Conclusion: One way of looking at market valuations is to find out the number of years it could take the market to reach a certain level. In our base case, the BSE Sensex (used as a market proxy) could take almost 13 years to breach 50,000 from its current level. If the assumptions are optimistic, the period to 50K shrinks to under ten years.

What's New: The critical success factors for returns and hence the period to reach 50K include some obvious ones such as GDP growth, interest rates, the inflation rate and the success of India’s infrastructure roll-out. A less obvious but increasingly accepted factor is global risk appetite, which has a bearing on the expected rate of return and hence the actual rate of return. Some of the least obvious factors include the pace at which Indian companies globalize, the rate of wage increases, the investment rate, the estimated asset life in the books of accounts and capital structure alterations.

Implications: That the long-term return implied by the BSE Sensex using our residual income model is 11% under the most probable outcome is not a source for comfort since this return may not be able to compensate investors for the risks involved in investing in India. However, this return appears consistent with the current low levels of risk appetite still making Indian equities attractive in the context of current high levels of risk love. If things turn for the worse, the probability of which appears to be higher than usual, long-term returns could end by being just a tad better than the yield offered by government long bonds. For investors to be compensated with the return and risk premium they deserve (which we think is 14% given the risks associated with Indian equities), the critical success factors listed above may have to exceed our most bullish assumptions over the coming years.

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