Despite so many negatives plaguing the economy, corrective measures by the new government led by PM Narendra Modi can quickly revive growth. From an equity market stand-point, macro-economic revival in India will open opportunities to make strong returns in the next few years.
We would expect a GDP growth of 6% in FY15 and believe that economy will see a revival of growth and earnings cycle. For FY15, we would expect a Sensex EPS growth of around 15%. We believe that earnings growth CAGR for the new five to six year business cycle could be at least 20% considering the economy will revive from a very low base.
If the infrastructure cycle revives quickly, the earnings growth revival will be faster with even 25% CAGR looking possible. A multiple re-rating 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 20-25% and multiple re-rating from 15x to 16-17x in the next few years can lead to a 25% compounding of Sensex returns, which will take it to 100,000 levels by Calendar year 2020!
There have been several instances in the past with 20-25% compounding for long periods in other global markets. The Dow experienced its most spectacular rise in history in 1980s. From a meager 777 on August 12, 1982, the index grows more than 1,500% to close at 11,722.98 by January 14, 2000. This report is an attempt to look at long term market trends globally to decipher what the economic and market trajectory could be in the next six years.
This period of high returns in US economy was achieved as economy revived from a period of stagflation in 1970s resulting in aggressive monetary tightening by Federal reserve Governor Paul Volcker which broke the back of inflation. It took until 1982 before a new economic recovery was born.
There is no reason that India can’t see a prolonged economic growth cycle with low inflation. The prolonged economic growth can create similar equity market returns in India as seen in United States in 1980s.
By KARVY Stock Broking Report