Mapping the meteoric rise of Nifty stocks: What drove prices – earnings or enthusiasm?
One of the most quoted adages of the market is that stock prices are slave to earnings. But, are they? We analysed earnings of Nifty 50 companies since 2020, and their price performance to understand how much of that price rise can be explained by earnings and how much has come on the pack of momentum, herd buying or any other reasons.
One of the most quoted adages of the market is that stock prices are slave to earnings. But, are they? We analysed earnings of Nifty 50 companies since 2020, and their price performance to understand how much of that price rise can be explained by earnings and how much has come on the pack of momentum, herd buying or any other reasons. How did we do this? We first calculated actual price gains from January 1, 2020 till August 2023-end. Then we calculated how much gains would have come if the price-to-earnings (PE) remained constant, and subtracted that to the total gains. This gave us a percentage of total gains that came from earnings expansion and that came from the rest of the factors, clubbed under PE expansion.
2/11
The Adani Group flagship, despite the impact of Hindengerg allegations, is the biggest gainer among Nifty 50 stocks since 2020, but not much of its gains come from earnings expansion. The company has managed to more than double its earnings in the 3-year period (FY20-24) but just one tenth of its 1,100 percent gains can be justified by earnings.
3/11
One of the newer entrants to the Nifty 50 index, its price as well as earnings performance has dazzled the Street, led by not just its hospitals portfolio but also fast growing online pharmacy business. About half of its 240-percent returns since 2020 can be explained by earnings expansion but the rest is just due to momentum buying, which has inflated its PE ratio.
4/11
The steelmaker is likely to see sharp improvement in earnings performance, according to analysts, which is going to improve its ranking in the list. This is despite concerns over steel prices, and slowdown in China. About two-thirds of its gains can be explained by earnings, data shows.
Another new entrant to the Nifty 50 index, about 45 percent of its actual returns are driven by earnings expansion. The IT sector has been seeing a slowdown in demand that has derailed their earnings momentum. However, some IT names, especially those having niche expertise like Mindtree, have performed better.
6/11
This is a peculiar case. The earnings expansion for M&M has been so swift that price is still playing catch up. Its EPS is likely to climb nearly nine times in the four fiscals driven by new launches and entry into EVs. However, the stock price has only tripled leading to PE contraction, which many can see as a positive signal for the stock.
7/11
Another steel company in the list, Tata Steel benefitted from the super cycle in commodities in the last 3-4 years but the rally seems to have died down, so has the earnings expansion. Nonetheless, the stock is up over 170 percent from its January 2020 level and a third of its gain seems to be driven by earnings.
8/11
Another jewel of Tata Group, Titan managed to more than double its EPS in the little over three year period with expectation of further improvement in FY24. Investors seem to have believed in its earnings trajectory more than the narrative as 88 percent of its stock price gains are thanks to the success of the company in delivering profits.
It is among the two pharma giants in this list. The stock has delivered 160 percent returns in the period but only a third of the gains seems to be driven by earnings. The justification behind the PE expansion, many believe, is that the counter was available at sub-20 PE in January 2020, which would have made it an attractive bet then.
10/11
Rising profits and narrative has equally delivered for the stock in the period under consideration. The company has managed to expand its portfolio by organic and inorganic roots. The pandemic and adoption of e-commerce has also deepened its roots in the market.
11/11
Sun Pharma — after a lull in the last three years – is likely to see better performance in FY24, which has improved its standings list. As much as, its price is playing catchup to its likely earnings performance.
Shubham Raj has six years of experience covering capital markets. He primarily writes on stocks with special focus on F&O and PMS-AIF industry.
