Analyzing Indian Equity Returns: A Flashback to Historical Data

Turn to learn from past Return Looking at flashback of Indian equity returns Dhiraj Dave Goa- June 2019 Valuepickr Meet

Objective To understand Indian market return since independence

Limitation No data available, Sensex started from 1 Jan 1986 with base year 1978-79 (1 April 1979 being 100)

Data sources Compiled data from RBI, Economic Survey, Google books and BSE Given the limitation of data, approach was developed to use available data and learn from same rather then putting efforts to get relevant data. That is BIG constraint which the reader shall recognize that.

Approach One: Bottom Up BSE Year book on 1946 is a classic read. https://ns.mstatic.in/LS/BSE_Book.pdf Got information about many companies in 1940s. Tried to see the current market cap and other financials ratios of the companies Summarised finding about how Indian companies (very few survived over 8 decades) have performed over period in the following slide

Indian companies performance Company Mkt Cap (Rs Cr) Mkt Cap (Rs Cr) Mkt Cap XIRR (Without Adj Capital change) 1945 2019 Bank of Baroda 2.06 43,257.00 14.77% Bank of India 2.00 26,696.00 14.05% Central Bank of India 9.05 13,801.00 10.68% Dena Bank 0.70 2,858.00 12.20% Bombay Dyeing 5.00 2,800.00 9.15% Century Textile (Spinning) 2.44 11,784.00 12.46% Tata Steel 14.71 57,745.00 12.11% Tata Chemical 2.19 16,1999.00 13.12% Tata Power 7.69 19,150.00 11.43% ACC 19.94 33,047.00 10.81% Phoenix Mills 1.78 9,442 14.48%

Approach One: Learning Insurance, Banking, Textile, Sugar and very few other companies were main listed companies during early 1940s Banking sector return would not be correct representation due to nationalisation and also frequent dilutions. These companies have survived over 7 decades itself is major achievement. The average return in market capitalisation since 1946 for these selected companies sample is around 12.30% p.a.

Approach Two: Total Market Cap BSE Year book available on BSE website and RBI Data on Economy did provide for Year wise Indian market capitalisation over year Equity change (increase/decrease) are not considered and hence this approach has limitation as compared with Index which considered adjusted prices

Approach Two: Results XIRR of --> Market capitalisation GNP at current price GNP at constant price Market Cap/GDP Current price 1 1951-1961 6.9% 5.6% 4.1% 6.6% 1961-1971 7.3% 10.4% 3.8% 5.0% 1971-1981 11.5% 13.2% 3.5% 4.3% 1981-1991 31.3% 12.6% 4.8% 19.6% 1991-2001 17.9% 14.1% 5.6% 27.3% 2001-2011 28.2% 13.6% 7.5% 91.5% 2011-2018 11.0% 11.9% 6.8% 86.5% 1951-2018 16.4% 11.7% 5.1% 86.5% 1991-2018 19.7% 13.3% 6.6% 86.5% 1 For End year, for instance for 1951-1961 period, the ratio is for 1961 and likewise

Approach Two: Learning Every year new equity issues in form of Rights/New issues/IPO is in range of 0.1% - 1.3% of Market cap. Hence, we may adjusted CAGR return by 0.50-0.75% for new equity related market capitalisation 1981-1991 is Golden decade for Indian equity investor. During the period, market capitlisation compounded at 31% p.a. During last 7 decades, market capilisation has compounded at 16.4% p.a. as against 11.7% p.a. for Nominal Indian GDP. Post liberalisation of Economy in 1991, market capitlisation compounding increased marginally to 19.7% p.a.

Approach Three: Adjusted Index While BSE Sensex is the oldest data point about market performance, from Economic survey and RBI report, the market performance was measured by an Index named Index of Prices of Variable Dividend Securities (Old Index). In my limited understanding, this index was calculated from base price of securities with variable dividend (equities) to evaluate performance of equity pre-Sensex Era. I have compiled data of Old Index with various base years, and adjusted Sensex derived value from Base year to calculate the adjusted Sensex Series since 1950s.

Approach Three: Results Start value 1 End value1 Period Start date End date XIRR 7 Decades 01-01-1952 31-03-2019 -41.75 38,672.91 10.7% Post liberalisation 01-04-1991 31-03-2019 -1,167.97 38,672.91 13.3% 1950s 01-01-1952 31-03-1960 -41.75 64.83 5.5% 1960s 01-04-1960 31-03-1970 -64.83 81.48 2.3% 1970s 01-04-1970 31-03-1980 -81.48 128.57 4.7% 1980s 01-04-1980 31-03-1990 -128.57 781.05 19.8% 1990s 01-04-1990 31-03-2000 -781.05 5,001.28 20.4% 2000s 01-04-2000 31-03-2010 -5,001.28 17,527.77 13.4% 2010s 01-04-2010 31-03-2019 -17,527.77 38,672.91 9.2% 1 Adjusted BSE Sensex Value

Approach Three: Learning Over the 7 decade, Adjusted BSE Sensex provided yield of around 10.7% p.a. which is comparable to Bottom up average, but lower then market cap approach. 1980s and 1990s were the best decade for equity market while 1960s was the worst performing decade for Indian stock market.

Summary Equity market return over 7 decades have been 12.3% p.a. Approach I, 15.4% p.a. (adjusted with -1% for increase in market capitalisation by new issue) Approach II and 10.7% p.a. under Approach III. While these approaches have various limitations which make finding questionable, at least it provide for range for 10.7%-15.4% being return over 7 decades in Indian stock market. My basic objective was to get indicative number range which various approaches have achieved. This is not an end result, but a first step in process. It was my attempt to get answer to the question, what has been Indian stock market return since independence?

Disclaimer I have prepared this presentation to share my approach on calculating return in Indian stock market. These approaches may have many limitations some of which are highlighted in presentation, but many more, which are not mentioned in presentation. The objective of presentation is more to make reader about probable return achieved in stock market since independence then to give number itself. There is possibility of error in calculation at author s end which reader shall take note off. Any view on this presentation may be shared with reader on valuepickr thread on the subject.