Post on 06-Jul-2018
8/17/2019 Religare Invesco Market Outlook
1/15
Equity Market
Outlook
Vetri Subramaniam,
Chief Investment
Officer
December 2015
8/17/2019 Religare Invesco Market Outlook
2/15
India’s economic indicators are exhibiting mixed outcomes
The investment cycle trends have weakened
India’s twin deficit – Fiscal Deficit and Current account deficit are exhibiting stable trends
Inflation – Supportive of the RBI’s accommodative stance
India’s earnings cycle continues to be weak with hope of recovery in FY17
While visibility of earnings recovery is poor, high degree of operating and financial leverageprovide scope for disproportionate uptick in earnings
Valuations are at 8% premium to the long term average. It is within our comfort zone (+ or –
10% of the long term average)
Equity Market Outlook
2
8/17/2019 Religare Invesco Market Outlook
3/15
India Macro – Mixed Bag
3
India's Index of Industrial Production (IIP) growth was recorded at ‐3.2% in Nov’15, after hitting
a 60
‐month
high
of
9.8%
in
Oct’15
India's December manufacturing PMI dipped below 50 for the first time in over two years,
coming in at 49.1 versus 50.3 in November, as both output and new order flows contracted.
Source: Bloomberg.
49.1
‐3.20%
44
46
48
50
52
54
56
58
60
‐6%
‐4%
‐2%
0%
2%
4%
6%
8%
10%
12%
06/11 10/11 02/12 05/12 09/12 12/12 04/13 07/13 11/13 02/14 06/14 09/14 01/15 05/15 08/15 12/15
M a n u f a c t u r i n g P
M I
I I P G r o w t h
IIP Growth (%) and PMI
Manufacturing PMI IIP
8/17/2019 Religare Invesco Market Outlook
4/15
India Lead Indicators ‐ Mixed Bag
Source: Kotak
Commercial Vehicles Sales Growth, Passenger Vehicles growth and petroleum products consumption growth have recovered
and report healthy trends whereas all other parameters like Railway Freight Growth, Export Growth, Credit and Deposit Growth,
2 wheeler growth continue to report weakness
4
‐10.37%
‐15%
‐10%
‐5%
0%
5%
10%
15%
A p r ‐ 1 0
J u l ‐ 1 0
N o v
‐ 1 0
M a r ‐ 1 1
J u l ‐ 1 1
N o v
‐ 1 1
M a r ‐ 1 2
J u l ‐ 1 2
N o v
‐ 1 2
M a r ‐ 1 3
J u l ‐ 1 3
N o v
‐ 1 3
M a r ‐ 1 4
J u l ‐ 1 4
N o v
‐ 1 4
M a r ‐ 1 5
J u l ‐ 1 5
N o v
‐ 1 5
Railway Freight Growth
‐24.43%
‐40%
‐20%
0%
20%
40%
60%
80%
A p r ‐ 1 0
J u l ‐ 1 0
N o v
‐ 1 0
M a r ‐ 1 1
J u l ‐ 1 1
N o v
‐ 1 1
M a r ‐ 1 2
J u l ‐ 1 2
N o v
‐ 1 2
M a r ‐ 1 3
J u l ‐ 1 3
N o v
‐ 1 3
M a r ‐ 1 4
J u l ‐ 1 4
N o v
‐ 1 4
M a r ‐ 1 5
J u l ‐ 1 5
N o v
‐ 1 5
Export Growth
7.03%
‐40%
‐20%
0%
20%
40%
60%
80%
A p r ‐ 1 0
J u l ‐ 1 0
N o v
‐ 1 0
M a r ‐ 1 1
J u l ‐ 1 1
N o v
‐ 1 1
M a r ‐ 1 2
J u l ‐ 1 2
N o v
‐ 1 2
M a r ‐ 1 3
J u l ‐ 1 3
N o v
‐ 1 3
M a r ‐ 1 4
J u l ‐ 1 4
N o v
‐ 1 4
M a r ‐ 1 5
J u l ‐ 1 5
N o v
‐ 1 5
Commercial Vehicles Sales Growth
9.79%
0%
5%
10%
15%
20%
25%
30%
A p r ‐ 1 0
J u l ‐ 1 0
N o v
‐ 1 0
M a r ‐ 1 1
J u l ‐ 1 1
N o v
‐ 1 1
M a r ‐ 1 2
J u l ‐ 1 2
N o v
‐ 1 2
M a r ‐ 1 3
J u l ‐ 1 3
N o v
‐ 1 3
M a r ‐ 1 4
J u l ‐ 1 4
N o v
‐ 1 4
M a r ‐ 1 5
J u l ‐ 1 5
N o v
‐ 1 5
Credit Growth
8/17/2019 Religare Invesco Market Outlook
5/15
India Investment Cycle ‐ Weakness post
initial rebound
Source: CMIE, Citi
After initial rebound in first 2 quarters of FY16 new projects announcement fell sharply by 74%
YoY and 65% qoq in 3q16 For 9 months FY16, new project announcement is down 34% YoY
Projects under implementation but stalled also continue to inch up by 11% YoY and 3% qoq.
Quarterly New Project announcements (Rs bn) – fall from earlier rebound Projects under implementation but stalled as % of total O/S Projects
5
8/17/2019 Religare Invesco Market Outlook
6/15
India Twin Deficit ‐ Broadly stable
Fiscal Deficit increased 46.4% in Nov‐15 vs a decline of 11.5% in Oct ‐15.
On a trailing 12 month basis fiscal deficit increased to 3.5% of GDP vs 3.3% in Oct 2015 –
tracking below the target of 3.9%
While fiscal deficit is currently tracking the target, there might be a 4th quarter challenge due
to fall in Nominal GDP and failure to meet divestment targets
Current account deficit at 1.12% of GDP remains in comfort zone.
Source: Bloomberg. Controller General of Accounts (Government of India), Morgan Stanley Research6
‐1.12%
‐6%
‐5%
‐4%
‐3%
‐2%
‐1%
0%
M a r ‐ 1 2
J u n
‐ 1 2
S e p
‐ 1 2
D e c
‐ 1 2
M a r ‐ 1 3
J u n
‐ 1 3
S e p
‐ 1 3
D e c
‐ 1 3
M a r ‐ 1 4
J u n
‐ 1 4
S e p
‐ 1 4
D e c
‐ 1 4
M a r ‐ 1 5
J u n
‐ 1 5
S e p
‐ 1 5
Current Account Deficit Fiscal Deficit (12M Trailing Sum % of GDP)
8/17/2019 Religare Invesco Market Outlook
7/15
Inflation trends support accommodative
policy
Source: Bloomberg7
6.75%
6.50%
7.00%
7.50%
8.00%
8.50%
9.00%
J a n
‐ 1 2
M a y
‐ 1 2
A u g
‐ 1 2
N o v
‐ 1 2
F e b
‐ 1 3
M a y
‐ 1 3
A u g
‐ 1 3
N o v
‐ 1 3
F e b
‐ 1 4
M a y
‐ 1 4
A u g
‐ 1 4
N o v
‐ 1 4
F e b
‐ 1 5
M a y
‐ 1 5
A u g
‐ 1 5
N o v
‐ 1 5
Repo Rate
5.41%
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
J a n
‐ 1 2
M a y
‐ 1 2
A u g
‐ 1 2
N o v
‐ 1 2
F e b
‐ 1 3
M a y
‐ 1 3
A u g
‐ 1 3
N o v
‐ 1 3
F e b
‐ 1 4
M a y
‐ 1 4
A u g
‐ 1 4
N o v
‐ 1 4
F e b
‐ 1 5
M a y
‐ 1 5
A u g
‐ 1 5
N o v
‐ 1 5
CPI
Current CPI of around 5% remains comfortable
India may
achieve
its
CPI
target
of
4%
earlier
than
targeted
due
to
commodity
tailwinds
Current demand, Inflation – interest rate dynamics offer some scope for monetary easing
8/17/2019 Religare Invesco Market Outlook
8/15
Earnings Season – Near term weak but
hopes of a Revival
Consensus growth expectation of 3Q16E earnings is ‐2% implying a weak earnings season for the
upcoming quarter
However consensus is expecting a strong growth revival from 4Q16E onwards implying FY17E EPS
growth of 18%
Growth expectation for FY17 might be at a risk considering the current trends
Source: Bloomberg.8
‐40%
‐
30%
‐20%
‐10%
0%
10%
20%30%
40%
50%
60%
1 q 1 1
2 q 1 1
3 q 1 1
4 q 1 1
1 q 1 2
2 q 1 2
3 q 1 2
4 q 1 2
1 q 1 3
2 q 1 3
3 q 1 3
4 q 1 3
1 q 1 4
2 q 1 4
3 q 1 4
4 q 1 4
1 q 1 5
2 q 1 5
3 q 1 5
4 q 1 5
1 q 1 6
2 q 1 6
3 q 1 6 E
Nifty earning growth and expectation
9%
18%
0%
5%
10%
15%
20%
FY16E FY17E
Nifty earning expectation
8/17/2019 Religare Invesco Market Outlook
9/15
Earnings – Levers for Recovery
While current earning cycle is weak, there are levers to earnings recovery
India’s Incorporation’s capacity utilisation is a 6 year low
Resultantly EBITDA margins are 120 bps lower than average during the period FY09 ‐ FY15
Interest expense in FY15 forms 26% of EBIT as compared to 13% in 2010 representing significant
financial leverage
Any cyclical uptick in demand should result into more than proportionate uptick in earnings due
to operating and financial leverage
Source: RBI, IIFL, Capitaline, Religare Invesco AMC Research9
15.43
16.48
15.77
14.0913.19
13.05 13.24
73.93
77.9077.68
77.00
74.50
73.50
72.15
69
70
71
72
73
74
75
76
77
78
79
8
9
10
11
12
13
14
15
16
17
FY09 FY10 FY11 FY12 FY13 FY14 FY15
Capacity Utilisation vs EBITDA Margin trends
EBITDA Margins (RHS) CU (LHS)
13%
13%
18%
21%
23%
26%
5% 5%
6% 6%
7%
7%
3.00%
3.50%
4.00%
4.50%
5.00%
5.50%
6.00%
6.50%
7.00%
7.50%
10%
12%
14%
16%
18%
20%
22%
24%
26%
28%
2010 2011 2012 2013 2014 2015
Financial Leverage
Interest Exp/EBIT (LHS)
Cost of Borrowing (Interest Expense/Avg Borrowings) (RHS)
8/17/2019 Religare Invesco Market Outlook
10/15
Earnings –ROE’s subdued
Current ROE’s of Nifty companies are at a 15 year low and 500 bps below long term average
Source: Religare Invesco AMC Research, Bloomberg, Data as on 31st December 2015.10
13
0
5
10
15
20
25
30
J a n
‐ 0 1
M a r
‐ 0 2
A p r
‐ 0 3
J u n
‐ 0 4
A u g
‐ 0 5
O c t
‐ 0 6
N o v
‐ 0 7
J a n
‐ 0 9
M a r
‐ 1 0
M a y
‐ 1 1
J u n
‐ 1 2
A u g
‐ 1 3
O c t
‐ 1 4
D e c
‐ 1 5
Nifty ROE
8/17/2019 Religare Invesco Market Outlook
11/15
Valuations ‐ Premium to Long term Average
Recent price correction has resulted into meaningful valuation correction despite weak
earnings
Sensex now trades at a 8% premium to its long term trailing 12 months average P/E multiple
as compared
to
22%
premium
in
March
2015
Source: MOSL, Religare Invesco AMC Research, Bloomberg, Data as on 8th January 201611
17.6x
21.69x
5
10
15
20
25
30
J a n
‐
1 6
J u l
‐
1 5
J a n
‐
1 5
J u l
‐
1 4
J a n
‐
1 4
J u l
‐
1 3
J a n
‐
1 3
J u l
‐
1 2
J a n
‐
1 2
J u l
‐
1 1
J a n
‐
1 1
J u l
‐
1 0
J a n
‐
1 0
J u l
‐
0 9
J a n
‐
0 9
J u l
‐
0 8
J a n
‐
0 8
J u l
‐
0 7
J a n
‐
0 7
J u l
‐
0 6
J a n
‐
0 6
J u l
‐
0 5
J a n
‐
0 5
J u l
‐
0 4
J a n
‐
0 4
J u l
‐
0 3
J a n
‐
0 3
J u l
‐
0 2
J a n
‐
0 2
J u l
‐
0 1
J a n
‐
0 1
J u l
‐
0 0
J a n
‐
0 0
J u l
‐
9 9
J a n
‐
9 9
J u l
‐
9 8
J a n
‐
9 8
J u l
‐
9 7
J a n
‐
9 7
J u l
‐
9 6
J a n
‐
9 6
J u l
‐
9 5
J a n
‐
9 5
Sensex PE Ratio (trailing twelve months)
Average since Jan 95 : 16.3x
8/17/2019 Religare Invesco Market Outlook
12/15
Relative valuation of Midcaps
Midcap Index valuation is currently at a 28% premium to its large cap peer (Nifty), as
compared to a long period average of 15% discount
Source: Religare Invesco AMC Research, Bloomberg, Data as on 31st December 2015.12
28%
‐80%
‐60%
‐40%
‐20%
0%
20%
40%
J a n
‐
0 6
A p r
‐
0 6
J u l
‐
0 6
O c t
‐
0 6
J a n
‐
0 7
M a y
‐
0 7
A u g
‐
0 7
N o v
‐
0 7
F e b
‐
0 8
J u n
‐
0 8
S e p
‐
0 8
D e c
‐
0 8
M a r
‐
0 9
J u n
‐
0 9
O c t
‐
0 9
J a n
‐
1 0
A p r
‐
1 0
J u l
‐
1 0
N o v
‐
1 0
F e b
‐
1 1
M a y
‐
1 1
A u g
‐
1 1
N o v
‐
1 1
M a r
‐
1 2
J u n
‐
1 2
S e p
‐
1 2
D e c
‐
1 2
A p r
‐
1 3
J u l
‐
1 3
O c t
‐
1 3
J a n
‐
1 4
A p r
‐
1 4
A u g
‐
1 4
N o v
‐
1 4
F e b
‐
1 5
M a y
‐
1 5
A u g
‐
1 5
D e c
‐
1 5
( D i s c o u n t ) / P r e m i u m
Valuation of Mid cap v/s Large Caps (trailing twelve months)
9 Years Average: 15%
8/17/2019 Religare Invesco Market Outlook
13/15
Market Outlook
In India macro‐economic parameters like current account deficit, fiscal deficit and inflation
are in the comfort zone
Local demand indicators are mixed while global growth is a dampener
The investment cycle is recovering slower than earlier expectations, but the process of de‐leveraging by companies is now clearly underway
The Sensex is now trading at a P/E of 17.6x trailing twelve months EPS; an 8% premium to
long term average (as of January 8, 2016). It has corrected significantly from early 2015
when it was a premium of nearly 30% to the long term average in. It is within our valuation
comfort zone (+ or ‐
10% of long period average) Earnings growth still remains weak but both operating leverage and financial leverage will
kick in and support faster profit growth when economic trajectory strengthens
Sectors such as financials, consumer discretionary and industrials will benefit from cyclical
recovery in growth. Based on valuations we prefer consumer discretionary and Financials
over Industrials
We have added exposures to utilities and global cyclicals due to attractive valuations
We favour a pro cyclical stance to benefit from a recovery in the economic cycle. But our
portfolio strategy is focused on bottom up stock picking
13
8/17/2019 Religare Invesco Market Outlook
14/15
Disclaimer: This presentation is for information purposes only and is not an offer to sell or a solicitation to buy any mutual fund units/securities. The
information alone is not sufficient and shouldn’t be used for the development or implementation of an investment strategy. It should not be
construed as investment advice to any party. All opinions, figures, charts/graphs and data included in this presentation are as on date and are subject
to change without notice. The sectors referred in this presentation are for illustrative purposes only and should not be construed as
recommendations from Religare Invesco Asset Management Company Private Limited (Religare Invesco AMC) and/or Religare Invesco Mutual Fund.
Schemes of Religare Invesco Mutual Fund may or may not have any present or future positions in these sectors. The content of this document is
intended solely for the use of the addressee. If you are not the addressee or the person responsible for delivering it to the addressee, any disclosure,copying, distribution or any action taken or omitted to be taken in reliance on it is prohibited and may be unlawful. The data used in this presentation
is obtained by Religare Invesco AMC from the sources which it considers reliable. While utmost care has been exercised while preparing this
document, Religare Invesco AMC does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages
arising out of the use of this information. Neither Religare Invesco AMC nor any person connected with it accepts any liability arising from the use of
this information. The recipient(s) before acting on any information herein should make his/their own investigation and seek appropriate professional
advice.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
M K T G /
R o u n d u p E
q u i t y / 1 2 1 5 / C 0 3 1 7 7
Disclaimer
14
8/17/2019 Religare Invesco Market Outlook
15/15
Get in touch
Corporate Office:
Religare Invesco Asset Management Company Private Limited3rd Floor, GYS Infinity, Paranjpe ‘B’ Scheme, Subhash Road,Vile Parle (E), Mumbai – 400057T +91 22 67310000 F +91 22 28371565
To invest:Call 1800-209-0007 ∆ sms ‘Invest’ to 56677Invest Online www.religareinvesco.com
Follow us on