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Kimi or Krishnaraj Venkataraman is based out of Bangalore and he would welcome comments, especially if you think he has made an error, at krishnaraj.v@kimiandpartners.in
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2 replies on “The shocking truth about the growth rate of Nifty Earnings”
I think we need more of such kind of analysis to understand how Nifty-50 behaves w.r.t. to economy’s growth i.e. nominal GDP growth. It is bewildering to note that we have all along thought or rather fed to think that the Nifty-50 represents almost all of Indian Economy and therefore grows at least a pace as good as nominal GDP growth. If nominal GDP grows at 15% and Nifty-50 grows at 9.1% or say 10%, it is a warning sign. Similarly if PAT to GDP ratio keeps on falling from 5.24% to 3.15% over a ten year period, it is further more alarming.
I think more alarming is also the fact that market represents all the past results and also discounts future earnings also (with fair degree of accuracy) over a longer period. Does it mean that market expectation is much higher than even the past of 9.1% growth?
Can you do some study which would tell us that over a 20-year period, at what points of time, market over estimated the earnings and then headed for a severe correction. That would be more interesting to find out and understand.
Hey Kamal,
I just saw this now so sorry for the delay in response. I think you have asked very relevant questions.
Here’s my response:
Nifty tries its best to choose among various and sometimes conflicting factors to choose “India in a portfolio”. For instance we know real estate is a big part of the economy, but then you hardly find worthy, liquid and representative real estate firms to put in the Nifty. The divergence between Nifty earnings and GDP is also because corporate earnings are a small portion of GDP. Our GDP is driven by consumption and so I think household income among all incomes should be the largest part of GDP (when looked at from Income approach); why even Govt Income given that central tax to GDP is around 10% is also larger than corporate earnings.
PAT to GDP falls even in developed markets like US where it swings (atleast in the last 50 years) between 6 – 11% and NOT in line with GDP growth. Think about it this way, economic resources get redistributed among its claimants depending on various push and pull factors. Hypothetically if Govt just increases taxes by 50% assuming no tax evasion the share of earnings to GDP will fall. My own unproven hunch is that household incomes have substantially gone up. I say this for a few untested reasons: 1. Personal Incomes are price inelastic in India, if they go up they do not come down, unlike corporate earnings 2. Subsidies like MNREGA and high MSPs for crops have distributed a substantial amount of resources into households.
I also think the market as it currently stands is overvalued and Nitin knows I keep parroting this all the time, possibly wallowing in the certainty that some time I have to be true 🙂 As for comparing GDP to market over 20 years well I think the market is a random beast and to predict what the market did is when is to my mind a mug’s game 🙂
Thanks and we can also catch up offline!
Warm regards,
Kimi