Valuation Of Sensex

Valuation Of Sensex

This week, we witnessed a significant correction in Indian stock markets, and analysts have given various reasons:

1)Increase in US treasury bond yield due to rising inflation

2)Investors want to rebalance their portfolio mix by allocating more capital to bonds against equities.

So i decided to value Sensex to understand the following:


1)Would the equity risk premium change? Low ERP indicates the market is in a bubble, and higher ERP indicates investors’ fear of investing in equities.

2)I took the Sensex closing price yesterday to check what earnings growth rate markets are pricing the Sensex.

Sensex closing price (24th Jan) = 57,491.51
Dividend yield = 0.93
P/E ratio = 30.45
Earnings yield = 3.28%

10-year GOI bond adjusting for default spreads = 4.44%

Implied Equity risk premium = risk free rate + country risk premium = 6.42%

I took the solver function in excel to see at what growth rate in earnings the intrinsic value of Sensex = Sensex Closing price.

The earnings need to grow at 19.94% in the next five years to justify the price.

In my view, this growth rate is realistic but vulnerable to companies’ earnings, which rely on inflation, input price risks, and commodity prices (especially crude oil).

Overall, I think the Sensex actual value should hover around 52,000 to 58,000 in 2022.


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