Sensex scales above 100,000; Voila it is already there

26 Jul 2023 , 07:20 AM

In the last couple of months, when the Sensex rallied from below the 60,000 mark to cross the 67,000 mark, one question that has been doing the rounds is, “when will the Sensex scale 100,000.” Not that the Sensex of 100,000 has any special meaning. In the long term process of wealth creation, it is just a number. After all, in the 44 years since the Sensex base of 100 in April 1979, the index has multiplied wealth 670 times. 

That is mind boggling returns, but we will come back to that later. An index that has grown 670 times in 44 years, ideally should not have a problem growing another 50% in the next few years. However, that is not the point. The point is that the Sensex has already breached the 100,000 mark. The only difference is that we are looking at the TRI Sensex index and not the Sensex Price Index. What exactly is the difference between the two?

TRI index versus Price Index: what is the significance

If you read the factsheet of any equity mutual fund, you will find that it is benchmarked to the Nifty or to the Sensex or to a more broad-based TRI index. So, let us first understand what this TRI index is all about. Typically, when you hold shares of a company, there are two kinds of returns that you get. There are the capital gains you get on sale of the shares and you will get the dividends declared by the companies if you are holding the shares on the record date. 

The typical Sensex Price Index (which is currently at the 66,000-67,000 levels) ignores the dividend aspect of shares. It only considers the point-to-point price change. However, that does not give a true picture since when you hold shares you also earn dividends. That is the gap that the TRI index fills up. Total Returns Index (TRI) factors the dividend and the capital appreciation and then calculates the returns. The TRI returns are always higher than the price returns since dividends are also included. That is why, SEBI has made it mandatory for equity mutual funds to benchmark against a TRI index since that would be not unnecessarily overstate their fund performance.

Is the TRI Sensex really above 1 lakh?

According to data sourced from moneycontrol.com, the TRI Sensex crossed the 100,000 mark for the first time on July 17, 2023 and current it stands at 101,246. So, if you look at the Sensex TRI index, it has already crossed the 1 lakh mark, event through the Sensex Price index is still in the range of 66,000-67,000. But, how come the gap between the Price based Sensex and the TRI Sensex is so high? You can understand that with a very simple illustration of how the Sensex values have grown since inception.

Let first look at the Sensex price index. The index has moved from its base value of 100 in April 1979 (Sensex base month) to a level of 67,000 currently. That is a 670 bagger. In other words, had you invested Rs1 lakh in the Sensex, without doing anything, that would have been worth Rs6.70 crore. What does that translate into in terms of CAGR over the last 44 years. A simple excel simulation would tell you that this translates into CAGR returns of around 15.91% over the last 44 years. That is quite impressive, but there is more to come.

Till now we have been only looking at the Sensex Price Index. To arrive at the Sensex TRI index from the base, we have to add the impact of dividends. Obviously, you cannot go stock wise since the composition itself has changed over time. Hence, we can use the average Sensex dividend yield as a proxy. If you look at the range of dividend yields over the last 40 years (excepting for the extreme situations), the dividend yield has ranged between 1.2% and 1.4%. To be conservative, we shall use 1.2% since we will also be getting the benefit of compounding. To arrive at the CAGR for TRI, we shall add the 1.2% dividend yield to the 15.91% Sensex CAGR returns. That gives us compounded TRI returns of 17.11% on the Sensex between 1979 and 2023. If you extrapolate this yield over 44 years, you will find that the TRI Sensex is already above the 1 lakh mark.

What does that mean in terms of wealth creation on the Sensex? Remember, in the TRI index, the assumption is that all dividends received are reinvested in the Sensex in the same proportion. Obviously, that does look practically difficult, but it is important as it factors in the dividend income too. What this means is that if you consider the TRI Sensex instead of the Price based Sensex, then the index has actually been a 1,010 bagger and not just a 670-bagger. Also, your investment of Rs1 lakh in April 1979 in the Sensex would have growth to Rs10.1 crore as per the Sensex TRI calculations.

Sensex TRI index has consistently outperformed Sensex Price index

Even if you look at different periods under consideration, the TRI index has outperformed the Price index quite comfortably. For example, over the last 10 years since the year 2013, the Sensex Price Index and Sensex TRI index have delivered returns at a CAGR of 12.8% and 14.3% respectively. The difference is the dividend impact on the Sensex stocks. The Sensex on the various screens and charts may show that the Sensex 67,000. 

However, what matters in the ultimate analysis is how much wealth the Sensex has created, and that includes price appreciation and dividends. If you go by that benchmark, the Sensex is well above the 100,000 mark now. Sensex TRI or the Sensex Total Return Index was created assuming that all dividends paid by constituent companies were systematically reinvested into the index itself. That may be practically tough but the logic of the assumption cannot be disputed at any point. From that perspective, Sensex is already above 100,000.

What has driven the growth in both Sensex indices?

Interestingly, the Sensex Price Index and the Sensex TRI have shown most of the percentage growth in the initial years but most of the value growth in the last 10 years. The dividend advantage means that the Sensex TRI has gained more than the Price based Sensex. For instance, the regular Sensex has doubled from its level of October 2017 while the Sensex TRI has doubled from its level in January 2018. We have seen both the indices over the last 10 years, but what about last 20 years. 

In last 20 years, the returns on the regular price-based Sensex stood at 15.5% while the CAGR returns on the TRI Sensex stood at 17.2%. This can also be attributed to the fact that companies have started paying out more liberal dividends in the last few years when they have been flushed with cash. How does that look in value terms. Remember, year 2003 was the start of the 5 year structural bull market. From that level, Rs1 lakh invested in the regular Sensex would have grown to Rs18 lakhs while it would have grown to Rs24 lakhs as per the TRI Sensex.

By God, are we sitting on a massive bubble then?

Fortunately, we are nowhere close to a bubble. Let me explain. Rising indices do not create a bubble. What really creates a bubble is when the earnings do not keep pace with the growth in the indices. Let us look at the Sensex level and the Sensex earnings for the last 33 years since the Iraq Kuwait war, when the Sensex had touched 1,000 for the first time. Since then, the Sensex has grown over 66 times, but even the earnings of the Sensex companies have grown by a whopping 45.9 times from Rs59 Sensex EPS to Rs2,706 Sensex EPS. For now, it is a good time to pop the champagne and raise a toast to the Sensex. It may be the TRI index, but it has eventually crossed the 100,000 mark.