India In Multi-Year Bull Market; Sensex Seen At 1,00,000 In 10 Years

NEW DELHI: Analysts at Dalal Street see India in a multi-year bull market, which may push the Sensex level to much debated 100000 in the next 10 years, supported by earnings growth, economic revival and reform push by the new government.

The benchmark index Sensex has managed to rally 420 per cent or a little over 21,500 in the last 10 years. But can it triply from here in the next ten years? That remains to be seen. However, analysts are not giving up hopes just yet.

“India has a long way to go. The ingredients for a sustained bull market are very much in place and there is a good amount of visibility that we will at least go back to the long range profit growth of 14-15 per cent,” said Navneet Munot, CIO, SBI Mutual Funds.

“Considering the fact that valuations are reasonable and if India Inc can deliver growth of around 15 per cent per annum, which is not an unreasonable expectation over a long period, the Sensex can hit 1,00,000 in 10 years,” he added.

Year 2014 has been eventful for the Indian markets, pushing them up by over 25 per cent, with both the Sensex and the Nifty touching record highs on the back of improving domestic macros, supportive global liquidity and the expected governance improvement in India after the last general elections.

The macro-economic data is looking positive, the economic activity is expected to gather steam by 2015 and GDP growth rate might hit near the 7 per cent mark in the next two years.

However, Munot is not the only one who is optimistic about the Indian markets. Back in the month of June, Varun Goel of Karvy also predicted the level of 100000 for the Sensex in the next six years.

“We see 2014 bringing a new bull cycle into existence. A strong export sector, revival in investment activity, continued recovery in the US & a stable Euro area are significant positives for equity markets. With domestic macro-economic data also on the mend, we are aggressive buyers of the Indian equity,” said Varun Goel, Head PMS, Karvy.

From an equity market stand-point, macro-economic revival in India will open opportunities to make strong returns in the next few years. Goel expects a GDP growth of 6 per cent in FY15 and believes that the economy will see a revival of growth and earnings cycle from there on.

“For FY15, we expect a Sensex EPS growth of around 15 per cent and believe that earnings growth for the new five to six year business cycle should be at least 20%, considering the economy will revive from a very low base,” he added.

Goel is of the view that a multiple rerating is also possible as cost of equity goes down in the next few years with the decrease in risk-free rate. An earnings growth between 20 and 25 per cent and multiple rerating from 15x to 16-17x in the next few years can lead to a 25% compounding of the Sensex returns, which will take it to 100,000 levels by calendar year 2020, he explains.

Economic revival key for earnings growth:

The Indian markets have got support from strong inflows from foreign institutional investors who have pumped in over $26 billion in the Indian market so far in the year 2014.

FIIs are betting big on the Narendra Modi-led BJP government as they see it initiating reforms to spur economic growth, remove bottlenecks and aid investment activity.

Prime Minister Narendra Modi is about to finish his first 100 days in office, but India Inc CEOs are convinced an economic revival is around the corner.

A majority of 50 CEOs polled by ET are preparing to make fresh investments and are also stepping up hiring, all in anticipation of a 6-8% GDP growth most feel is possible over the next three years.

The results of the exclusive ET Poll suggest that after years of uncertainty and inaction, India Inc is now preparing to re-ignite its growth engines. The poll shows 74 per cent of CEOs are already seeing demand pick-up, 80 per cent have made new investment decisions or are likely to do so soon and two-thirds are now stepping up hiring.

Earlier this week, global brokerage firm Nomura, which sees nearly 15 per cent upside in the Sensex in the next one year, revised its FY16 real GDP growth forecast to 6.8 per cent YoY vs. 6.5 per cent previously.

Of the many variables that make up the market’s macro ecosystem, growth is unarguably the most important, largely because its relationship with the market is quite unequivocal and straightforward.

“Rising growth is strongly correlated with a re-rating of the market’s earnings multiple, while falling growth is strongly correlated with a de-rating of the market’s earnings multiple,” added the Nomura report, authored by Sonal Varma and Aman Mohunta.

So, is a 15 per cent earnings growth possible if the economy turns around?

It is very much possible provided global environment remains stable, the Reserve Bank of India eases key policy rates which would help in kick starting investment cycle for India Inc’s control on inflation and policy push.

Despite so many negatives plaguing the economy, corrective measures by the new government can quickly revive growth. The growth rebound to those levels can take place quickly by reviving the investment demand. Once that has been achieved, the more difficult path of reclaiming the 7-8 per cent growth can start.

“While 15 per cent earnings growth rate does not look difficult, the fact is we have not had three years of 15% plus earnings growth rate except in the period of 2003 to 2008,” said Anoop Bhaskar, Head-Equities, UTI AMC.

“We need to get the right kind of macro factors in place for you to deliver that number on a consistent basis. Of course, we can get two years or three years, but to get it for the next six-seven years in a row requires that we have in place macro factors which remain fairly comfortable and positive,” he added.