Markets are abuzz with most analysts predicting a steep fall in markets in the month of December. They all quote similar falls in the months of December in previous years for their current prediction. In stock markets, a majority view about the likely moment of stock market may not prevail, since stock prices work on random walk theory in the short-term. It is difficult to draw any conclusion merely because most analysts are on one side of the argument.
When corporate profits are growing in size, the prices are unlikely to see a correction except in cases where there was a big bull run preceding such rise in profits from companies. Since the market direction is attempted to be discussed in this article, we may stay away from concentrating on any particular sector and would do well to analyze broad-based indices to judge the likely moment of market in the coming days.
Vivekam has been presenting the graphs of several indices on its website to help investors see some sense in the forecasts given out by analysts on TV. The following graph and the numbers about nifty for the last 18 months clearly show us that the profits of the companies covered by nifty are on the rise and profit after tax has gone up by 12.15% while the operating profit has gone up by 25.75%. In this period, the average P/E ratio has moved from around 16.27 to 14.79 and then recover to 16.64 as of today. When we computed the historical P/E ratio of nifty, we realized that it stood at 19.02, clearly indicating a room for upward movement of prices in the coming days.
Broad basing our analysis to CNX 100 index, we realized that the corporate profits of companies covered in this index have gone up in last 18 months by 15.74% as far as profit after tax is concerned. The EPS of CNX 100 index has grown from around 320 levels to 370 levels. In the same time operating profits of the companies went up by 26.28%. Here again, the P/E ratio started from 16.26 a year ago and dropped to 14.2, only to come back to 16.09. When we took the historical PE average of last five years for CNX 100 index, it stood at 18.65, again clearly indicating that there is a possible upside left for CNX 100 index shares.
Further broad basing our study to CNX 200 index, where 197 companies have announced their latest quarterly results so far, we realized that the overall profits even for CNX 200 companies are on the rise. The EPS for CNX 200 index stood at 167 level 18 months before and has reached to 185 as of today showing a rise of approximately 11.57%. In this case also, operating profits of the company’s showed an improvement of 25.6%. The P/E ratio stood at 16.24 about an year back and slid to 14.21, three months back, only to bounce back to 16.29 as of today when we used EPS of trailing 12 months. Historical P/E ratio for this index, when we measured for last five years, stood at 18.26. With such a gap between current P/E ratio and historic P/E ratio, given the backdrop of increasing earnings of companies, we firmly believe that the prices could be moving upwards than downwards as feared by a few analysts.
Expanding our sample size further, let us now look at CNX 500 index. Out of 500 companies included in this index, only 488 companies have announced their quarterly results so far. It is a well-known fact that this index included a few small cap shares. The corporate governance of such small cap shares is difficult to believe to be of high standard. However, the law of averages takes all such aberrations into its stride and normally come out with an accurate finding. With that assumption, when you look at the EPS of this index, it stood at around 264, 18 months before. In the last 18 months, the EPS managed to climb up to 281. This implied in increase of 7.86% in profit after taxes which was on the back of 23.16% increase in operating profit of the 500 companies covered in this index. Historical P/E ratio of this index was 18.01 whereas the latest P/E ratio is at 16.59. When profits are rising, it is not uncommon to expect an expanding P/E ratio. Even if we were to believe that only historic P/E ratio could be reached, there is a clear scope for further 10% rise in the overall index.
With nifty 50, CNX 100, CNX 200 and CNX 500 stocks reporting improved performance and increasing profits in the last 18 months period, along with a lower current P/E ratio when compared with their respective historic P/E ratios, it is hard to believe that the prices would correct in the month of December. As has been proven several times in the past, majority view of the analysts may not hold good at all times.
Therefore, Vivekam strongly believes that the markets may slowly inch upwards in the month of December, subject to any unforeseen global developments, and reward the shareholders who wish to invest on merits of the performance of the companies than on the moods of the market as predicted by analysts.