5 reasons why Karvy thinks the Sensex can hit 100,000

Despite so many negatives plaguing the economy, corrective measures by the new govt can quickly revive growth, says Karvy Stock Broking's Varun Goel

Equity markets have been on a roll since the past few months in the hope of a pro-reform and business friendly government at the Centre that could help turnaround the economy, and in turn, lift fortunes of India Inc.

As the bulls tightened their grip on the markets, the benchmark indices - the S&P BSE Sensex and the CNX Nifty - hit their lifetime highs. While the Sensex breezed past the 25,000 mark, the 50-share Nifty topped the 7,500 level.

As 'Modi-mania' took over, most analysts revised upwards their targets for the benchmark indices with a few estimates pegging the S&P BSE Sensex at 40,000 by 2017.

In a latest report, Varun Goel, head of portfolio management services (PMS), Karvy Stock Broking suggests that the Sensex can touch 100,000 mark by 2020!

"Despite so many negatives plaguing the economy, corrective measures by the new government can quickly revive growth. The potential growth rate of economy is running around 6%. The growth rebound to those levels can take place quickly by reviving the investment demand. Once that has been achieved, the more arduous path of reclaiming the 8% growth can start," Goel says.

Adding: "There have been several instances in the past with 20-25% compounding for long periods in other global markets. The Dow experienced its most spectacular rise in history in 1980s. From a meagre 777 on August 12, 1982, the index grows more than 1,500% to close at 11,722.98 by January 14, 2000."

Here are five reasons why he thinks the index can touch the 100,000 mark:

First: From an equity market stand-point, macro-economic revival in India will open opportunities to make strong returns in the next few years. The GDP (gross domestic product) growth is pegged at 6% in FY15 and Karvy believes that economy will see a revival of growth and earnings cycle.

Second: The agricultural and services sector continue to show strong traction and gradually even manufacturing sector should pick-up as consumer demand revives. A real GDP growth of 6% along with Inflation of around 7% should lead to a nominal GDP growth of 13%.

Third: Sensex earnings growth has improved from 5% in FY13 to about 10% in FY14 on the back of rupee depreciation. For FY15, Karvy pegs the Sensex EPS (earnings per share) growth of around 15%. They believe that earnings growth for new five to six year business cycle should be at least 20% considering the economy will revive from a very low base.

Fourth: If the infrastructure cycle revives quickly, the earnings growth revival will be faster with even 25% CAGR (compounded annual growth rate) looking possible. A multiple rerating is also possible as cost of equity goes down in the next few years with the decrease in risk free rate.

Fifth: An earnings growth between 20-25% and multiple rerating from 15x to 16-17x in the next few years can lead to a 25% compounding of Sensex returns, which will take it to 100,000 levels by calendar year (CY) 2020.