04/03/2018
Analysing Some data:
Average EPS Growth for last 15 years is 10% for NIFTY
Average EPS Growth for last 3 years is 3% for NIFTY
NIFTY has in last 15 years crossed 27.5 PE on twice - Once in JAN 2008 and Second JAN 2018
Infact NIFTY has never ever sustained even 25 PE for more than a few months.
Even if we assume EPS Growth of NIFTY TO be 22-25% and accordingly EPS at 500 for FY19, Average PE of 18 will give a value of 9000 on Index. (This is the most optimistic estimate of EPS)
If it does that growth will be even lower for subsequent years as even in best of times NIFTY EPS growth of 10% is the best that we have observed over a longer period of time. Last 15 years to be precise.
Now whenever in past NIFTY has corrected from above 23-24 PE the correction has never stopped at 18-20 PE. Best case scenario was in August 2015 when NIFTY Bounced from 15 PE.
In 2003 NIFTY Corrected to PE of 11
In 2004 NIFTY corrected to PE of 13 (After hitting 23 again in less than a year)
In 2008 NIFTY Corrected to a PE of 11
In 2010 NIFTY Hit a PE of 25.5 and corrected 20% from there. At the same time there was growth in earnings because of which NIFTY PE contracted to 15 at the end of 3 years. It was the least painful correction compare to previous one.
Based on above empirical data even if we assume 20% EPS Growth and NIFTY returning to 18 PE it gives a target of 9000. If it is to hit 15 PE target is 7500 and even lower if PE contracts to even lower level. Now this is possible if all of above happens in a year. But suppose Earning growth happens and NIFTY EPS Grows to 500 in +1 year, 560 (12% growth after a 20-25% growth) in +2 years and 625 (another 12% growth after previous two superb years) in +3 years. Valuing NIFTY at a date 3 years later will give a target of 11250 on 18 PE basis.
So basically, best we can get is less than savings bank account return and worse case.. u know it..
Just for reference, I personally dont think with a rising interest rate scenario globally and in India, NPA issues, Rising crude and possible macro situation (Globally and in India), many state elections and union elections in 2019 it will be possible to report such superb performance and maintain market sentiments to sustain a 25-28 PE would be possible.
And one more thing, always remember that some fundamentals like PE, PEG, P/B etc have not changed since the time of Benjamin Graham till that of Porinju (Ours)... U may ignore it now in the euphoria but it comes back to it mean when it has to...
All the places where PEs have been mentioned are TTM.
*Fwd as Received*
