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Sensex at 2003 Levels! Is the Next Big Bull Run Really Coming?

Like I suggest that you must not watch CNBC (or any business channel) for their expert views on where the stock market is heading, and instead watch them just for entertainment purpose…

…I also suggest you read my today’s post for entertainment purpose. This is because today I talk about my view on Indian stocks market, and where I see it going forward.

Please note that I am not trying to make a prediction here – I’ve failed many times at that and have got over that addiction few years back.

All I’m trying to do is put forward my thoughts on Indian stock market’s current situation and how it is placed for the future. There’s a 100% chance of my view falling flat on its face, so watch out!

Anyways, here is a document that Sudhir, a Safal Niveshak tribesman, forwarded me a couple of days back.

This document is prepared by Morgan Stanley, where the analysts argue that the BSE-Sensex is trading at a level similar to September 2003!

Confused? From around 4,000 in 2003, the Sensex has moved up to around 19,000 now. So how can it trade at the same level? 4,000 doesn’t equal 19,000, right?

Well, the authors have explained their reasoning to prove why the Indian markets are extremely cheap now – as cheap as they were at the start of the massive bull-run in 2003. As they write…

…a closer look at the index reveals that the market has not only declined since September 2010, but it is trading at a level similar to September 2003. The market is close to the level it was trading at nine years ago.

…there has been almost no change to the absolute market multiple in nine years. Arguably, the growth outlook is a lot better than it was in 2003 (the trailing five-year EPS growth then was 2.2% versus 10.2% now).

So, as per their explanation, the Sensex is at the 2003 level based on valuation parameters like P/E (price-to-earnings) and P/BV (price-to-book value).

Here is a chart that supports this argument.

Data Source: Ace Equity, Safal Niveshak Research

But then, being a value investor, I am least interested in valuations based on past-12 months’ earnings (also known as trailing twelve months or TTM earnings). I am more comfortable using an “E” (or “BV”) that is average of the last 10 years, which is the Graham & Dodd method of calculating P/E.

So here is my chart that shows the Sensex’s P/E based on its last 10 years’ average earnings per share…

Data Source: Ace Equity, Safal Niveshak Research

And here is a chart that shows the Sensex’s P/BV based on its last 10 years’ average book value per share…

Data Source: Ace Equity, Safal Niveshak Research

Interestingly, even these charts show (see the green lines) that the Sensex is trading at P/E and P/BV almost same as in 2003 even when you consider the Graham & Dodd method!

I am impressed and my mind starts conjuring up images of me picking up some cheap stocks now and seeing them multiply over the next 9-10 years.

“Wait, Vishal!” I hear another voice from within. “Don’t jump to conclusions so soon! Don’t you remember what Prof. Bakshi recently told you about the ‘first conclusion bias’?”

“Of course I remember,” I replied to my inner voice. “But can’t you see that the valuations are shouting that this is the time to buy? This is such simple math, dear!”

“Wish this was so simple, Vishal. You are missing the big idea by just focusing on the small idea of valuations!”

“And what’s the big idea?”

“Here…look at this chart of Graham & Dodd based P/E for Sensex again…

Data Source: Ace Equity, Safal Niveshak Research

“If you see the difference between green and blue lines, the gap indirectly represents how far net profit margins are expected to be from their “trend” i.e., 10-year average earnings.

“In simpler words, the bigger the gap between the green and blue lines, the higher net profit margins these companies are ‘expected’ to earn as compared to their 10-year trend.

“As of now, while the P/E based on TTM earnings of Sensex companies stands at 17.5x, the Graham & Dodd based P/E stands at 28.4x. This highlights the big divergence of expected profit margins of Sensex companies from their long-run normal levels.

“Hmmm,” I said.

“So if you believe in the law of averages, such high divergence in ‘expected’ profit margin from its long term average cannot sustain.”

“But then, didn’t the gap increase manifold during the April 2005 to Jan 2008 period?” I retorted. “That time the Sensex’s average TTM P/E was 20x while the Graham & Dodd P/E was 40x…which means a gap of 100%! Now the gap between the two P/Es is just about 60%.”

“Well that’s an intelligent observation,” I heard my inner voice praising me for the first time. “But…”

“But what?” I asked.

“But the time when the gap was rising towards 100% was a bubble period for the Indian stock markets, led by a bubble in the global financial markets, global economy, and the Indian economy. That – April 2005 to January 2008 – was a period of irrational exuberance!”

“So irrational exuberance can return, right?” I asked.

“Indeed! But see these following three charts. These are average numbers for Sensex companies over the past ten years.”

Data Source: Ace Equity, Safal Niveshak Research

Data Source: Ace Equity, Safal Niveshak Research

Data Source: Ace Equity, Safal Niveshak Research

“Vishal, as you can see from the chart, the average profit margins and return on equity of Sensex companies – which improved during the bubble years – are back to their 2003 levels…like the P/E as suggested by the Morgan Stanley report and your own calculations.

“And the debt to equity ratio – that reduced during the bubble years – is also back up to the 2003 level.”

I asked, “So these can improve again, like they started improving after 2003. Can’t that be so?”

“Of course these can improve, but for them to improve, certain conditions that were true of the period between 2005 to 2008 need to come true.”

“Like what?”


  • Faster GDP growth of the US and Indian economies, and booming Chinese & European economies – that sucked in a lot of India’s exports
  • Big growth in domestic consumption – that aided corporate cash flows
  • Cost cutting by companies – that helped in margin improvement
  • Safer balance sheets of global governments – that did not create the need for billions of dollars of artificial money floating all around, and which meant more stability in the monetary system
  • Lower inflation – that caused lower discount rates and thus higher intrinsic values
  • Greater confidence – that created the belief that trees could grow to sky

“If you can see any or some of these things repeating over the next few years, I guarantee that India would see the ‘mother of all bull runs’ that so many experts are predicting these days.

“Also, one positive fundamental side of current weak net margins and return on equity is that, if these improve from here on, the current P/E of 17x might look cheap. But then, given the state of global and Indian economy, and given that most industries in India are highly competitive now, I don’t see a major improvement in their numbers.”

“So you mean that the glory days are behind us?” I asked, this time hoping against hope that I will hear some promising words.

“No, I am not saying that! All I am saying is that you must be prepared for big volatility in your returns over the next few years. The negative side of this is that you may be so terrified of all this that you may quit investing in stocks. The positive side is that you will get a lot of chances to buy stocks at cheap valuations.”

“Great! But what should I do now? Now as in NOW!”

“Keep playing the game. Keep investing in sustainable, growing, profitable businesses that you can get at reasonable valuations.

“Don’t get bogged down by stock price volatility. Be wary only of permanent loss of capital. If you can do that, you need no bubble to retire wealthy with your stocks.

“Finally, remember what Charlie Munger says so often – ‘All I want to know is where I’m going to die so I’ll never go there.’

“This will help you keep your head when all about you are losing theirs…in bull or bear markets.”

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About the Author

Vishal Khandelwal is the founder of Safal Niveshak. He works with small investors to help them become smart and independent in their stock market investing decisions. He is a SEBI registered Research Analyst. Connect with Vishal on Twitter.


  1. Dear Vishal,

    If we keep listening to news and wait for all the good news to be there for us to invest, you can only end up investing at the peak of the market at crazy valuation like in Jan 2008. It is the investment made during the most pessimistic time like Mar 2009 can only produce great returns in equity. It is quite difficult to time the market so precisely for an average retail investor like me. So the best available and effective tool is regular SIP in Mutual funds with a proper asset allocation strategy to manage your risk and to handle volatility for your regular investments. Here displine is the key to achieve the targets. You may not get those mind boggling returns as you make in individual stocks (if at all we make returns), but you will better of than most other investment by adopting SIP approach.

    In stocks, one has to buy quality stocks with reasonable amount of balance sheet (low debt, Good ROE, most importantly good management etc.) and specifically at a time when there is lot of negative news is there around such stock. Such stocks will certainly yield good returns, if you have capacity to buy, hold and be with the stock patiently and withstand short term notional osses. Stocks such as Infosys, BHEL, Bharti and many other stocks are still available at reasonable valuations due to negative news around those stocks.

    As you have rightly pointed out there is only one way out there “Keep playing the game. Keep investing in sustainable, growing, profitable businesses that you can get at reasonable valuations”.

    Vishal, infact I suggest if you could workout a list of stocks with lots of negative news but that can turnaround sometime in future and analyze the same in stock talk. You have already done that for INFY, BHEL and Bharti, but many other simple stocks are still available.

  2. Sunny Gupta says:

    Thanks Vishal for the nice post. I wished these expert analysts came with these reports in May – June, I bet they have no guts or authority to do this while facing multi-year lows, they can only do this when markets are trying to kiss all time highs…and we know what’s the unethical driving force…

    On a separate note, I feel we’re at an inflection point. I don’t know, nor do I have data, but possibly things were similar during 1928-1945. It started with a massive rally, only to crash in 1929. This was synonymous to 2007-2008 rally, driven by visible growth. But then cracks opened, and the underlying reality of leverage surfaced (2008-2009, not sure what was the counterpart in 1929-31). Then, in order to fix, read patch things, governments did fund infusion, a lot of it…and we reach 2010 / 2011, but since problems were so bad, things went back again to abyss in 2011-12…

    From now on, it depends on world leaders. If they continue to patch economy through liquidity, we’re doomed, seriously! However, if they know how to fix the root cause and take bold steps to fix it, then we’ll have a gradual recovery. Yes, there’ll be tough stands, one of them should be strict cap on leverages that can be allowed, across all domains. One great step would be to change margin multiples from current 10 to something like 3 or 4 at max. And on commodities, to max 5-6. This will limit the %age gains people can made quickly, and then their urge to bet short term will reduce, since there won’t be much difference then in average realizable profits from short term and long term investing. All this means, less volatility, maybe less liquidity, but with the benefit of commited wealth, focussed investments, and these will drive business growth.

    LBOs should be completely banned! Or if allowed, there should be a cap again on the leverage multiple to less than 3…this means, healthy businesses will be saved from unnecessary debt burden due to greed of a cash fat individual…

    Finally, something that has come up, banks should revert back to unlimited liability regime, and should be state owned. Banks should only lend money and store deposits. If you want to speculate, you should have no relation to banks, and banks should be forbidden to buy any stake (ok, not more than 0.1% of their net worth) at all in any businesses involved in investing. If they have surplus funds, they should invest in businesses, as angel investors, and there must be regulation to ensure those businesses have a minimum quality and intent to qualify for fund raising from banks (yes, at times, we might have situation like Kingfisher airlines, etc, but still far better than ICICI bank using savings deposits to buy sub-prime CDRs from Morgan Stanley!!!)

    All the world problem is artificially created out of greed of few rich people, who believe in leverage too badly, and we must curb it for sustainable future of this capitalist world economy.

    Until then, we’re doomed! We’ll continue to have such relief, liquidity driven rallies, and declines. Good for me. I’ll buy quality stocks on declines, and since I can’t be 100% right, use euphoria of rally to clean up my mistakes 🙂 and hold strong businesses forever!!!

  3. Manish Sharma says:

    Vishal, i have some confusion. The chart of Morgan Stanley showed a different P/E based on TTM, which is quite volatile than it is showing in the chart prepared by you where the P/E multiples based on TTM is rather range-based.

    But, this sort of chart is useful to analyse overall health of the market. I can observe that the gap almost merged on two occassions – in 2003 and 2009, that’s the time market shot up from its low levels.

    Still, i would like to focus upon finding good balance sheets at reasonable prices..Because as a small retail investor, I have got limited resources at my disposal. And, as you have mentioned in your write-up that one may jump to some conclusion by (mis) reading the charts and can make bad investment decisions.

    • Hi Manish, Morgan Stanley’s report does not carry any chart on P/E! What you are seeing are Sensex’s charts. 🙂

      Indeed, focusing on finding good businesses at reasonable prices across market cycles is the key to investing success.

  4. Thank you. You have given your perspective very well and it is worth pondering over.

  5. Is the Next Big Bull Run Really Coming?

    Answer to this question lies in a quote by a great man called Sir John Templeton.”Bull-markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”

    I can confidently say the bull market is already born long back out of the 2009 pessimism.Where we are now out of the remaining 3 phases and how long will it take to reach the last phase is anybody’s guess.

    If we define a Bull as being optimistic then markets like the human beings are always(or at least most of their lifetime) optimistic.Its the traders and short sellers who do the holy job of controlling this optimism by selling stocks on bad news.But finally at some point of time the optimism will be out of control of these people and we will see the actual bull run in terms of actual Sensex and Nifty numbers.

    So the answer to this question is “We are already in a bull market, but most people don’t realize that.” 🙂

  6. Faster GDP growth of the US and Indian economies, and booming Chinese & European economies – that sucked in a lot of India’s exports
    Big growth in domestic consumption – that aided corporate cash flows
    Cost cutting by companies – that helped in margin improvement
    Safer balance sheets of global governments – that did not create the need for billions of dollars of artificial money floating all around, and which meant more stability in the monetary system
    Lower inflation – that caused lower discount rates and thus higher intrinsic values
    Greater confidence – that created the belief that trees could grow to sky

    Vishal … I couldnt find any such now….
    yes iam still continuing the SIP’s…
    but with the opening of QE3… wondering whether we are again in a region like 2007-08!!!

    • Good that you raised the point about QE3. So while the Sensex is as “young” as it was in 2003 (as the Morgan Stanley would make you believe), this youngster is more reliant on steroid shots (easy dollars) than the young Sensex of 2003. 🙂

  7. One visible indicator Vishal…
    During 2006-2008 companies were hiring and paying like there is no tommorrow..every X/Y was providing stock markets/MF tips
    The Loan growth in Cars,Apartments were skyrocketing…
    But so called the real estate transactions are getting less day by day.
    Iam in a Tier II city… there are good number of industries around us… Almost every one is furiously cutting the jobs… Very few of the kids whom passed out now arein jobs..even those who have received the orders are not called….
    Iam unable to connect the dots… Tribesmen..

    • True Kartik, that is why the PM had said growth is a national security issue . Unnecessary opposition and resistance benefits no one or may be a few ! Those who just know how to shout and create nuisance do just that with no solution to offer. Given the huge amount of youngsters which are unskilled or semi skilled creating employment should be a major priority and I am sure it must be for atleast those who are working tirelessly and sincerely (they do not find mention in news) towards this.
      As regards the dots you are seeing around you what Vishal is writing as well. That this rally is unlikely to sustain since the outlook looks muddy and there is chaos in western economies (which affects our exports like software and manufacturing). So as he suggests do your home work well and buy when you see decent dips. Volatility is the friend of a value investor.

    • That’s right Sudhir! Karthik, I believe the reason for the divergence between what’s happening in the stock market and what’s happening on ground (economy) is “easy and cheap liquidity” sloshing around. These cheap dollars can raise asset values in a blink of an eye. But the benefit to the economy will come only when the money comes via the FDI route, which is much more long term and productive in nature.

      India is a labour-sufficient and capital-deficient country, and that’s why we will always need foreign capital – but only the right kind of foreign capital (read FDI). The short term FII money (plus P-Notes money, where we do not know the real source) will only add to the volatility and noise around.

      A big negative of being a labour-sufficient and capital-deficient country is that we will have mass social unrest if the economic growth does not pick up and the income disparity rises even further. That’s I think one of the biggest risks that are rarely factored in stock valuations. Regards.

      • Actually that mass unrest is already there through the naxalite and maoist movements in mineral rich people poor districts. An economist I had met mentioned the GDP level varies widely across regions/ states in India (which you may very well be aware) and if you draw a vertical line from Kanpur in UP to Chennai in Tamilnadu all that is to the west of it will reach (by current growth rates) a certain level of prosperity by 2020 while all that is to its east will take another 20 years to get there.
        Agree, that the current rally is just excess dollars floating around. One default by a country or contraction and it could be a huge downfall.
        I would suggest consider buying gold, as well, of up to 5 to 10% of your portfolio while keeping an eye on global events for any fall in prices.
        In fact invest in all asset classes (gold, equity, real estate, debt and most importantly your skills) since these (next 3 years) are very very uncertain times. The western developed world which was a rock of stability and prosperity is shaking and getting cracks (faultlines as some call them). We will continue to plod along and may be sprint once in a while as well.

        • Agreed Sudhir… I will add Silver also..
          Real Estate– A nice Farm/Estate is more worth than some apartment or some 1 ground plot some where in a remote place…

          Infact sudgir.. people are misguided by this reel estate.. Agreed many of us would be sitting on big profits on real estate… But seems it has almost hit the roof…

          Other than premium properties/ properties in major cities.. iam seeing a contraction in my area… the difference between buy / ask rate is huge. where people are sitting on huge land banks and unable to monetise it…

          but i find gold to be only real asset as per common people… with mushrooming jewellery shops everyone is ready with new schemes.. I saw one such scheme for a jewellery shop. they had opened recently.. such was the queue on the first day for joining the scheme.. Nothing grt,, the amnt u invest is converted in relevant grams and accumulated.. after 15 months u can get jewels/coins..

          Since it can be started for as low as 1000 Rs..with minimum documentation… every common man is interested.

          • In that case it could be the making of another scam ….. a clear herd mentality amongst gold buyers. The more it goes up the more is bought and then it will fall someday or stay stuck for long periods of time.
            Also how does someone who is putting Rs 1000 a month (or for that matter 10,000 a month) establish purity of what is being given to him.
            Please note many such coins are not encashable and typically you will get 18k or 20k jewellery of the same weight as the 24k coin !

            • true.. But imagine the case.. A common man who can save something with minimum hassles is Gold alone.. there is a mushrooming of gold loan companies..
              And people who have some farms in their villages..their biggest investment is Gold..Reason.. Pledging/retrieving and minimum paper work..

              Tough to convince such people….

              • similar euphoria has come an gone in many categories. teak plantation, chit funds, fd at high interest rates by well known (but possibly non compliant or opaque) comapnies was one such i recollect. as long as you don’t put an unduly large share of your investible surplus it is fine I guess.

          • If you have to stay in a house whose value has gone through the roof it has no meaning. For you it is a dead asset.
            Also while bid and ask gap can be huge (indicative of a bubble) the fact is if number of transactions are low such rates have no meaning. Then in such a case whatever you get is the price.
            I stay in Noida and can see a glut forming on the Noida – Greater Noida expressway (a 20 kms stretch) where every month some 20 to 30 feet gets added to the under construction tower after tower and there is hardly any infrastructure.

  8. priyaranjan says:

    Why sensex P/E? ,Why sensex P/bv ?………….Why the market barometer only to compare? ….Even the scrips consisting the barometers have changed a few now. Why not comparing the strong fundamentals of the economy & the company as well ,Why making a technical calls ……like a head & shoulder pattern & so …..THE ball is in your court ….Make a sense of the investment , you are convinced with .

  9. Awesomely written Vishal…

    Loved the lines-
    “Keep playing the game. Keep investing in sustainable, growing, profitable businesses that you can get at reasonable valuations.

    “Don’t get bogged down by stock price volatility. Be wary only of permanent loss of capital. If you can do that, you need no bubble to retire wealthy with your stocks.

  10. R K Chandrashekar says:

    Very timely and thought provoking. It is a sad fact of stock market, that everyone seems to be very happy when the sensex is rising and the analyst are falling head over heals to predict the sensex level. Actually sensible investors who fully invested in a bear market should be very happy and not visa-versa!! We are very good in hindsight and act foolishly through foresight!! One would need to build a complex model of the various stocks in the sensex, with the underlying fundamentals for each mash it with the Govt policies- Fiscal and monetary, et all, mix with global factors- Q3 Easing, FII Flows, European economy, and what have you and the inter-linkages of each. That would be one heck of a economic model! What I am coming to is this: Its foolhardy to predict the sensex!! As Vishal said, watch the business channels for entertainment or to see some pretty faces!!
    The sensible thing would be to pick your stocks very carefully, nibble in small bits when the market is rising, wait for corrections- to add more. Never buy at one go or sell at one go(unless the initial stock pick was a mistake). What i have observed is if your have picked the right stock at bargain or with high margin of safety, you could continue to hold or sell partially when it is trading at rich valuations. It is not possible nor necessary to know the peak or bottom of a stock price! Ex: HDFC Bank – got in the IPO . Someone mentioned to me that HDFC Bank seem to be operating in a different planet!! I Sold a very small qty and soon realized my mistake!!
    I am a great fan of Buffet since my holding period for a majority of the stocks seems to be Forever!! Unless there is major worldwide catrastrophe like world war and all hell breaks loose??? Did some one say Black Swan!!

  11. Harish Bihani says:

    Vishal, guess this link might interest you.

  12. Hard work has gone into presenting the arguments of this article. appreciate that.

    What is the source of Sensex P/E data and graph? Do you have a excel sheet or google doc to share with the base data? It would be useful to most readers of this incisive and informative blog. Maybe we can crowdsource this data analysis

  13. Hi Vishal, can you please let me know where have you got the Graham-Dodd P/E ratio numbers from? I see that the chart mentions that the source is your research as well as Ace Research date, but If I see on the BSE website the average P/E ratio based on the last 10-12 year figures comes to only about 18.

    Have you made any adjustments to the EPS numbers reported by BSE? If so, can you please let us know the same?


  14. I think the next bull run is about to come which would take Sensex to 33000 in the next two-three years. The argument I am trying to make is based on the premise that every 8 years, there is a bull run (1992/2000/2008). By this logic, 2016 could be the year of reckoning. As the Sensex PEs charts suggest, during a bull run, Sensex PEs expand to 25 or thereabouts. Assuming a 15% Sensex EPS growth over the next two years, the EPS should be at a level of upwards of 1500. Taking a PE multiple of 25, the Sensex could easily cross 35000 and Nifty 10000. This seems ridiculous now, but so have all bull-runs been, as you would feel if you look back in hindsight.

    Another way to look at it could be to look at the average Sensex growth over the last 20 years. It has been at around 14%. Now if take 2010 November peak of 21000 as the starting point and apply 14% CAGR till 2016 (the next peak), it would work out to above 45000. We are talking of just 35000.

    I am not sure what may catapult markets to these levels, but we never knew what factors would take markets to the earlier peaks of 1992(opening up of economy), 2000 (Y2k / IT boom) and 2007-08 (global liquidity). Something may emerge from out of the blue to take the markets to the next boom. May be it is crash in commodity prices (particularly crude – following US becoming self-dependent) and unprecedented liquidity infusion via QEs.

    Your comments please.


    • But havent u heard this time is different .But logic is good 32k was my projection

      But many people dont get just like dow gold ratio there is sensex gold ratio

      So if u think gold will move to 89k

      yea sure sensex 32k … But when gold is rising crude will keep quite ?

      THE PROBLEM is debt . China check is blowing up 2000 or 1950 isa pressure point.

      So it wont work but yea ur scenario opens up only when 20080 sustains above this in sensex

  15. How to know if particular stock will cause me a permanent loss of capital?


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