Wednesday, June 23, 2021

Sensex @2 lakh in 10 years: Raamdeo explains math behind his projection

 

Sensex @2 lakh in 10 years: Raamdeo explains math behind his projection

ETMarkets.com
If Sensex grows at 15 per cent, tracking the earnings growth, it will double every five years.

Synopsis

The renowned value investor says he used two methods – earnings trajectory of India Inc and historical data of Sensex - to predict the market movement. The required compounded annual growth rate for Sensex to hit the 2 lakh mark is just 15 per cent.

When Raamdeo Agrawal recently came out with his prediction that BSE barometer Sensex can hit the 200,000 mark in the next 10 years, a number of market participants, particularly new retail investors, were left puzzled at the bullish prophecy.

However, it was not a simple back-of-the-envelope calculation or pure guesswork for the Dalal Street veteran.

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The renowned value investor says he used two methods – earnings trajectory of India Inc and historical data of Sensex - to predict the market movement. The required compounded annual growth rate for Sensex to hit the 2 lakh mark is just 15 per cent.

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“Earnings are, of course, the foundation. Earnings growth is linked to the GDP. Presuming that the base GDP growth rate would be 7% with 5% inflation, you would get 12% nominal growth rate. Our corporate profit-to-GDP ratio has been one of the lowest. It is about 3-3.5% now and we can definitely go up to 7%, as it was in 2007-08. So even if it goes to 5-6%, there is a chance that with a 12% GDP growth rate, you can achieve 15-16% corporate profit growth in the years to come. That is the basis of the projection,” Agrawal said.
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If Sensex grows at 15 per cent, tracking the earnings growth, it will double every five years. So in the first five years, it will double from 50,000 to 100,000, and in the next 5 years, from 100,000 to 200,000.

“When you look at it today, 200,000 looks like a gigantic target, but a country can change in a decade,” Agrawal, the Chairman of Motilal Oswal Financial Services, told ETNOW.

The second way to do this is look at the history of Sensex in the last four decades. Despite all the Black Swan events in its history, the bellwether index has grown by a mind-boggling 530 times in the last 42 years. Sensex was technically born in April 1979, although it was launched only in January 1986.

From 1980 to 1990, the index grew at a compounded annual growth rate (CAGR) of 20 per cent. From 1990 to 2000, it again grew at the same CAGR of 20 per cent. From 2000 to 2010, the equity gauge rose at a CAGR of about 13-14 per cent. It’s only in the last decade between 2010 to 2020 that the growth rate slipped to 10 per cent.
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If you are pessimistic, you can say that this decade will also mirror last decade's growth of 10 per cent. “So it will grow 2.5 times in 10 years: 50,000 will become 130,000,” Agrawal said. “If you are too optimistic, you can consider the upper band of 20 per cent. If that happens, Sensex might actually grow to hit the 300,000 mark.”

If you look at the Sensex history of last four decades, 15 per cent is the base CAGR growth rate. “So we are saying, let us not talk about the upper number. Let us talk about something between 1.5 to 2 lakh,” he said.

In a dramatic recovery since the trough of 25,639 hit last year on March 24, 2020 amid the pandemic, Sensex has rebounded around 106 per cent in a span of just 64 weeks.

If this bull market is reminiscent of the one in 2003-08, as we think (given a likely fresh earnings cycle), it has more legs to it, Morgan Stanley had said in its recent report.

“We have defined a bull market as where the index (BSE Sensex) doubles from its trough. Including the current one, India has had six bull markets over the past three decades,” MS analysts wrote in the report.

If we exclude the 2003-08 bull market, in which Sensex catapulted 630 per cent, the average duration of the other four bull markets has been 72 weeks, compared with 64 weeks for the ongoing one.

Analysts from the foreign brokerage believe that given a likely new profit cycle, the 2003-08 bull market duration may be a template for the ongoing one.

Agrawal warned that there would also be steep corrections during the next 10 years and investors may even have to tolerate a collapse. “Big corrections will come only if there is a big rise. Small corrections will come only if there is a small rise, but the trajectory is set," he says.

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