Sensex may breach 100k in 5 years as reforms take hold

Growth  will be led by IT services, financials, telecom, pharma and staples, say experts

Robust foreign liquidity flows fuelled by ultra-loose policies at global central banks catapulted the BSE Sensex beyond 50,000 on Thursday. A revival in earnings growth and structural reforms can propel the index to the 100,000-mark in the next five years, or even earlier, market experts said.

“Fundamentally, if you see, the last 20 years’ earnings growth for the Sensex has been 10.5% and the returns over the same period have been 13% on a compounded annual growth rate (CAGR) basis. Assuming the same continues and on a higher base, we should be able to hit 100,000 in next 5-7 years," said Amit Shah, India equity research head, BNP Paribas India.

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According to Shah, the growth will be led by IT services, financials, telecom, pharma and consumer staples. “These sectors either have the potential to be businesses of tomorrow or have businesses that can continue to reach the Indian masses and hence ensure a sustainable growth trajectory," he said.

Others concur. Amar Ambani, senior president and institutional research head, Yes Securities, believes that the Sensex may cross the 100,000-mark by 2025. “We have entered a super-cycle for Indian equities, as we had seen in the year 2003. We see a high possibility of decisive reforms from the government, accelerated earnings growth and a continued liquidity flow chasing growth, in a period of weakening dollar," he said.

The Sensex, which first hit 1,000 in 1990 took almost three decades to touch the 50,000-mark, crossing milestones such as the dotcom boom and bust, followed by a global growth rally which ended with the global financial crisis, then a sharp liquidity-driven rally, taper tantrum, European debt crisis and the covid-19 pandemic.

Indian corporate earnings have been muted in the decade gone by. “Hope for an earnings revival, as ever, remains intact as India emerges out of the crisis. The last decade also saw near-historical low interest rates, both in India and globally, which would have a defining impact on consumption, growth outlook," said analysts at Motilal Oswal.

Foreign institutional investors led the investments in Indian markets in 2010-20. During the decade, FII investments in Indian equities stood at $107.38 billion, with only four years of outflows. Domestic institutional investors (DIIs) have invested $23.94 billion in Indian shares, with mutual funds being the major contributor, which tapered off in 2020.

Binod Modi, head of strategy at Reliance Securities, said, “Outlook for domestic equities remains bright. Low awareness about equities, the dominant share of traditional asset classes in households’ investments and the absence of robust technology were key headwinds in India. In spite of these, Sensex registered around 14% CAGR growth over the last 30 years, which is commendable."

According to Modi, ongoing financial inclusion, dismal returns from traditional asset classes, improving share of households’ investments in equities/debentures and rising awareness among millennials are likely to aid equities in the long run.

“Equities are likely to remain the best investment avenue from the long-term perspective, and the benchmark index is poised to maintain a long-term growth rate of 13-14% in subsequent years," he said.

Interest Rates

• H

SBI’s FD rate hike may be sign of turn in rate cycle

For the time being, deposits are galloping at 10-11% year-on-year (YoY), while the non-food credit growth languishes at 5-6%. Bankers FE spoke to said the banking system and the money markets are seeing some readjustment in liquidity conditions after the Reserve Bank of India (RBI) signalled restoration of normal liquidity operations last Friday.

• By: Shritama Bose
• January 14, 2021 12:45 AM

Narang said barring a few large entities, the cost of deposits for private banks is typically higher than that for public sector banks (PSBs).

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State Bank of India’s (SBI) decision to raise the one-year term deposit rate by 10 basis points (bps) to 5% may be a sign that rates are likely to rise for depositors in coming months. At the same time, bankers say that the process will be slow and contingent, to a large extent, on the pace of credit growth.

For the time being, deposits are galloping at 10-11% year-on-year (YoY), while the non-food credit growth languishes at 5-6%. Bankers FE spoke to said the banking system and the money markets are seeing some readjustment in liquidity conditions after the Reserve Bank of India (RBI) signalled restoration of normal liquidity operations last Friday. Some of that may be spilling over into pricing of bank deposits. However, economic conditions will have to improve speedily for a decisive turn in the rate cycle.

Sameer Narang, chief economist, Bank of Baroda, said the rate hike by SBI must be viewed in the context of short-term rates, which have increased and the RBI decision to normalise monetary policy operations and mop up excess liquidity. “Short-term rate curves up to one year have inched up and are likely to increase even more in coming months. There’s a more than even chance that the interest rates, from the saver’s perspective, will be higher than what they have been in the last year,” he said.

At the same time, if rates were to be seen in conjunction with the trajectory of economic growth, savers may have to wait before a significant rise in deposit rates. Neeraj Gambhir, group executive & head – treasury, markets and wholesale banking products, Axis Bank, said there is still need for continued policy support, and a complete withdrawal of monetary stimulus may not happen anytime soon. “Given that short-term rates had fallen significantly, the RBI may start anchoring the short-term rates to the reverse repo rate and that could trigger some adjustment here and there, but I would not call it the end of the rate cycle,” he said, adding that there is a need to wait for at least two more quarters to see how growth pans out and what the monetary policy committee does. “So, savers may need to be watching out for how long this low interest rate regime lasts.”

Once policy normalisation begins, market share dynamics and the borrower profiles of banks will also have a role in pricing of deposits. Narang said barring a few large entities, the cost of deposits for private banks is typically higher than that for public sector banks (PSBs). PSBs tend to have a higher market share in lending to government-owned enterprises, where the risk weights and thus lending rates are lower. “Only those banks meet that pricing which have a much lower cost of deposits. The key to that is to have a high CASA (current account savings account) ratio and relatively lower term deposit rates, while keeping them competitive,” he said.

The rate hike by SBI also gains significance in the light of a secular trend of erosion in PSBs’ market share in deposits. In a recent report, Kotak Institutional Equities said PSBs’ deposit market share declined to 64% in FY20 from 75% in 2011. The shift has accelerated in recent years, with PSBs losing close to 100-200 bps every year since FY16. PSBs lost about 100 bps in market share, of which private banks gained 30 bps and SFBs and foreign banks got the rest. “The loss of market share of PSU banks was more pronounced in term deposits (down ~250 bps YoY) and current accounts (down ~150 bps YoY) compared to SA deposits (~70 bps YoY),” Kotak sai