NIFTY 50 PE Above 35!

NIFTY 50 EPS Growth to Accelerate to Higher Trajectory

Introduction

November 2020 has happened to be one of the best for the Indian markets. The NIFTY 50 has gained over 11% and is currently trading at a PE levels above 35. Let’s talk about the elephant in the room, the one question that’s on everyone’s mind – Is this PE really justified ?

NIFTY 50 EPS growth to accelerate to higher trajectory

• We have witnessed a blockbuster corporate earnings season from the Nifty 50 companies for the quarter ending September 2020. 60%-65% of the companies have managed to beat the Q2FY21 estimates.

• From a bird’s eye view of the NIFTY 50 , we can say that results were better than analyst expectations and there have been more upgrades than downgrades. At present upgrades to downgrades ratio is 4:1, indicating the best earnings season in many years.

• The bolt in the blue was that despite the plunge in revenues, companies have posted phenomenal growth in profits. The pandemic coerced the companies into implementing effective cost containment efforts thereby boosting EBITDA and catapulting corporate performance.

• In normal times, companies generally refrain from taking such cost management measures believing that it may affect sales. However, when the novel virus struck, it compelled these institutions to change their mindset . The result is we are seeing optimum efficiency reflected in healthy expansion profit margins.

• In context to the points discussed above the total revenue of Nifty 50 companies has grown by 25% QoQ, while on a YoY  basis it has declined by 5%.

• On the brighter side, the overall Profit After Tax (PAT) of Nifty 50 companies  as skyrocketed by 140% QoQ and 36% YoY.
• NIFTY 50 EPS forecasts for the upcoming years are also promising as shown below.

• NIFTY 50 FY22 E PE is calculated as :

• As compared to current PE ,forward looking PE of NIFTY 50 is quite modestly valued at 19 x. This is the main reason that markets are so euphoric considering the FY22E EPS growth.

5 Sectors that will contribute incremental growth in FY21

• The recent rally in the Indian markets was majorly a result of strong performance in sectors like Financials, Automobiles, IT, Pharmaceuticals/Healthcare telecom. These 5 sectors are expected to continue contributing in a significant manner to the incremental growth in FY21 and one must keep a close watch on them.

• Keeping aside the moratorium worries, private banks and well capitalized NBFCs have reported better than expected results in Q2FY21 refuting several pessimists. The Bank Nifty Index has advanced by 23% this month and maybe the show has just started.

• With the work from home and learn from home culture, more ubiquitous than ever, has given a big boost to data consumption and will keep the telecom sector in the limelight for the 2-3 years.

• Sectors like  oil & gas, utility, capital goods, retail, etc have been trailing behind and have a lot catching up to do. Despite normalcy in economic activities steadily coming into play, people are still taking their time acclimatizing to the new environment, hence several of the mentioned sectors are yet to experience pre-COVID-19 levels.

• In the meantime let’s keep our fingers crossed and hope than we get back on track sooner than later.