I plotted the Nifty 1 year EPS growth (gathered from P/E as reported by NSE) versus the P/E over the last three years:

• Nifty P/E is still around 22 today, versus trailing EPS growth of 12.73%.
• The point where Nifty P/E is equal to trailing EPS growth (when the P/E and EPS growth lines should cross over) is 2983.
• Assuming forward 12% growth again with a forward P/E of 15, Nifty hangs out at 4,000.
• In the dramatic upmove from the 4,500 levels EPS growth has dipped substantially. In October 07, we see the PEG crossover into negative territory - meaning trailing EPS growth is less than P/E.
• The last time EPS growth was so low or lower was May-Aug 2006 when the Nifty had crashed 30%. But the growth was low then because of a very high growth in 2005. Right now we don’t even have the high-base effect and a crash in EPS growth is not a one-off event.

While this may make us sound bearish, it provides a reasonable base from which value buys can be noted. The levels to which the Nifty can sink, observing fundamental data, is 3000-4000, a further 30-40% drop from today. In the short term, however, hopes for a friendly budget can keep the Nifty buoyant.