One of my friends ask me, “now #PE is dropped too much from 40 to 20. Does it indicate that now the #MarketRisk is reduced for #Investment?”
Once the PE rises, it will reduce in two scenarios only, first when the market gets corrected, or second, the #earnings are increased.
Wait, first of all, check the reality. Do you know how the PE is calculated?
Till 30 March 2021, PE was calculated based on standalone earnings, but from 31 March 2021, it is changed to based on consolidated earnings. By 31 March, PE was dropped by almost 20 per cent from 40.4 (#EPS 367.45) to 33.2 (#EPS 442.49). The increase in EPS in a single day was 25%. Currently, it is 20.64 (EPS 828.21).
This way, PE is dropped, but the #MarketRisk is not. PE is lowered because of changing the formula for calculating PE.
With this formula, so many subsidiaries’ part of earnings is added twice in EPS. Part of HDFC BANK’s EPS is added to HDFC LTD also. The same is in HDFC LIFE both are HDFC LTD’s subsidiaries.
Same way, other companies’ subsidiaries are also contributing to EPS, but actual EPS is not increased. One more thing, part of the EPS of some next 50, #Mid-Cap and #Small-Cap companies which are not part of nifty are also added in the calculation of Nifty EPS because they are subsidiaries of Nifty50 company.
Just on 30 March 2021, EPS was 367 and current is 828+ means corporate earnings are increased more than 2.25 times. In real terms, corporate earnings are not increased by 2.25 times. For that, we should refer to Corporate Tax Collection Figs.
By using common sense, we can prove If the EPS increases, #CorporateTax collection should also increase, but Corporate tax collection is not justifying the increase in EPS. The main reason behind the increase in the EPS of nifty 50 is a change in the formula for the calculation of the #EPS. Till 30/03/2021, the calculation was based on standalone earnings and from 31/03/2021 new procedure was applied which is why the earnings shot up by 20% in just a single day. The reason is now earnings are calculated based on consolidated earnings. For example, Company A is stacked in Company B by 25%, so 25% of earnings are added to Company A. Company A and Company B are part of Nifty50 Earnings. Both companies’ earnings are added while calculating #Nifty50 earnings. The real reason behind the reduction in PE is that 25% of the earnings of company B is added to Nifty50 earnings twice. That is why in just a single day PE dropped from 40.43 to 33.2 and EPS shoot up from 367.18031 to 442.79096.
One more thing is pointed out in this data growth in EPS from 31/03/2021 to 30/09/2022 also does not match with the corporate data collection. EPS increased by 87.17% (442.49096 to 828.21463) but Tax collection was just by 58.21% only (4.57 to 7.23). Compare to 31/03/2020 Tax collection increased by 30.04% (5.56 to 7.23) but EPS jumped 71.77% (443.60 to 828.21) is also not justifying the growth in EPS. If we increase EPS of 31/03/2020 by 30.04% (as per growth in tax collection) it will be approx 576.84. According to this PE will be 29.63. If we consider a tracking error of 10% then also it will be 26.94.
As per the above reason though the PE is at 20.64 it is still in #RedZone and the #MarketRisk is still like a PE of 28+.
Somebody argued that the tax rate decreased, but that was the period to October 1, 2019. If Tax collection is compared to the October 1, 2019 Tax collection fig, then the EPS is justified.
I personally believe in India’s #GrowthStory No doubt that India will be a super #Economy in the next decade but as far as investment is concerned we can not invest blindly. Buying at any cost is not the correct policy. Your return should always be compared in terms of #Inflation-adjusted return. If you buy at a higher price you might earn some yield but the real return might be negative.
Our financial system is driven by a huge marketing machine in which the interests of sellers are directly in conflict with the interests of buyers. The sellers, having (as ever) the information advantage, nearly always win.
Next week we will discuss “How the illusion is created in the market.“
On which topic would you like to attend the webinar?
What is stopping MFDs from becoming limitless Adviser?
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