Sensex @ 1,00,000 By 2020?

In view of the fact that the BSE Sensex has yielded an internal rate of return (IRR) of 17.25 per cent since its inception in 1979, the chances of it hitting the 1,00,000 level over the next decade are not too dim.

The Bombay Stock Exchange (BSE) launched a Sensitivity Index with the title ‘Sensex’
in 1979 to track the movement of the prices of the major stocks trading with it so as to work as a barometer for the benefit of the investor community and to understand the general trend of the direction of the capital markets. Over a period of time, Sensex has become synonymous to the Indian capital market and has garnered significant top-of-the-mind brand recall value. The eternal question on the minds of the market observers and the investor community always is: ‘Where is the Sensex heading towards? And how is the market expected to perform?’ in this connection, we have just made an attempt to see where will the Sensex levels reach in the coming future and whether historic trends will continue in the future too?

Hitting The Crore Level
Over a period of the past 30 years i.e from 1979 to 2009, the BSE Sensex has yielded an IRR (internal rate of return) of 17.25 per cent per annum. And, 30 years is a sufficiently long enough period to take as a basis to deduce the long-term average IRR. If history can form any basis for the future and if the historic average IRR of 17.25 per cent per annum has to be maintained, the Sensex will reach whopping high levels of 1,00,000 or more by 2020. And, by 2050, the Sensex shall reach a level of about 1,17,50,000. To maintain similar IRRs of 17.25 per cent per annum, by 2100 the Sensex should be at the 3,354,90,91,491 level — that is about 3,354 crore.

Bullish To The Extreme
Further, since the commencement of the ‘great bull phase’ of the Indian capital markets in the year 2003, the BSE Sensex has yielded an IRR of 26.21 per cent per annum. If such an IRR of 26.21 per cent per annum has to be maintained, the Sensex has to reach a level of 2,23,000 by 2020. And, by 2050 the Sensex shall be at 24,05,77,897. And to maintain similar IRRs of 26.21 per cent per annum, by 2100 the Sensex should be at the 27,28,626,29,99,684 level - that is about 27 lakh crore.

Predictions And Projections
We do not have any idea what’s there in store for Indian markets and the Sensex levels in the next decade or century. However, the sheer levels that the Sensex should reach just to maintain the average IRR levels of the past is simply breathtaking! Of course there can be innumerable factors and hurdles which can emerge in the path of the Sejisex in reaching any of these levels. For sure, there will be bouts of ups and downs with significant volatility. Further, to achieve these levels of the Sensex what shall be the levels that the individual stocks are likely to reach? This is done assuming that all the 30 Sensex components are going to contribute to it in line with their respective weigh rage.

For indicative purposes we have calculated the estimated stock specific levels through the years 2020, 2050 and 2100 for five stocks viz. Bharti Airtel, Infosys, L&T, Reliance and SBI. Over the next decade or century, different stocks will perform at different rates of return. For sure, some of the Sensex components will out-perform the Sensex and others will under- perform. The earnings’ potential and sustainability of several companies may also differ over the next decade. However, the levels that several stocks should reach make for an amazing scenario, if they are going to contribute in line with the Sensex.

Conclusion
If anybody gets a feeling that the indicative Sensex levels or stock levels discussed here are hypothetical and out of reach, we won’t complain because the indicative levels surely are ‘sounding’ exaggerated. However, it leaves us wondering if equities can’t even yield 17.25 per cent per annum IRR in the next decade (that is the period which is widely expected to be the ‘decade of India’) and do equities really match the risk-return spectrum involved?