India equity market – outlook

DSP BlackRock Investment Managers

India Equity Market – OutlookIndia Equity Market – Outlook

July 2013

Invest in Mutual funds online. Contact your Wealth Advisor:LIC Agent ANANDARAMAN ARN-30155 Mob: +919843146519 Email : [email protected]

Indian Equity Markets – Challenging EnvironmentIndian Equity Markets – Challenging Environment


Market Scenario

5 Year Sensex CAGR: 7.58%

0

5000

10000

15000

20000

25000

Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13

Sensex

1939613642

3Source: Bloomberg

Industrial Production is low

-10

010

20

Feb

-08

May

-08

Aug

-08

No

v-08

Feb

-09

May

-09

Aug

-09

No

v-09

Feb

-10

May

-10

Aug

-10

No

v-10

Feb

-11

May

-11

Aug

-11

No

v-11

Feb

-12

May

-12

Aug

-12

No

v-12

Feb

-13

May

-13

IIP


Infrastructure Bottlenecks

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

FY

96

FY

97

FY

98

FY

99

FY

00

FY

01

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

Rsb

n

-

5,000

10,000

15,000

20,000

25,000

Rsb

n

Projects announced vs. project stalled

4

FY

96

FY

97

FY

98

FY

99

FY

00

FY

01

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

Projects stalled New Projects Announced (RHS)

0%

5%

10%

15%

20%

25%

30%

35%

40%

Aut

os

Con

glom

erat

es

Con

stru

ctio

n .C

ons

Non

dura

bles

Hea

lth C

are

Med

ia

Met

als

& M

inin

g

Ene

rgy IT

Tel

ecom

Util

ities

FY13E Avg (FY9-FY12)

Capex (as % of sales): FY13E vs. last 4 yr avg

Source: Bloomberg, Internal


CAD vs. US$/INR

Depreciating Rupee

42

44

46

48

50-15

-10

-5

0

Source: CEIC, Ministry of Commerce, Morgan Stanley Research55

50

52

54

56

58

60

62-35

-30

-25

-20

-15

Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13E

Current Account Deficit, US$ bn, LSUS$/INR, RS (reverse scale)


GDP growth – Back to old days of 2001-2002

4

6

8

10

12

14

16

18GDP Services Industry

GDP growth in FY11 – 9.30% GDP growth in FY12 – 6.26% GDP growth in FY13 – 5.00%

6

GDP growth in FY03 – 5.5% GDP growth in FY13 – 5.00%

-4

-2

0

2

4

Jun-

03S

ep-0

3D

ec-0

3M

ar-0

4Ju

n-04

Sep

-04

Dec

-04

Mar

-05

Jun-

05S

ep-0

5D

ec-0

5M

ar-0

6Ju

n-06

Sep

-06

Dec

-06

Mar

-07

Jun-

07S

ep-0

7D

ec-0

7M

ar-0

8Ju

n-08

Sep

-08

Dec

-08

Mar

-09

Jun-

09S

ep-0

9D

ec-0

9M

ar-1

0Ju

n-10

Sep

-10

Dec

-10

Mar

-11

Jun-

11S

ep-1

1D

ec-1

1M

ar-1

2Ju

n-12

Sep

-12

Dec

-12

Mar

-13

� GDP growth slowing down due to industry slowdown



– India’s growth slowdown is partly related to the slowdown in the global growth cycle– China and Brazil – the other two BRIC countries – have also witnessed sharp deceleration of growth in last tow years

India’s growth highly correlated with the global gr owth India’s growth correlation with other two BRIC coun tries

9

12

15

(GDP

grow

th, %

)

India not decoupled with the global growth cycle

6

9

12

(GD

P g

row

th, %

)

-3

0

3

6

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

(GDP

grow

th, %

)

Brazil China India

Fall in India’s economic growth has been sharper th an the fall in global growth in last two years

-3

0

3

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

(GD

P g

row

th, %

)

World GDP growth India GDP growth

Source: IMF


Are we over-reacting?Are we over-reacting?


Different Asset Class Returns

33.0%

3.7%

19.2%

6.2%8.0% 7.1%

22.1%

11.7%

16.8%

6.9% 7.8% 7.4%

FY04-FY08 FY09-FY13 FY04-FY13

Equities (CNX Nifty) Bank FD Gold 10 Year G Sec %

9

27.37%

-3.78%

12.66%

0.60% 0.50% 0.60%

16.53%

4.24%

10.32%

1.30% 0.30% 0.90%

FY04-FY08 FY09-FY13 FY04-FY13

Equities (CNX Nifty) Bank FD Gold 10 Year G Sec %

Inflation adjusted

Equities have out-performed other asset classes ove r longer periods


Could this phase be an exception?


Inflation Erodes the Purchasing Power

100

60

80

100

120

Nom

inal

Val

ue

Over 79-14YTD, CPI Inflation has been 8.5%

10

6

-

20

40

Mar

-79

May

-80

Jun-

81

Jul-8

2

Aug

-83

Oct

-84

Nov

-85

Dec

-86

Jan-

88

Mar

-89

Apr

-90

May

-91

Jun-

92

Aug

-93

Sep

-94

Oct

-95

Nov

-96

Jan-

98

Feb

-99

Mar

-00

Apr

-01

Jun-

02

Jul-0

3

Aug

-04

Sep

-05

Oct

-06

Dec

-07

Jan-

09

Feb

-10

Mar

-11

May

-12

Jun-

13

Nom

inal

Val

ue

Purchasing Power

Source: CMIE, Bloomberg & Motilal Oswall. Data as on June 2013.


Equities Enhance the Purchasing Power

1,226

800.00

1,000.00

1,200.00

1,400.00

1,600.00

1,800.00

Pur

chas

ing

Pow

er

11

256

100

-

200.00

400.00

600.00

Mar

-79

Aug

-80

Jan-

82

Jun-

83

Nov

-84

Apr

-86

Sep

-87

Feb

-89

Jul-9

0

Jan-

92

Jun-

93

Nov

-94

Apr

-96

Sep

-97

Feb

-99

Jul-0

0

Jan-

02

Jun-

03

Nov

-04

Apr

-06

Sep

-07

Feb

-09

Jul-1

0

Jan-

12

Jun-

13

Pur

chas

ing

Pow

er

Sensex Gold Fixed Deposit

Source: CMIE, Bloomberg & Motilal Oswall. Data as on June 2013. Information used is for illustrative purposes and should not be construed as an investment advice


Equities Have Created Investor Wealth

Rs. 17,68,679

1,500,000

2,000,000

2,500,00020 Year CAGR: 11.4% 15 Year CAGR: 12.6% 10 Year CAGR: 18%

12

Rs. 100,000

0

500,000

1,000,000

Jan-

91

Feb

-92

Mar

-93

May

-94

Jun-

95

Aug

-96

Sep

-97

Nov

-98

Dec

-99

Feb

-01

Mar

-02

May

-03

Jun-

04

Aug

-05

Sep

-06

Nov

-07

Dec

-08

Jan-

10

Mar

-11

Apr

-12

Jun-

13

Source: Bloomberg, Internal. The figures mentioned are for illustration purpose only, it does not indicate performance of any of the schemes of

DSP BlackRock Mutual Fund

Rs. 1,00,000 invested into Sensex in January 1991 wo uld have grown to Rs. 17,68,679 as of June 2013.


Opportunity within volatility

13000

15000

17000

19000

21000

23000

13

7000

9000

11000

Sensex

…During this Phase as well, Sensex has given attract ive investment opportunities

Source: Bloomberg


Bull – bear phases over the last 5 years

2008: - 52%

20287

9647

De

c-0

7

Jan

-08

Fe

b-0

8

Ma

r-0

8

Ap

r-0

8

Ma

y-0

8

Jun

-08

Jul-

08

Au

g-0

8

Se

p-0

8

Oct

-08

No

v-0

8

De

c-0

89647

17465

De

c-0

8

Jan

-09

Fe

b-0

9

Ma

r-0

9

Ap

r-0

9

Ma

y-0

9

Jun

-09

Jul-

09

Au

g-0

9

Se

p-0

9

Oct

-09

No

v-0

9

De

c-0

9

17465

20509

De

c-0

9

Jan

-10

Fe

b-1

0

Ma

r-1

0

Ap

r-1

0

Ma

y-1

0

Jun

-10

Jul-

10

Au

g-1

0

Se

p-1

0

Oct

-10

No

v-1

0

De

c-1

0

2009: +81% 2010: +17%

14

2011: -25% 2012: +25%

Ma

r

Ma

y

Ma

r

Ma

y

Ma

r

Ma

y

20509

15455

De

c-1

0

Jan

-11

Fe

b-1

1

Ma

r-1

1

Ap

r-1

1

Ma

y-1

1

Jun

-11

Jul-

11

Au

g-1

1

Se

p-1

1

Oct

-11

No

v-1

1

De

c-1

1

15455

19340

De

c-1

1

Jan

-12

Fe

b-1

2

Ma

r-1

2

Ap

r-1

2

Ma

y-1

2

Jun

-12

Jul-

12

Au

g-1

2

Se

p-1

2

Oct

-12

No

v-1

2

De

c-1

2

Source: Bloomberg


Sensex 5 year Rolling Returns

Median CAGR 17.1%

10%

20%

30%

40%

50%

60%5yr rolling return Median Return

90% of times: Positive returns

15Source: IIFL Research, data as of June 28, 2013

On a 5 year rolling basis, Sensex has delivered a p ositive return 90% of the times

-20%

-10%

0%

Ap

r/84

Oct

/86

Mar

/89

Aug

/91

Jan/

94

Jun/

96

No

v/98

Ap

r/01

Oct

/03

Mar

/06

Aug

/08

Jan/

11

Jun/

13

10% of times: Negative returns


Disciplined Approach: True Value Add During Volatil e Times

2.00%

4.00%

6.00%

8.00%

SIP vs Lumpsum Investment Returns

16

-6.00%

-4.00%

-2.00%

0.00%

CNX Nifty BSE Sensex BSE100 BSE200 CNX Midcap

Lumpsum Investment SIP Investment

Notes: Bloomberg, Internal.1. Assuming SIP investment done at the beginning of each month for period starting Jan 1, 2008 to Jun 1, 2013 i.e. 66 months. 2. SIP returns shown above denote the internal rate of return. Lumpsum returns shown above denote the point-to-point annualised return for the period Jan 1, 2008 to June end 2013. The above figures is for illustration purpose only and not an indication of the performance of the schemes of DSP BlackRock Mutual Fund.

3.


Outperformance of Key stocks/Sectors

21%17% 16% 14% 13% 11%

4%

-12%

-3% -4%-8% -9%

-20%

-10%

0%

10%

20%

30%

5 Year CAGR %

17

-25%-30%

BS

E -

FM

CG

BS

E -

Aut

o

BS

E -

Hea

lth C

are

BS

E -

IT

BS

E -

Con

sum

er D

urab

les

BS

E -

Ban

kex

BS

E -

Sen

sex

BS

E -

Rea

lty

BS

E -

Pow

er

BS

E -

PS

U

BS

E -

Oil

BS

E -

Cap

ital G

oods

BS

E -

Met

al

Consumption theme has outperformed capital intensi ve sectors

Source: Bloomberg


Stock Performance Divergence…An Opportunity to Long term Investors…

5 Year CAGR %

31%

27%25% 24%

20% 19% 17% 17%15% 15%

12% 12% 11%9%

6% 5% 5% 4% 2%0%

-2%-4%

-6% -7%

18

Stock Performance Divergence…An Opportunity to Long term Investors…

Source: Bloomberg

-6% -7% -7%-9%

-12%-15% -16%

TC

S

Sun

Pha

rma.

Inds

.

ITC

Dr

Red

dy's

Lab

s

M &

M

HD

FC

Ban

k

Her

o M

otoc

orp

Tat

a M

otor

s

Hin

d. U

nile

ver

Info

sys

H D

F C

Cip

la

Wip

ro

Mar

uti S

uzuk

i

ICIC

I Ban

k

St B

k of

Indi

a

O N

G C

SE

NS

EX

GA

IL (I

ndia

)

Jind

al S

teel

Lars

en &

Tou

bro

Tat

a P

ower

Co.

NT

PC

Bha

rti A

irtel

Rel

ianc

e In

ds.

Hin

dalc

o In

ds.

Ste

rlite

Inds

.

Tat

a S

teel

B H

E L


Indian Equity – A Promising story ahead

19


Government Reforms are in the Right Direction

� Boost investments:

• Cabinet Committee on Investment to speed up the approval process for big projects.

• Addressed various bottlenecks in road (easier exit clause), coal (imported coal price pass-through), gas (price hike) and power sectors (SEB restructuring, expanding projects eligible for FSA, etc)

� Attract foreign capital

Recent initiatives Key reforms in the pipeline

� Fiscal prudence

• Direct Cash Transfer

• Goods and Services Tax

� Boost investments

• Land Acquisition Bill

• Mining Development Bill

� Attract capital flows

Source: OECD, CEIC and Nomura Global Economics.

� Attract foreign capital

• Increase FDI limit in multi brand retail, aviation, broadcasting

� Reduce fiscal deficit

• Gradually deregulate diesel prices

• Rationalize spending

• Increase tax compliance

� Reduce inflation

• Smaller increase in Minimum Support Prices

� Attract capital flows

• FDI limits in telecom, defense, insurance and pension sectors

20


Fiscal Deficit is Under Control

Fiscal Deficit

5

6

7

Return to fiscal prudence

% of GDPFiscal stimulus post the crisis

Fiscal prudence

� India has always had a high fiscal deficit, but the deficitballooned post 2008 due to consumption-orientedgovernment spending and lower revenues due to slowgrowth.

� However, the government has returned back to the path offiscal prudence starting Sep 2012 by cutting back onspending and hiking diesel prices. Fiscal deficit in FY13 at4.9% of GDP was better than budgeted (5.1%).

� In FY14, while cutting back on spending will be difficultgiven the upcoming general elections, increased taxcompliance is likely to help keep the fiscal deficit in checkat 4.8% of GDP.

0

1

2

3

4

FY00 FY02 FY04 FY06 FY08 FY10 FY12 FY14 FY16

at 4.8% of GDP.

� The government is committed to lowering the fiscal deficitto 3% of GDP by FY17. Structural reforms such as theGoods and Services Tax and the Direct Cash transfer willhelp bring down the fiscal deficit in the medium term.

� Hence, risks from the fiscal deficit – a pre-dominantconcern over the last 5 years - have receded.

21Source: Ministry of Finance and Nomura


Current Account Deficit: Worst is Behind Us

-6

-5

-4

-3

-2

-1

0

1

2

3

Current account balance

% of GDP

Source: CEIC and Nomura Global Economics estimates.

� INR deprecation - a medium term positive

Along with a fiscal deficit, India has also historically had a current account deficit. Recent currency weakness (due to lower inflows) will delay ratecuts. However over time, INR depreciation should improve export competitiveness.

� Lower commodity prices a boon for India

A large part of India’s import basket (45%) is commodity oriented. The fall in commodity prices should help lower the import bill.

Sharp fall in gold prices and lower investment demand for gold (due to lower prices and lower inflation) should reduce the gold import bill.

� Structural reforms an added positive

Government’s decision to gradually deregulate diesel prices should help rationalize domestic energy demand and thus reduce oil imports.

Therefore, we expect the current account deficit to moderate from 4.8% of GDP in FY13 to 4.3% in FY14 and to 3.0-4.0% by FY15.

-6FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13

22


Falling Commodity Prices: Boon for India

� India, unlike other emerging economies like China, Brazil, etc. is net consumer of commodities.

� Wholesales Price Inflation (WPI) for June at 4.86% Y-o-Y, the lowest since Nov 2009, is a positive sign

� Core inflation has also declined to 2.1% Y-o-Y

� This decline was a result of the drop in prices of crude oil and gold, which together account for 45% of India’ import bill

� Every 10% decline in global crude oil prices (for the full year), would result in reducing WPI by 0.8-1.0 percentage point & consumer price inflation by about 0.6 percentage point

� Every 10% reduction in crude oil prices would result in India’s import bill and current account deficit reducing by about 0.6% of GDP

� Oil – 6.3% of GDP and 60% of trade deficit� US Shale Gas – a game changer

23Source: Bloomberg, Internal & Deutsche Bank Research

account deficit reducing by about 0.6% of GDP

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Feb

-08

Aug

-08

Feb

-09

Aug

-09

Feb

-10

Aug

-10

Feb

-11

Sep

-11

Mar

-12

Sep

-12

Mar

-13

WPI Inflation (%)

…should lead to further fall in inflation

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

Feb

-08

Aug

-08

Feb

-09

Aug

-09

Feb

-10

Aug

-10

Feb

-11

Sep

-11

Mar

-12

Sep

-12

Mar

-13

Change in Commodity Prices YoY%, US$ terms

Crude

Gold

CRB Index

Fall in commodity prices….

� Gold – 2.7% of GDP and 26% of trade deficit


Lower Twin Deficit to Correct India’s Macro Imbala nces

� After a tough period from 2009-2012, we expect India’s macro-imbalances (rising consumption-investment gap, sticky inflation, twin deficits and low growth) to start to correct due to fiscal consolidation and recent reforms.

� While none of the reforms will lead to a quick turnaround in the economy, the government is moving in the right direction. For instance, gas and power price hikes will increase the cost for consumers (which is negative for consumption), while easing the burden for producers and encouraging increased supply (positive for investment) – a rebalancing that is long overdue in India.

� Lower twin deficit and falling inflation should open up the room for further interest rate cuts. Lower inflation should also lead to a move away from physical savings to financial savings, which will improve banking system liquidity.

� As India’s macro-economic imbalances correct, we expect the investment cycle to gradually recover, productivity to improve and a pick up in growth.

24


Sensex EPS CAGR FY93-13: 15%

450523

718

833 820 834

10241123

1196

1346

1543

FY93-96: 45% CAGR

FY96-03: 1% CAGR

FY03-08: 25% CAGR

FY08-13: 7% CAGR

FY13-15E: 14% CAGR

FY93-12: 15% CAGR

25

81129

181250 266 291 278 280

216 236 272348

450

FY

93

FY

94

FY

95

FY

96

FY

97

FY

98

FY

99

FY

00

FY

01

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14E

FY

15E

Source: Data as on May 2013 Motilal Oswal Research


20.421.3

23.424.2 24.0

22.8

19.0

15.316.9 17.1 16.7

FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13

Sensex ROE (%)

Gap Between RoE and Interest Rates Near 10 Year Low

26


13.5

15.917.2 17.1

16.214.9

11.3

8.09.0 8.7 8.5

6.9

5.4

6.27.1

7.87.9

7.6

7.2

7.9

8.4 8.2


Difference RoE - G-Sec 10 Year G-Sec (%) Average - RHS

Source: Motilal Oswal Research


BSE Sensex Valuation snapshot

Mar’91 – Mar’13 P/E P/B ROE

Low 8.29 1.58 14.30

Average 14.88 2.57 19.01

High 24.64 4.15 24.19

Current 14.10 2.39 16.7

27

Is this a bad time to invest?

Source: Data as on May 2013 Motilal Oswal Research


Market returns Vs. Starting P/E

0

20

40

60

80 Avg. 1 yr return

Median 1 yr returnCurrent PE is 14x

% 1 yr return

28

(60)

(40)

(20)

<10x 10-12 12-14 14-16 16-19 19-22 >22

Sensex PE at start of period

Historical analysis suggest that investing at curre nt levels has generally yielded double digit return s in the equity market

P/E – Price/Earnings; Source: CLSA, data since 1992 for BSE Sensex Index


Valuation Discount of Mid Caps to Large Caps is at Historical Extremes

0.40

0.50

0.60

0.70

0.80

0.90 BSE Mid Cap Index P/B to BSE Sensex P/B

0.30

0.40

0.50

0.60

0.70 BSE Small Cap Index P/B to BSE Sensex P/B

29

0.30

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

0.20

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Source: Bloomberg, Ambit Capital

Calendar YTD performance as on June 24, 2013 INR USD

BSE Sensex -4.56% -12.81%

BSE Mid Cap -17.29% -24.44%

BSE Small Cap -24.20% -30.76%


Risks

� Geo-political risk

� Oil prices: India imports ~85% of its oil requirement yearly

� Twin Deficits: Fiscal Deficit and Current Account Deficit (CAD) - though there has been some improvement recently

� Rupee Depreciation

� Incremental Demand in gold due to falling prices

� Global macro� Global macro

30


Disclaimer

The views expressed are as of July 18, 2013 and may change as subsequent conditions vary. This is a generic presentation on IndiaEquity Market; it shall not constitute any offer to sell or solicitation of an offer to buy units of any of the Schemes of the DSPBlackRock Mutual Fund.

Mutual Fund investments are subject to market risks , read all scheme related documents carefully.

31


India equity market – outlook

Economy & Finance

Transcript of India equity market – outlook