Sensex at 16000…looks Expensive….but not if you’re looking 2 to 3 years Forward

Sigh !…..”I should have got in at 8000 and 9000 and 10000 !” in March and April,just a few months ago !”

This is the refrain of most with the Sensex doubling to 16000 in just five months !…one of the quickest rises in the history of the Sensex

Most lost a great chance of averaging portfolio holdings…Both,no Cash and no Conviction in most cases…My Clients hold  Sesa Goa…..some from pre 2007/8 at lower holding costs,but many having purchased  it in 2008 cum bonus and cum split at Rs 165-Rs 175 levels……It dropped to 60 and is now up 300% to Rs 240 !

There are several such scrips…good companies,some that were available below book values in March 2009 and which also have strong visible earnings….additional funds deployed in Equity would have worked wonders for the Portfolio

Now at 16000,Sensex is 18,16 and 14/15 times FY 10,11 and 12 Expected Earnings respectively….This may look expensive,considering it had dropped to 10 times a few months ago

But we have support coming in from Foreign Fund Managers…higher risk appetite for India…over US $ 7 Biilion already brought in by FIIs this year…considering a US $ 3 Biilion reversal in Jan-March 2009,that’s over US $ 10 Billion got in since April 2009

We are now yet again talking like we did in 2007…India deserves a higher PE Multiple rating on the back of a strong Earnings Upgrade for the next three years

The Message is clear…If the Sensex corrects to 13000/14000 levels,like it must for a healthier move forward,it should be a buying opportunity with a three year outlook

Because mathematically on a macro valuation if we witness a Sensex Earnings CAGR of 15% for the next three years then the FY 12 Sensex EPS would cross 1300…at 18 multiple that’s a record Sensex level of 23500 levels by 2011/12…Even if we dilute the Earnings CAGR to 10% we get an EPS level of Rs 1150…at 18 multiples that’s a Sensex level of 20700

Now a 50% Sensex upward move inside three years may pale in comparison with the 100% it has achieved inside five months this year !…but look at it in two ways

  • Equity should give you double the Gains that a Bank’s Fixed Deposit would give you in three years ,even if you consider only the Sensex potential
  • You could make strong alpha returns,when your portfolio,based on astute stock selection and weightage,outperforms significantly the Sensex benchmark
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