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
State Bank of India also issued a 1: 5 rights at Rs 1590 in February 2008….The absolute return is just 41+% & CAGR on this is a mediocre 4 % in the eight and a half years from 2008 to 2016
Of course Equity Investment in State Bank of India did get better return than in the Bank’s FD over 16 years….the returns are even higher if Dividends are considered and that all these gains are tax exempt while the Interest on FD is taxable and can be at 30% tax rate if one is in the top bracket
Sensex in this 16 year period from July 2000 to July 2016 has grown at a 12% CAGR from levels of 4500 to levels of 28000
State Bank Of India Share Price had zoomed to Rs 3500 (FV Rs 10) in 2010…that’s a CAGR of 27.5% in 10 years from 2000 to 2010….. & even Rs 3000 (FV Rs 10) in 2014…then last year in 2015 it reached a high of Rs 336 (FV Rs 1) from where it dropped sharply to under Rs 150 in February this year before recovering back to Rs 225 levels currently….PSU banks continue to be a bane for Investors with their rising NPAs & rising provisions for them resulting in red bottoms in FY 16 !….Investment in them in recent years have caused heartaches to all Shareholders with the Government being the largest of them….This raises the debate yet again whether ‘Buy & Hold Forever’ is the best Strategy
Adjusted for Inflation,the returns from Fixed Deposits & Equity both shed 5% at least
Yet the Magical Power of Compounding comes to the Fore over Longer Periods
Imagine this :
SBI Equity Share Price has returned a CAGR of 15.5% in the 16 years 2000 to 2016 with an Investment of Rs 5 lakhs growing to Rs 50 lakhs,that’s 10x
CAGRs % of 20/25/30/35 would have grown Rs 5 lakhs to Rs 92 lakhs/Rs 1.78 crs/Rs 3.33 crs & Rs 6.09 crs respectively in 16 years ,that’s 18x to 120x !…..see how tweaking the CAGR can dynamically change fortunes !
So it’s the High Compounders you should be researching for….There are quite a few Listed Companies that are already 100 Baggers & more or 100x & more & surely quite a few that have this potential….Ah ! the 100x question !…which ones & how to spot them and have the conviction to stay invested in them over longer periods through storms till they realise their 100 x potential !….Training Sessions will give you more insights
Desire Serious Wealth Creation in Equity then heed this ….It’s easy ,as it’s mathematical,to understand the Magic & Power of Compounding over Long periods but it’s not easy though to spot & then make & then retain all the way Equity Selections that go on to give you such magical compounding !….this though should not deter you from an ongoing effort
“Lage Raho Munnabhai!”,to snatch the title of this hit 2006 sequel of the Super Bollywood 2003 Hit ‘Munnabhai MBBS’
Cheers to Compounding !