S&P BSE SENSEX Valuation report – June 2023

S&P BSE SENSEX

Valuation Report
As on 30th June 2023

Prepared by :Prince Gupta

Guided by: Parth Verma
S&P BSE SENSEX Valuation report – June 2023

S. No. Particulars
1 Introduction
2 Context of Valuation
3 Approach & Methodology
4 Valuation
5 Sources & Disclaimer
S&P
S&PBSE
BSESENSEX
SENSEXValuation
Valuationreport
report––June
June2023
2023

1. Introduction
1.1 Background

• The Sensex was introduced on January 1, 1986, and was initially calculated with a base
value of 100.
• The Sensex, also known as the S&P BSE Sensex, is the benchmark stock market index of
the Bombay Stock Exchange (BSE) in India.
• The Sensex represents the performance of the top 30 companies listed on the BSE.
• The index acts as an indicator of the overall performance of the Indian stock market and is
used to measure the sentiment and trends of the market.
1.2 Key stats

• The S&P BSE SENSEX is witnessing a rally with 19% jump from low of 27590 on March 23,
2020.
• It is consider as relief rally by market gurus, but disrupted supply chain across the globe with
lack of guidance on earnings by the industry leaders in their quarterly review results
increases uncertainly in 2020 earnings and certainly, the index is running ahead of itself.
• The Average historical CAGR returns provided by the Index for various periods are:
a) 15 Years CAGR Returns- 14.37%
b) 10 Years CAGR Returns- 11.41%
c) 7 Years CAGR Returns- 11.88%
d) 5 Years CAGR Returns- 10.26%
S&P
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Valuationreport
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1. Introduction
1.3 Composition of Sensex

• Sensex is made up of 30 selected stocks from the top 30 companies that are used to calculate the
index.
• Few notable companies are- Reliance Industries ltd, HDFC Bank, ICICI Bank, HUL, ITC, Infosys, Bharti
Airtel, Bajaj Finance, Kotak Mahindra, Asian Paints and so on.
• The index comprises wide range of sectors such as conglomerates, Financial services, Information
Technology, Energy, Telecom, Metals, Infrastructure, Automotives etc.

1.4 Key stats

Sector Weight (%) Sector Weight (%)
Banks 30.91 Holding Companies 2.61
IT Consulting & Software 14.62 Electric Utilities 2.42
Integrated Oil & Gas 11.81 Pharmaceuticals 2.41
Personal Products 7.08 Furniture,Furnishing,Paints 2.07
Cigarettes,Tobacco Products 5.46 Other Apparels & Accessories 1.74
Construction & Engineering 4.09 Cement & Cement Products 1.31
Cars & Utility Vehicles 3.69 Iron & Steel/Interm.Products 1.24
Housing Finance 3.27 Finance (including NBFCs) 1.13
Telecom Services 3.02 Packaged Foods 1.12
S&P
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SENSEXValuation
Valuationreport
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June2023
2023

2. Context of Valuation
2.1 Context

• The valuation report for the Sensex index as of March 31, 2023. As mentioned, the report aims to determine
the valuation of the Sensex index in the context of the uncertain events that occurred during the FY 2022-23
and their impact on the Indian equity markets.
• The Sensex, which represents the top 30 companies listed on the Bombay Stock Exchange (BSE), saw a
modest appreciation of 0.72% during the FY 2022-23, indicating the challenging market conditions during
that period.
• The valuation of the index has been carried out considering various factors, including dividends paid,
buyback yield, future earnings growth, equity risk premium, and India's 10 Year Government Bond Yield as a
proxy for the risk-free rate.
• The approach used for valuation is based on the methodology used by Prof. Aswath Damodaran, a
renowned expert in valuation from NYU Stern. However, certain modifications have been made to adapt the
methodology to suit the Indian capital markets and general macroeconomic scenario.
• As with any valuation report, it is important to keep in mind that it is prepared using assumptions, and the
interpretation of the results can be subjective and dependent on the users' requirements.
• The report provides a broader idea of whether the Sensex index is considered Overvalued, Undervalued, or
Fairly valued, primarily based on the cash flows (dividends and buybacks) available to investors and
shareholders.
• Given the uncertain events and economic risks that unfolded during the FY 2022-23, the valuation report
will shed light on the impact of these factors on the Sensex index's valuation as of March 31, 2023.
• However, specific valuation results and insights would require access to the full report with detailed data
and analysis.
 S&P
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3. Approaches & Methodology

3.1 Free Cash Flow to Equity holders Historical average Yields of Sensex
• The valuation report takes into consideration the importance Years Dividend Yield (%) Buyback Yield (%) Total Yield (%)
of cash flows in the Discounted Cash Flow (DCF) valuation 20 Years 1.36% 0.13% 1.48%
approach. In DCF valuation, cash flows represent the extent of
equity holders' rights to the cash generated by a company. 15 Years 1.28% 0.12% 1.40%
• Specifically, the report focuses on Free Cash Flows to Equity 10 Years 1.23% 0.12% 1.35%
(FCFE), which are the cash flows available to shareholders. 5 Years 1.10% 0.10% 1.20%
• Deriving FCFE for all companies in the index can be a laborious
2022 1.20% 0.11% 1.31%
task, so the report follows a convenient and effective
approach. Instead of directly calculating FCFE, the report uses
dividend payouts and buybacks as substitutes for FCFE.
• These are considered to be the ultimate cash flows in the
hands of shareholders. Historical Dividend and Buybacks
• The rationale behind this approach is that whatever cash a
company generates, it is expected to be ultimately paid to ₹ 700.00
shareholders either through dividends or buybacks. This
₹ 600.00
assumption is based on the idea that in the long run, a
company will distribute its excess cash to shareholders, either ₹ 500.00
through regular dividend payments or through share buybacks. ₹ 400.00
• Dividend yield data is sourced from the BSE website, while
₹ 300.00
buyback data is sourced from Prof. Aswath Damodaran's
website. ₹ 200.00
• As buybacks are relatively smaller in emerging economies, ₹ 100.00
using sectoral buyback yield data does not cause significant
fluctuations in the valuation results. ₹ 0.00

• By considering dividend payouts and buybacks as proxies for

FCFE, the report captures the cash flows available to Divident Amount BB
shareholders, which are crucial for the valuation of the index.
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3. Approaches & Methodology

3.2 Earnings Growth
Average EPS CAGR Earnings Growth (%)
• The earnings of the Sensex 30 companies are
15 years 11.16%
calculated using the P/E ratio formula. The earnings
are derived by dividing the Index's PE Ratio by the 10 Years 8.81%
price of the Sensex (Sensex points).
• To calculate the earnings, the Sensex PE ratio and 5 Years 6.64%
corresponding price levels are sourced from the 3 Years 7.41%
BSE website. It appears that the data on the BSE
website provides daily information on Sensex prices
and PE ratios.
• However, for the sake of brevity and convenience, Average Sensex EPS
the yearly average PE range and yearly average ₹ 2,500.00
Sensex price levels are considered. ₹ 2,300.00
• To determine the future cash flows, the "Average ₹ 2,100.00
EPS CAGR 3Y" (Compound Annual Growth Rate ₹ 1,900.00
over a 3-year period) is used. This growth rate is ₹ 1,700.00
calculated for 3 years, 5 years, 10 years, and 15 ₹ 1,500.00
years. ₹ 1,300.00

• The average of these growth figures is then ₹ 1,100.00

considered for the final growth rate. ₹ 900.00

• The reason for using the "Average EPS CAGR 3Y" ₹ 700.00

over the other time frames is that it provides the ₹ 500.00

₹ 300.00
best representation of the current market trends
₹ 100.00
while also factoring in the impact of various factors
such as the COVID-19 pandemic, geopolitical
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3. Approaches & Methodology

3.3 Risk Free Rate
Average Rate For India 10Y Govt. Bond
Yield
• The risk-free rate for valuation purposes in
India is determined by considering India's 10- 15 Years 7.45%
year Government Bond Yield. 10 Years 7.25%
• The latest available data as of March 31, 5 Years 6.82%
2023, has been selected to ensure the
Latest (March 31 2023) 7.12%
valuation is forward-looking and reflects the
general economic scenario in India.
• It's worth noting that the risk-free rate is
typically derived from government bond 10Y GOI Bond Rate
14.00%
yields as they are considered relatively safe
investments. 12.00%

• Given the fact that the India's 10Y 10.00%

Government Bond Yield has varied largely 8.00%
from ~12% to ~7%, for the purpose of
6.00%
valuation.
• However, in the case of emerging economies 4.00%

like India, where reliable data for default 2.00%

spreads and sovereign default probabilities 0.00%
may not be readily available, the 10-year
Government Bond Yield is often used as a
 S&P
S&PBSE
BSESENSEX
SENSEXValuation
Valuationreport
report––June
June2023
2023

3. Approaches & Methodology

3.4 Market Risk Premium
Average Implied MRP Market Risk Premium

• The Market Risk Premium is the additional 15 Years 2.60%

return that investors expect over and above
10 Years 2.16%
the Risk-Free Rate for investing in a
particular market, which is generally 5 Years 1.91%
considered risky.
• It is a country-specific or market-specific risk Latest (March 31 2023) 1.58%
that reflects the cautious stance of investors.
When the Market Risk Premium is higher, it
indicates a defensive market stance, where Implied ERP in India
investors expect higher returns to justify 8.00%

investing in the market. 7.00%

• This suggests that investors are willing to pay 6.00%

lower prices for investments, even with 5.00%

constant cash flows. 4.00%
• The specific value of the Market Risk 3.00%
Premium for the Indian equity market is not 2.00%
provided in the given information.
1.00%
• To incorporate the latest developments in the
0.00%
Indian equity markets, the latest Market Risk
Premium data has been sourced from the
 S&P
S&PBSE
BSESENSEX
SENSEXValuation
Valuationreport
report––June
June2023
2023

3. Approaches & Methodology

3.5 Time Frame for the Valuation Report

• The valuation date for the report is set as 30th June 2023. The valuation assessment involves comparing the derived
Sensex value as per the valuation analysis with the closing price of the Sensex index as of 30th June 2023.
• This comparison helps evaluate the relative valuation of the Sensex index and assess its potential for investment.
• To calculate the derived Sensex value, several data averages have been calculated using the data from FY 1998-99 to
FY 2022-23.
• These averages include:
1. Risk-Free Rate: The average risk-free rate for this period is determined.
2. Market Risk Premium: The average market risk premium is calculated based on the historical data.
3. Nifty 50 Historical Returns: The average historical returns of the Sensex index are determined using the
available data.
4. EPS Growth: The average earnings per share (EPS) growth is computed based on the data for the specified
period.
5. Dividend Yield: The average dividend yield is calculated by considering the available data for the given period.

3.6 Beta

While valuing the index, the beta is considered to be 1. This implies that the index is being valued as a broad
representation of the market, and its movements are expected to be in line with the overall market. A beta of 1 indicates
that the index's volatility is similar to that of the market.
S&P
S&PBSE
BSESENSEX
SENSEXValuation
Valuationreport
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June2023
2023

4. Valuation
4.1 Original Case Valuation Results

Equity Risk Cost of Sensex Current

Total Yield Expected Growth Risk-Free Rate Result
Premium Equity Valuation Price

20 Years 3 Years Latest Latest 8.64 75000.00 64718.56 Undervalued

Valuing the S&P BSE SENSEX

75000
Key Inputs Assumptions
Undervalued
Date 30-06-2023 30-06-2023
Current SENSEX Level 64718.56 64718.56
The market implied fair value of Sensex
Total Yield 20 Years 1.48% is 75000.00 The Sensex is currently
Expected Growth 3 Years 10.64% trading at 64718.56.
A 15.89% appreciation is expected from
Risk-Free Rate Latest 7.06% this level.
Equity Risk Premium Latest 1.58%
Cost of Equity 8.64%
S&P
S&PBSE
BSESENSEX
SENSEXValuation
Valuationreport
report––June
June2023
2023

4. Valuation
4.2 Maximum time frame case Valuation Results

Equity Risk Cost of Sensex Current

Total Yield Expected Growth Risk-Free Rate Result
Premium Equity Valuation Price

20 Years 3 Years Latest Latest 8.64 55400.00 64718.56 Overvalued

Valuing the S&P BSE SENSEX

55400
Key Inputs Assumptions
Overvalued
Date 31-03-2023 31-03-2023
Current SENSEX Level 64718.56 64718.56
The market implied fair value of Sensex
Total Yield 20 Years 1.48% is 55400.00. The Sensex is currently
Expected Growth 3 Years 10.64% trading at 64718.56.
A 14.40% correction is expected from
Risk-Free Rate Latest 7.06% this level.
Equity Risk Premium Latest 1.58%
Cost of Equity 8.64%
S&P
S&PBSE
BSESENSEX
SENSEXValuation
Valuationreport
report––June
June2023
2023

5. Sources and Disclaimer

5.1 Sources
• Investing.com
• NSE India official website
• Market Premia website
• Prof. Aswath Damodaran website

5.2 Disclaimer
• The report's valuations are founded on a set of assumptions that are derived from an understanding of the
current situation in the Indian capital markets. This implies that the accuracy of the valuations depends on the
validity of those assumptions.
• The report is prepared solely for educational purposes, suggesting that its primary aim is to provide information
and knowledge rather than serve as professional advice.
• The author explicitly states that they bear no liability or responsibility for any losses incurred as a result of
using the report as investment advice. This implies that individuals should not rely solely on the report when
making investment decisions.
• Although efforts have been made to ensure the report's accuracy, users are advised not to rely on it for
investment purposes. This statement suggests that while the report aims to be as accurate as possible, it may
not be comprehensive or entirely reliable for making investment decisions.

5.3 End Note

I would like to thank the readers for their time dedicated towards reading the report. Feedbacks are always welcome.
Please feel free to get in touch at Princegupta1523@gmail.com for any questions and/or feedback.
S&P
S&PBSE
BSESENSEX
SENSEXValuation
Valuationreport
report––June
June2023
2023

5. Acknowledgement

Report Prepared by- Prince Gupta

Guided by- Mr. Parth Verma, Founder- The Valuation School

I would like to extend my sincere gratitude to Mr. Parth Verma, Founder of The Valuation
School, for his invaluable guidance and support throughout the preparation of the Index
Valuation Report!