There is fairly good correlation between the Nifty's earnings pattern and its price-movements. Although there are leads and lags, the priceline generally moves in the same direction as the earnings trends. The National Stock Exchange (NSE) calculates Nifty earnings data on the basis of free-float weights of respective companies, which is the same way the index itself is calculated.
The NSE calculates EPS on the basis of the latest four quarters of results for each company. According to this data, the Nifty's EPS peaked at a value of about Rs 393 in October-December 2014 (Q3 2014-15). Of course, this became evident only in January-February 2015, when Q3 results were released.
After that high, the index EPS slid down for three successive quarters. The Nifty EPS hit a low of Rs 358 in July-September 2015 (Q2 2015-16), which became evident in October-November 2015. After Q3, 2015-16, there seems to have been some kind of recovery. But, EPS flattened out after hitting a peak of about Rs 375 in October-December 2015 (according to the results released in January-February 2016).
The index priceline went up through most of financial 2014-15, hitting a peak in March 2015, which was pretty much in line, with when the Q3 results indicated earnings peak. After March 2015, the index was sold down until February 2016, when it hit a low of 6,825 on Budget day. The Nifty has since seen a recovery of 17 per cent but the index is still down by over 10 per cent from its all time highs of March 2015.
The latest results indicate that the current Nifty EPS is running at about Rs 370 with 29 Nifty companies having released Q4 2015-16 results. Of course, it is possible that the remaining results will pull EPS up sharply. But, as of now, the results don't seem to indicate a major revival among big stocks at least.
The impression of flattened earnings growth among bigger companies is reinforced by data from the website, Capitalmind, which has collected Q4 results for 279 companies, with market capitalisations of over Rs 1,000 crore. According to the Capitalmind data, these companies have seen total year-on-year revenue increase of 3.6 per cent but profits have fallen by 2.2 per cent.
If the pattern of pricelines conforming to the earnings pattern holds, the index should move sideways until there is a pickup in the earnings growth rate. Indeed the index is moving more or less sideways at the moment.
The prior pattern of correlation suggests that the index price line will move up as and when EPS picks up. Again, there may be some lead or lag but the movements do seem to broadly conform to that pattern. This has interesting implications for traders.
Most of the time, traders look for short-term triggers that will change sentiment. Many factors can have a short-term kneejerk impact on index movements and of course, short-term triggers can affect fundamentals both directly and indirectly. For example, strong net buying (selling) by FIIs might push up the rupee (or pull down the rupee) and that in turn, affects corporates with currency exposure.
But, even in the medium-term of a month or so, the Nifty's movement conforms well to the fundamentals of EPS growth or shrinkage. If that relationship holds and if the Nifty companies, which are yet to deliver results, don't produce big surprises (positive or negative) in Q4, the major market index is unlikely to trend anywhere. This implies that traders should not expect really big moves because the price movements correlate quite well to the fundamentals.
The author is a technical and equity analyst
