Equity Returns Estimates for FY27

2000 to 2024: P/E multiples went from 11x to 22x. EPS Growth: 9% CAGR. Equity Returns: 12% CAGR. Now P/E cannot go from 22x to 44x. So, equity returns must be solely funded by EPS Growth.

PE Expansion Era Is Over

a. PPFAS Rajeev Thakkar told ET: “People must get accustomed to lower equity returns now.” Why is the seller himself saying: “My product is no longer attractive?”

b. From 2000 to 2024, Indian equities delivered 12% CAGR returns for two reasons:

(1) EPS Growth was 9% CAGR; and (2) PE multiples doubled from 11x to 22x because investors were betting on India growth story. (So, doubling of the multiple roughly added 3% CAGR on top of EPS Growth of 9% CAGR.)

c. Now that engine of PE expansion cannot run again because there is no mind-blowing India growth narrative anymore. So, going forward, equity returns must be funded almost entirely by EPS Growth (plus dividend yield) alone.

Equity Returns Formula

Total Equity Return = EPS Growth + PE Multiple Change + Dividend Yield

EPS Growth =
Corporate Earnings Growth

PE Multiple Change =
PE Expansion or Contraction
(What multiple the investors are willing to pay per rupee of earnings)

Nifty EPS Growth in FY27

FY25: Est 15%; Actual 3.4%
FY26: Est 12%; Actual 4.5%
FY27: Estimated 8.5%

Note: 8.5% is Bank of America (BofA) estimate, which is the most trusted.

Dividend Yield for Nifty 50 = 1.20% (historic low)

Total Equity Return in FY27

SCENARIO 1: BULLS ARE RIGHT

EPS Growth: 11%
(Beats BofA estimates)

PE Change: 0%
(Nifty PE stays 22x)

Dividend Yield: 1.2%

Total Equity Return = EPS Growth + PE Multiple Change + Dividend Yield

= 11% + 0% + 1.2%
= 12.2%

SCENARIO 2: BASE CASE

EPS Growth: 8.5%
(Matching BofA estimates)

PE Contraction: -1.5%
(Mild downward PE revision)

Dividend Yield: 1.2%

Total Equity Return:
= 8.5% - 1.5% + 1.2%
= 8.2%

SCENARIO 3: BEARS ARE RIGHT

EPS Growth: 4%
(Below BofA estimates)

PE Contraction: -10% (not 10x)

Dividend Yield: 1.2%

Total Equity Return =
= 4% - 10% + 1.2%
= -4.8% (Negative Return)

Equity Risk Premium (ERP)

ERP is the additional gain (compared to fixed income) for bearing the financial risk + psychological stress of investing in a volatile asset.

Is it Worth the Pain?

BULL CASE

Equity Return: 12.2%
Less LTCG: 12.5%
Net Return: 10.68%

FD return: 7%
Less Tax: 30%
Net Return: 4.9%

ERP = 10.68% – 4.9%
= 5.78%

BASE CASE

Equity Return: 8.2%
Less LTCG: 12.5%
Net Return: 7.18%

FD return: 7%
Less Tax: 30%
Net Return: 4.9%

ERP = 7.18% - 4.9%
= 2.3%

Strategy for Retail Investors

a. If you are a bull, it is worth going 100% into equities because the Risk Premium (Extra Gain) is 5.78% over & above FDs, which will strongly compound over time.

b. If you believe the base case, then a small risk premium (extra gain) of 2.3% may not be worth the pain if you are investing for less than 5 years.

Over a long period, this small premium will also compound. But for below 5 yrs horizon, the pain-reward ratio looks poor.

c. For bears and believers in the base case scenario, it may be best to diversify into gold, FDs, and selective equities.

Gold can give superior returns (than 2.3% CAGR). Cash can deliver life-changing returns if the market crashes and you are the only buyer in town.

d. Extraordinary returns can still be made in this market if you are a good stock researcher, and have the temperament to stay invested, come hell or high water. Most people overestimate their ability.

Endquote [Original]

A stock circulates on X after the money has been made. If you have found a stock on X, you have not discovered it. You have been introduced to it.

@arabicatrader