Disclaimer: Nobody should use this as advice of any kind! I am just writing this for myself.
This is going to be a super short post but I wanted to get it out because I just spent an entire afternoon playing with some numbers trying to value the Nifty 50 in India. Basically, I was trying to see if the market was pricing Indian Equities reasonably as of today given the info we had. The good news is as far as my analysis is concerned, the market is fairly priced & we can actually enter it. The bad news is, well I took too many liberties & would need to review everything one by one over the summer.
Without further ado, let's jump into what I did:
I took India's Equity Risk Premium from Prof Damodaran's website. Like I said earlier, my objective was too see if what the market was pricing in was reasonable.
Got the "risk free" rate on 10 year as 7.1%. Given what we know of Countries & default risks, I cleaned up this rate to arrive at 4.41% as my actual base for RFR (using above link in 1 from Prof Damodaran).
I think 4.41% is a reasonable-ish estimate for India's long term growth aspects. Still high in my opinion, but we can work with this.
Now this is where I think inconsistencies will start to pop & my thesis would be wrong: I projected earnings growth over 20 years instead of your 5 or 10. I'll give my reasoning: 5 year & 10 year is too short a time frame for India's growth story. 20 year seems like a more reasonable ask here & that is what the markets are pricing in for India in my humble opinion. I accept that this may be entirely wrong.
With all the macro stuff out of the way, the last remaining piece was the cash yield. This is the sum of Dividend Yield & Buyback Yield that is used to estimate the forward market premiums. Remember we are solving for the expected growth rates here on cash yield. This is the point where I am 100% I have gotten something wrong. I got the Dividend Yield on Nifty from Screener.in as 2.73%. The problem is Buyback Yield. I could not find the data for Buyback Yield on Nifty. So I simply added 1% as a random guess from me as Buyback Yield.
Using solver function, I arrived at 9.24% of implied growth in cash yield over 20 years. It seems pretty reasonable given my numbers.
Drawbacks of my valuation:
Obviously there is a lot of holes in my valuation above:
I am relying entirely on data from Screener.in for my Dividend Yield. A quick google search tells me 1:4%-2.41% which is problematic because it means I may be overstating cash yield & hence underestimating the growth that is priced in.
Similarly, I just randomly added 1% as buyback yield. This in my opinion is the most dangerous & moronic adjustment. But I legit could not find the data in public domain for this.
I assumed 7.10% govt bond rate for entirety of 20 years (adjusted for default spreads). This is obviously wrong because you want to move the rate down over time as India becomes a more mature economy. That being said I don't think this will make a large difference. The right way to do these things is to use Spot rates but no way I am getting that data easily.
Lastly, individual stocks that make up the Index are actually priced off FCFE instead of Cash Yield. So valuing the Index that is made up of individual stocks should also be priced off FCFE! I tried to do this but failed badly as my FCFE yield came out to be 9-10% which made no sense as priced in growth came to be 0%! This made no sense to me but in my defense I did not have any historical data to normalize. That being said this is a project that is in the pipeline but I will be doing it for individual companies as a personal project & probably not write about it (this is because of regulatory restrictions on me).
To conclude, based on my dirty calculations the Indian market seems to be reasonably priced. I am happy to allocate some of my portfolio to Equities but have a large position in Fixed Income because I like the yields & think the Risk to Reward favors Bonds. The pricing for Equities is peak optimism without risk of a lot of going wrong, which may happen but I like to prepared for bad things. But I do feel more comfortable after this analysis going more into Equities. Remember to always do your own research & not listen to any moron like me on the internet. Stay safe all.
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