august-08 presentation by mr prashant jain
TRANSCRIPT
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Equities are unique assets that investors feel more
comfortable buying at higher prices and selling at
lower prices
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Net Inflows in Equity Mutual Funds andBSE Sensex
-20,000
0
20,000
40,000
60,000
80,000
100,000
120,000
2000 2001 2002 2003 2004 2005 2006 2007 2008
0
5000
10000
15000
20000
25000
Net Inflow s (Rs. In crs) - LHS BSE SENSEX - RHS
Source: www.amfiindia.com, www.bseindia.comEquity mutual funds include Equity, Balanced and ELSS Funds (AMFI Classification)CY2008 figures as on July 31, 2008
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SENSEX vs GOLD(July 31, 1988 July 31, 2008)
Source: Bloomberg. Period July 31, 1988 July 31, 2008.Returns are compounded annualised. Gold returns refer to returns in INR.$/oz Dollars / Ounce
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The Indian Growth Story
6.06.25.5Indonesia
4.15.05.0Korea
5.35.95.9Malaysia
6.07.97.9Singapore
4.66.06.8Hong Kong
7.89.09.4India10.011.411.1China
Regional Economies
0.91.72.4Japan
1.52.62.9EU
1.92.22.9US
Global Economies
2008E20072006
GDP Growth Rates Forecast (%)
India is now a trillion dollarIndia is now a trillion dollar
economy. Growing at 7economy. Growing at 7--9% p.a.9% p.a.
Source: CLSA Estimates
Size and growth make India a compelling asset.Size and growth make India a compelling asset.
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India transitioning to a large economy
2 0 0 6 G D P
( U S $ b n )
5 y e a r
C A G R
2 0 1 1 G D P
( U S $ b n )
U S A 1 3 , 2 0 2 3 . 0 1 5 , 3 1 3
J a p a n 4 , 3 4 0 1 . 8 4 , 7 4 6
G e r m a n y 2 , 9 0 7 1 . 1 3 , 0 6 3
U K 2 , 3 4 5 2 . 5 2 , 6 4 7
F r a n c e 2 , 2 3 1 1 . 5 2 , 4 0 6I t a l y 1 , 8 4 5 0 . 7 1 , 9 0 7
C a n a d a 1 , 2 5 1 2 . 7 1 , 4 3 3
M e x i c o 8 3 9 2 . 8 9 6 3
B r a z i l 1 , 0 6 8 3 . 2 1 , 2 5 2
0C h i n a 2 , 6 6 8 1 0 . 0 4 , 3 0 1
I n d ia 9 0 6 7 . 8 1 , 3 1 8
India is fast catching up with the bigger economies of the world due to the higher
growth rates. The Indian economy will be one of the biggest among developed and
developing countries, nearing that of Canada in the coming years.
Source: Based on recent data from Bloomberg
(Estimates)
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Economy Review
Stable Consumption demand Robust Investment demand
Real estate is facing large slowdown (actually very
positive for long term growth)
After a moderation in FY09, growth rates may
accelerate from FY10 onwards.
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Indias vulnerability to oil
Higher Current
Account Deficit
Higher Fiscal
Deficit
High Interest
rates, Inflation
High Oil prices
Adverse effect
on Equities
Equity Markets are forward looking, hence most probably have bottomed out
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Impact of oil
Indias vulnerability to oil has been a major concern, particularlyfor the FIIs Oil consumption ~7% of Indias GDP
World average ~5%, US 5%, China 7%
Oil Imports - 30% of Indias total imports in FY08 Gross Oil imports = $77bn in FY08 (net imports (E) - $58bn)
FY08 avg price = $85/bbl
At avg $110, FY09E oil imports to rise $20bn (2% of GDP)
Large subsidy bill FY08 Rs.770bn ($19bn)
FY09e Rs.2trillion ($50bn) @ $125, ($1/bbl = $600mn of subsidy)
Fuel & Light - 14% weight in WPI
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Oil Has it peaked?
Sharp correction in crude prices
Slowing global growth, stability in USD,suggest best of commodity prices are behind
Source: Bloomberg
As on August 15, 2008
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World Oil consumption
Low savings & lower growth rates should impact oil demand in US/Europe
(50% of consumption)
Source: BP Amoco
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Oil on one side demand is slowing
Global oil demand is slowing down US of global oil demand, negative growth for past several months
OECD 60% of global demand, negative growth in recent past
US - Weekly Product Supplied (kb/d)
19,000
19,500
20,000
20,500
21,000
21,500
22,000
Jan Feb Mar April May June July
2007
2008US oil demand de-growth
avg 3% in past 2Q
Source: DoE, IEA, Broker estimates
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Oil on the other, supply is growing
Demand-Supply mismatch is easing Non-OPEC supplies expected to grow by ~1.1mbd in each of 2008 & 2009
OPEC oil production assumed steady at 2007 levels, however OPEC NGLprodn expected to rise ~1mbd
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
2007 2008e 2009e
Incremental supply
Demand growth
Incremental World Oil Supplies (mb/d)
Source: DoE, IEA
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Institutional flows to equity markets
FII are possibly under-weight India
Movement of MSCI Emerging market
900
1000
1100
1200
1300
1400
1500
8/13/2007
9/3/2007
9/24/2007
10/15/2007
11/5/2007
11/26/2007
12/17/2007
1/7/2008
1/28/2008
2/18/2008
3/10/2008
3/31/2008
4/21/2008
5/12/2008
6/2/2008
6/23/2008
7/14/2008
8/4/2008
Index
poin
ts
Emerging marekts are down 20% in CY 2008
Some broad numbers
Holding on Dec-07 $360bn
(-) value drop (30%) $108bn
(-) 10% INR apprn $ 25bn
(-) actual sale $ 6bn
Current value (est) $221bn
FII exposure to India down 38% in CY-08
MSCI Emerging markets Index down
20% only
Source: Bloomberg, Internal Estimates
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Results Update 1QFY09
Earnings surprise positivelyProfit growth for the Sensex companies at 16.7%, sales growth at 31.3%.Profits clouded by forex losses, unlikely to repeat if currency remains stable
Adjusting for the forex losses earnings grew at a robust 26% YoY.
Sensex - June-0 Growth %
Sales Turnover 31.3%EBITDA 21.4%Other Income -9.4%Interest 31.6%
Depreciation 17.9%Tax 1.4%Net Profit 17.5%Net Profit (incl. Fin Cos) 16.7%Net Profit (Adjusted for Forex) 25.6%
Source: Merrill Lynch
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Sensex reverts to attractive P/Es
0
5,500
11,000
16,500
22,000
96 97 98 99 00 01 02 03 04 05 06 07 08
BSE
Sensex
30x 25x 20x
15x
12x
BSE Sensex one year forward P/E(x)
Source: CLSA Asia-Pac Markets
As on August 21, 2008
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Outlook for Equities
Indias Growth Premium has fallen
Country Fwd P/E Fwd P/EJuly 08 Jan 08
USA 12.5x 13.6x
Japan 11.2x 13.8x
China 13.8x 21.5x
India 14.2x 20.4x
Source: CLSA Asia-Pac Markets
Markets are fairly valued; mid caps are under valued Room for some P/E expansion (particularly if interest rates fall) in addition
to EPS growth
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Conclusion
Deep pessimism has given way to cautious optimism
Favourable developments FIIs Under- weight India
Decent cash balances of local Institutions
Poor supply of new stocks
Dividend Inflows ($10 bn) Ranbaxy Buyback $1.7bn
Risks/concerns
Further increase in Crude prices Populist measures/ government policy
Maintain stable outlook with positive bias.
Mid caps should outperform
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Inflation & Equities
Inflation measures rate of change. Even at current prices,
1year later, rate of change will be zero. Inflation should bemuch lower after 1 year
Equities are a hedge against inflation. Companies over
time pass on the cost increases, maintain real growth and
thus real returns
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Finally, in the last 20 years,
weve seen .Wars, terrorism, droughts & floodsAt least two major financial scandals
Assassination of 2 prime ministers
At least 3 recessionary periods
10 different governments and
Sept 11th , Pokharan blasts etc
Yet, GDP has grown nearly 15% p.a. and the Sensex by 19%p.a.
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NO. YEAR END SENSEX ROLLING 1 YR ROLLING 5 YR ROLLING 10 YR ROLLING 15 YR
GROWTH GROWTH GROWTH GROWTH
0 Mar-79 100
1 Mar-80 129 29%
2 Mar-81 173 34%
3 Mar-82 218 26%
4 Mar-83 212 -3%
5 Mar-84 245 16% 20%
6 Mar-85 354 44% 22%
7 Mar-86 574 62% 27%
8 Mar-87 510 -11% 19%
9 Mar-88 398 -22% 13%10 Mar-89 714 79% 24% 22%
11 Mar-90 781 9% 17% 20%
12 Mar-91 1168 50% 15% 21%
13 Mar-92 4285 267% 53% 35%
14 Mar-93 2281 -47% 42% 27%
15 Mar-94 3779 66% 40% 31% 27%
16 Mar-95 3261 -14% 33% 25% 24%
17 Mar-96 3367 3% 24% 19% 22%
18 Mar-97 3361 0% -5% 21% 20%
19 Mar-98 3893 16% 11% 26% 21%
20 Mar-99 3740 -4% 0% 18% 20%
21 Mar-00 5001 34% 9% 20% 19%
22 Mar-01 3604 -28% 1% 12% 13%
23 Mar-02 3469 -4% 1% -2% 14%
24 Mar-03 3049 -12% -5% 3% 15%
25 Mar-04 5591 83% 8% 4% 15%
26 Mar-05 6493 16% 5% 7% 15%27 Mar-06 11279 74% 26% 13% 16%
28 Mar-07 13072 16% 30% 15% 8%
29 Mar-08 15644 20% 39% 15% 14%
28% 19% 18% 18%
10/29 3/25 1/20 0/15Probability of Loss
Average Return
Past performance of the SENSEX may or may not be sustained in future
*Returns for the 1 year period are absolute
**Returns for periods more than 1 year are shown on a compounded annualised basisNote:
The base year of the SENSSEX is 1978-79 and the base value is 100. Please visit www.bseindia.com for the SENSEX calculation methodology
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Thank You
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