Nifty Strikes Back!

Well…the blogpost might not be as interesting as the title. I think I am getting influenced by Bollywood masala.

Anyway, I seem to have this strange obsession with Nifty valuations and how good an indicator it is of the broader market. Here are a couple of posts that I already posted on Nifty

a) Keeping you out of trouble

b) Nifty Valuation as an Investing Strategy

Continuing with this obsession, I have the following piece of data on Nifty –

FY Avg. P/E Avg P/B Avg Div Yield Avg. Nifty Avg Nifty EPS
2002 16.04 2.71 1.81 1050.14 65.76
2003 14.32 2.63 2.33 1198.90 83.79
2004 16.50 3.38 2.02 1731.97 107.76
2005 14.78 3.84 1.81 2217.50 149.95
2006 19.14 4.74 1.41 3308.95 172.87
2007 21.00 5.35 1.11 4485.71 213.25
2008 19.20 4.38 1.28 4449.63 232.00
2009 18.26 3.17 1.41 4013.83 219.09
2010 22.79 3.69 0.99 5417.43 237.59
2011 22.11 3.64 1.09 5749.54 260.31

With lot of talk on whether the market is overvalued or undervalued (‘experts’ swinging either way with reasons ranging from Japan earthquake to Anna Hazare’s impact on the Indian economy), I decided to let data speak for itself (mind you, 10 year data might not be statistically significant, but nevertheless). Here is the data on the Avg. Nifty Growth versus Avg. Nifty EPS growth.

FY Nifty growth (%) EPS Growth (%)
2003 14.17 27.41
2004 44.46 28.61
2005 28.03 39.15
2006 49.22 15.28
2007 35.56 23.36
2008 -0.80 8.79
2009 -9.79 -5.57
2010 34.97 8.44
2011 6.13 9.56

The data table doesn’t speak much, does it? Here is a graph to depict that data –


As the graph indicates, over a period of 10 years, Nifty growth followed EPS growth (as should be the case). For example, during the 2006-2007 phase, although EPS growth declined dramatically, Nifty refused to budge. The arrival of 2008 sparked panic and husha-busha happened.

As you can see for the current year, the EPS growth is only slightly ahead of Nifty growth indicating fair valuations. At current valuations, according to the graph, the Nifty is neither overvalued nor undervalued. So much for the noise on CNBC.

So, what are the stocks that we can invest based on this post? I have no clue.

So, what was the purpose of the post? Precisely not to trust market experts and let them swing you this way or that. Data will tell you everything you need to know, if you are willing to dig enough.

Excepting serious unforeseen circumstances (like crude shooting upto $200 and staying there for a while or another war or another calamity in India), we can expect normal growth in Corporate India results (approx. 10-12% y-o-y, assuming 8% GDP growth in real terms). Conclusion being, any serious correction from these levels (due to FIIs pulling out, unwinding of yen-carry trade or some such fantastico reasons) would result in Nifty getting undervalued and hence should be a time for accumulation of your favorite stocks.

Again, as this post suggests, once Nifty P/E goes below 20, risk-reward equation turns in your favor.

Disclaimer: This is not investing advice. It is just a rambling and an obsession I seem to have with Nifty. That is all.

P.S – I have updated the About section here. Feel free to add me on twitter.


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  1. #1 by Manshu on April 18, 2011 - 7:47 PM

    I probably don’t understand what Nifty growth means here. FY 2008 shows a slight decline of 0.80% but wasn’t that the bloodshed year?

    Is the Nifty growth anything other than the nominal value of Nifty?

  2. #2 by kdaaku on April 18, 2011 - 8:55 PM

    Hi Manshu,

    Nifty growth is just a proxy for Nifty y-o-y; as you put it, it is just a nominal value of Nifty.

    I just did that to get a common base of Nifty vis-a-vis the Nifty EPS, else depiction on the graph would be an issue (I did contemplate tracking P/E, than Nifty growth – it would lead to similar results).

  3. #3 by Manshu on April 18, 2011 - 9:26 PM

    In that case for 2008 shouldn’t the number be -30.0% or something instead of 0.8%?

  4. #4 by Kiran on April 19, 2011 - 11:26 AM

    I see your point. I think the average calculation is screwing up things (tried Median too, but with similar results).

    Jan 08, Nifty was 6081. Dec 08, Nifty was 2682 – fall of more than 100% and yet not reflected in the averages. (Even taking P/E would lead to similar results)

    Just taking the min. or max. of any year of Nifty wouldn’t do justice too.

    Hmm. The graph looks right (and the logic behind it), but maybe my methodology is wrong. Hmm…maybe I should do EPS growth vis-a-vis normalized P/Es…maybe..

  5. #5 by Dev on April 26, 2011 - 12:39 AM

  6. #6 by nowinki technologiczne on August 24, 2014 - 11:44 AM

    What’s up, just wanted to say, I liked this article.

    It was inspiring. Keep on posting!

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