Historical Sensex EPS Growth + Returns

Most of us are inquisitive about the rationale behind our growth and P/E targets. We offer to explain the same taking historical EPS YoY growth of BSE Sensex from 1995 to 2008.

On the basis of valuation, growth targets are modest if you look at them from a historical perspective.

In the table above, data suggests that EPS usually grows 15%-20% in the year following a declining profit year in the market. However, EPS growth would be higher if the survivorship bias in the index was adjusted.

Will history repeat itself? We think so - particularly if the country has better governance and global factors are not disabling.

For our market P/E target, we are assuming a relatively modest expansion of P/Es from the current 15.5x one-year forward to 17-19x one- year forward as investors’ increase their appetite for risk. This is the normal trend 12 months from the bottom of every past cycle.

Clear picture will emerge not just after the Budget presentation but after Q1-FY10 management guidance. Long Term, stay bullish and take the opportunity to invest on every dip.

Important terms to check while purchasing a stock

1. P/E:
The P/E ratio (price-to-earnings ratio) of a stock (also called its “earnings multiple”, or simply “multiple”, “P/E”, or “PE”) is a measure of the price paid for a share relative to the annual income or profit earned by the firm per share. A higher P/E ratio means that investors are paying more for each unit of income. It is a valuation ratio included in other financial ratios. The reciprocal of the P/E ratio is known as the earnings yield. Stock having a P/E less than 30 are said to be good investments.

2. EPS:
EPS. Total earnings divided by the number of shares outstanding. Companies often use a weighted average of shares outstanding over the reporting term. EPS can be calculated for the previous year (”trailing EPS”), for the current year (”current EPS”), or for the coming year (”forward EPS”). Note that last year’s EPS would be actual, while current year and forward year EPS would be estimates.

3.DVI (Sividend yield):
The yield a company pays out to its shareholders in the form of dividends. It is calculated by taking the amount of dividends paid per share over the course of a year and dividing by the stock’s price. For example, if a stock pays out Rs.2 in dividends over the course of a year and trades at Rs.40, then it has a dividend yield of 5%. Mature, well-established companies tend to have higher dividend yields, while young, growth-oriented companies tend to have lower ones, and most small growing companies don’t have a dividend yield at all because they don’t pay out dividends