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Nifty closes above 15k mark after 25-year journey

In flashback – 1996 to 2021

For the first time in history, the Nifty has closed above the psychological mark of 15k on 8th Feb 2021. Nifty has come a long way after it was launched in Apr’96, when it traded at 1,107, with the base year of Nov’95 set as 1,000. Like the Sensex, which recently crossed the 50k market, Nifty took nearly ~18 years to reach 7K while the next 8K has come in the last ~6.8 years. Nifty 50 Index constituents make up roughly 58% of the total India market cap. On this spectacular journey, the Nifty has mirrored the country’s economic growth from the time that it was launched. It saw the initial phase of political instability over 1996–98; since then, it has seen and overcome various challenges – such as the Asian Financial Crisis, the dot com bubble, the Global Financial Crisis, the Taper Tantrum, and the COVID pandemic – all of which have shaped it into the economic powerhouse it is today.

* The recent sprint to 15k in Feb’21, from pandemic lows of 7.6k in Mar’20 – has seen the index has double in just 220 days. The sharp recovery in the index has been driven by a benign global liquidity backdrop, better containment of COVID-19 cases, sharp recovery in corporate earnings, and a market-friendly budget.

* In this note, through select interesting exhibits, we traverse the Nifty’s journey from 1,107 in 1996 to 15k today

Nifty up 14x in ~25 years – a non-linear journey

* While traversing its journey from 1107 to 15k, the Nifty (up ~14x) has delivered 11.1% CAGR returns in the last 25 years. While the returns have been impressive, this has been a non-linear journey (as shown in Exhibit 4).

* CY’2009, the post-GFC year – in which the markets rebounded from the lows of the GFC and the UPA formed a stable government at the center – was the best year of annual returns, with the Nifty delivering 76% gains. On the other hand, CY2008, the year of the Global Financial Crisis (GFC), was the worst – the Nifty ended this year with a 52% decline.

* In the last 25 years, the Nifty has given calendar annual returns of >20% in 10 years and has declined in 7 years.

* The Nifty’s journey from 1107 to 2k was the most excruciating – as it took a total of 2,167 trading days (almost 8.7 years). The move from 6k to 7k was also prolonged (1,589 trading days or 6.5 years) as the markets took time to recover from the long phase of correction in the aftermath of the GFC in 2008. On the other hand, the move from 14k to 15k has been the quickest – covered over just 25 days. Of course, as the levels move higher, every 1k point journey implies lower percentage returns.

Sunrise and Sunset: Some sectors gained prominence, others have faded

* Over the years, the sectoral representation of the Nifty has undergone a world of change. In fact, the representation of sectors remains in consonance with the changes in the underlying economy. The Nifty in Apr’96 had zero representation from Technology and was dominated by Consumer, PSU Banks, and other sectors such as Oil & Gas, NBFC, Autos, Metals, and Textiles. Private Banks had only one representative in the form of HDFC Bank with 0.4% weight. With a) a change in the economy from Manufacturing to Services over the past three decades and b) the rise of the private sector, the sectoral representation in 2021 is vastly different from that of 1996.

* The Top 2 sectors in 2021 – Private Banks (25.5%) and Technology (16.1%) – had 0.4%/0% representation in the Nifty in 1996.

* PSU Banks and Metals have also seen massive decline in weights to 2.3%/2.1% now in 2021, from 12.2%/10.7% in 1996. Textiles (4.9%), Hotels (2.2%), and Shipping (0.9%) have zero representation in the Nifty as of 2021.

* Consumer / Auto / Capital Goods / Cement weight has dropped to 9.4%/6.0%/2.9%/2.4% in 2021 from 17.6%/10.9%/4.4%/3.9% in 1996. On the other hand, Oil & Gas has remained largely flat (from 11.7% to 11.5%), primarily on account of Reliance. Healthcare has seen a minor increase in weight. Life Insurance and Retail are other smaller sectors with a representation in the Nifty in 2021 (which were not present in 1996).

13 companies have traversed the entire journey!

* Of the 50 stocks in the Nifty, thirteen companies – HDFC Bank, RIL, HDFC, ITC, HUL, L&T, SBI, Tata Motors, Dr Reddy’s Labs, Tata Steel, Grasim, Hero and Hindalco – have been a part of the index’s journey since inception.

* The combined market-cap of these 13 companies has grown at a CAGR of 18% between Apr’1996 and Feb’2021.

* The common stock weightage in the Nifty-50 has reduced to 44% currently from 50.8% in Apr’1996.

Nifty Earnings compounded by 8% over FY1997–FY2020

* Nifty EPS compounded by 8% over FY1997–FY2020. Nifty EPS, which was at 75 in FY1997, ended FY2020 at 467.

* Nifty Earnings growth can be broken down into three periods. Over FY1997– FY2003, Nifty EPS grew at a 3.5% CAGR. Post this, over FY2003–08, during the economic boom, Nifty EPS compounded by a 25% CAGR. Again, between FY2008–20, the Nifty EPS CAGR slowed to a 6% CAGR. Post the recent pandemic, we estimate Nifty EPS to grow at a 23.5% CAGR over FY2020–22E to 713.

Valuation multiples changed in line with underlying change in constituents

* In line with the change in the underlying composition of the Nifty, the valuation multiples of the Nifty have also moved up.

* The average P/E multiple of the Nifty between Apr’1996 and Feb’2021 stands at 15.7x; however, the average for the last 10 years is 18.8x.

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