Sensex companies are the 30 companies that form part of the BSE 30 Shares Sensitive Index also called Sensex.
Analysts determine if the markets are fairly valued largely on the basis of Sensex EPS or the Nifty EPS. These are nothing, but the Earnings Per Share (EPS) of all the 30 companies.
What is the significance of the Sensex EPS?
Many analysts try to predict the Sensex EPS in advance and then determine whether the markets are fairly valued. To begin with they predict the EPS for each company separately and then divide the same by 30.
Let's see how that works with an example. Say, Company A reported an EPS of Rs 25, company B Rs 42, company C Rs 35 and so on. If the total of these companies EPS works to Rs 1500 and the Sensex is trading at Rs 25,800, we say that the p/e multiple for Sensex companies is 17.2 times.
That is: 25,800/1500 = 17.2 times
We take 25,800 because that is what the index is at the moment.
The long term average p/e multiple for Sensex companies is around 17 times. So, we can say that the markets are fairly valued at the current levels since their current p/e is 17.2 times.
What are the predictions of analysts on Sensex companies EPS for 2015-16 and 2016-17?
Recently, HDFC Securities put out a report in August estimating that the Sensex EPS could be around Rs 1696 for FY 2015-16. This looks a little difficult to achieve at the moment considering the poor set of quarterly results for the period ending June 30, 2015.
If one considers the EPS that HDFC Securities has projected for Sensex companies than the Sensex p/e ratio works out to 15.21 times, which is below the long term average.
In June Motilal Oswal predicted the Sensex EPS at a more conservative level of Rs 1601, making the p/e slightly more expensive at 16.11 times.
The way corporate results have panned out, even these targets look optimistic. In any case the Sensex looks neither expensive nor cheap at the current levels. Hence, for markets to go up earnings must improve. But, most of the time markets defy logic and are driven by sentiments and liquidity.