Consensus Sensex EPS Estimate – Bullcrap!

A pungent headline that. And I apologize for it. But I am sick and tired of these TV analysts touting consensus Sensex EPS estimates (and thereby, the Sensex value) for FY12, and why this market is cheap.

For one thing, I have no idea whether this market is cheap or not.

But I’d like to clear the consensus Sensex EPS estimate bullcrap.

This bit of news from Bank of America Merill Lynch ticked me off. Inspite of the bearish tone of the entire article, the analyst says that the consensus estimate for Sensex EPS is Rs. 1200 for FY12.

Some time back (when Sensex was around 17800 levels), another analyst Samir Arora said that we were trading at 15 times FY12 earnings. (which is the same as Sensex EPS to be around 1200).

I really don’t understand/know how can they say all this with a straight face. Seriously.

Let’s look at the data for the past 10 years.

Year Sensex Price/Earnings Sensex EPS EPS Growth(%)
May-01 3631.91 18.86 192.57
May-02 3125.73 16.19 193.07 0.26
May-03 3180.75 13.21 240.78 24.72
May-04 4759.62 17.28 275.44 14.39
May-05 6715.11 14.94 449.47 63.18
May-06 10398.61 20.41 509.49 13.35
May-07 14544.46 20.84 697.91 36.98
May-08 16415.57 20.66 794.56 13.85
May-09 14625.25 17.88 817.97 2.95
May-10 16944.63 19.96 848.93 3.79
May-11 18518.81 19.94 928.73 9.40

To ensure consistency, I have taken Sensex values for the past 10 years for the month of May. Apart from the news item from BoA, which appeared today (in May), there is another bit of logic for taking the month of May as a starter for the analysis. By April end, companies constituting 50% of the Sensex would have declared results and by May end, almost all constituents of the Sensex would have declared results. And hence, Sensex value in May is a good data point.

[So, when these analysts say FY11 earnings, FY12 earnings etc, they are usually talking about Sensex EPS in the April-May period of every year (immediately after the declaration of Q4 results of the previous year).

Sensex and P/E ratio taken from this link. Sensex EPS is derived by dividing Sensex by P/E ratio (very elementary, but still!). EPS growth is just a derivation of the values of Sensex EPS year on year.]

What has been the typical growth percentages in Sensex EPS? Except for the May 04-May-05 period and May-06-May-07 period, the growth in Sensex EPS has been very normal (our GDP growth has varied between 8-12% over these years, along with say average inflation of 8-12%). The growth in Sensex EPS has typically been in line with the GDP growth (give or take some inflation).

So, why did I call the analysts estimates bullcrap?

Well, when they say FY12 earnings consensus is 1200, they are implying a growth of FY11 EPS of 928.73 to FY12 EPS of 1200, implying a CAGR of 29.21%. Our GDP growth is estimated to be around 8-8.5% a year, and inflation around 12%. For a nominal growth of 20%, how the hell can Sensex achieve a CAGR of 29.21%? Absolutely ridiculous. How can this even be a consensus estimate? Whose consensus is this?

(Of course, there is a chance of an outlier, an extreme outlier where this can happen, but these guys are touting it as if its given).

And people are taking this 1200 figure to be golden and are extrapolating Sensex figures to be 24000 all over TV (CNBC etc).

Seriously, is this the kind of financial reporting that these folks undertake? With all their conscience and a straight face? It’s a bloody farce.

Let’s say we do really well and keep our growth in pace with GDP (give or take inflation), let’s say Sensex EPS grows at 12% in this financial year FY11-12. In that case, FY12 Sensex EPS value would be 1040 and given today’s Sensex at 18559, we are looking at a Sensex P/E of approx. 18. That is, we are quoting at 18 times FY12 earnings and not some 15 times FY12 earnings.

Is 18 times future earnings cheap or expensive depends on your personal perception of India’s growth. Should we invest at these levels? I have no clue. But at the very least, we can stop giving bhav to these consensus estimates

P.S – In Hyderabadi hindi, we’d say to the BoA ML guy, ‘kaisa dikru, howla dikru? deewana dikru? kahan se aaya yaaro…dimaag ki dahi banaane’ 🙂

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  1. #1 by Mayank on June 2, 2011 - 5:40 PM

    The data from BSE that you have taken is standalone numbers and doesn’t include consolidated numbers. If you calculate the numbers taking in consolidated numbers of several companies in Sensex, you should come to around 1050 – 1075, Im not sure of the exact number, but it is definitely not 928 as you’re saying. And you have bashed all the analysts like anything with the wrong data. Please rectify the mistakes in your blog post.

  2. #2 by Kiran on June 2, 2011 - 7:12 PM

    @Mayank – I’ve seen the standalone vs consolidated numbers argument on Deepak Shenoy’s twitter/blog stream too. It was quite a revelation.

    From a EPS of say 1050, 1200 doesn’t look that far then.

    You think all analysts calculate EPS and blurt it out on TV using consolidated numbers?

    Even if they do, why are we projecting a 20 P/E (current P/E) and saying Sensex as 24000? P/E currently is around 16 using consolidated numbers. Even if we use that P/E, we arrive at the same conclusion – Sensex at 18000. That’s mis-reporting by the news channels, no?

    Anyway, same result doesn’t justify my analysis using the wrong data though.

  3. #3 by pravin on June 19, 2011 - 2:24 PM

    Hi Kiran,
    good article, although ur base values are incorrect and you have not taken few other things into consideration while coming at a conclusion abt all the analysts appearing on TV ara bullcrap, but those considerations doesn’t change the conclusion you have arrived.
    I have been active in market since 2003 and it took me 4 years to learn that never believe these analysts.. only thing u can believe is the past data and past performance 😉 and analyze it urself. so Best source to get tips is nseindia.com and bseindia.com 🙂

  4. #4 by Abk on October 6, 2011 - 3:28 AM

    Correct.well put.

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