Sensex Nifty EPS after one month of results

The result season is almost midway and the people are eager to know what the Sensex and Nifty EPS would be at the end of this quarter. Till now many big companies like Infosys, Wipro, TCS, RIL, HDFC Bank, BHARTI, ICICI Bank, Hero Honda, Maruti, Sterlite has announced results. The companies which have already announced results have a weightage of around 50.25% in Sensex. So we are clearly almost midway.

Many of these companies reported bumper results. Hero Honda, Maruti and Sterlite reported more than 100% increase in net profits. RIL, HDFC Bank, ICICI Bank and TCS announced profits that are 30% or more higher than the same quarter last year. Shouldn't this translate to a surge in Sensex/Nifty EPS? Guess what? Sensex EPS is up from 806.81 on 4 February 2010 to 17558.71/20.69=848.66 today. The big results that are still pending are L&T, HDFC, ITC, ONGC, SBI and BHEL.


The situation is worse in case of Nifty. Apart from the stocks listed above, ABB, Ambuja Cements, Axis Bank, HCL Technologies, IDFC and Siemens have also announced results. The companies who have announced results have a weightage of around 60% in the Nifty. The Nifty EPS on 4 February 2010 was around 232.5 while it stands at 5278/22.29=236.79 today. This shows a meagre 1.8% increase after 60% results are out. What can be the reason? One possible reason is change of index constituents. Kotak Bank, a high P/E stock, replaced Grasim, a low P/E stock in Nifty from April 8. The second possible reason is dilution of equity. Even though the net profit for many companies is up by more than 30%, companies like Tata Steel, HINDALCO, Tata Motors, Unitech, Axis Bank, Cipla, HDFC, HDFC Bank, Sterlite, and SBI have diluted their equities through various equity offerings including Rights, private placement or GDR/ADR. Mr RA is still betting on Sensex EPS of 1000+. In hindi, this is called "Kehta bhi diwana, Sunta bhi diwana (the one who speaks and the one who listens are both mad).

This is not all. Even in the next year, the dilution is going to take place in companies like SAIL, RINFRA and HDFC/HDFC Bank. Some of it is through Follow-on public offer while some of it is due to maturing of convertible warrants. Even though the demand side looks good, the supply side pressures have started mounting. Raw material and employee cost have started hurting most of the companies. Companies like Infosys, TCS, Wipro will see their tax liabilities go up etc... Many such negatives can be counted.

Conclusion? Expect a bloodbath in large cap stocks. A correction of at least 25% from here in 12 to 18 months. Wait for Nifty 4000.

The market is there to serve you & not to instruct you. -Benjamin Graham