Hey, Mr Dayal, whatever happened to 21,000? - The Honest Truth By Ajit Dayal
Investing in India - Honest Truth by Ajit Dayal
Hey, Mr Dayal, whatever happened to 21,000? A  A  A
22 JUNE 2010

So, whatever did happen to the Index reaching 21,000 by July 2010?

To refresh our memories, this is what I had predicted at an equitymaster webinar on November 7th, 2008 (please note that the BSE 30 Index had closed at 9,734 on November 6th, 2008).

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"Equitymaster: Just to take that a bit forward, when do you see the Sensex reach its recent high again? In how many years, if you want to take a call on that?

Ajit Dayal: I'd hazard a guess within two years. I'd say within the 2 years you can have an Index that is easily 20,000, 25,000, within two years. That's based on the premise that company earnings will come through in India and the fact that valuations will go back to a kind of a median average. Right now the markets are trading at 10 times or below 10 times earnings and the average PE ratio for the market over the last decade has been about 15 times. So if you took 15 PE ratio, you are already seeing a 50% upside from where you are and if you add the earnings growth that could happen over the next year and a half or two years, then you can be close to a double or more than a double, from where you are today."

Well, firstly let me remind readers in my defence that - in November 2008 - with the BSE-30 Index falling off the cliff most people were predicting an Index that could slide into a bottomless pit.

The gloom and doom views spoke about the BSE-30 Index settling at 6,000 - a further decline of -30%. The Indian Rupee had slipped by -20% adding to the losses faced by NRIs and FII's and threatening a shut down of global capital flows into India's stock market.
If foreigners don't buy, was the mantra, the Index will collapse further.
Sell, was the advice to local investors, before the market sinks into the abyss.

So, was I giving this "bullish view" of 20,000 just to be different?
Was the prediction of a +100% surge in the BSE-30 Index made because I was smoking some non-tobacco items and was hallucinating?

Repeating the prediction!
It looks like my "highs" have not left me!

At the next Equitymaster webinar in March 2009 and for some video clips placed on YouTube on May 16th, 2009 - just after the election results - I gave a more precise level of the BSE-30 Index: 21,000 by July 2010.

At that time, the Index had just broken out of the 8,000 to 10,000 range where it was stuck since October 2008. In fact, the Index had crossed 12,000 but the market expectations were that it would head back down towards 10,000 after the election results were announced. The election results propelled the market to break through the 14,000 barrier.

On February 8th 2010, at the Equitymaster WebSummit I reiterated the view that, on fundamentals, the Index could be at 19,000 and - with some frothiness and the search for a "safe haven' the power of money flows could see the Index at 21,000

Sure, there were the risks that I had noted earlier: the US economy, the global economy, and the emotions of investors. But, from an "earnings" perspective, investing in the Indian stock market seemed like a great idea. The index was "range-bound" at the 15,000 to 17,000 levels and would probably head up.

On June 4th 2010, the Index was 17,118. At an equitymaster webinar the next day, I went one step further and said that the Index could head up to 31,000 by July 2012.

Boy, people must be thinking, whatever this guy is smoking it must be great! Not only does it make him chirpy and cheerful, it makes him chirpier and more cheerful over time!

No negative loopback after-effects in this stuff.

The honest truth is that I don't smoke.
Tobacco or non-tobacco items,

And I don't "drink" either.
Well, I may be tempted to have one glass of beer in a year.

No, sire, why pay for all that intoxicating, lung-wrenching stuff when you can be high on earnings and the optimism of future earnings!

Yes, the simplicity of my arguments for a 21,000 or a 31,000 Index are based on earnings (a fact) and the multiple that people are willing to pay for them (a guesstimate of the mood swings of the bulls and the bears).

The moods of the market
The markets, as we all know, go through wild emotional swings. As we have all seen, they oscillate between greed and fear.

A recent Chart of the Day on www.equitymaster.com showed the wild ride of the Price/Earnings Ratio (P/E). For the BSE 100 Index, the PER was 30x in January 2008, then it slid to 11x by October 2008, picked up to 24x by October 2009 and is 21x in June 2010.

Chart 1: The love and hate of greed and fear.
Source: Equitymaster.com

The P/E is what people "feel" about the earnings that the companies generate - depending on their views of the future, the bulls and bears are willing to pay a higher P/E (optimisim) or a lower P/E (pessimism).

But, what exactly are the earnings (E) of the companies doing over time? And at what price is the market as shown by the BSE-30 Index (P) trading over time? What have been the trends of the P/E Ratio over time?

Table 1: How the P/E ratio has moved in 13 years.
Year ending March 31st The Earnings of the companies in the BSE 30 Index (E) The BSE -30 Index on that date (P) The historical P/E Ratio
1998 163 3,893 23.9
1999 158 3,740 23.7
2000 190 5,001 26.3
2001 206 3,604 17.5
2002 228 3,469 15.2
2003 288 4,049 14.1
2004 333 5,591 16.8
2005 446 6,493 14.6
2006 542 11,280 20.8
2007 710 13,072 18.4
2008 824 15,644 19
2009 792 9,709 12.3
2010 838 17,528 20.9
      Average = 18.7

So, based on all this data we can see that - over the past 13 years - the average P/E Ratio of the market has been 18.7.

There have been global and Indian crises and droughts and floods over this period, just as there have been boom times and bubbles.

There have been scams and scamsters; fake IPO's from India's wannabe-like-Wall Street firms; and true-blooded scams from the blue-blooded Wall Street firms.

We have had the same pathetic sort of lack of governance. In fact Jawahir Mulraj - the author of Straight From the Hip - makes a case that governance has gotten worse.

The market, being frightened or pleased by some event has given a range of P/E ratios from a low of 12.3 on March 31, 2009 (the depths of the current global financial crisis) to a high of 26.3 on March 31, 2000 (the peak of the technology, media, and telecom bubble).

On average over these 13 time-points, the PER is 18.7.

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And what about the future earnings?
Since October 2008, a few weeks after the collapse of Lehman Brothers, the research analysts employed by the brokerage houses have been a depressed lot.

They saw blood on the streets and they saw blood in the sky. They saw red ink on their personal portfolios and they saw red in their forecasts on the future of corporate India's earnings.

But, as the Indian economy recovered from its minor fade and - more importantly - as the value of their personal portfolios grew, the research analysts have been happy to make slightly higher estimates on what their expected earnings per share (EPS) of the BSE 30 Index companies are likely to be.

Their jobs are secure and the bonuses are rolling in again. But the Lehman memory is still a little fresh in their minds. Give them a few more months of good GDP data and a slightly better flow from FII's and they will be ready to see solid green - with rose coloured glasses.

Table 2: as the economy recovers, the fear fades away...
Estimate made for earnings by research analysts working for broking houses Actual March 31, 2009 EPS for BSE-30 Index Estimated EPS for March 31, 2010 Estimated EPS for March 31, 2011 Estimated EPS for March 31, 2012
In October 2009 792 838 1,002 Not made
In March 2010 792 897 1,105 1,305
Comments: These were actuals, so no changes 7% better than earlier estimates 10% better than earlier estimates Be prepared for this to be increased!
Source: Bloomberg consensus earnings estimates for the BSE-30 Index

Not only will they "up" the earnings estimates for March 2012 but they will use the data in Table 1 to tell their clients why India is the best buy and is trading "at the lower end of its historical range".

The BSE-30 Index, they will say, is ready to reach a new plane.

For this, they will use Table 3 to explain why companies in India will have a higher growth rate in the Earnings, and why the Indian companies deserve a higher P/E Ratio (of 20.9x or some such number) all of which will result in a BSE-30 Index of 30,000.

Table 3: How the P/E ratio has moved in 13 years.
The Future Earnings of BSE-30 Index P/E ratio likely BSE-30 Index
2011 1,105 18.7 - the average of the past 13 years 20,664
2012 1,305 18.7 24,404
The Future Same earnings But a better P/E ratio BSE-30 Index
2011 1,105 20.9 - what it was in March 2010 23,095
2012 1,305 20.9 27,274
The Future Better earnings And a better P/E ratio BSE-30 Index
2011 1,216, increase of +10% 20.9 - what it was in March 2010 25,414
2012 1,436, increase of +10% 20.9 30,002
Source: the idle mind of Ajit Dayal with no influence from any intoxicants

QED - the science of unscientific common sense
So, there it is.

No brilliant insights, no great khabar from any insider, no market guru telling us what to do.

The BSE-30 Index which was supposed to head to 21,000 by July 2010 now looks on course to head to 30,000 by July 2012.

I don't know what you are doing about these forecasts, but I like them.

You can call me an "uneducated moron" as one reader very politely wrote to me for missing the 21,000 (so far!) by July 2010 but getting the first 100% from a 9,000 Index in November 2008.

For those looking for a specific Index number to "bet" on, many apologies for missing the target.

But for those who are willing to apply the very uncommon characteristic of common sense, you can sit down and plan where to invest your savings for the long term and ride the trend of earnings growth based on better GDP numbers in the Indian economy. Keep investing and avoid false promises (except those that "promise" a 30,000 Index.J)

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Disclaimer: The Honest Truth is authored by Ajit Dayal. Ajit is a Director at Quantum Advisors Pvt. Ltd and Quantum Asset Management Company Pvt. Ltd. The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and has not been authenticated by any statutory authority. The author, Equitymaster, Quantum AMC and Quantum Advisors do not claim it to be accurate nor accept any responsibility for the same. Please read the detailed Terms of Use of the web site. To write to Ajit, please click here.

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18 Responses to "Hey, Mr Dayal, whatever happened to 21,000?"


Sep 19, 2010

sir i am bit afraid about investing in stock shares after it has crossed the 19000 kindly comment on it and said your email to this mail thank you yours hari


i .c. sanghal

Jul 2, 2010

Please arrange to send the video clipping of web submit held recently on 6th June 10,as it could not viewed properly due to technical problems



Jul 1, 2010

After a whole lot of marketing gimmick with the huge "21000 in July" hoardings you have the nerves to come out and say that one should not predict the index but the direction of share prices. If only there was a regulator to stop anybody and everybody from writing and publishing their stuff.
Pity the subscribers...guess they all learn the hard way!!!


Ajit Dayal

Jun 27, 2010

Mr Sriram is correct, we inadvertently had a typo error that had the incorrect Index for 2003 (it was 3,049 and not 4,049 as we had typed in) but it does not change the trend of the "analysis" - an increase in earnings will reflect in higher share prices over the long term.

Many others should note that a "prediction" of the Index is really a prediction of the direction of share prices in general, and don't get hooked on to a specific number like 19,000 or 21,000 by July 2010 or 30,000 by July 2012.

Mr Ralph Rau's comments on USD returns for US-Dollar based investors is valid, but the potential for inflation and a loss in currency value is, in my opinion, a bigger danger for investors who stay invested in US Dollars today.

Thank you for all your comments.


valmik Desai

Jun 23, 2010

Dear Mr. Ajit,
I do believe that you have got good knowledge of share
market but I am asking you a question.Why so much contradiction is in your own statements. Let us see following 2 cases.
On February 8th 2010, at the Equitymaster WebSummit I reiterated the view that, on fundamentals, the Index could be at 19,000 and - with some frothiness and the search for a "safe haven' the power of money flows could see the Index at 21,000

2)On June 4th 2010, the Index was 17,118. At an equitymaster webinar the next day, I went one step further and said that the Index could head up to 31,000 by July 2012.

1) & 2) are predictions by you. They are extremely contradictory. For the same period you are predicting
21000 and again in june you are predicting 31000.
This is share market. Nobody can predict future. e.g.
worldwar may happen, war with neighbouring country may
happen and all predictions are wrong.

Thanks & regards.



Jun 23, 2010

Hi Ajit

I think this was your first time at predicting the index in the public domain. I think you should stick to what you are doing best. It appears that even if you have justifications now for saying what you said then, it earned you sound bytes then since equitymaster went berserk with youtube webcasts and all.


Nilesh Thakkar

Jun 23, 2010

The targets seems very much rational - there are no doubts about the targets being rational, atleast from my side. But the bigger question is, does the market behave rationally all the times? I have very strong doubts about markets being rational all the times from whatever understanding I have about the markets. And the "honest truth" about the markets, as it appears to me, is that they are irrational (i.e. either in the grip of greed or in the grip of fear) almost all the times, though the degrees and directions of it's irrationality keeps on changing. Given the circumstances of global uncertainty at present and the memories of the market crash just 2 years old, people may remain in a state of disbelief for some more time and investor psychology may prompt them to liquidate their positions as the markets approach their historic peaks (i.e. 21,000). This may lead to some more delay in making new highs in a decisive (or sustained) manner. This may even lead to crossing the 21,000 only after the sensex EPS has crossed 1,400 with PE of 15 only, followed by very strong momentum for next 3-4 years due to (a) earnings growth rising upto 30% caused by pay-back phase of the capex cycle and (b) PE expansion upto 30 (PEG = 1), which will not be sustainable for very long period of time, putting an end to the "greed" phase of the market cycle. And the show may go on and on and on .....



Jun 23, 2010

Your BSE Index value for 2003 of 4049 is wrong. It should be 3049 as published in the BSE WEbsite. ALso your PE values and thereby your EPS calculations are different from those on the BSE website. Below is a comparison of your PE values with those published on the BSE website.

PE Ratios
1998 23.9 15.65
1999 23.7 14.81
2000 26.3 21.6
2001 17.5 18.7
2002 15.2 17.15
2003 14.1 13.26
2004 16.8 18.57
2005 14.6 15.61
2006 20.8 20.92
2007 18.4 20.33
2008 19 20.11
2009 12.3 13.65
2010 20.9 21.32
Average 18.73 17.82



Jun 23, 2010

Mr Dayal -- JAI HO !! I admire your candid views but what about the global siutation. On one side your friend Mr Bonner keeps talking of the Great Correction coming and predicts bearish times in the immediate near future and you are optimistic of a 50% jump in Sensex EPS in the next 3 years. Please do not ignore what is going around the globe, fears of a double dip and another financial mess created by debt default cannot be ruled out. What will happen then ? Your die hard fans will get get rude shock. Whilst i agree that India will grow and we will that reflected in stock market returns but right now until 2011 we need to tread with caution. Assuming that markets will zoom past 30000 so soon is a very ambitious projection.


Shakeel Ahmed

Jun 23, 2010

Dear Mr. Dayal,

Irrespective of what people think about you, you are still an officer and a gentleman. Keep the "Science of unscientific common sense" flowing. 30,000 is not that far away. Happy investing.

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