Sensex Nifty EPS after FY11 results

It seems all the results are out and the Sensex EPS as of 6 June stands at 18420.11/19.58=940.76. The Nifty EPS stands at 5532.05/20.43=270.78. This compares with 828.5 on 27 May 2010 for Sensex, i.e. an increase of 13.55% YoY and 239.4 for Nifty, i.e. 13.1% increase YoY.

Sensex EPS drops after SBI results

I had tried to give an early indication of Sensex EPS for the year 2011 in an earlier post. I had assumed that since around 46% of the companies; that are part of the Sensex; had announced results that increased EPS by 12.6% YoY, there will be some more gains in EPS when all the companies finish reporting their results. Today SBI announced their horrible results for the year ended March 2011 and the Sensex EPS; which was prevailing at somewhere around 933 (18345.03/19.66) yesterday; dropped to 924 (18137.35/19.63) today. Nifty still does not seem to be reflecting it. This result was before the interest rate hikes of 25 bps of January 2011 and 50 bps of May 2011 since the bad loans take at least 90 days/three months to come into banks' books. God help those analysts predicting an EPS of 1200 or more for FY12 (1100 for FY11 by Rakesh J, 1070 for FY11 by Motilal Oswal, 1250 for FY12 by Raamdeo, 1345 by UBS and 1100 for FY11 and 1250 for FY12 by Credit Suisse). Those who are finding PSU banks cheap on P/B or P/E basis need to rethink about the correctness of the results being published by UBI, Bank of Baroda, PNB, Canara Bank, IOB, Indian Bank, Allahabad Bank, Central Bank of India and Andhra Bank. I had already written about a coming banking crisis in India in September 2010 and I still stick to it.

Sensex Nifty preliminary EPS after Q3FY11

While there are some companies, like Tata Steel, Tata Motors, M&M and Unitech still left to announce their Q3FY11 numbers, the preliminary EPS for Sensex and Nifty can still be calculated. Sensex ended at 18008.15 with a P/E of 19.78 which gives Sensex EPS of 910.42. The Nifty ended at 5395.75 with a P/E of 20.67 which gives Nifty EPS of 261.05. This compares with Sensex EPS of 876.36 and Nifty EPS of 250.62 at the end of Q2FY11 and Sensex EPS of 806.81 and Nifty EPS of 232.5 at the end of Q3FY10.Thus Sensex EPS has grown by 12.84% compared to last year while Nifty EPS has grown by 12.28%. This too in a year when the whole economy grew by more than 20% in nominal (inflation 12% + real 8%) terms. Now try to think how the EPS would grow to 1250 in five quarters, i.e. 28.86% compounded annually? If it cannot, then ask samir arora why he thinks Sensex is trading at 14.5-15 times FY12 earnings?

Image: renjith krishnan / FreeDigitalPhotos.net

Sensex Nifty EPS after Q2FY11

Sensex ended at 19691.84 on 23rd November with P/E at 22.47. This gives Sensex EPS of 876.36. Nifty ended at 6010 on 22nd November with P/E at 23.98. This gives Nifty EPS of 250.62. This compares with Sensex EPS of 781.98 and Nifty EPS of 230.38 after Q2FY10. Thus Sensex EPS has increased by 12.07% and Nifty EPS by 8.78%. If the first two quarter numbers are anything to go by, the Sensex EPS at the end of FY11 should be 12% higher than last year's 828.5, i.e. somewhere around 930 and Nifty EPS should be 8.78% higher than last year's 239.64, i.e. around 260. Compare this with analyst's estimates of 1100 by Rakesh J, Motilal Oswal and Credit Suisse. This requires EPS growth of 25.52% in just two quarters, i.e. 51% compounded annually. All the best to analysts.

It is contrary to human nature for investors to take extreme precautions against future collapse when current conditions make for optimism. - Benjamin Graham

Sensex - Nifty EPS - almost flat

It seems that quarter after quarter, I am providing the same post again and again. I had talked about Sensex-Nifty EPS not increasing in my last post.The same thing is being repeated after this quarter results too. Sensex EPS today stands at 18217.44/21.62=842.62 and Nifty EPS at 5467.85/23.07=237.01. This compares with 828.5 for Sensex EPS and 239.64 for Nifty EPS reported on 29 May. Sensex EPS has grown by 1.7% in the quarter, i.e. 6.5% annualized and Nifty EPS has contracted by 1.1%, i.e. 4.4% annualized. Be cautious!!!!

Sensex Nifty EPS not increasing

I had provided an early indication of what Sensex and Nifty EPS would look like after this quarter results in the article on May 1. The situation has not improved at all since then. Low P/E Grasim was replaced by high P/E JSPL in Sensex on 26 May and so the latest Sensex EPS has come in at 16387.84/19.78=828.5. The Nifty EPS is holding at 4917.4/20.52=239.64. So since our last update, the Sensex EPS has gone down by 2.375% and Nifty EPS has gone up by 1.2%. Not very pretty. Have some negatives like higher tax rate and dilution and the Sensex 16.5K and Nifty 5K does not hold a good picture. Be cautious!!!!

Macro Call

There are very few times when a value investor is able to make a macro call. But I am daring to do it at this stage. The call is on financial sector in India. If you look at Index composition of Nifty and Sensex, there is hardly any diversification left. Financial sector represents 23.74% of Sensex (ICICI Bank, HDFC, HDFC Bank and SBI) and 25.37% of Nifty (AXIS BANK, HDFC BANK, HDFC, ICICI BANK, IDFC, KOTAK BANK, PNB, RELIANCE CAPITAL, SBI). As all of you must be knowing, a value investor generally does not invest in financial firms since they are difficult to evaluate. This leaves just 76.24% of Sensex for investment for a value investor like me.

It has already been observed many a times in the past that when a particular sector garners most of the weightage of a financial index, it underperfoms the index. The evidence can be seen in IT sector after 2000 and FMCG and Pharma in India after 2003. So I am taking a call on Indian Financial sector today, that the sector would be an underperformer in the next five years.

Abnormally good or abnormally bad conditions do not last forever. - Benjamin Graham

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.

Sensex - Nifty EPS after Q3FY10

Sensex EPS stands at Value-16224.95/PE-20.11=INR 806.81 as per BSE on 4 February 2010. Nifty EPS stands at Value-4845.35/PE-20.84=INR 232.5 as per NSE. ACC and Ambuja results were still not counted so this may change a little bit.
S&P CNX 500 EPS stands at Value-4139.7/PE-18.6=INR 222.56. BSE500 EPS stands at Value-6484.64/PE-20.06=INR 323.26 while that of BSE SMALLCAP EPS stands at Value 8344.74/PE-16.02=INR 520.895.

The following table may summarize better:

Date	Sensex	Nifty	S&P CNX 500	BSE 500	BSE SMALLCAP
Jan 7, 2008	734.39	222.629	203.26	295.67	603.15
Mar 9, 2009	702.27	210.74	174.99	254.52	482.61
Feb 4, 2009	721.71	210.91	174.92	278.62	599.46
Today	806.81	232.5	222.56	323.26	520.895
Two Year CAGR	4.8%	2.19%	4.64%	4.56%	-7.07%

This shows that even though the profits of Indian companies may have risen by 20-25%, due to dilution of equity, the EPS has risen by 10-12% for Sensex and Nifty. The rise in EPS for broader indices like S&P CNX 500 and BSE500 is more due to the fact that they fell more too compared to Jan 7, 2008 levels. For all the indices, the EPS growth is less than 10% when compared to January 7, 2008 in two years, i.e. less than 5% compounded annually and negative for BSE SMALL CAP index. People are still optimistic and saying INR 1250 EPS for Sensex and INR 375 EPS for Nifty in FY12. Pretty stupid forecasting.

India Inc is not deleveraging at all

World over the private sector is reducing its debt but in India, the party is still not over. Companies, especially small by size, are continuing their debt binge. Even the banks are lending without strict lending norms as can be seen in case of many companies.

The total outstanding debt of 473 BSE SMALL CAP Index companies stood at approximately INR 1,68,000 Crore at the end of FY09. This only includes debt of standalone non-financial entity. BSE SMALL CAP index's total market cap is just INR 3,22,680 Crore, with P/E of 17.68 and P/B of 2.13. This indicates that net profits of BSE SMALL CAP index would be around INR 18,250 Crore (and lower if we exclude financials) and Book value around INR 1,51,500 Crore (and lower if we exclude financials). Thus the total outstanding debt is even more than the book value (or net worth or shareholders' equity) giving debt/equity of 1.1 (higher if financials are excluded). Since the interest rates are low right now and the profitability of many companies is above average, the companies have been able to bear their interest burden. Reverse the two and the situation will become completely different. If interest rates increase and operating margins contract, the outcome will be nothing but horrible. Even with the current scenario, it will take more than nine years for companies to pay their debt completely. The only thing difficult to predict is the timing. The real punishment will be to the banks since their assets will deteriorate.

Compare this to companies belonging to BSE 500 index. The total outstanding debt of 500 BSE 500 Index companies stood at approximately INR 7,68,000 Crore at the end of FY09, excluding that of financials, 4.5 times that of BSE SMALL CAP index companies. The total market cap of BSE 500 is at INR 55,00,000 Crore, i.e. 17 times that of BSE SMALL CAP index. The P/E of 21.16 and P/B of 3.79 gives net profits at INR 2,60,225 Crore and book value of INR 14,57,102 Crore. Thus total outstanding debt is much less than the book value, with debt/equity at 0.53. It will take just three years of profits to pay the debt completely.

This puts BSE500 companies in much stronger position than that of BSE SMALL CAP. This is just a conclusion based on average. The individual companies may vary. Also notice the fact that some companies like, 3i Infotech, Alok Industries are present in both the indices. This is just to highlight the fact that investing in small companies is riskier than that of larger ones. Even when it comes to restructure debt, the banks would provide favourable terms to big companies compared to smaller.

Some Statistics

Looking at the way market is heating up, I would like to provide how odds stack up against investors at current valuations. In the data available for Nifty from January 1, 1999 till 1st Dec 2008 (yes, this is 2008, since I don't know what returns Nifty gives from 2nd December 2009 onwards), the following observations can be made:

• There are 721 days out of 2485 total days when Nifty settled above a P/E of 20. The next one year returns from Nifty averaged -8.5%, lowest -56.8%, highest 65.7% and median -14.5%.
• There are 222 days when Nifty settled below a dividend yield of 1%. The next one year returns averaged -25.6%, lowest -56.8%, highest 26.4% and median -21.0%.
• There are 1438 days when Nifty settled above P/B of 3.5. The next one year returns averaged 8.18%, lowest -56.8%, highest 89.95% and median 6.76%.
  

These statistics show that except P/B, other statistics do not favour investments in Nifty at these levels.

Some more EPS

Let's have a look at some more EPS numbers as shown in the table:

Index	Jan 7, 2008	Nov 4, 2008	March 9, 2009	Today
BSE500	8882.28/30.04 = 295.67	3879.58/12.8 = 303.09	2983.02/11.72 = 254.52	5945.36/19.67 = 302.25
SMLCAP	13975.19/23.17 = 603.15	4035.11/6.37 = 633.45	2866.68/5.94 = 482.61	6741.24/15.33 = 439.74
CNX500	5500.15/27.06 = 203.26	2421.25/12.42 = 194.95	1966.85/11.24 = 174.99	3727.45/17.6 = 211.79

From the above EPS numbers it is clear that the biggest variation in EPS was in BSE SMALL CAP index. The EPS went down from 633.45 in November 2008 to 439.74 today, a decrease of 30%. The SMALL CAP index was trading at a P/E of 23.17 in January 2008 and came down to a P/E of 5.94 in March 2009, a correction of 75% in P/E itself. The earnings went down by only 24% from 633.45 to 482.61. But the slide didn't end in March. The earnings declined to 439.74 today. Some of it has come due to changes in index constituents but a lot of it has come from profit declines. The SMALL CAP index went down from around 14K in Jan 2008 to 2.8K in March 2009, a correction of around 80% in around 15 months. If you consider the peak earnings of 633.45, at a level of 2866.68, the P/E came to around 4.53.

Surprisingly, Both BSE500 and CNX 500 EPS have gone beyond what it was in January 2008 but P/E has contracted and so the index values are still 33% below their lifetime high made in January 2008.

Sensex-Nifty EPS after Q2 FY2010

Sensex EPS increased from 771.5 after Q1 FY2010 to 15404.94/19.7=781.98 after Q2 FY2010. Nifty EPS increased from 223.4 after Q1 FY2010 to 4711.7/19.81=230.38 after Q2 FY2010. This compares with Sensex EPS of 10631.12/13.1=811.54 and Nifty EPS of 3142.1/13.76=228.35 on November 4, 2008.

This is a degrowth of EPS for Sensex and growth in EPS for Nifty YoY while QoQ both have seen increase. The reason for growth in Nifty can be attributed to new scrips like JSPL, Axis Bank, IDFC introduced in place of Tata Communications, NALCO and Zee.

How has Nifty composition changed?

I would like to compare the constituents of Nifty between 2003 and now. Here are some statistics:

• In 2003, there were eight companies belonging to FMCG sector in Nifty, namely, Britannia, Colgate, Dabur, Glaxo Consumer, HUL, ITC, Nestle and Tata Tea. Today there are only two companies from this sector in Nifty, namely, HUL and ITC. Just to add, ITC was only in cigarettes at that time. Today it is in cigarettes, biscuits and soap/shampoos too.
• In 2003, there were six companies belonging to Pharma sector in Nifty, namely, Cipla, Dr Reddy, Glaxo, Novartis, Ranbaxy and Sun Pharma. Today there are only three, namely Cipla, Ranbaxy and Sun Pharma.
  
• These two examples show that when a particular sector has a very high representation in an index, it collectively underperforms the index. Individual companies like Colgate, Dabur, Glaxo Consumer and Nestle might have outperformed the index but the bigger players like HUL and ITC clearly underperformed the index. Today sectors that dominate Nifty are
  

1. Finance with seven companies representing the sector in Nifty
2. Power with five companies in generation/transmission/distribution and five in equipment.
3. Metals with six companies in aluminium/copper, steel, and iron ore.
   

• In 2003, there were total 21 different sectors that were represented in the Nifty constituents (if banks and housing finance, petrochemicals and refineries, auto 2 wheelers and 4 wheelers, steel and aluminium, are considered separate. If they are combined, the sectors would reduce to 17). Some of them included Hotels (Indian Hotels), Shipping (Shipping Corporation of India), Chemicals (Tata Chemicals) and Media (Zee). Today there is no representation of these sectors in Nifty (ITC is more of FMCG now then hotels). Today the number of sectors represented in Nify have reduced to 19 only (if you consider oil exploration, gas transmission and refineries, steel, aluminium and metals, banks and housing finance, separate. If these are combined, the sectors would reduce to 14 only). This clearly shows that many big companies from a particular sector has been put in the index. The examples are
  

1. Finance where HDFC, HDFC Bank, Axis Bank, SBI, ICICI Bank, Reliance Capital and PNB all are part of Nifty.
2. Power Equipment where ABB, BHEL, Siemens, L&T and Suzlon are all part of Nifty.
3. Telecommunication services where BHARTI, RCOM, Idea and TataCommunications are all part of Nifty and if BSNL lists then it too will be included.
4. Power where RINFRA, RPOWER, NTPC, Tata Power and JSPL are all included.
5. Metals where Hindalco, Nalco, SAIL, Tata Steel, JSPL and Sterlite are all included.
   

• From the above examples, it seems NSE should put a cap on number of companies representing a particular sector in Nifty.
  
• Surprisingly, developed nation like the US does not have a single power company in the Dow Jones Industrial Average.
  
• There is no representation of Media/Advertising, Chemicals/Paints, Retail, Insurance (there is no seperately listed entity to represent this sector), Transport (Railway/Airlines), Textiles, Paper, Auto Ancillaries (including tyres), Logistics, Hospitals, Restaurants and Consumer Durables in Nifty.

We can conclude from this that investing in Nifty is not a diversified way of investing in the whole Indian economy. It is better to chose a broader index like S&P CNX 500 or BSE500.

Is Sensex Cheap? - Part 2

I had put an estimate of thirty Sensex companies in the first part of this article. It seems that the first quarter results are out and there are surprises - both positive and negative. I want to revise the estimate as below. Also Ranbaxy has been replaced with Hero Honda Motors.

Company	Net Profit FY2010E	Free Float	Free Float Profit
ACC	1500	0.55	825
Bharti	9000	0.35	3150
BHEL	3750	0.35	1312.5
DLF	3500	0.25	875
Grasim	3000	0.75	2250
HDFC Bank	2650	0.85	2252.5
Unilever	2250	0.5	1125
Hero Honda	1800	0.5	900
Hindalco	2000	0.65	1300
HDFC	2800	0.9	2520
ITC	3750	0.7	2625
ICICI Bank	4000	1	4000
Infosys	6500	0.85	5525
Jaiprakash Associates	1100	0.55	605
L&T	4000	0.9	3600
M&M	1600	0.75	1200
Maruti	1500	0.5	750
NTPC	9750	0.15	1462.5
ONGC	17500	0.2	3500
RCOM	7000	0.35	2450
RINFRA	1750	0.65	1137.5
RIL	20000	0.5	10000
SBI	15000	0.45	6750
Sterlite	4000	0.4	1600
Sun Pharma	1500	0.4	600
Tata Motors	1250	0.55	687.5
Tata Power	1750	0.7	1225
Tata Steel	5000	0.7	3500
TCS	5750	0.25	1437.5
Wipro	4500	0.2	900
Total			69465

The major increase is coming from Cement (ACC, Grasim and JP Associates), Auto (M&M and Hero Honda), Tech (Infosys, Wipro, TCS), Power (NTPC, Tata Power) and Banks (SBI). The major decrease is coming from Oil and Gas (RIL) and FMCG (Unilever). The market cap of Sensex EOD - 5 August 2009 is INR 11,60,461 Crore at the index level of 15903.83. This makes a forward P/E of 16.7 not as cheap as it was when we estimated in May. The EPS comes out to be 952, 3.5% higher than 920, what we estimated last. Remember that many companies have diluted their shares or are looking to dilute. These include Tata Steel, DLF, Tata Power, RINFRA, Sterlite and HDFC. Some of that dilution has already been in the Sensex Market Cap. The last time we took the data, Sensex was at 13589.23 with Market cap of 981352. The latest index was 15903.83 with a market cap of 1160461. Thus index has increased by 17.03% but market cap has risen by 18.25%, i.e. 1.18% more.

People are still talking about 1050-1100 EPS of Sensex in 2010. I am not sure where they are getting their estimates from. This is still too early to comment since only Q1 results are out and three quarters left to go.

Sensex-Nifty EPS after Q1 FY2010

Sensex EPS increased from 762 at the end of FY2009 to 771.5 after Q1 FY2010. Nifty EPS increased from 214.9 to 223.4 after Q1 FY2010. Thus Sensex EPS increase is almost 1.2% while that of Nifty is 3.95%.

A nightmare for a value investor?

Here is the list of Sensex non-commodity stocks with their P/E ratios. Ben Graham would not touch a company with P/E of more than 18 and with P/E of last 7 years' EPS of more than 25. The criteria for commodity is different. Can you find even one with P/E less than 18?

Company	TTM P/E	P/E of 7 year EPS
BHEL	34	62
Hero Honda	22	37
HUL	30	30
HDFC	30	50
ITC	27	40
Infosys	19	40
L&T	22	55
Maruti	30	38
NTPC	21	30
Tata Power	23	38
TCS	19	33
Wipro	18	32

This really is a nightmare for a value investor. Stocks are overvalued doesn't mean they would come down soon. The famous British economist John Maynard Keynes has said

"Markets can remain irrational longer than you can remain solvent".

The only thing a value investor can do is to sell some of his holdings. Mr. Market is very enthusiastic right now and nobody can fight his enthusiasm.

Sensex Nifty EPS for FY2009

Sensex EPS as per BSE Website at INR 762.4 and Nifty EPS as per NSE Website is at INR 214.9. Hindalco, Tata Motors, Suzlon and Tata Steel almost took INR 9 off from Nifty EPS since Nifty EPS was around INR 223.4 till 24 June. This compares with Sensex EPS of INR 807.78 and Nifty EPS of INR 236 at the end of FY2008. Thus EPS of both Sensex and Nifty has decreased by around 5-9%. Nobody, not a single investor, thought this in August 2007 - January 2008.

Two years of consolidation?

I was looking at the S&P CNX Nifty statistics today in terms of P/E, P/B, and Dividend Yield as well as Nifty levels. Here are the data for last two years:

Date	Nify	P/E	P/B	Dividend Yield
26 June 2007	4285.7	20.6	5.4	1.11
26 June 2008	4315.85	16.66	3.86	1.4
26 June 2009	4375.5	20.08	3.63	1.14

Can this be called consolidation with the Nifty range varying between 6357.1 (8 Jan 2008) and 2252.75 (27 October 2008)?

India Inc Dividend Payout decreasing

The historical data available on the NSE website for Dividend Yield of S&P CNX Nifty and S&P CNX 500 shows that even though the EPS of S&P CNX Nifty increased by around three times between April 2003 and June 2009; from INR 74 to around INR 220; the dividend payout increased only by twice from INR 28.45 to INR 55.15. The data is almost similar for S&P CNX 500. The EPS of S&P CNX 500 increased from INR 54.5 to INR 190, i.e. 3.5 times, the dividend payout only increased by two times i.e. from INR 23.15 to INR 45. Even if you consider the impact of DDT (Dividend Distribution Tax), the dividends would have increased to INR 64.9 and INR 52.95 for S&P CNX Nifty and S&P CNX 500 respectively. Are Indian companies becoming stingy?