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Gra5- 6: In$ia -i&s a lo7 on G4P gro7&-

+o!rce9 >loomerg!rope is still torn etween the :erman prescription of ta$ing it on the chin and read=!sting to the new reality of

lower growth and the l!re of the American charm of printing and getting o!t of the mess" The :erman scepticismof printing money lies in their own e;perience prior to World War II # they elieve the *+ will end !p in a iggermess at an !n$nown, f!t!re date" The comical an$r!ptcy of (ypr!s and it@s even more h!mo!ro!s resc!epac$age efforts show the diffic!lties of $nitting together very different c!lt!res !nder one c!rrency !mrella, the!ro"apan, a case st!dy for Bederal .eserve (hairman >en >ernan$e of how to r!in an economy, has ac!ired theCest to print" It wishes to e etter than Delicopter >en # so named eca!se >ernan$e once remar$ed that hewo!ld e willing to throw *+ ollarills from a helicopter to $ic$#start an economy" /!c$ily for *ncle >en, theprinting presses of the Bed are wor$ing well and he does not need to get on a helicopter to do what he promisedto do" Tho!gh the apanese are the last $id to =oin the printing race, the apanese government is now ready toprint at a rate e!al to what the *+ Bed is printing9 appro;imately *+ illion per month"We are all Americans9 we eat 8conald@sE we drin$ (o$eE we !y American dollar illsE and we print"

Flo7s 7ill be s&rong" b& 7-a& abo& earnings8With all this gloal printing activity, money flows to India are li$ely to remain in the *+ 20 illion per ann!mrange even in if foreign investors are nervo!s ao!t India" If there is an estimated *+ 2 trillion of new moneycreated in the develop world and 1 of that gets allocated to India, that is *+ 20 illion in flows"If India was Fli$edF y foreigners, we may end !p getting 2 of that *+ 2 trillion # or *+ -0 illion" That wo!ldsend the stoc$ mar$ets soaring to new highs">!t India is not Fli$edF at this point in time largely d!e to the ovio!s reasons of9

1" olitical !ncertainty and elections &y +eptemer

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prevent yo! from eing fired in an already shrin$ing ind!stry" !st efore placing the !y order, the BII as$s9 FTellme, what is the ho!se view on earnings for 8arch 201-?F)o! can answer the !ery in m!ltiple ways9

1" )o! can tell yo!r research analyst, the person who writes the Fho!se viewF to give a rosy pict!re or elseyo! will fire him, or

2" )o! can tell the BII that the Indian mar$et is trading at its long term average of 16; historical earningsso it is not FcheapF and neither is it Fe;pensiveF # yo! sort of evade the !estion of f!t!re earnings, or

3" )o! can loo$ gl!m and tell yo!r BII client9 Fthere is little hope of any ma=or growth in earnings for 8arch201-F"

.esponses 1 or 2 will proaly still generate the F!yF order from the BII" The commissions from that will $eepyo!r =o intact and, if yo! are l!c$y, yo! may see a on!s at the end of the !arter"The client interest has een !ried and yo!r interest is intact9 yo! are a tr!e hero and deserve to e employed inthe financial services ind!stry"%r yo! may e a maveric$ and give F.esponse 3F, which may not go down well with the BII"The BII may still !y eca!se all the other BII fol$s are !ying"%r the BII may red!ce the siCe of the !y order # or, worse, not !y at all"&Statutory Warning: Please do not ascribe any genius to these FII folks - you hear them on TV and they babble

and guess like everyone else. Their suits and accents are a little more refined than the stars that come on TV at am and tell you !hich stock is likely to rise or fall in the ne"t #$ minutes of trading% but they are all e&uallydangerous to your !ealth.'With a : of less than 6, interest rates that are !nli$ely to decline a lot f!rther from here, and interest ratesfor small#cap and mid#cap companies that may act!ally increase &given their inherent !siness and managementris$' # I don@t see a great s!rge in earnings"Mone! in'es&e$" 7ill no& genera&e *#- earnings>etween 2006 and 200, Indian companies raised a lot of money &det and e!ity' to finance a massive capitale;pendit!re &cape;' inge" India, if yo! recall, was +hining and every Indian company wanted some of that shineto r! off on it"(arried away with visions of their own s!perior powers and their aility to t!rn a political friendship into a private$haCana, (orporate India invested as if money was free # and it was"

At least for a while"Gow that cape; inge is ready to start prod!ction">!t the economy is slow, so sales may not e as great as (orporate India e;pected when they first set thoseplants !p" (apacity !tilisation will e lower than e;pected for most !sinesses"And Finterest e;penseF and Fdepreciation e;penseF will increase"This will res!lt in s!ppressed Freported profitsF"B%. TD%+ WD% WI+D T% HG%W TD A((%*GTIG:, .A TDI+, %TD.WI+ +HI %WG"""When a (lant is ready% the interest that is (aid on the creation of the (lant no longer ends u( as )ca(italisedinterest)% it has to start flo!ing through the (rofit and loss as an )interest e"(ense). * bit of accounting here:When a (lant is being built% the interest on the loans taken to build that (lant are (aid by the com(any to thebank +so it sho!s u( in cash flo!' but it does not get deducted through the (rofit and loss statement, it getsadded to the value of the ca(ital asset being built and sho!s u( as a Fi"ed *sset or Work In Progress. *nd once

the ca(ital asset is ready% then it is amortised or de(reciated over a % $% or / year (eriod: this de(reciationsho!s u( in the (rofit and loss statement.%nce the plant is ready and commissioned, it needs to e depreciated over the estimated !sef!l life of theplant"This adds to the )de(reciation) e"(enses and reduces the re(orted (rofitability. 0ut it makes no differenceto the )cash flo!) of the com(any% since this is only an accounting entry - no (erson is actually (aid this)de(reciation e"(ense) amount every year. The (lant !as already (aid for !hen it !as built and ended u( as anasset in the balance sheet. Since it has a limited life% the de(reciation charge !ill bring that asset value do!n to1ero over time.*sing data so!rced from the !itymaster F)earoo$sF which analysed the financial statements of 13 to 17companies etween 2005 and 2012 &the a!dited, f!ll year n!mers for 8arch 2013 are not yet reported', onegets an idea of how profitaility has changed over time and what co!ld have ca!sed these changes inprofitaility" Go an$s and financial firms were incl!ded in this list"

Table 6: Gro7" gro7 0 an$ borro7 &o bil$ ne7 5lan&s

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+o!rce9 >loomerg

.ecognising that there is no a!dited data for B)2013, and ma$ing certain ass!mptions on how m!ch of theoverall cape; completed this year was done y this sample of companies, the interest cost of their det, howthey will !tilise their e;panded capacity &and many other variales', I ended !p with the following9If 20 of the new capacity coming to fr!ition in India was implemented y this sample of companies !singB)2012 as a ase, then9

1" epreciation and interest will red!ce reported rofit >efore Ta; y #-"7E2" .even!es from higher capacity will increase rofit >efore Ta; y 46"-E

3" Get effect will e an increase in rofit >efore Ta; y 41"5".ecognising that this e;ercise is done !sing B) 2012 data as a ase year and recognising the vario!sass!mptions made on so many fronts, there is room to add some growth for the B) 2013 earnings">!t, if yo! told an BII short#term investor &and most of them are short#term' that they were p!mping illions ofdollars every month into a stoc$ mar$et where there is a marginal 1"5 improvement in profits, they wo!ld note a partic!larly happy lot"Gote that this is a macro calc!lation for a large n!mer of companies # there will still e companies that may nothave this large cape; cycle and are ale to generate a healthy clip of 15 to 20 growth in their earnings"lease don@t ta$e me wrong9 I am a long term !yer of Indian stoc$s" 8y advice to investors is to invest 50 to5 of their intended investment into Indian e!ity at these levels of the Inde;" >!t a long term !yer &with cashon the side to ta$e advantage of a decline' is not loo$ing at B)201- earnings"The money eing p!mped into India as a y#prod!ct of all the gloal printing is not necessarily long term money"In fact, my g!ess is that 70 of it has a 1#day to 70#day view on any mar$et, incl!ding India"They get disappointed very easily" They get e;cited very easily".ecall the small#cap and mid#capmayhem".ecall what they did even to large companies li$e Infosys when they had disappointed earnings"+o, the mar$ets are at a dangero!s place for tr!sting investors"asy money and a fast#tal$ing Binance 8inister with many !ic$#fi;es has ca!sed a s!rge since !ly 2012" >!t,event!ally, we need earnings to s!stain any mar$et rise"I wo!ld rather e a !yer of stoc$s in a mar$et where there is strong earnings and wea$ flows" >eca!se then Iam !ying into a company which is growing its intrinsic val!e # and others have not yet come forward to !y itsshare" That is fine with me"This mar$et is the reverse9 the money flows are there for s!re !t, on a mar$et level, I don@t see the earnings in

the near term"

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