Widely read:
First of all, Nifty touched 20,000 in September. There were celebrations around it and it has been hovering around that numbers ever since. What does it really mean - 19,000, 20,000, tomorrow it might touch 21,000?
Nifty is not some abstract thing. The underlying of Nifty is 50 companies - the proportionate ownership of 50 companies in a certain ratio. Those companies, a lot of people, lakhs of people get up every morning to do their job and earn, deliver something for their customers, produce something for the customer. Maruti makes cars, TCS serves people all over the world and that is the business and that is a real thing underlying it. And they make money. Are they making more money? Will that grow faster? And I think that is the way to look at it. If those businesses are going to grow faster, if they are making enough money in relation to the price, which is the market cap of all these companies, I think one should be looking at it from a very objective lens that assuming Nifty was a company and it was making money, I will be looking at it how fast it is growing and what is the price of all these companies if I had the money to write a check and buy all these companies - 100 per cent. What does it mean? So, it means like this, the value of all the companies in Nifty adds up to Rs 1,33,11,797 crore. It is such a big number - very difficult to fathom this. All these companies put together make something like, for sake of simplicity Rs 6,33,000 crore a year, whether it be SBI, whether it be Tata Steel, whether it be Maruti Suzuki or all the 50 companies of Nifty. All this translates into a nearly 5 per cent earnings yield. This profit after tax is after paying taxes, after charging depreciation. The company earns, spends money in earning that - there is a real cost of men, material, money - and after that you make some profit, after that you pay interest, then you pay taxes. Then, after that whatever is left for shareholders as the owner of these companies is that, which adds up to this Rs 6,33,000 crore on a market cap of that much which translates into earnings yield of 4.8 per cent. Five per cent earnings yield in a country of the 50 largest companies where they are growing by 8 per cent and last year they grew by 54 per cent.
So, this is the way to look at it. How do they stack up? Is it value for money? Are they growing enough? If these things are in place, and most of the company in Nifty are - of course you have outliers, there are companies growing by 100 per cent - there are companies which are slipping by 50 per cent or on the profit, but all of it adds up to majority of the company that still in double digit growth, and double digit growth after a year when everything grew by 50 per cent is very comforting. Market is not alarming. It's a nice round number, feel happy, but don't celebrate. In the short-run, it means nothing. In the long-run, you have to see that valuation and fundamentals are very well intact.
What about Sensex?
Similar story, older index, so higher value. The complexion and the character or if you look at the constituents of Sensex, constituents of Sensex is a subset of Nifty and the underlying character or if you look at the broad dynamics of Sensex and Nifty companies, not very different, it's somewhat similar. This is a nicer, larger, even larger number but it was invented in 1978. And this was created in 1990 artificially. NSE started in 1994. So, that is why it just a function of age
How long before it touches one lakh?
One lakh from here for Sensex is not a very significant thing. Because one must have a sense of magnitude, sense of proportion, sense of percentage. 50,000 to 60,000 is 20 per cent growth and 60,000 to one lakh - 40,000 on 60,000 is what you have to make which is two-thirds - 33 per cent is not a big deal. Because, if you look at 2008, the market peaked at 20,000, slipped down to 8,500. So, 20,000 to 60,000 is three times, and 60,000 to one lakh is just 33 per cent, it isn't a big deal. It's just a function of time.
And if everything works as being anticipated, if all the optimism gets translated or moderately gets translated into reality, then because, there is a whole India story tailwind, which means that companies will keep doing well, they will grow, they will do better. And in that situation, if this has to go up to 100 thousand, 1 lakh at Sensex, it will be 33 per cent. So, I would expect that in a fast growing company, in a fast growing economy, it should be two and a half years.
That looks ambitious. And that could be an even bigger reason for celebration though it may not be because 20,000 to 40,000 was a big deal. The Sensex touched a high at 4,000 level on Sensex in 1992 and that 1992 - that was three decades ago - and 1992 great Indian scam, Harshad Mehta, market went ballistic and it went up from 1,000 points to 4,000 points in a matter of three years. And that was a big deal. 300 per cent. Now that 4,000 after going up and down, opening of the economy, many companies dying, many companies surviving, new companies coming into being, so a decade of the turbulence and a new post-reform Indian economy or the corporate sector emerging post-liberalisation. And then the market touched 4,000 level. Once again, 10 years later, in 2004. Ten years, nothing happened, it touched a high and again touched a high. That time, it was because of the whole turbulence in the economy, the liberalisation, most companies are going under, they were not competitive enough.
Today, we have a situation where companies are competitive, we are getting back on track, we are getting back on track with our manufacturing, companies are growing and we have a far greater degree of optimism. What I was saying is that 2004, It attained a level of 4,000. And then, in another five years, it went up five times to 20,000, what I was is referring to 2004 to 2008 and achieved a bigger, nice round number of 20,000. And then a year of global financial crisis, all the struggles, ups and downs, so 60,000 to one lakh, it might look like a big deal, but it isn't.
So, the way you put it, the valuations are not very expensive. And in such a scenario, what do you think investors should do?
Investors should do three-four things very carefully and diligently and do it with belief. And there are 100 things they should not do, I will not get into 100, I will try and list a couple of them, basically, they are behavioural things. But two-three things which Indian investors should do is they should believe in equity, they should believe in diversification because we don't know what will work and what will not. And diversification means accepting the fact that you don't know everything, you will keep getting surprises in the market. Then embrace the madness of the market. Because at this level, markets will be very turbulent. It takes years to go up and then in five days, it will come down very sharply and it'll scare you. So do it with belief. Everybody thinks that they have to be successful on a short-term basis as well, continuously on a daily basis. That is not going to happen and embrace that, reconcile with it. And if you're not comfortable, then look for steadier vehicles like hybrid funds, aggressive hybrid or conservative hybrid. Because if you are deprived of equity, you will not benefit from the India story as in when it unfolds and tailwind which is clearly visible in numbers as well. And then don't get into over analysis. Most of the people I come across when I tell them equity, then they get into another confusing state: index fund, active fund, flexi-cap fund, mid-cap fund, small-cap fund, and the numbers will take you in all directions, just do something and do it well. Do it diligently. Even if you invest in small-cap fund, you are not at great risk. Because if you're doing it for 10 years, everything else will be sorted. If you're doing your aggressive hybrid fund, it will be sorted anyway. It's a fairly conservative thing. Because when we think that small-cap is risky, yes, it is. But for 10 years, for your SIP, it's not risky. We're investing in 50 small companies. Maybe the risky thing will be when you invest lump sum in a small-cap today, after it has gone up. But today, if you think in terms of what is happening, if you're going to invest for the next 10 years, and assuming a constant sum of money - Rs 10,000 every month for the next 10 years. This is one of the 120th, it's not a risk. In fact, if it is bad luck, then it will be risk for a while and after that you will have every reason to be optimistic because look at the 10-year return of the small-cap funds. SIP returns will be 23 per cent and point-to-point return will be 20 per cent and you will have 50 reasons to worry why you should not be investing.
Alright, so embrace equity and stay the course - that's the gist of our conversation.
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This article was originally published on October 06, 2023.
Disclaimer: This content is for information only and should not be considered investment advice or a recommendation.
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