http://www.business-standard.com/article/markets/forward-earnings-forecast-can-mislead-115092800011_1.html
For example, the Nifty FE estimates for FY15, first put out in May 2012, were pegged at Rs 522 a unit of the Nifty index. This was progressively downgraded to Rs 415 when the last estimates were published in May this year. Even this turned out to be on the higher side and Nifty companies ended FY15 with underlying earnings per share (EPS) of around Rs 360.
For example, the Nifty current EPS at Rs 360 is lower than optimistic Street estimates for 2008-09. In September 2007, at the height of the pre-Lehman crisis boom, analysts were expecting the Nifty EPS to cross Rs 400 by the end of FY09.
The FE for this financial year and the next are equally ambitious. Despite recent downgrades, the benchmark index is expected to report underlying EPS of Rs 487 in FY16 and Rs 577 in FY17. This requires earnings growth of 35 per cent in the next three quarters. For FY17, the implied annual growth in earnings is 18.5 per cent. In comparison, Nifty companies' underlying earnings have grown at a compounded annual rate of 8.8 per cent in the past five years and have seen a five per cent decline in the past year.
The growing gap between actual and projected earnings has made Indian equity one of the costliest in the world. This, in turn, has made the market volatile, as investors start selling at the first sign of economic or financial trouble. "The market has been in exuberance for many years, fed by benign liquidity flow from foreign institutional investors. This puts pressure on analysts to justify the higher valuations by coming out with equally bullish earnings estimates" says Dhananjay Sinha, head of institutional equity at Emkay Global Financial Services.
For example, the Nifty FE estimates for FY15, first put out in May 2012, were pegged at Rs 522 a unit of the Nifty index. This was progressively downgraded to Rs 415 when the last estimates were published in May this year. Even this turned out to be on the higher side and Nifty companies ended FY15 with underlying earnings per share (EPS) of around Rs 360.
For example, the Nifty current EPS at Rs 360 is lower than optimistic Street estimates for 2008-09. In September 2007, at the height of the pre-Lehman crisis boom, analysts were expecting the Nifty EPS to cross Rs 400 by the end of FY09.
The FE for this financial year and the next are equally ambitious. Despite recent downgrades, the benchmark index is expected to report underlying EPS of Rs 487 in FY16 and Rs 577 in FY17. This requires earnings growth of 35 per cent in the next three quarters. For FY17, the implied annual growth in earnings is 18.5 per cent. In comparison, Nifty companies' underlying earnings have grown at a compounded annual rate of 8.8 per cent in the past five years and have seen a five per cent decline in the past year.
The growing gap between actual and projected earnings has made Indian equity one of the costliest in the world. This, in turn, has made the market volatile, as investors start selling at the first sign of economic or financial trouble. "The market has been in exuberance for many years, fed by benign liquidity flow from foreign institutional investors. This puts pressure on analysts to justify the higher valuations by coming out with equally bullish earnings estimates" says Dhananjay Sinha, head of institutional equity at Emkay Global Financial Services.
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