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  • JULY 15, 2014

Can the Sensex ever touch 1,00,000?

It's amazing how words like 'stock market' and 'BSE-Sensex' suddenly start finding much more frequent mention in everyday conversations when the indices are rising and touching new highs. Conversely, when markets are falling or remain stagnant for a while, general interest levels in the stock market quickly nosedive.

Indeed, with the Sensex touching new highs recently, interest levels in the stock market are currently running high.

One of our team members recently had an interesting experience. A friend came up to him with an incredulous look on his face and exclaimed "They're saying the Sensex will touch 1,00,000 points one day! Can this really happen?"

What would be your answer to such a question?

The simple answer is, yes it will. How?

Back to the basics

Well, understanding the answer to this questions demands that you understand a very basic thing about how companies function. And make no mistake, as basic as this is, most small investors in the market do not fully comprehend the implications of this basic nature of businesses.

Companies make and sell their goods and services, and in the process they earn a profit. The average company with a sustainable business model will be able to increase its sales and profits over the years. And the secret to how they are able to do so lies in what they do with their previous year's profits. They use that money to buy more assets to run the business, and in turn use those assets to make and sell more goods and services. As this process continues over the long term, the size of these businesses keeps marching upwards.

A great shortcut

One great proxy to track these changes in a company is to view the year to year changes in its net worth. When companies retain a part of their previous year's profits, this gets added to their net worth. In the average case, this change in net worth is a good indicator of the increase in the scale of business that company can conduct. So an increasing net worth leads to a business getting bigger and bigger over the years. Since a bigger business means a higher value for the business, the stock prices of the average company also follows this upward trajectory over the years.

Getting back to our question.

The Sensex is nothing but a weighted indicator of the prices of 30 big Indian companies. Considering that these companies are going to, in aggregate, keep increasing in size and thus price over the years (due to the reason given above), the Sensex will keep treading higher over the long term.

In other words, it is just a matter of time before you see the Sensex touching 1,00,000. How much time?

Well, if one were to assume that the 30 Sensex companies will be able to grow in size at an average rate of 15% per annum and valuations will be more or less the same as currently, it will take roughly 10 years for the Sensex to quadruple from its current level of 25,000 - and thus touch that glamorous figure of 1,00,000.

Sounds hard to believe isn't it? But then when Sensex was around 5,000 ten years back, even the current level of 25,000 looked impossible to achieve.

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