Ridham.Desai@morganstanley.com

Sheela.Rathi@morganstanley.com

MORGAN STANLEY INDIA COMPANY PRIVATE LIMITED+

Ridham DesaiEQUITY STRATEGIST

+91 22 6118-2222

Sheela RathiEQUITY STRATEGIST

+91 22 6118-2224

India Equity Strategy Alpha AlmanacIndia Equity Strategy Alpha Almanac || Asia Pacific Asia Pacific

Triggers in place for Growth RevivalIndia’s growth may have troughed in the quarter gone by. With the government and the RBI actingin concert to improve liquidity and lower rates, save for a big global growth slowdown, India couldbe on a path for a growth recovery and relative outperformance.

Morgan Stanley does and seeks to do business withcompanies covered in Morgan Stanley Research. As aresult, investors should be aware that the firm may have aconflict of interest that could affect the objectivity ofMorgan Stanley Research. Investors should considerMorgan Stanley Research as only a single factor in makingtheir investment decision.For analyst certification and other important disclosures,refer to the Disclosure Section, located at the end of thisreport.+= Analysts employed by non-U.S. affiliates are not registered withFINRA, may not be associated persons of the member and may notbe subject to NASD/NYSE restrictions on communications with asubject company, public appearances and trading securities held bya research analyst account.

Exhibit 1:

Macro trade maturing Bonds still hold the edge on performance

5%

15%

25%

35%

45%

55%

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Explanatory Power of Market Effect1Y Rolling R-

squared

Time for macro,Oct-10

Time formacro,Aug-07

Time formacro, Jul-05

Time for macro,Aug-03

Stock pickers'time, Sep-04

Stock pickers' time, Jul-06

Stock pickers' time,Jun-09

Stock pickers'time, Dec -11

Stock pickers'time, Mar-16

Time formacro

Feb-00

Jan-08

Dec-08

Jun-14

0.00.20.40.60.81.01.21.41.61.82.02.22.42.6

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Equity multiple (using 12M fwd PE) over bond multiple (using 10-year bond yields)

Jun-13

Jul-15

Mar-03

Oct-10

Nov-16Sep-11

Source: RIMES, MSCI, Morgan Stanley Estimates, Morgan Stanley Research; RIMES, MSCI, Bloomberg, Morgan Stanley Research

1

July 10, 2019 04:15 AM GMT

Triggers in place for Growth RevivalThe government and the RBI have made a combined call to lower the cost of capital in order to revive the growth cycle. It is a measured risk since our view is that the Fed could be cutting rates and global growth is likely slowing, keeping a lid on oil prices.

• Long yields likely headed lower: The government has proposed to provide capital to the state-owned banks (Rs700 billion) who had the liquidity to lend but not the capital. It has also estimated a lower fiscal deficit for F2020 to take pressure off the long yields and also decided to raise part of its borrowing overseas for the first time, implying an actual fall in the supply of long bond paper in F2020.

• Short rates also likely going lower: The fiscal position will let the RBI exercise more monetary accommodation. The government has raised minimum support prices for crops by just 3.8% and, with oil prices range bound, inflation is also likely to remain subdued allowing for a fall in interest rates across the curve. The RBI has cut rates by 75 bps in the past four months and we expect another 50 bps in upcoming meetings.

• More system liquidity: The RBI has made system liquidity positive which will ensure transmission of rates. It is providing liquidity of Rs1.34 trillion for banks to lend to the non-bank financial companies and the government has back stopped a loss of up to Rs100 billion from such lending (for public sector banks). The government has announced measures to increase direct and portfolio foreign flows which will help forex reserves to rise and improve liquidity further.

• Higher net demand for equities: In the meanwhile strong balance sheets and private equity funds are bidding businesses which means that the net demand for equities could be rising over the next 12 months after falling precipitously in the previous period. The new tax on buybacks could temper this somewhat. Trailing 12M saw about US$9 billion of buybacks.

• Relative valuations, growth and defensive characteristic in India’s favor: India’s relative valuations to EM are approaching 1 SD below average whereas its forward earnings growth looks more attractive than it has been in a while. Relative policy uncertainty seems low and return correlations continue to trend lower, underscoring India’s defensive nature in a tough global environment.

• The key risk is from external sources, i.e., slowing global growth: Exports (including goods and services) account for 20% of GDP so any global growth slowdown will affect growth and investments in India. The absolute upside to stocks may be constrained by our less than sanguine view on global equities whereas India’s relative performance should make a comeback in the remainder of 2019.

• Portfolio strategy: The performance gap between narrow and broad market has a fair bit of distance to cover to hit normal levels so we expect the broad market to outperform a likely rising narrow market (Nifty/Sensex). We like “growth at a reasonable price” stocks among Financials, Discretionary Consumption, and Industrials – both large and mid-caps.

2

Key Charts – Growth is KeyGlobal factors including Growth & Terms of Trade are key risks

Consumption Slowdown may have Troughed Growth is key to drive Equity Returns

Source: BSE, Bloomberg, Morgan Stanley Research; RIMES, MSCI, Morgan Stanley Research; RIMES, BSE, Morgan Stanley Research; Bloomberg, Morgan Stanley Research.

MSCI India's likely ROE progression: A New cycle in the Making

-30%

-20%

-10%

0%

10%

20%

30%

40%-60%

-40%

-20%

0%

20%

40%

60%

80%

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

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2015

2016

2017

2018

2019

Brent crude Rel to Copper YoY ReturnsMSCI India Rel to EM YoY Returns - RS (on Reverse scale)

-5%

0%

5%

10%

15%

20%

25%

30%

-80%-60%-40%-20%

0%20%40%60%80%

100%120%

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

3MMA Nominal IIP growth - RS

YoY Sensex Returns (pushed fwd 6 months)

10%

12%

14%

16%

18%

20%

22%

24%

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019E

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

-20%

-10%

0%

10%

20%

30%

40%

50%

Sep-

08

May

-09

Jan-

10

Sep-

10

May

-11

Jan-

12

Sep-

12

May

-13

Jan-

14

Sep-

14

May

-15

Jan-

16

Sep-

16

May

-17

Jan-

18

Sep-

18

May

-19

Two Wheeler Sales, LS

HUL Growth, RS

YoY% 3MMA

3

Key Charts – Liquidity ImprovingPolicy measures Taken to Boost Foreign Flows

System Liquidity in Surplus Real Rates are Falling

Source: BSE, Bloomberg, Morgan Stanley Research; RIMES, MSCI, Morgan Stanley Research; RIMES, BSE, Morgan Stanley Research; Bloomberg, Morgan Stanley Research.

Positive Delta in Forex reserves Could Drive Markets Higher

-40

-20

0

20

40

60

80

100

Jun-

14

Dec-

14

Jun-

15

Dec-

15

Jun-

16

Dec-

16

Jun-

17

Dec-

17

Jun-

18

Dec-

18

Jun-

19

Interbank Liquidity (US$ bn)

Inter-bank liquidity has moved into surplus in June after being tighter than usual in Apr / May

0

50

100

150

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300

350

Dec

-04

Sep-

05Ju

n-06

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-07

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08Ju

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-10

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-10

Sep-

11Ju

n-12

Mar

-13

Dec

-13

Sep-

14Ju

n-15

Mar

-16

Dec

-16

Sep-

17Ju

n-18

Mar

-19

Gross FDIFPI (Eq+debt)

5Y trailing Gross FDI vs Net FPI flows (Equity + Debt) US$ bn

-30%

-20%

-10%

0%

10%

20%

30%

40%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

2001

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2012

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2015

2016

2017

2018

2019

6M sensex change (LS) 6M change in Forex Reserves

0%

5%

10%

15%

20%

25%

-13

-9

-5

-1

3

7

11

Mar

-96

Mar

-98

Mar

-00

Mar

-02

Mar

-04

Mar

-06

Mar

-08

Mar

-10

Mar

-12

Mar

-14

Mar

-16

Mar

-18

3M Real Rates (on CPI)Avg real rate at 2.5%

Avg real rate at 0.6%

4

Key Charts – The Bid RemainsRising M&A: PE Funds and Strong Companies in the Bid

Aggregate Institutional Flows: On an Uptrend

Source: RBI, RIMES, Morgan Stanley Research; CSO, Morgan Stanley Research; CDSL, SEBI, Morgan Stanley Research; Bloomberg, Morgan Stanley Research.

With Flows Looking Up, Net Demand Supply set to Rise

0

10

20

30

40

50

60

70

2001

2002

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2006

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2008

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2012

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2017

2018

2019

12M rolling M&A activity - US$ bn (LS)

-35.0-30.0-25.0-20.0-15.0-10.0

-5.00.05.0

10.015.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Equity demand supply gap (US$ bn)

Sensex at Fair Value Relative to M2 Growth

-80%-60%-40%-20%

0%20%40%60%80%

100%

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

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2006

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2008

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2018

2019

YoY Sensex change minus YoY M2 supplygrowth

0

5000

10000

15000

20000

25000

30000

35000

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

12M Rolling Total Flows (US$ mn)

5

Key Charts – India’s Relative Position GoodRelative Policy Uncertainty Low in India

Relative PB Approaching -1 SD

-20%

-10%

0%

10%

20%

30%

40%

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

MSCI India 2Y Fwd EPS Growth minus MSCI EM 2Y Fwd EPS Growth

Source: RBI, RIMES, Morgan Stanley Research; CSO, Morgan Stanley Research; RIMES, MSCI, Morgan Stanley Estimates, Morgan Stanley Research; Bloomberg, Morgan Stanley Research.

India’s Return Correlation with Global Equities @ 15 year Lows

India’s Relative Earnings Growth Approaching All-time Highs

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

PBLTA+1 Stdev-1 Stdev

MSCI India (relative to EM)

-45%-35%-25%-15%-5%5%15%25%35%45%55%65%75%85%95%0

100

200

300

400

500

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

India Economic Policy Uncertainty Index relative to World(3MMA) (pushed forward 3M) on reverse scale -LS

MSCI India YoY perf. Relative to ACWI

-0.25-0.15-0.050.050.150.250.350.450.550.650.750.850.95

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

52 Week Correlation of MSCI India with MSCI EM

52 Week Correlation of MSCI India with MSCI ACWI

6

Index TargetBSE Sensex Outlook: Risk-Reward for June 2020 Index target:

On our June 2020 target of 45,000, the BSE Sensex would trade at a forward P/E of 18.5x and at a trailing P/E of 22x, higher than the 25-year trailing average of 19.7x.

Base case (50% probability) – BSE Sensex: 45,000: Growth accelerates. We expect Sensex earnings growth of 24% YoY in F2020 and 20% YoY in F2021.

Bull case (30% probability) – BSE Sensex: 50,000: Better-than-expected outcomes, most notably on policy and global factors. Strong policy delivery especially in terms of tax cuts, infrastructure creation, foreign investments and fiscal consolidation. Earnings growth accelerates to 26% in F2020 and 24% in F2021.

Bear case (20% probability) – BSE Sensex: 35,000: Global conditions deteriorate and the policy delivery suffers - fiscal deficit expands and growth falters. Sensex earnings grow 18% in F2020 and 15% in F2021.

Source: RIMES, Morgan Stanley Research (E) estimate.

22,00024,00026,00028,00030,00032,00034,00036,00038,00040,00042,00044,00046,00048,00050,000

Jun-

14Se

p-14

Dec-

14M

ar-1

5Ju

n-15

Sep-

15De

c-15

Apr-1

6Ju

l-16

Oct

-16

Jan-

17Ap

r-17

Jul-1

7O

ct-1

7Fe

b-18

May

-18

Aug-

18No

v-18

Feb-

19M

ay-1

9Se

p-19

Dec-

19M

ar-2

0Ju

n-20

45000 (14%)

50000(+27%)Jun 20 Fwd probability-weightedoutcome @ 45000

Base Case (June 2020)

Current Price (July 5, 2019)

35000 (-11%)

39513

Historical Performance

7

Portfolio StrategySector Model Portfolio Recap of our biggest sector views:

•Consumer Discretionary (+500bp): Strong consumer loan growth and rising real incomes drive our view.•Financials (+500bp): Credit costs may have peaked, driven by the bankruptcy process and a recovery in economic growth. Recapitalization should also help the corporate banks. Loan growth prospects are improving as the economy gathers pace. Non-banks face growth slowdown but the stronger ones look in a good position and are further helped by the budget announcements.•Industrials (+400bp): Private capex is likely turning in the coming months, and public capex remains strong.•Technology (-700bp): Business momentum has been strong, but stocks have re-rated and recent outperformance probably prices in the strong growth. With the US capex slowing, business could be challenged in the coming months.•Consumer Staples (Neutral): Government spending for farmers and middle income families could boost consumption. Valuations keep us from being overweight.•Energy (Neutral): Stocks look selectively attractive but overall sector view is not strong enough to warrant a call either way.•Healthcare (-200bp): The sector remains challenged by regulatory burdens.•Utilities (-200bp): We prefer cyclical exposures.•Materials (-200bp): Funding source for our overweights.•Communication Services (-100bp): Funding source for our overweights.

Source: RIMES, MSCI, Morgan Stanley Research; Past performance is no guarantee of future results.

SectorMSCI Wt

(%)OW/ UW

(bps)YTD 12M

MSCI India 7% 8%Consumer Disc. 8.4 500 -14% -27%Consumer Staples 10.3 0 -10% -5%Energy 15.1 0 6% 13%Financials 26.4 500 9% 12%Healthcare 4.3 -200 -15% -22%Industrials 4.5 400 2% 9%Technology 16.6 -700 5% 6%Materials 8.3 -200 -2% -2%Comm Services 3.0 -100 -5% -22%Utilities 3.0 -200 -5% -2%

Performance relative to MSCI India

We continue to back growth at a reasonable price. We believe the way to construct portfolios is to buy stocks of companies with the highest delta in return on capital. We expect market performance to broaden; hence, we also like mid-caps where the forward growth is not reflecting share price performance.

8

Portfolio StrategyFocus List

Source: RIMES, MSCI, Morgan Stanley Research; Past performance is no guarantee of future results.

YTD Perf 12m PerfBajaj Auto Cons. Disc. EW 2,843 12.0 21 -1% -10% 7%M&M Cons. Disc. OW 642 11.1 32 -24% -34% 4%Maruti Suzuki Cons. Disc. OW 6,360 28.1 88 -19% -36% 14%Jubilant foods Cons. Disc. OW 1,235 2.4 23 -7% -19% 22%Dabur Staples OW 407 10.5 14 -10% 1% 16%United Spirits Staples OW 581 6.2 13 -14% -14% 24%Reliance Industries Energy EW 1,263 117.0 179 7% 22% 23%M&M Financial Financials OW 397 3.6 12 -21% -19% 16%HDFC Bank Financials OW 2,472 98.7 115 10% 9% 22%ICICI Bank Financials OW 436 41.1 103 15% 50% 131%Indusind Bank Financials OW 1,533 13.5 92 -9% -27% 43%Shriram Transport Financials OW 1,078 3.6 32 -18% -13% 11%ICICI Pru Life Financials OW 398 8.4 10 16% 1% 2%SBI Financials OW 371 48.3 116 19% 35% NMPrestige Estates Financials OW 275 1.5 2 18% -7% 25%Ashok Leyland Industrials OW 87 3.7 30 -20% -35% -5%Interglobe Aviation Industrials OW 1,562 8.8 49 27% 36% NML & T Industrials OW 1,558 31.9 63 3% 16% 16%Asian Paints Materials OW 1,359 19.0 28 -6% -4% 20%Ultratech Cement Materials NC 4,522 18.1 37 7% 7% 40%

Rel to MSCI IndiaAvg 3M T/O($ mn)

RatingSectorPrice as onJuly 5, 2019

MCap ($ bn)2Y Fwd EPS

Growth

9

The Known Unknowns

Source: Morgan Stanley Research

Why this is important What the market could be pricing in Our expectationGrowth

High-frequency data Growth cycle is at an inflexion point, in ourview Mixed data with signs of steep slowdown Better improvement than what may be priced in

Earnings season Earnings have persistently disappointedsince 2010 Little improvement in growth We are watching for a margin recovery from close to all-time lows as

operating leverage kicks in

Earnings Guidance Will set the stage for earnings estimaterevisions breadth to turn positive Neutral to negative guidance Positive guidance from banks and industrials

GST Collections GST revenues are stabilizing but still notoptimum Revenues at around the current levels of Rs1 trillion As the economy picks up pace, GST revenues will likely head higher.

Loan growth A lagging indicator of growth Modest increase led by retail loan growth New credit growth cycle underway, in our view

Order books A signal that capex is returning No major increase in the immediate future We think order books are likely to build visibly in the coming months

Rates

CPI We expect the RBI to have limitedtolerance for a rise in CPI Lower inflation trajectory Incoming headline inflation data likely to remain benign in 2019

Monetary policy Crucial to protect India's hard-earnedmacro stability Market is expecting a dovish RBI 50 bps rate cuts in 2019

Long bonds Seen as the anchor to the discounting ratefor equity cash flows Borrowing calendar keeps long bonds ranged See: India Equity Strategy: Why and How Long Bond Yields Matter to

Equities (22 Mar 2018)

10

The Known Unknowns

Source: Morgan Stanley Research

Why this is important What the market could be pricing in Our expectationPolitics & Policy

Fiscal deficitSets the stage for immediate growth and

fiscal targets. A higher deficit creates inflation risks

Some fiscal slippage from the targeted level of 3.3% for F2020 Limited or no fiscal slippage

Infrastructure Spending Key growth driver in the absence of private corporate capex

The BJP election manifesto promises US$1.4 trillion in spending over five years

If public capex crosses 10% of GDP in three years, it will be a good outcome

Privatization A source of revenues for government and also a boost to productivity

Stake sales to institutional investors continues. F2020 target is Rs1.05 trillion. As indicated by the government

Foreign investments Key to capital formation More liberalised regime for both FDI and Debt flows. Cumulative FDI over five years was US$286 billion

Capital market reforms inorder to improve FPI flows and India's weight in the MSCI Index

Market

Domestic flows Domestic flows have been a reliable source of equity demand over the past three years

Challenge to the run rate of US$2 billion due to market volatility India Equity Strategy: DREAM is Reality (4 Apr 2019)

Corporate activity Higher supply will drag down share prices, while M&A is an offset NA We expect net supply-demand to be more balanced in 2019 vs. the

negative gap of 2018Fed rates Determines risk appetite for EM Rate cuts later this year Rate cut of 50 bps later this month

EM performance India remains highly correlated to global equities NA Return correlations are below historical levels - India is behaving

idiosyncratically and may continue to do so in 2019

Oil prices Given the fiscal constraints, higher oil could hurt growth

Oil to have a negative impact on the fiscal deficit and growth

Oil relative to copper important for India's relative performance to EM. Our global oil team believes oil prices are range bound in 2019

11

Politics and MacroMacro Forecasts at a Glance

Inflation Real Rates

Source: RIMES, MSCI, Morgan Stanley Research (e) estimates ; RBI, Morgan Stanley Research; RBI, CSO, Morgan Stanley Research; RBI, CEIC, Morgan Stanley Research.

F2018 F2019E F2020E F2021E

GDP Growth (new) 7.2% 7.0% 7.4% 7.5%

IIP Growth 4.4% 3.7% 4.2% 4.6%

Average CPI 3.6% 3.4% 3.7% 4.2%

Repo Rate (year end) 6.00% 6.25% 5.25% 5.25%

CAD% of GDP -1.9% -2.3% -2.2% -2.2%

Sensex EPS 1471 1692 2090 2508

Sensex PE 27.0 23.4 18.9

Sensex EPS (consensus) 15.9% 26.1% 16.4%

EPS growth YoY -0.4% F19e F20e F21e

Broad Market Earnings Growth 3.0% 10.0% 22.0% 20.0%

Broad Market PE 30.6 27.8 22.8

Policy Rates

3%4%5%6%7%8%9%

10%11%12%

Jul-0

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9

Repo Rate Rev repo

Cash Reserve Ratio 91D Yield

0%

5%

10%

15%

20%

25%

-13

-9

-5

-1

3

7

11

Mar

-96

Mar

-98

Mar

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Mar

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3M Real Rates (on CPI)Avg real rate at 2.5%

Avg real rate at 0.6%

-8%

-3%

2%

7%

12%

17%

22%

Mar

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Mar

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WPI CPI

12

-40%

-20%

0%

20%

40%0

100

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Nov-

03Ju

l-04

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l-18

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-19

India's economic policy uncertainty indexLTA of Policy Uncertainty IndexMSCI India vs. EM: 12M relative performance - RS (on reverse scale)

Politics and MacroPolicy Uncertainty Index

Bank Credit Growth PMI: Manufacturing and Services

4%

8%

12%

16%

20%

24%

28%

32%

36%

2000

2001

2002

2003

2004

2005

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2007

2008

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2012

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2016

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2018

2019

Credit Growth

Source: Economic Policy Uncertainty Index, RIMES, MSCI, Morgan Stanley Research; Economic Policy Uncertainty Index, RIMES, MSCI, Morgan Stanley Research; CEIC, Morgan Stanley Research; Haver, Morgan Stanley Research.

Policy Uncertainty Index: India vs. World

454647484950515253545556

Jan-

15M

ar-1

5M

ay-1

5Ju

l-15

Sep-

15No

v-15

Jan-

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ar-1

6M

ay-1

6Ju

l-16

Sep-

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Jan-

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ar-1

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ay-1

7Ju

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Jan-

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ar-1

8M

ay-1

8Ju

l-18

Sep-

18No

v-18

Jan-

19M

ar-1

9M

ay-1

9

Manufacturing PMI Services PMI

-45%-35%-25%-15%-5%5%15%25%35%45%55%65%75%85%95%0

100

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2019

India Economic Policy Uncertainty Index relative to World(3MMA) (pushed forward 3M) on reverse scale -LS

MSCI India YoY perf. Relative to ACWI

13

Politics and MacroExternal Balance Sheet Terms of Trade

Consolidated Fiscal Deficit

Source: RBI, CEIC, Morgan Stanley Research; RIMES, MSCI, Morgan Stanley Research; CSO, Morgan Stanley Research, Morgan Stanley estimates; RBI, CEIC, Bloomberg, Morgan Stanley Research.

-30%

-20%

-10%

0%

10%

20%

30%

40%-60%

-40%

-20%

0%

20%

40%

60%

80%

2001

2002

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2004

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2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Brent crude Rel to Copper YoY ReturnsMSCI India Rel to EM YoY Returns - RS (on Reverse scale)

-5%

-3%

-1%

1%

3%

5%

7%

9%

Dec-

97De

c-98

Dec-

99De

c-00

Dec-

01De

c-02

Dec-

03De

c-04

Dec-

05De

c-06

Dec-

07De

c-08

Dec-

09De

c-10

Dec-

11De

c-12

Dec-

13De

c-14

Dec-

15De

c-16

Dec-

17De

c-18

Capital Account BalanceOverall BoPCurrent Account Balance

4-quarter trailing sum, as % of GDP

REER Movement

96

100

104

108

112

116

120

124

2006

2006

2007

2007

2008

2009

2009

2010

2010

2011

2012

2012

2013

2013

2014

2014

2015

2016

2016

2017

2017

2018

2019

RBI REER Trade Weighted 36 Currencies, LS

10 YearAverage

Mean + st dev

Mean - st dev

MSe for Jun-19, 5.6% above 10Y

3%

4%

5%

6%

7%

8%

9%

10%

F198

3

F198

5

F198

7

F198

9

F199

1

F199

3

F199

5

F199

7

F199

9

F200

1

F200

3

F200

5

F200

7

F200

9

F201

1

F201

3

F201

5

F201

7

F201

9BE

F202

1E

Consolidated Fiscal Deficit % of GDP

14

LiquidityP/E Relative to Earnings Growth – Force of the Bid Small cap Liquidity

Financial Conditions Index vs. Share Prices M2 Supply Growth Relative to Share Prices

Source: RIMES, Bloomberg, MSCI, Morgan Stanley Research; RIMES, Bloomberg, MSCI, Morgan Stanley Research; Bloomberg, RBI, CEIC, RIMES, Morgan Stanley Research; RBI, RIMES, Morgan Stanley Research.

-30%

-20%

-10%

0%

10%

20%

30%

40%

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Trailing 3 year CAGR Trailing 5 year CAGR Average

Index change minus EPS growth

(1.5)

(1.0)

(0.5)

-

0.5

1.0

1.5

2.0

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

6M Sensex change - LS FCI

-80%-60%-40%-20%

0%20%40%60%80%

100%

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

YoY Sensex change minus YoY M2 supplygrowth

-150%

-100%

-50%

0%

50%

100%

150%

200%

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

MSCI India Small Cap MSCI India12M Index change minus EPS growth

15

LiquidityGap with Fed rates and India's relative performance to EM Yield Curve vs. Sensex Returns

XXX Global Liquidity YoY change chart

Source: Bloomberg, RBI, MSCI, RIMES, Morgan Stanley Research; BSE, Bloomberg, Morgan Stanley Research; RIMES, MSCI, Bloomberg, Morgan Stanley Research; RIMES, MSCI, Bloomberg, Morgan Stanley Research.

0%1%2%3%4%5%6%7%8%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

MSCI India vs. EM: 12M relative performance - LSRate Gap (Repo rate - Fed rates) - Inverted RS

-80%-60%-40%-20%0%20%40%60%80%100%120%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Yield Curve pushed fwd 2MSensex 12M trailing Returns - RS

Global Liquidity Proxy: US Treasury Yield Minus India's Earnings Yield

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

-100%

-50%

0%

50%

100%

1995

1997

1998

2000

2001

2003

2004

2006

2007

2009

2010

2012

2013

2015

2016

2018

12M Fwd Return MSCI India USD (LS)

YoY Change in (MSCI India EY minus US 10Y Yield) (RS)-8%

-6%

-4%

-2%

0%

2%

4%

-80%-60%-40%-20%

0%20%40%60%80%

100%120%

1995

1997

1999

2000

2002

2004

2006

2007

2009

2011

2013

2014

2016

2018

Sensex YoY

US 10Y Yield- MSCI India earnings yield (RS)

16

Corporate FundamentalsMacro Earnings Model Based on Kalecki Equation Proprietary Macro Earnings Model Based on IIP/Inflation Differentials

Corporate Profit to GDP India vs. US: Corporate Profits to GDP

Source: CEIC, Capitaline, Morgan Stanley Research (e) estimates; CEIC, Capitaline, Morgan Stanley Research (e) estimates; CEIC, CMIE, Morgan Stanley Research; CMIE, Haver, Morgan Stanley Research (e) estimates.

0%

2%

4%

6%

8%

10%

12%

F199

2F1

993

F199

4F1

995

F199

6F1

997

F199

8F1

999

F200

0F2

001

F200

2F2

003

F200

4F2

005

F200

6F2

007

F200

8F2

009

F201

0F2

011

F201

2F2

013

F201

4F2

015

F201

6F2

017

F201

8E

India USCorporate Profits to GDP

-100%

-50%

0%

50%

100%

150%

200%

-40%

-20%

0%

20%

40%

60%

80%

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Earnings Growth Leading Indicator (Real IIP growth) *

Broad market Earnings Growth (ex Oil PSU)-RS

E E

-20%

0%

20%

40%

60%

80%

100%

F199

4

F199

6

F199

8

F200

0

F200

2

F200

4

F200

6

F200

8

F201

0

F201

2

F201

4

F201

6

F201

8E

F202

0E

F202

3e

F202

5e

F202

6e

F202

8e

Corporate Profit Growth Based on the Macro model

Actual Broad Market Profit Growth

0%

1%

2%

3%

4%

5%

6%

7%

8%

F199

2

F199

4

F199

6

F199

8

F200

0

F200

2

F200

4

F200

6

F200

8

F201

0

F201

2

F201

4

F201

6

F201

8E

Corporate Profits to GDP

17

Corporate FundamentalsEarnings Drawdown or Indicator of Earnings Recession BSE Sensex Consensus EPS Growth Trend

Morgan Stanley Top-down Sensex EPS Estimates Earnings Estimate Revisions Breadth

Source: RIMES, MSCI, Morgan Stanley Research; RIMES, IBES, Morgan Stanley Research, Company Data, Capitaline, Morgan Stanley Research, e = Morgan Stanley estimates except for Consensus estimates, which are IBES estimates; RIMES, MSCI, Morgan Stanley Research.

-25%

-20%

-15%

-10%

-5%

0%

Dec-

94

Sep-

96

Jun-

98

Mar

-00

Dec-

01

Sep-

03

Jun-

05

Mar

-07

Dec-

08

Sep-

10

Jun-

12

Mar

-14

Dec-

15

Sep-

17

Jun-

19

MSCI India EPS drawdown from peak

BSE Sensex EPS F19e F20e F21e

MS Top Down EstimatesBear Case 1,996 2,296

EPS Growth 18% 15%Base Case 1,692 2,090 2,508

EPS Growth 15% 24% 20%Bull Case 2,133 2,645

EPS Growth 26% 24%Consensus EPS Estimates 1,705 2,149 2,502

EPS Growth 16% 26% 16%MS Analyst EstimatesEPS 1,694 2,101 2,454EPS Growth 15% 24% 17%Broad MarketMS Top Down EstimatesEPS Growth 10% 22% 20%

-60%-40%-20%0%20%40%60%80%100%120%

-15%

-10%

-5%

0%

5%

10%

15%

Feb-

01Fe

b-02

Feb-

03Fe

b-04

Feb-

05Fe

b-06

Feb-

07Fe

b-08

Feb-

09Fe

b-10

Feb-

11Fe

b-12

Feb-

13Fe

b-14

Feb-

15Fe

b-16

Feb-

17Fe

b-18

Feb-

19

MSCI India (yoy, RS)

Analyst Revisions 3MA -LS

Reflexivity in corporate earnings outlook and share price

6%8%

10%12%14%16%18%20%22%24%26%28%30%

Jun-

16

Aug-

16

Oct

-16

Dec-

16

Feb-

17

Apr-1

7

Jun-

17

Aug-

17

Oct

-17

Dec-

17

Feb-

18

Apr-1

8

Jun-

18

Aug-

18

Oct

-18

Dec-

18

Feb-

19

Apr-1

9

Jun-

19

BSE Sensex consensus EPS growth trend

F2021E EPS - 2502

F19 to F21 EPS CAGR

F2020E EPS - 2149

F2019E EPS -1705

18

Corporate FundamentalsBalance Sheet Recession Corporate Confidence: MS AlphaWise Data

India's ROE and Asset Turnover Trend GDP Growth vs. Earnings Growth

Source: Company data, Morgan Stanley Research; AlphaWise, Morgan Stanley Research; Worldscope, RIMES, MSCI, Morgan Stanley Research; RIMES, MSCI, CEIC, Morgan Stanley Research.

100

1000

FY19

94

FY19

96

FY19

98

FY20

00

FY20

02

FY20

04

FY20

06

FY20

08

FY20

10

FY20

12

FY20

14

FY20

16

FY20

18

Nominal GDP

Indexed to 100

on a log scale

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

Dec-0

2

Dec-0

3

Dec-0

4

Dec-0

5

Dec-0

6

Dec-0

7

Dec-0

8

Dec-0

9

Dec-1

0

Dec-1

1

Dec-1

2

Dec-1

3

Dec-1

4

Dec-1

5

Dec-1

6

Dec-1

7

Dec-1

8

Gap between revenue growth and MCLR /Base rate ( 3-quarter average)

MS coverage universe

32%

38%

49%

47%

77%

88%

61%

54%

44%

45%

20%

10%

7%

6%

7%

8%

3%

2%

FY13

FY14E

FY15

FY16E

FY18

FY19E

Confidence on Business Growth

Improved y-o-y No change y-o-y Worsened y-o-y

50%

60%

70%

80%

90%

100%

110%

0%

5%

10%

15%

20%

25%

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

MSCI India

Asset Turn Trend - RS

ROE trend

net proft margin

19

Corporate FundamentalsBroad Market Revenue Growth

YoY Revenue and Profit Growth for Broad Market

Source: Company data, Capitaline, Morgan Stanley Research.

-10%

0%

10%

20%

30%

40%

Mar

-05

Mar

-06

Mar

-07

Mar

-08

Mar

-09

Mar

-10

Mar

-11

Mar

-12

Mar

-13

Mar

-14

Mar

-15

Mar

-16

Mar

-17

Mar

-18

Mar

-19

Revenue growth (BroadMarket - 1277 cos) RS

Breadth of Corporate Performance

15%

25%

35%

45%

55%

65%

75%

15%

25%

35%

45%

55%

65%

75%

Dec-

03

Dec-

04

Dec-

05

Dec-

06

Dec-

07

Dec-

08

Dec-

09

Dec-

10

Dec-

11

Dec-

12

Dec-

13

Dec-

14

Dec-

15

Dec-

16

Dec-

17

% of Cos with >10% Revenue Growth% of Cos with >10% Net Pft Growth

Large Companies’ Share in Total Profits

30%

35%

40%

45%

50%

55%

Dec-0

3

Dec-0

4

Dec-0

5

Dec-0

6

Dec-0

7

Dec-0

8

Dec-0

9

Dec-1

0

Dec-1

1

Dec-1

2

Dec-1

3

Dec-1

4

Dec-1

5

Dec-1

6

Dec-1

7

Dec-1

8

Share of top companies by net profit as % oftotal broad market net profits (trailing 4Q)

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

-120%

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

Mar

-05

Mar

-06

Mar

-07

Mar

-08

Mar

-09

Mar

-10

Mar

-11

Mar

-12

Mar

-13

Mar

-14

Mar

-15

Mar

-16

Mar

-17

Mar

-18

Mar

-19

Broad market earnings growth (ex-oil PSU)

Broad market revenue growth (ex Oil PSU) - RS

20

Average Predicted Performance by All Valuation Tools Absolute P/B

Share of India in World Market Cap & GDP MSCI India P/B Relative to MSCI EM

Source: RIMES, MSCI, Morgan Stanley Research; RIMES, MSCI, Morgan Stanley Research; IMF, Bloomberg, Morgan Stanley Research; RIMES, MSCI, Morgan Stanley Research.

-75%-50%-25%

0%25%50%75%

100%125%150%

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

12M Fwd. PerformancePredicted 12M Fwd. Performance

1

2

3

4

5

6

7

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

PBLTA+1 Stdev-1 Stdev

MSCI India

1.5%

1.7%

1.9%

2.1%

2.3%

2.5%

2.7%

2.9%

3.1%

3.3%

3.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Share of India (inWorld Market Cap)Share of India (inWorld GDP) - RS

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

PBLTA+1 Stdev-1 Stdev

MSCI India (relative to EM)

Valuations

21

ValuationsCyclically Adjusted P/E Market Cap to GDP

Equity vs. Bond Multiple Small Cap Price to Book

Source: RIMES, MSCI, Morgan Stanley Research; BSE, Bloomberg, Morgan Stanley Research; RIMES, MSCI, Bloomberg, Morgan Stanley Research; RIMES, MSCI, Morgan Stanley Research.

10x12x14x16x18x20x22x24x26x28x30x

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

in USDin INR

India Shiller PE

0%10%20%30%40%50%60%70%80%90%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Market Cap to GDP ex Sensex

Sensex market cap to GDP

Feb-00

Jan-08

Dec-08

Jun-14

0.00.20.40.60.81.01.21.41.61.82.02.22.42.6

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Equity multiple (using 12M fwd PE) over bond multiple (using 10-year bond

Jun-13

Jul-15

Mar-03

Oct-10

Nov-16Sep-11

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

0.4

0.9

1.4

1.9

2.4

2.9

3.4

3.9

4.4

4.9

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

MSCI India Small Cap PB (LS)

MSCI India Small Cap PB relative to MSCI India (RS)

22

P/B Forecasting 10-year CAGR of 13.8% in Returns Value Assigned to Future Growth

MSCI India P/E Relative to MSCI US Valuation Summary

Source: RIMES, MSCI, Morgan Stanley Research.

R² = 0.7438y = -0.0344x + 0.2385

0%

5%

10%

15%

20%

25%

1 2 3 4 5 6 7

MSCI India Trailing P/B

Annual 10-year fwdMSCI India returns Current P/B of 2.7 implies a

10-year annual return of 14.4%

0%10%20%30%40%50%60%70%80%90%

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

Value assigned to future growth for MSCI India Index

5 Year trailing average10-year

Valuations

Current Average z-score %ile of currentreading

Trailing PE 24.2 18.3 1.3 95%12M Fwd PE 17.6 14.5 1.0 92%Trailing PB 2.7 3.1 -0.4 57%Dividend Yield 1.4% 1.4% -0.1 26%VAFG 64% 54% 0.8 88%Modified EY Gap -1.8% -1.6% -0.1 47%EY Gap -2.7% -1.9% -0.5 41%

Trailing PE 1.8 1.2 1.7 99%12M Fwd PE 1.4 1.2 0.7 93%Trailing PB 1.7 1.7 -0.2 80%Dividend Yield 0.5 0.6 -0.6 24%

MSCI India

MSCI India Relative to EM

P/B Forecasting 10-year CAGR of 14.4% in Returns Value Assigned to Future Growth

MSCI India P/E Relative to MSCI US Valuation Summary

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

MSCI India PE relative to MSCI US

23

SentimentProprietary Sentiment Indicator Value-at-Risk for BSE Index

Realized Inter-day Volatility

Source: RIMES, Bloomberg, ASA, BSE, NSE, CDSL, Morgan Stanley Research; RIMES, Morgan Stanley Research; NSE, Morgan Stanley Research; Bloomberg, Morgan Stanley Research;

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

1998

1999

2001

2002

2004

2005

2007

2008

2010

2011

2013

2014

2016

2017

2019

Composite Sentiment Indicator (CSI)Overbought

Oversold

BUY ZONE

SELL ZONE

May-03

Sep-01

Apr-07

Aug-06

Oct-08

May-00Dec-98

Jun-99

Jan-04

Nov-06Jan-08

Oct-09

Nov-10

Sep 13Feb 16 Apr 19

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

1 Yr Rolling Interday Volatility

-16%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

1985

1987

1988

1990

1991

1993

1994

1996

1997

1999

2000

2002

2003

2005

2006

2008

2009

2011

2012

2014

2015

2017

2018

99%/One-week VaR for BSE Sensex

-50%-40%-30%-20%-10%

0%10%20%30%40%50%

1991

1993

1994

1996

1997

1999

2000

2002

2003

2005

2006

2008

2009

2011

2012

2014

2015

2017

2018

Gap between 200 DMA and 50 DMA as % of Nifty

GAP between 200 DMA and 50 DMA

24

SentimentEquity Capital Raising vs. Valuations Net Equity Demand-supply

Flows: Foreign Portfolios vs. Domestic Mutual Funds Margin of Safety for Equity Mutual Fund Investors

Source: Capitaline, CMIE, Morgan Stanley Research; Capitaline, CMIE, Morgan Stanley Research; NSDL, CDSL, SEBI, Morgan Stanley Research; AMFI, Morgan Stanley Research.

-35.0-30.0-25.0-20.0-15.0-10.0

-5.00.05.0

10.015.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Equity demand supply gap (US$ bn)

-50%-25%0%25%50%75%100%125%150%175%200%

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

-500

0

500

1000

1500

2000

2500Cumulative 12M flows in equity mfs (Rs bn)

Margin of safety - RS

(15,000) (10,000)

(5,000) -

5,000 10,000 15,000 20,000 25,000 30,000 35,000

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

FPI flowsDMF flows

12M trailing flows (US$ mn)

0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%

5

10

15

20

25

30

35

40

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

MSCI India PE - PushedForward 2 months12M Rolling EquityIssuances/GDP (RS)

25

Correlation across Stocks Daily Market breadth

Source: Bloomberg, Morgan Stanley Research; RIMES, BSE, Morgan Stanley Research; RIMES, BSE, Morgan Stanley Research; RIMES, BSE, Morgan Stanley Research.

5%

15%

25%

35%

45%

55%

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Explanatory Power of Market Effect 1Y Rolling R-squared

Time for macro, Oct-10

Time for macro, Aug-07

Time for macro, Jul-05

Time for macro, Aug-03

Stock pickers' time, Sep-04

Stock pickers' time, Jul-06

Stock pickers' time, Jun-09

Stock pickers' time, Dec -11

Stock pickers' time, Mar-16

Time for macro

Relative Perf. of Large caps to Small caps

-65%-55%-45%-35%-25%-15%

-5%5%

15%25%35%

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

12M returns gap - Sensex vs. Midcap12M returns gap - Sensex vs. Smallcap

SentimentWeekly Market Breadth

0%10%20%30%40%50%60%70%80%90%

100%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

% of BSE 500 stocks outperforming BSE 500Index on a 12M trailing basis

Buy Zone

Sell Zone

0%10%20%30%40%50%60%70%80%90%

100%

1999

2001

2002

2003

2004

2006

2007

2008

2009

2011

2012

2013

2014

2016

2017

2018

% of BSE 500 stocks trading above 200DMA

Oct-08Jul-18

Dec-11Aug-13

Feb-16

26

SentimentNon-Systematic Domestic equity flows Ownership Status (Quarter Ended Mar-19)

India’s Position in EM Portfolios

Source: AMFI, Morgan Stanley Research; BSE, Morgan Stanley Research; EPFR, Morgan Stanley Research; NSDL, CDSL, BSE, SEBI, Morgan Stanley Research.

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

(100)

(50)

-

50

100

150

200

Jun-

09

Jan-

10

Aug-

10

Mar

-11

Oct

-11

May

-12

Dec-

12

Jul-1

3

Feb-

14

Sep-

14

Apr-

15

Nov

-15

Jun-

16

Jan-

17

Aug-

17

Mar

-18

Oct

-18

May

-19

Non SIP flows (Rs bn) - LS Sensex OverallInstitutional sector positions

FPIs DFIs DMFs TotalInst.

MSCIWeight

TotalInstitutional Position over MSCI weight

QoQChange

YoY ^ inTot Inst. Position

Cons Disc 7% 8% 5% 7% 9.1% -2.4% 0.0% 0.0%Cons Staples 7% 16% 11% 9% 10.2% -0.8% 0.6% -1.2%Energy 11% 19% 11% 13% 15.1% -2.5% 0.1% -1.0%Financials 44% 19% 39% 39% 24.8% 14.0% 0.1% 1.6%Healthcare 2% 3% 3% 2% 5.3% -2.8% 0.0% 0.2%Industrials 4% 9% 6% 5% 4.1% 0.9% -0.2% 1.5%Materials 5% 7% 6% 6% 8.4% -2.5% -0.1% 0.0%Technology 15% 13% 11% 14% 17.3% -3.5% -0.3% 0.4%Comm. Services 2% 1% 2% 2% 2.7% -0.6% 0.1% -0.6%Utilities 3% 5% 5% 3% 3.1% 0.4% -0.3% -1.0%

0

20

40

60

80

100

120

140

160

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Apr-

00

Apr-

01

Apr-

02

Apr-

03

Apr-

04

Apr-

05

Apr-

06

Apr-

07

Apr-

08

Apr-

09

Apr-

10

Apr-

11

Apr-

12

Apr-

13

Apr-

14

Apr-

15

Apr-

16

Apr-

17

Apr-

18

Apr-

19

India's Weight in GEM Funds* Relative to India'sWeight in MSCI EM

Gap between FPI Holding of Top 75 cos &Broader Market

MSCI India US$ total return PerformanceRelative to MSCI EM (Right)

* Benchmarked to MSCI EM

Aggregate Institutional Flows

-7000

-2000

3000

8000

13000

18000

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

3M Rolling FII Flows (US$ mn)

3M Rolling DII Flows (US$ mn)

3M Rolling Total Flows (US$ mn)

27

SentimentSensex Drawdown Midcap Drawdown

Small-cap Drawdown

Source: Bloomberg, Morgan Stanley Research; RIMES, MSCI, Morgan Stanley Research.

India vs. EM relative perf.

-12%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Sensex Drawdown

-16%

-23%

-80%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

BSE Midcap Drawdown

-21%-15%

-31%

-80%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

BSE Smallcap Drawdown

-20%

-15%

-10%

-5%

0%

5%

10%

Jan-

16M

ar-1

6M

ay-1

6Ju

l-16

Sep-

16No

v-16

Jan-

17M

ar-1

7M

ay-1

7Ju

l-17

Sep-

17No

v-17

Jan-

18M

ar-1

8M

ay-1

8Ju

l-18

Sep-

18No

v-18

Jan-

19M

ar-1

9M

ay-1

9Ju

l-19

MSCI India performance relative to MSCI EM - USD

MSCI India performance relative to MSCI EM - local currency

28

Sector DataSector Fundamentals

Source: RIMES, MSCI, Bloomberg, Morgan Stanley Research.

MSCI Sectors F19 ROE1Y Fwd

Change in ROE

ROE as SD from

AvgF18 Net D/E F18 FCF/

Sales

Trailing 5Y CAGR in

EPS

F19 EPS growth

6M Revision in F19 EPS growth

F20 EPS growth

1M Revision in F20 EPS growth

6M Revision in F20 EPS growth

Consumer Disc. 15.5% 2.3% (1.1) 0.3 5.5% -0.1% -23.6% -15.6% 26.3% -1.2% -14.1%Consumer Staples 28.4% 0.4% (1.0) -0.2 15.0% 7.1% 15.3% -0.9% 14.0% -0.8% -5.2%Energy 14.6% 0.1% (0.8) 0.4 2.4% 6.9% 12.0% -3.1% 8.5% -0.1% 1.3%Financials 13.4% 6.8% (2.1) 6.5% -4.0% 5.1% -9.9% 86.7% 1.6% -73.3%Health Care 12.1% 1.0% (1.7) 0.4 12.7% 10.4% 11.5% -1.9% 20.9% -1.4% -56.0%Industrials 16.6% 1.3% (0.1) 0.6 6.1% 14.1% -0.7% 1.4% 26.0% -0.3% -1.9%Technology 25.4% -1.7% 0.1 -0.4 17.5% 10.8% 14.7% -1.2% 8.0% -0.2% -8.9%Materials 11.9% -0.8% (0.4) 0.7 8.8% 20.3% 14.3% -10.0% 6.5% -1.3% 26.7%Comm. Services -6.5% 0.6% (1.4) 1.2 3.3% 18.9% NM NM NM NM NMUtilities 12.8% 0.1% (0.1) 1.3 19.7% 3.4% 7.9% -5.4% 13.6% -1.9% 2.1%

Sector ValuationsMSCI Sectors Trailing PE PE as SD

from Avg Trailing PB PB as SDfrom Avg Div Yield Div Yield as SD

from AvgLT Implied EPS

GrowthLT Implied Div

GrowthValue Assigned to

Future Growth

Consumer Disc. 37.0 3.2 3.0 (0.3) 1.0% -0.8 16.7% 14.3% 78.0%Consumer Staples 43.8 1.0 12.5 0.4 1.2% -0.7 17.7% 12.4% 79.2%

Energy 13.5 0.2 1.8 (0.5) 1.8% -0.2 -3.3% 8.1% 45.9%Financials 27.2 1.1 2.8 0.5 0.8% -1.0 -11.5% 17.9% 67.8%

Health Care 25.4 (0.5) 2.5 (1.8) 0.7% -0.5 8.7% 19.7% 59.3%Industrials 26.8 0.7 4.0 0.3 1.0% -0.6 5.9% 14.6% 66.3%Technology 20.3 (0.4) 5.1 (0.3) 1.8% 1.1 3.1% 8.6% 50.6%Materials 16.6 0.3 1.9 (0.2) 1.9% 0.4 5.4% 7.6% 48.1%

Comm. Services 120.1 2.6 1.2 (0.7) 1.6% 0.0 NM 9.9% 91.5%Utilities 11.1 (0.4) 1.5 (0.3) 3.6% 1.8 8.3% 1.0% 13.0%

MSCI Sectors Abs 3M perf Abs 12M perf Abs YTDperf

5 Year CAGRPerf

200DMADeviation 12M Beta 3M Change in

12M BetaInstitutionalOwnership

Sell SideReco

3M change in SellSide Reco

Consumer Disc. -9% -27% -33% -1% -11% 1.2 0.03 71% 52% -2%Consumer Staples 1% 0% 13% 13% 0% 0.9 0.00 58% 49% 3%Energy -4% 17% 14% 9% 14% 1.5 -0.03 73% 53% -4%Financials 3% 17% 19% 12% 10% 1.0 0.10 82% 56% -6%Health Care -16% -17% -20% -4% -1% 0.6 -0.19 70% 39% 2%Industrials 6% 11% 6% 5% 5% 0.9 0.00 66% 61% 4%Technology -3% 13% 35% 9% 5% 0.7 -0.02 84% 38% -15%Materials -4% 0% -13% 4% 2% 1.0 -0.10 65% 50% -3%Comm. Services -4% -18% -45% -10% -6% 0.6 0.01 91% 39% -10%Utilities -4% 0% -15% -1% 4% 0.8 -0.03 85% 41% -2%

Sector Market Dynamics

29

Sector DataTotal Institutional Sector Positions – Absolute and Relative over Time

Source: Company data, BSE, MSCI, RIMES, Morgan Stanley Research Dark blue Line – Weight in the average Institutional portfolio (domestic + foreign) using our sample of 75 companies – LS Light red line – Relative Position to MSCI Sector weight (above/below benchmark in bps) – RS

Consumer Disc. Consumer Staples Energy Financials Healthcare

Industrials Materials Technology Comm Services Utilities

(800)

(600)

(400)

(200)

0

200

400

600

2%

4%

6%

8%

10%

12%

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

(500)

(300)

(100)

100

300

500

700

900

1,100

0%

4%

8%

12%

16%

20%

24%

28%

32%

36%20

0120

0320

0520

0720

0920

1120

1320

1520

1720

19

(700)(600)(500)(400)(300)(200)(100)0100200300

0%

5%

10%

15%

20%

25%

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

(400)(200)02004006008001,0001,2001,4001,600

12%

16%

20%

24%

28%

32%

36%

40%

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

(700)

(600)

(500)

(400)

(300)

(200)

(100)

0

100

2%

4%

6%

8%

10%

12%

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

(400)

(300)

(200)

(100)

0

100

200

300

400

500

0%

3%

6%

9%

12%

15%

18%

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

(1,000)(800)(600)(400)(200)02004006008001,000

4%

6%

8%

10%

12%

14%

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

(400)(300)(200)(100)0100200300400500600700

0%1%2%3%4%5%6%7%8%9%

10%11%12%

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

(150)(100)(50)050100150200250300350

2%

3%

4%

5%

6%

7%

8%

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

(1,000)

(800)

(600)

(400)

(200)

0

200

5%

7%

9%

11%

13%

15%

17%

19%

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

30

Disclosure SectionThe information and opinions in Morgan Stanley Research were prepared or are disseminated by Morgan Stanley Asia Limited (which accepts the responsibility for its contents) and/or Morgan Stanley Asia (Singapore) Pte.(Registration number 199206298Z) and/or Morgan Stanley Asia (Singapore) Securities Pte Ltd (Registration number 200008434H), regulated by the Monetary Authority of Singapore (which accepts legal responsibility for its contentsand should be contacted with respect to any matters arising from, or in connection with, Morgan Stanley Research), and/or Morgan Stanley Taiwan Limited and/or Morgan Stanley & Co International plc, Seoul Branch, and/or MorganStanley Australia Limited (A.B.N. 67 003 734 576, holder of Australian financial services license No. 233742, which accepts responsibility for its contents), and/or Morgan Stanley Wealth Management Australia Pty Ltd (A.B.N. 19 009145 555, holder of Australian financial services license No. 240813, which accepts responsibility for its contents), and/or Morgan Stanley India Company Private Limited, regulated by the Securities and Exchange Board of India(“SEBI”) and holder of licenses as a Research Analyst (SEBI Registration No. INH000001105); Stock Broker (BSE Registration No. INB011054237 and NSE Registration No. INB/INF231054231), Merchant Banker (SEBI RegistrationNo. INM000011203), and depository participant with National Securities Depository Limited (SEBI Registration No. IN-DP-NSDL-372-2014) which accepts the responsibility for its contents and should be contacted with respect to anymatters arising from, or in connection with, Morgan Stanley Research, and/or PT. 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Alternatively you may contact your investment representative orMorgan Stanley Research at 1585 Broadway, (Attention: Research Management), New York, NY 10036 USA.Analyst CertificationThe following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation inexchange for expressing specific recommendations or views in this report: Ridham Desai; Sheela Rathi.Unless otherwise stated, the individuals listed on the cover page of this report are research analysts.Global Research Conflict Management PolicyMorgan Stanley Research has been published in accordance with our conflict management policy, which is available at www.morganstanley.com/institutional/research/conflictpolicies. 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Ltd., State Bank of India, United Spirits Ltd.Within the last 12 months, Morgan Stanley has received compensation for products and services other than investment banking services from HDFC Bank, ICICI Bank, ICICI Prudential Life Insurance, IndusInd Bank, Larsen & ToubroLtd, Reliance Industries, State Bank of India.Within the last 12 months, Morgan Stanley has provided or is providing investment banking services to, or has an investment banking client relationship with, the following company: Bajaj Auto Ltd., Dabur India, HDFC Bank, ICICIBank, ICICI Prudential Life Insurance, IndusInd Bank, InterGlobe Aviation, Larsen & Toubro Ltd, Mahindra & Mahindra, Reliance Industries, Shriram Transport Finance Co. 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31

COVERAGE UNIVERSE INVESTMENT BANKING CLIENTS (IBC) OTHER MATERIAL INVESTMENTSERVICES CLIENTS (MISC)

STOCK RATING CATEGORY COUNT % OF TOTAL COUNT % OF TOTAL IBC % OF RATINGCATEGORY

COUNT % OF TOTALOTHER MISC

Overweight/Buy 1110 36% 282 42% 25% 515 37%Equal-weight/Hold 1404 45% 312 47% 22% 656 47%Not-Rated/Hold 13 0% 2 0% 15% 2 0%Underweight/Sell 581 19% 73 11% 13% 229 16%TOTAL 3,108 669 1402

Data include common stock and ADRs currently assigned ratings. Investment Banking Clients are companies from whom Morgan Stanley received investment banking compensation in the last 12 months. Due to rounding off ofdecimals, the percentages provided in the "% of total" column may not add up to exactly 100 percent.Analyst Stock RatingsOverweight (O). The stock's total return is expected to exceed the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months.Equal-weight (E). The stock's total return is expected to be in line with the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months.Not-Rated (NR). Currently the analyst does not have adequate conviction about the stock's total return relative to the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over thenext 12-18 months.Underweight (U). The stock's total return is expected to be below the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months.Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months.Analyst Industry ViewsAttractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the relevant broad market benchmark, as indicated below.In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant broad market benchmark, as indicated below.Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant broad market benchmark, as indicated below.Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe - MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index or MSCIsub-regional index or MSCI AC Asia Pacific ex Japan Index.Important Disclosures for Morgan Stanley Smith Barney LLC CustomersImportant disclosures regarding the relationship between the companies that are the subject of Morgan Stanley Research and Morgan Stanley Smith Barney LLC or Morgan Stanley or any of their affiliates, are available on the MorganStanley Wealth Management disclosure website at www.morganstanley.com/online/researchdisclosures. 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32

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