indian equities – best is ahead

Motilal Oswal Business Impact Conference (MOBIC)

INDIAN EQUITIES – BEST IS AHEAD

STRATEGY | October 2016

9 1 3 5 7 9 1 3 5 7 9 1 3 5 7 9 1 37 8 8 8 8 8 9 9 9 9 9 0 0 0 0 0 1 1

r- r- r- r- r- r- r- r- r- r- r- r- r- r- r- r- r- r- a a a a a a a a a a a a a a a a a aM M M M M M M M M M M M M M M M M M

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Definition of Investing

60only buy “wor

After factoring in

1STRATEGY | October 2016

Mar

-16

onl y buy goods “wor th”

120

100

100

80

INR100 of 1979 can

INR 5.5 today!

40

the Consumer Price

20

In

fla

ti

o

n

In

de

x

5.

5

0

r

51y-Ma

9 1 3 5 7 9 1 3 5 7 9 1 3 5 7 9 1 37 8 8 8 8 8 9 9 9 9 9 0 0 0 0 0 1 1r- r- r- r- r- r- r- - - - - - - - y- y- y- y-a a a a a a a pr pr pr pr pr pr prM M M M M M M A A A A A A A Ma Ma Ma Ma

Fixed deposit would have preserved your Purchasing Powe


Purc

hasi

ng P

ower

Mar

-16

100

150

130

104110

90

70

50

51y-Ma


Gold would have doubled your Purchasing Power


Purc

hasin

g Po

wer

Mar

-16

350

300

250

200

214150

100

100

50

51y-M


Equities would have multiplied your Purchasing Power 15x


Purc

hasin

g Po

wer

Mar

-16

a

1,750 1,570

1,500

1,250

1,000

750

500

250

Key Objectives of Investing: Over 36 years --> 18x Vs 38x Vs 476x

50,000 47,508,Sensex nsex cum Dividend Fixed D

If you had invested Rs100 ...40,000

25,342,

30,000ver the last 100 years -- >

S&P 500 rose 273x,

Include dividends, it rose 18,520x!20,000

3,808,

10,0001,842,

0


Nom

inal

Val

ue

Mar

-79

Mar

-81

Apr-

83

May

-85

May

-87

Jun-

89

Jul-9

1

Jul-9

3

Aug-

95

Sep-

97

Sep-

99

Oct

-01

Nov

-03

Nov

-05

Dec-

07

Jan-

10

Jan-

12

Feb-

14

Mar

-16

Sen Sensex c eposit Gold 18%

16%

O

I

ver th

9% -->

10%

8%

Macros: Read, Discussed, Debated Threadbare!

Feb-07: Risingdefault rate hits

subprime mortgageindustry in US


Macros push you out of Time-in & into TIMINGDec-14:30,000

Sep-08: USGovernment

takesover Fannie Maeand Freddie Mac,Merril Lynch sold

Roubletumbles

May-10:750b Euro

Stabilizationpackage to

PIIGS countries

Feb-07:Rising

defaultrate hits

25,000 to BoA, Lehmansubprimemortgageindustry

in US

Brotherscollapse

Mar-15:Taper tantrum

II(FED rate

20,000hike fear)

Sep-14:15,000Brent crudegoes belowUSD100/bb

Aug-11:S&P

downgradesUS Sovereign

Oct-09: Greecepublic finance

weaknessrevealed10,000triggeringsovereign

debtcrisis

5,000


Jan-

07

Jul-0

7

Dec-

07

May

-08

Sep-

08

Mar

-09

Jul-0

9

Dec-

09

May

-10

Oct

-10

Mar

-11

Aug-

11

Jan-

12

Jun-

12

Nov

-12

Apr-

13

Sep-

13

Feb-

14

Jul-1

4

Dec-

14

May

-15

Oct

-15

Mar

-16

Stocks are SLAVES OF EARNINGS

KNOWABLE

UNKNOWABLE

UNIMPORTANT IMPORTANT


Unknowable& Unimportant

ImportantBut Unknowable

Knowablebut Unimportant

Important& Knowable

Earnings growth / Stock Returns captured by -->Time-In & Not Timing, stupid!


1984-2013 S&P 500 returned 11.1% CAGR Avg returns earned by investors in Equity mutual funds was a paltry

3.7%!!

Bond Index returned 7.7% CAGR Avg returns earned by investors in Bond funds was a paltry 0.7%!!

The most powerful concept of Finance


The most powerful concept of Finance -> The idea that a $ saved today will grow to be worth more than a $ tomorrow

The greatest shortcoming of the human race is our inability to understand the exponential function

DID YOU KNOW -> It's hard to believe that $65.7

billion of Warren Buffett's $66 billion net worth came after

his 50th birthday. But it did.

Compound Interest: The Eighth Wonder of World

He

Hewho

whounderstands it, earns it…

doesn’t…pays it! - Albert Einstein


INDIAN EQUITIES – TIME IN OR TIMING?

STRATEGY | October 2016 12

India Macro The missing "G" (QLP are in place!)

India Corporate The worst is behind

India Valuations Quite reasonable

India Flows The tide has turned

India Outlook Best is ahead

16E FY

1F

6Y1F 6

Y

6Y1FE 16

E FY

16FY

Y1E

6

F

Macro: On a very strong footing Government steadfast on the fiscal consolidation roadmap CAD-GDP ruling well within sustainable level of 3%

Fiscal deficit (Centre, %) CAD/GDP (%)6.55.9

4.1 3.93.5

-1.7

-4.2-4.7

Inflation came down to decadal lows; deflationary conditionprevails for the wholesale prices

Comfortable forex reserves built up while allowing INR todepreciate nominally

Forex reserves INRCPI Inflation (YoY%) WPI Inflation (YoY%)67

6512.4 61

10.5 10.5 10.2 9.5

6.04.9

3.5

2.2


FY10

FY10

FY11

FY11

FY12

FY12

FY13

FY13

FY14

FY14

FY15

FY15

FY16

FY16

FY17

EFY

17E

FY10

FY10

FY11

FY11

FY12

FY12

FY13

FY13

FY14

FY14

FY15

FY15

FY16

FY16

FY17

EFY

17E

3.6

9.6 8.97.4 6.0

2.0-2.5

360

60

351

54

341

4746

305

48

304294 293279

-1.1 -1.4

-1.3

-2.8 -2.6

4.9 4.9 4.5

16E FY

16E FY

Growth: Is the only missing linkWitnessing deflation (nominal GDP near real) first time in fourdecades

Nominal GDP growth has collapsed

Nominal GDP growth (YoY%)20.2

20

15

10

5

0

-5

Real indicators of volume growth of industrial productionremains weak

New projects have dried up, moderate increase in projectsunder implementation

New projectsIIP (YoY%) Increase in under implementation projects

15.5 5000

11.08.2 2500

2.9 2.8 2.51.1 0

-0.1-2500


FY05

FY10

FY06

FY07

FY11

FY08

FY12

FY09

FY10

FY13

FY11

FY12

FY14

FY13

FY15

FY14

FY15

FY16

FY16

FY60

Jun-

10Se

p-10

Dec-

10M

ar-1

1Ju

n-11

Sep-

11De

c-11

Mar

-12

Jun-

12Se

p-12

Dec-

12M

ar-1

3Ju

n-13

Sep-

13De

c-13

Mar

-14

Jun-

14Se

p-14

Dec-

14M

ar-1

5Ju

n-15

Sep-

15De

c-15

FY64

FY68

FY72

FY76

FY80

FY84

FY88

FY92

FY96

FY00

FY04

FY08

FY12

FY16

12.9

8.65.3

2.5

15.1 15.713.9 13.3

10.88.7

40 years!

Global & Domestic cyclicals: Earnings collapse PAT (INR b)


But, diversity of corporate India has come to rescue PAT (INR b)


Share of Domestic Cyclicals witnesses sharp improvement QoQ Global Cyclicals and Defensives share largely flat


Defensive includes Consumer, Healthcare, Technology, Telecom and UtilitiesGlobal cyclicals includes Metals, Oil & Gas and JLRDomestic cyclicals includes Automobiles, Banks, Capital Goods, Cement, Media, NBFCs, Real Estate and Retail

Corporate Profit to GDP has halved Corporate Profit to GDP (%)


FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

E

4.3

7.8 Average7.3 of 5.5%

6.2

5.4 5.5 6.5

4.7 6.2

4.94.6

4.0 3.9

And Corporate profitability has collapsed


FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

14.3

Corporate PAT Margin (%)

Average:14.3%

17.216.3 16.3 16.4 16.1

14.8 14.6

13.112.5

11.911.6 11.0

Markets valuations below averages, on lowest margins Sensex Trailing P/E (x)

Market Cap to GDP (%)Trend in India's contribution to world market cap (%)Peak market cap to GDP of

Average of 66% forthe period

3.395

88 8174706664

1.8


Aug-

06

Feb-

07Ju

l-07

Dec-

07M

ay-0

8O

ct-0

8Ap

r-09

Sep-

09Fe

b-10

Jul-1

0De

c-10

Jun-

11N

ov-1

1Ap

r-12

Sep-

12Fe

b-13

Aug-

13Ja

n-14

Jun-

14N

ov-1

4Ap

r-15

Oct

-15

Mar

-16

Aug-

16

Sep-

06

Sep-

07

Sep-

08

Sep-

09

Sep-

10

Sep-

11FY

02

FY03

FY04

Sep-

12FY

05

FY06

FY07

Sep-

13FY

08

FY09

FY10

Sep-

14FY

11

FY12

FY13

Sep-

15FY

14

FY15

FY16

Sep-

16FY

17E

103149% in Dec 2007

82 83

5552

71

4226 23

India's Contribution to World Mcap (%)3.60

2.952.5

2.30Average of 2.3%

1.65

1.00

Current Sensex P/E (x) Sensex PE on Normalised PAT Margin (x) +1SD 10 Year Avg (x)

27

22 21.018.3 20.1

1717.0

12

7


Crystal ball gazing the Future

Short term hazy, Long term clear

Case for India emerging as an asset class

Top 10 GDP countriesIndia GDP (USD b)

Dec 2015GDP (USD

b)Rank Country

1

2

3

4

5

6

United States

China

Japan

Germany

United Kingdom

France

17,968

11,385

4,116

3,371

2,865

2,423

8

9

Italy

Brazil

1,819

1,800

10 Canada 1,573


7 India 2,183

Domestic buying would dwarf FII flows Trend in DII Flows (USDb)

14.913.312.1 11.8

3.2


FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

E

FY18

E

FY19

E

FY20

E

13.1 Avg DII/FS of 1.2%Avg DII/FS of 4.4%

-4.1 -3.7

DII Flows (USD b) DII as % to Financial Savings

0.4 0.2 3.3 6.0 12.3 10.5 3.1 -2.4 -0.7 -9.7 -6.6 -2.3 7.0 6.0 6.0 6.0 6.0

USD 28b 17.7 USD -12b 16.7

6.4 5.1

0.3 0.1

-0.9

-8.9-12.7

DII as % to Financial Savings

Sub-par earnings growth for 8 years now Sensex EPS: Rebound in FY16-18 with 17% CAGR Versus 6% CAGR during FY08-16

1% CAGR

1,024

446

291 278 280 272266 236216


FY93

FY94

FY95

FY96

FY97

FY98

FY99

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

E

FY18

E

FY93-96:45% CAGR

250

FY96-03: FY03-08: FY08-16: FY16-18E:

1,807

FY93-FY16: 1,490

1,337 1,356

1,120 1,181

720 833 820 834

540

361

25% CAGR

13% CAGR

6% CAGR 17% CAGR

1,330

81 129 181

Corporate Profit to GDP has hit the bottom

Corporate Profit to GDP 7.8

7.0 High:7.8%

6.2

5.2 5.5

5.0 4.64.7 4.6

4.34.0


FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

E

FY18

E

FY19

E

FY20

E

Corp Profit to GDP (%) Average Average Plus

8.0

7.3 Average: 5.5% Average Plus: 6.6%

6.5 6.5

6.26.0

5.9

5.4

5.5 5.1

4.9

4.7

4.0 4.3

3.9

3.0

REVERSION TO MEAN = 24% EPS CAGR

4,187

3,216

2,077

Note: Nominal GDP Growth & Sales Growth estimate of 11-12% in FY17-FY20


FY04

361

FY05

446

FY06

540

720

FY07

833

FY08

820

FY09

834

FY10

1,02

4FY

11

1,12

0FY

12

1,18

1

FY13

1,33

7FY

14

1,35

6FY

15

1,33

0FY

16

FY17

E

FY18

E

FY19

E

FY20

E

Sensex EPS (INR) Average Average Plus

4,50033% CAGR

3,600 24% CAGR

3,1542,700 2,439

2,567

1,8201,800

1,669

900

0

And stocks are slaves of earnings! Sensex Index

85,000 Trailing PE 80,643

61,774 21% CAGR

46,724


FY04

5,59

1

FY05

6,49

3

FY06

11,2

80

13,0

72FY

07

FY08

15,6

44

9,70

9FY

09

17,5

28FY

10

FY11

19,4

45

17,4

04FY

12

FY13

18,8

36

FY14

22,3

86 27,9

57FY

15

25,3

42FY

16

FY17

E

FY18

E

FY19

E

FY20

E

Sensex (INR) Average Average Plus

34% CAGR

Average: 17.5x Average Plus: 19.2x High:25.2x

65,000

55,223

45,000 45,950

34,77637,986

25,000 31,165

5,000

Corporate Profit Margins have hit the bottom

16.1 15.7

14.6

14.3 13.1 14.3

12.211.6

Note: Nominal GDP Growth & Sales Growth estimate of 11-12% in FY17-FY20


FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

E

FY18

E

FY19

E

FY20

E

Corporate PAT Margin (%) Average Average Plus

20.0Corporate PAT MarginAverage: 14.3%

17.2 Average Plus: 15.7%

17.0 16.3 16.3 16.4 High:17.2%

14.8 14.6

14.0 13.4

13.5

12.5 12.7

11.0 11.9 11.8

11.0

8.0

REVERSION TO MEAN = 25% EPS CAGR

3,000

1,867

2,081


FY04

361

FY05

446

FY06

540

FY07

720 83

3FY

08

820

FY09

834

FY10

1,02

4FY

11

1,12

0FY

12

1,18

1FY

13

FY14

1,33

7

1,35

6FY

15

1,33

0FY

16

FY17

E

FY18

E

FY19

E

FY20

E

Sensex EPS (INR) Average Average Plus

6,000

39% CAGR5,000 4,907

4,000 25% CAGR

3,581

3,201

2,5962,586

2,000

1,6671,000

0

And stocks are slaves of earnings!

Trailing PE 94,513


FY04

5,59

1

FY05

6,49

3

FY06

11,2

80

13,0

72FY

07

FY08

15,6

44

9,70

9FY

09

FY10

17,5

28

19,4

45FY

11

FY12

17,4

04

18,8

36FY

13

22,3

86FY

14

27,9

57FY

15

25,3

42FY

16

FY17

E

FY18

E

FY19

E

FY20

E

Sensex (INR) Average Average Plus

105,00039% CAGR

Average: 17.5x85,000 Average Plus: 19.2x

High:25.2x

68,78665,000 22%

CAGR

49,729 56,044

45,000 46,27535,669

38,047

25,000 31,134

5,000

Indian Markets: Up 103x in 32 years

BSE Sensex

35000

30000

25,34225000

103x in 32 Years(16% CAGR)

20000

15000

10000

5000

2450


Mar

-84

Mar

-85

Mar

-86

Mar

-87

Mar

-88

Mar

-89

Mar

-90

Mar

-91

Mar

-92

Mar

-93

Mar

-94

Mar

-95

Mar

-96

Mar

-97

Mar

-98

Mar

-99

Mar

-00

Mar

-01

Mar

-02

Mar

-03

Mar

-04

Mar

-05

Mar

-06

Mar

-07

Mar

-08

Mar

-09

Mar

-10

Mar

-11

Mar

-12

Mar

-13

Mar

-14

Mar

-15

Mar

-16

The Best is Ahead


REFORMS: GST, Bankruptcy Code, Strategic Sale of PSUs

DEMOGRAPHICS: ~50% of population below age of 26 years =>20% of worlds working population will live in India by 2025

INFRASTRUCTURE: Roads, Rail, Power - Reqd investment of $1.5tn

FINANCIAL SAVINGS – DII Flows $17.7b in FY08, $34b in FY20?

INDIA IN WORLD - 18% of population, 3% of GDP, 2% of Market Cap

GLOBALISATION - Technology, Health Care, Chemicals, Autos

CORPORATE PROFIT TO GDP: 3.9% in FY16 vs 5.5% avg & 7.8% peak

MARKET CAP TO GDP – 50% below peak

ADJUSTED PE - 7% below average (~25% upside), 32% below peak (~75% upside)

INVESTMENT OPPORTUNITIES GALORE


Diagnostic Chains

Hospitals

Staffing companies

New Consumption

Flavors & Fragrances

Gas chain

Small Finance Banks

Payment Banks

Insurance

NBFC's

E-Commerce

STRATEGY | October 2016

S – Du

INDIAN EQUITIES BEST IS AHEAD

Thank You

indian equities – best is ahead

Economy & Finance