Rs. 349/-. Read more about the book and pre-order now! |
i am sure it is unintentional..but in the last line u have said Nifty at 1000 - toooooooo many of your readers wil die if the Nifty were to be at 1000 so soon 🙂
i am sure it is unintentional..but in the last line u have said Nifty at 1000 - toooooooo many of your readers wil die if the Nifty were to be at 1000 so soon 🙂
Thanks. Corrected it. 🙂
Thanks. Corrected it. 🙂
1. 376 * 1.12 = 421. that should be the one-year fwd eps target, conservatively, going by past data as provided by you.
2. its expected that eps growth will accelerate to 15%, and 16th sep.,2015 eps will be 430.
3.430*22= 9,460, which is the one year target.
4. any further upside relies on faster eps growth, and expectations of it sustaining for next 3-4 years, to raise PE .
12% is the average growth rate. The projection is based on the linear tread from 2009.
Will be happy if I am proved wrong.
1. 376 * 1.12 = 421. that should be the one-year fwd eps target, conservatively, going by past data as provided by you.
2. its expected that eps growth will accelerate to 15%, and 16th sep.,2015 eps will be 430.
3.430*22= 9,460, which is the one year target.
4. any further upside relies on faster eps growth, and expectations of it sustaining for next 3-4 years, to raise PE .
12% is the average growth rate. The projection is based on the linear tread from 2009.
Will be happy if I am proved wrong.
Dear Sir,
Have you accounted the changes in the composition of companies in the Index...Its not the same company / sector in the index for a decade...Index is managed by adding performers and removing non-performers..so it may look different if you analyse the individual companies and if they are made to enter Index - it may look different....
Dear Sir,
Have you accounted the changes in the composition of companies in the Index...Its not the same company / sector in the index for a decade...Index is managed by adding performers and removing non-performers..so it may look different if you analyse the individual companies and if they are made to enter Index - it may look different....
Dear Sir,
Have you accounted the changes in the composition of companies in the Index...Its not the same company / sector in the index for a decade...Index is managed by adding performers and removing non-performers..so it may look different if you analyse the individual companies and if they are made to enter Index - it may look different....
I understand that. This is about checking a prediction and no one can say which company will be included in the Nifty in the future.
I understand that. This is about checking a prediction and no one can say which company will be included in the Nifty in the future.
Thanks very much for this valuable post. Your Sep 2014 analysis of weakness in Nifty earnings is playing out currently in May 2015. Nifty EPS of 400 looks elusive for Sep 2015. It will be great if you can post a Nifty EPS growth chart along with Indian GDP growth chart. If last 10 year GDP avg growth is 6%, then 12% Nifty EPS growth means there is a 2X multiplier. It will be interesting to see how the multiplier effect is playing in various times. Thanks again.
Thanks very much for this valuable post. Your Sep 2014 analysis of weakness in Nifty earnings is playing out currently in May 2015. Nifty EPS of 400 looks elusive for Sep 2015. It will be great if you can post a Nifty EPS growth chart along with Indian GDP growth chart. If last 10 year GDP avg growth is 6%, then 12% Nifty EPS growth means there is a 2X multiplier. It will be interesting to see how the multiplier effect is playing in various times. Thanks again.