State of State Bank of India @ Rs 225 ~ Shareholders Perspective
Sensex is arguably reckoned to be the Barometer of our Economy & State Bank of India & Larsen & Toubro have been arguably reckoned to be the best India Proxy Plays in our growing Economy
Received a Forward from an Overseas NRI Friend enquiring if it was true that :
- Rs 5 lakhs if invested in 2000 in a Fixed Deposit of State Bank of India would have been currently worth Rs 26 lakhs while
- Rs 5 lakhs if invested in 2000 in Shares of State Bank of India would be currently worth a whopping Rs 5.74 crs !
😈 Someone’s quite excitedly promoting Investment in State Bank of India & advocating Equity over Fixed Deposits over a long period….cannot blame the ‘someone’ for the excitement but deliberate exaggeration to prove the point !?
Anyway,gives me another opportunity to showcase the Magic & Power of Compounding with which I normally commence my Training Sessions
So FD ya Share?
Let’s take Investment in the Fixed Deposit first :
Here’s the Interest Rate Scenario in India form 2000 to date 2016
The average Interest Rate in the 16 years this Millennium is under 7% with Top High of 14.5% hitting in August 2000 & a low of 4.25% being recorded in April 2009
Assuming even that in July 2000 if one locked in the high rate of @ 14% in a 10 year deposit ,Rs 5 lakhs would have grown at a 14% CAGR to Rs 18.54 lakhs in 2010 & then at 8% CAGR grown to Rs 29.42 lakhs in the eight years till date July 2016….a straight CAGR would be 11.75% for 2000-2016 period….so the FD part of the Forward could be accepted when it states Rs 5 lakhs invested in a FD of SBI in 2000 would have grown to Rs 26 lakhs in 2016….this gives a CAGR of 11%
Now let’s Look at Equity Returns from State Bank of India :
The Forward excitedly proclaims that Rs 5 lakhs invested in the Shares of State Bank of India in 2000 would have grown to Rs 5.74 crs in 2016…..This would mean 11380% absolute returns and a CAGR of near 35%….Not Incredibly Unbelievable but certainly requires Verification
State Bank of India was at Rs 225 in July 2000 & is also Rs 225 today in July 13,2016,sixteen years hence….However the Face Value was Rs 10 in 2000 & now the Face Value is Rs 1
Thus Rs 5 lakhs invested in 2000 would have grown to Rs 50 lakhs now & not Rs 5.74 crs !….Original Investment of Rs 5 lakhs in 2000 would have been 2222 shares @ Rs 225(FV Rs 10) which on 10:1 Split to FV Rs 1 in November 2014 would have been 22222 shares which at current price of Rs 225 would be worth Rs 50 lakhs.The Absolute Returns would have been 900% while CAGR would be @ 15.5% in this 2000 to 2016 period