One of the most intriguing things about television news channels has been their ability to create events out of non-events. So when NDTV Profit invited a full panel of commentators for their opinion on completion of the first anniversary of Black Monday (a day when the BSE index lost close to 800 points intra day) the arrangement looked in place for another round of psycho analysis relating to questions like " What did you tell your clients on that day? Or what was going on in your mind or what lessons did you learn? What the Regulator did and what it could to a more forward looking what it should. In between a ticker kept jumping out to suggest that one should buy on days like those as if to suggest something that one may not be able to decipher in hindsight. How easy these conclusions appear after a year has gone by can only be experienced to be understood.
While the general discussion had just about enough to keep the audience on their seats which is just about what these channels need the stage was being set for yet another lousy session of post mortem. Quite like the way television talk shows are conducted the baton was being transferred from one commentator to another so that everyone got a fair chance of expression. The general discussion seemed on track until Rakesh Jhunjhunwala (the leader of this bull market) was asked for his forecast on the Index." I see the Index at 24,000 to 28,000 in the next 3 to 5 years" replied the big bull in his usual style and dialect. Now if this question had been posted to another of the so called Investment analysts the standard answer would have been " We should see a 15 to 20% growth from these levels if the monsoons are on track, interest rates do not go up, crude prices remain stable to weak, the US economy continues to nudge along, the Govt. continues to take bold economic decisions and finally if FII's continue to invest". The more specific you ask an analyst for his comments the more he tends to get probabilistic in his answer That there are no penalties for playing safe in this market suits them quite well. But Rakesh had a single line answer. If the global economy does not see a 1929 like crash we are on way to 28,000.
You need vision and mental breath to talk like that. While his talking style might appear arrogant it is really the confidence of the man. "India as a country saves about Rs 700,000 crores each year out of which hardly 2% find their way into the stock markets. These numbers are surely going to explode. To get a more definite picture on the target I did some number crunching just to see whether things fell within the realm of financial reasoning.
| Particulars | Data |
|---|---|
| Fund- Scheme | NAV (Date) |
| BSE Index level | 6500 |
| Index EPS for fy 05 | Rs 500 |
| CAGR for the next 6 years (as in 2010 the index would be discounting 2011 earnings) |
16% |
| Index EPS in 2011 (a) | Rs 1218 |
| PE for the Index at 1.5 times the growth (b) | 24 |
| Index level in 2010 (a x b) | 29323 |
A PE justification of 24 needs some analysis but what we are talking about is a bull market. A bull market characterized by rising perceptions (PE). Till now the Indian market has only seen an increase because of rising earnings. We are therefore yet to see the basic character of a bull market where the perceptions explode to astronomical levels. Remember Nikkei in 1989 or Nasdaq in 2000. We have had a couple of crazy bull markets where PE's have tended to explode (see table below).
The important "but" to the whole set up is that these days the PE should reflect global benchmarks. None of the countries across the world have a PE of more then 20 also with rising interest rates the PE's have to contract notwithstanding that a bull market is all about passion and hysteria and nothing about logic and sense!
(Figure in Rs crores)
| A case of rising perceptions (PE) | ||
|---|---|---|
| Index PE during the Great Harshad Mehta boom | Index PE in the Ketan Pareikh tech boom | Index PE at the peak of this structural boom |
| 57 | 37 | 24 (Estimated) |
While all this looks probable and possible there is another catch to this whole story. India's GDP is at present Rs 30 lac crores and should grow to about Rs 40 lac crores by the year 2010. The market capitalization of the BSE is at Rs 18 lac crores, which is 60% of the GDP. The previous high tested by the Indian system has been 67%. Giving it a market cap of around Rs 80 lac crores at a GDP level of Rs 40 lac crores would amount to about 200% of the GDP, which looks stretched and absurd. But as they say when the bulls are on the rampage the valuations do not matter.
| Moments! | Market Cap to GDP ratio at the peak |
Market Cap to GDP ratio post the peak |
|---|---|---|
| The Harshad Mehta boom | 56% | 32% |
| Ketan Pareikh tech boom | 52% | 21% |
| At the peak of this structural boom | 200% (Estimated) | ??? |
Basant Maheshwari is a Cost Accountant and a Post Graduate Diploma in Equity Research and Analysis from ICFAI Hyderabad) and also an AMFI certified mutual funds advisor He advises people on making portfolio investments through mutual funds.. He has investment positions in Pantaloon and Trent Comments and suggestions are invited at 
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