Nifty and Sensex eps.....

Research firms possibly use complex models to forecast earnings growth, price/earnings ratios and other market-driving factors. However, the cold calculations of a model are frequently overridden by a very rosy view, which inevitably leads to a downgrade of their estimates, when reality strikes. This is the pattern every year, in every country. But the farce goes on.

A few brokerages are now expecting the Nifty earnings per share (EPS) to grow by over 20% in FY17 and about 18% in FY18. How realistic are these growth figures? Analysts at Prabhudas Lilladher, a Mumbai-based stock broking firm, expect the Nifty EPS to grow to Rs459.1 by FY17 and Rs543.3 by FY18. This translates in to a growth of as a high as 23.9% in FY17 and 18.3% in FY18. Similarly, Edelweiss Research estimates the Nifty EPS to be at Rs483 in FY17 and Rs572 in FY18, which translates to a growth of 31% and 18% respectively.

Recently, brokerage firm Motilal Oswal Securities said that they have revised their FY17 and FY18E Sensex EPS downwards by 1.7% to Rs1,493 and 0.9% to Rs1,854 respectively, from March 2016. They expect the Sensex EPS to post 12.3% growth in FY17 and 24.2% growth in FY18. Clearly, of the three, Edelweiss is the most optimistic, while Motilal Oswal Securities has moderate expectations for FY17, but expects earnings to grow faster in FY18.

Prabhudas Lilladher explains that the stronger growth of FY17 is more on the back of de-growth in FY16 as well as the large provisioning of banks in last two quarters of FY16. They expect banks, automobiles, engineering & power and cement to lead the growth in FY17. For the June 2016 quarter, Edelweiss states that the top line and net profit of Nifty companies are estimated to grow 3% and 2% Y-o-Y, respectively. “The profit growth is indeed lower than our and consensus full year EPS estimate of 20% and hence there are chances of earnings downgrade,” they admit.

Over the past six years, the Nifty EPS’s peak growth has been 18% on a year-on-year basis. Moving out from an earnings de-growth as seen in FY16, to a growth of 20%+ in FY17 maybe overly optimistic. At 8,514 as on 22 July 2016, the Nifty P/E is at 23.43, which translates to an EPS of Rs364.54, lower than the EPS of Rs370.4 reported in March 2016.

A growth of 20% will put the Nifty EPS at Rs444. Assuming the P/E of the Nifty to be at around 21, (the same level as on 31 March 2016), the Nifty will be at around 9,300, up about 9-10% from the current level of 8,500 as on 22 July 2016. But as we mentioned earlier, a growth estimate of 20%+ is too optimistic.

Let’s assume the earnings to grow by a moderate 12% as suggested by Motilal Oswal. This will put the Nifty EPS at Rs415 in FY17. At a P/E of 21, the Nifty index will be around 8,700. This means that the Nifty will move up about 2% from the current level. In other words, Nifty future growth is probably discounted at the current level. A slight disappointment can push the market lower while a huge EPS growth would be needed to push the market much higher.