Nifty50 more resilient than S&P 500 in last one year, down 2.1%

American index's valuation fell 520 bps against 150 bps decline in NSE index

The National Stock Exchange (NSE) has proved to be more resilient in the current sell-off in global equities. 

The Nifty50 is down just 2.1 per cent in the last 12 months against a decline of 8.1 per cent year-on-year (YoY) in the S&P 500 index.

Nifty50 has done even better on the valuations front than its American counterpart. At its current price, the Indian benchmark is trading at 26 times its underlying earnings per share (EPS) in the previous 12 months, marginally down from its valuation of 27.5x a year ago. In the same period, S&P 500 price-to-earnings multiple has contracted nearly 520 basis points or nearly a quarter. S&P 500 is now trading at 17.7x its earnings per share in the previous 12-months down from 22.9x at the end of January 2018. One basis point is one-hundredth of a per cent. (See chart)

Analysts, however, say that it will require strong growth in corporate earnings for the Nifty to sustain its out-performance, something corporate India has failed to deliver in recent years. In the last five years, Nifty’s underlying earnings per share is up by just six per cent cumulatively from Rs 393 in January 2014 to Rs 415 now. In the same period, S&P 500’s underlying earnings per share is up 38 per cent cumulatively. All numbers are in local currency.

Dalal Street, however, believes that Nifty can live up to its current high valuation and report record earnings growth in the next 18 months. For example, Kotak Institutional Equity expects the Nifty 50 index EPS to reach Rs 505 by the end of FY19 and grow further to Rs 655 by the end of FY20. 

 

This translates into a cumulative earnings growth of 57 per cent over the next six quarters. Motilal Oswal Securities has similar hopes from Nifty companies with index earnings target of Rs 510 and Rs 548 for FY19 and FY20, respectively.

The Street’s bullish earnings projections are, however, up against a tough operating environment for corporates. Nifty companies’ combined net profit was up 12.8 per cent YoY in the H1FY19 and is likely to decline 3.6 per cent YoY during the third quarter of FY19.

A poor show in the current earnings season will put a spanner in forward earnings estimates, making it tough for bulls to justify the current valuation. On an average, the Nifty traded at a trailing P/E multiple of 19.2x in the last two decades, much higher than its current valuation ratio.