Sensex slips in earnings growth

Growth is the second lowest in five years; but at 16.7 times its PE is lower than historical averages

The BSE Sensex's earnings per share has grown by 10.2% over last year going by the increase in earnings at the same time last year. With all the companies in the 30-stock BSE Sensex declaring their results, the earnings per share of the Sensex now stands at Rs 1,226.9, which is higher by only Rs 113.8 from the same day the last year.

The bellwether's actual earnings is an important matrix to arrive at its fair value. While the Sensex initially showed higher growth rates in earnings for the last quarter, towards the end of the results season, PSU banks and capital goods companies reported a fall in net profits to finally drag the earnings growth lower.

Many experts prefer looking at the current earnings of the Sensex which reflects the true value as against forward earnings estimates. Market watchers say that the forward earnings tend to distort the earnings picture depending on how the analysts forecasts growth. An optimistic outlook tends to make the forward valuation look a lot cheaper.

Muted earnings growth
	EPS	Growth (% yoy)
Feb-10	812.91	13.3%
Feb-11	922.11	13.4%
Feb-12	980.14	20.6%
Feb-13	1113.1	13.6%
Feb-14	1226.86	10.2%
Source: BS Research; BSE

Against this background, the trailing earnings reflects the more accurate picture. Currently, the Sensex is holding up well in the market and experts say that it's trading at about fair value. Says Vetri Subramaniam, chief investment officer, Religare Invesco Mutual Fund: “Forward earnings can be overoptimistic or pessimistic depending on the forecasts. But the if you look at the actual underlying earnings of the Sensex, it's trading at just about fair value of 16-17 times.”

The 30-stock Sensex's earnings has grown by 11.3% compounded in the last five years to Rs 1228.9. Experts say that the growth in earnings is slightly below average in the last five years as earlier this usually was in the range of 13-14%.  

The Sensex's current P/E ratio stands at 16.7, which is a tad lower than its five-year historical average of 18.8 times trailing earnings. This trailing PE has never dipped below 16 times in the last five years, except post the Lehman crisis when the PE touched a nadir of 11.6 times in March 2009.

But the Sensex has been  buoyant in the last five years. The BSE Sensex has seen an increase of 17% compounded in the last five years, much faster than the underlying earnings growth in the Sensex. Market watchers attribute this to an increase in the PE valuation which was 12.6 times five years ago to the current levels of 16.7 times. Experts say that valuations are relative and depends on what is the expectation of earnings growth for the future. Says Dr Vikas Gupta, assistant vice president, ArthVeda Fund Management: “One has to look at whether the Sensex was undervalued five years ago as against whether it's undervalued now. If one is expecting higher earnings growth, then probably the Sensex is undervalued.”