Nifty50's earnings per share rises 8% in 10 days after falling for 2 qtrs

The rally on Dalal Street this week has been spurred by an equally sharp turnaround in the Nifty50’s underlying earnings per share (EPS). The index EPS has risen 8 per cent in 10 days as heavyweights such as Bharti Airtel, Indian Oil Corporation, Larsen & Toubro, and ICICI Bank saw large increases in net profit during the September quarter (Q2).

Though the swing was largely because of external factors and exceptional gains and losses, it boosted the index’s headline earnings and EPS. As a result, the index EPS jumped to Rs 371 on trailing 12-months basis as of Friday from six-year low of around Rs 343 on October 15. This also reversed the steady contraction in index earnings after it hit a record in January. The index’s trailing EPS took a hit of around 22 per cent during the March and June quarters due to Covid-19-induced nationwide lockdown. (See the adjoining chart).

The unexpected surge in index earnings has made it relatively cheaper on a price-to-earnings (P/E) multiple basis, despite this week’s rally. On Friday close Nifty was trading at P/E multiple of 33x, down nearly 200 basis points from its peak valuation in the middle of October.

Analysts say this created space for a rally in the broader market.

The biggest turnaround in Nifty earnings trajectory was from Bharti Airtel, which declared Q2 results on October 27. Though the firm reported a net loss of Rs 763 crore, there was a Rs 22,000 crore positive swing in its earnings on a year-on-year (YoY) basis — the amount being equivalent to nearly a fifth of combined net profit of index companies in a normal quarter. It had reported a net loss of around Rs 23,000 crore the previous year. 

Indian Oil’s net profit rose about 12 times YoY in Q2, after it booked inventory gains thanks to a sharp recovery in crude oil prices. In comparison, the company’s net sales were down 26 per cent YoY during quarter. 

Larsen & Toubro also provided a big boost to index earnings. The firm’s net profit nearly tripled to Rs 6,700 crore in Q2, and it reported post-tax profits of around Rs 8,500 crore from the sale of its electrical and automation business to Schneider Electric India.

Similarly, ICICI Bank’s net profit quadrupled in Q2 thanks to a sharp dip in bad loans and related provisioning after the Supreme Court’s order on loan moratorium.

The jump in earnings of these four companies more than compensated for the decline reported by other large firms such as Reliance Industries, Tata Consultancy Services, Bajaj Finance, Bajaj Auto, Housing Development & Finance Corporation, and IndusInd Bank, among others.

In all, the combined net profit of 34 Nifty companies in Business Standard’s sample was up 60 per cent YoY, though net profit adjusted for exceptional gains and losses was up just 5 per cent.

Analysts expect the trend to continue as the economy recovers. “Corporate earnings can only get better as economic activity in more sectors recovers,” said Dhananjay Sinha, head of research at Systematic Institutional Equity.