(a) Based on fact that the current market PE levels are around the historic average PE rating enjoyed by the Indian stock market over the last 15 years, equity market today is fairly valued
(b) India's GDP growth rate at 4.5-5% is probably at its lowest and any further downside may be limited.
Accordingly, if India is able to sort out its economic mess and move forward, equity markets today offer an excellent opportunity.
Taking the argument forward, let us look at all this in terms of some key numbers.
As on Jan 1, 2014, the Nifty was quoting around 6300 and market earnings per share (EPS) was Rs.337 giving a PE ratio of about 18.70 as against the 15-year average PE of 18.31. And, over a period of 15 years from 1999 to 2013, the compounded average growth rate (CAGR) of the EPS has been 10.38%.
Based on the foregoing, we look at three probable scenarios.
Average Scenario: EPS growth and PE follow historic averages of 10.38% and 18.31 over the next 5 years
This would mean that we can expect the EPS to be around Rs.550 and accordingly the Nifty to quote at around 10,000 by the end of 2018.
Pessimistic Scenario: EPS growth drops to mere 5% and PE is de-rated to 12
The Nifty would drop to 5100-5200 if the economic activity in India goes for a toss and the FIIs dump India.
Optimistic Scenario: EPS growth improves to 12.5% and PE is re-rated to 20
The Nifty would almost double and cross the 12,000 mark by early 2019.
So given that today Nifty is at around 6700, there is a chance that
- it may fall by 24-25% to 5100 levels, or
- it may rise by 79-80% to 12,000 levels.
Not a bad risk-reward ratio!
So, what's your take?
