When Mr. Rakesh Jhunjhunwala made a prediction in 2005 that Sensex will cross 25000 by 2010 we mocked at him attributing his statement to lack of experience in stock market. As sensex kissed the magical figure and closed yesterday above 15K for the first time, the research analysts are forecasting a safe and steady ride to 25K by 2010. Leave aside speeding the radar, even if we move at the current pace and maintain status quo, we will breach the 25K figure by 2010.Let us do some number crunching and dive into factual details which sets the road to 25000.

Industrial growth

At present, the average industrial growth is above 13%. Applying the adjustment factor for an average inflation rate of 5% takes the normal growth rate of industry to 18%. If we assume that Sensex is poised to grow at 18% in the next three years, the target can be easily achieved. Needless to say, this is without considering the fact that the Sensex stocks being top 30 stocks will outperform the average industrial growth of 18%. Thus, if we go by the current industrial growth rate there is no doubt that we are not far away from quarter century.

Profitability

Past data shows that the profitability of Sensex companies has increased by more than 20% in the last four years. Even if the profitability dips by 2% which is least probable and shares continue to quote at 22 times the P/E level as they are quoting now, it would not require any push to reach the target. The Bull Run is there to stay and Sensex companies being the top performing companies of India are not going to under perform. The growth of these companies further relates to unprecedented growth of Indian economy and the increasing demand for consumption which makes me put so much faith in the
Sensex companies.

Growth Rate of Sensex

In the last four years, Sensex has grown at the rate of 44% from 3048 as on March 31, 2003 to 13072 on March 31, 2007. In the last financial year, the growth had been a little slow and it took 146 sessions to cover 1000 point from 14000 to 15000 but still it managed a fair growth rate of 15%.Even if we consider the growth rate of the last financial year we will reach close to 25K if not 25K.The fact that the movement had been the second slowest in the history of Sensex in last year need to be considered and we may speed up in the years to come. This also shows that Indian share market no more moves on sentiments and it is turning out to be a matured paradise.

As per the current scenario, if we can control the inflation rate and interest rate from further surging up, 25000 is not too big a dream to come true by 2010. Secondly the appreciation of rupee is a major roadblock for IT companies whose major income come from export business. If the above issues are duly addressed, sensex can go well above 25K by 2010. Sustaining the growth rate and keeping the inflation and interest rate in control requires close monitoring by finance ministry and RBI. This will be a real test of acumen for YVR (RBI Governor) and PC (Fin Minister) and a good tussle to watch.

(The author is a Chartered Accountant working with TATA group)

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