Overpriced

A while ago, the RBI governor controversially quoted the old proverb about the one-eyed man being king in the country of the blind. This was in the context of India being the fastest-growing large economy in the world. Presumably, Rajan's point was that India was not growing particularly fast, except in comparison with other nations. The macroeconomic data, or at least the GDP growth estimates, are strong. But there are many contradictory variables that suggest that the new method of calculating GDP is overstating growth. It is also true that the corporate economy has not done well for a while. In fact, it could be argued that the corporate economy is not growing at all. But at best, it may have started shrinking. The latest Q4 results in aggregate show a continuing pattern of lower profits. But that is because of huge write-offs in the banking sector. Other corporate sectors have seen some growth after a long period of stagnation. One of the most stunning graphs is that of the Nifty 50's EPS record mapped since 2010 (Figure 1). Between January 2010 and January 2015, the Nifty 50's EPS, as released by the NSE (last four quarters, weighted by free float in the same ratio as the index) climbed from ₹224 to ₹393. That was a CAGR of 11.8 per cent. Although inflation was high through this period, there would have been real returns. After that, the trend of EPS growth broke down. It appears that the trend of earnings losses has more or less bottomed out. But it has not started climbing yet. If we remove the poor results of public-sector banks, there is probably an upwards trend. In June 2016, the EPS was ₹364. The CAGR over January 2010 to June 2016 was down to 7.7 per cent. This might not have beaten inflation by mu

This article was originally published on July 08, 2016.