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Motilal Oswal Business Impact Conference (MOBIC)
INDIAN EQUITIES – BEST IS AHEAD
STRATEGY | October 2016
9 1 3 5 7 9 1 3 5 7 9 1 3 5 7 9 1 37 8 8 8 8 8 9 9 9 9 9 0 0 0 0 0 1 1
r- r- r- r- r- r- r- r- r- r- r- r- r- r- r- r- r- r- a a a a a a a a a a a a a a a a a aM M M M M M M M M M M M M M M M M M
51
r- aM
Definition of Investing
60only buy “wor
After factoring in
1STRATEGY | October 2016
Mar
-16
onl y buy goods “wor th”
120
100
100
80
INR100 of 1979 can
INR 5.5 today!
40
the Consumer Price
20
In
fla
ti
o
n
In
de
x
5.
5
0
r
51y-Ma
9 1 3 5 7 9 1 3 5 7 9 1 3 5 7 9 1 37 8 8 8 8 8 9 9 9 9 9 0 0 0 0 0 1 1r- r- r- r- r- r- r- - - - - - - - y- y- y- y-a a a a a a a pr pr pr pr pr pr prM M M M M M M A A A A A A A Ma Ma Ma Ma
Fixed deposit would have preserved your Purchasing Powe
2STRATEGY | October 2016
Purc
hasi
ng P
ower
Mar
-16
100
150
130
104110
90
70
50
51y-Ma
9 1 3 5 7 9 1 3 5 7 9 1 3 5 7 9 1 37 8 8 8 8 8 9 9 9 9 9 0 0 0 0 0 1 1r- r- r- r- r- r- r- - - - - - - - y- y- y- y-a a a a a a a pr pr pr pr pr pr prM M M M M M M A A A A A A A Ma Ma Ma Ma
Gold would have doubled your Purchasing Power
3STRATEGY | October 2016
Purc
hasin
g Po
wer
Mar
-16
350
300
250
200
214150
100
100
50
51y-M
09 1 3 5 7 9 1 3 5 7 9 1 3 5 7 9 1 37 8 8 8 8 8 9 9 9 9 9 0 0 0 0 0 1 1r- r- r- r- r- r- r- - - - - - - - y- y- y- y-a a a a a a a pr pr pr pr pr pr prM M M M M M M A A A A A A A Ma Ma Ma Ma
Equities would have multiplied your Purchasing Power 15x
4STRATEGY | October 2016
Purc
hasin
g Po
wer
Mar
-16
a
1,750 1,570
1,500
1,250
1,000
750
500
250
Key Objectives of Investing: Over 36 years --> 18x Vs 38x Vs 476x
50,000 47,508,Sensex nsex cum Dividend Fixed D
If you had invested Rs100 ...40,000
25,342,
30,000ver the last 100 years -- >
S&P 500 rose 273x,
Include dividends, it rose 18,520x!20,000
3,808,
10,0001,842,
0
5STRATEGY | October 2016
Nom
inal
Val
ue
Mar
-79
Mar
-81
Apr-
83
May
-85
May
-87
Jun-
89
Jul-9
1
Jul-9
3
Aug-
95
Sep-
97
Sep-
99
Oct
-01
Nov
-03
Nov
-05
Dec-
07
Jan-
10
Jan-
12
Feb-
14
Mar
-16
Sen Sensex c eposit Gold 18%
16%
O
I
ver th
9% -->
10%
8%
Macros: Read, Discussed, Debated Threadbare!
Feb-07: Risingdefault rate hits
subprime mortgageindustry in US
6STRATEGY | October 2016
Macros push you out of Time-in & into TIMINGDec-14:30,000
Sep-08: USGovernment
takesover Fannie Maeand Freddie Mac,Merril Lynch sold
Roubletumbles
May-10:750b Euro
Stabilizationpackage to
PIIGS countries
Feb-07:Rising
defaultrate hits
25,000 to BoA, Lehmansubprimemortgageindustry
in US
Brotherscollapse
Mar-15:Taper tantrum
II(FED rate
20,000hike fear)
Sep-14:15,000Brent crudegoes belowUSD100/bb
Aug-11:S&P
downgradesUS Sovereign
Oct-09: Greecepublic finance
weaknessrevealed10,000triggeringsovereign
debtcrisis
5,000
7STRATEGY | October 2016
Jan-
07
Jul-0
7
Dec-
07
May
-08
Sep-
08
Mar
-09
Jul-0
9
Dec-
09
May
-10
Oct
-10
Mar
-11
Aug-
11
Jan-
12
Jun-
12
Nov
-12
Apr-
13
Sep-
13
Feb-
14
Jul-1
4
Dec-
14
May
-15
Oct
-15
Mar
-16
Stocks are SLAVES OF EARNINGS
KNOWABLE
UNKNOWABLE
UNIMPORTANT IMPORTANT
8STRATEGY | October 2016
Unknowable& Unimportant
ImportantBut Unknowable
Knowablebut Unimportant
Important& Knowable
Earnings growth / Stock Returns captured by -->Time-In & Not Timing, stupid!
9STRATEGY | October 2016
1984-2013 S&P 500 returned 11.1% CAGR Avg returns earned by investors in Equity mutual funds was a paltry
3.7%!!
Bond Index returned 7.7% CAGR Avg returns earned by investors in Bond funds was a paltry 0.7%!!
The most powerful concept of Finance
10STRATEGY | October 2016
The most powerful concept of Finance -> The idea that a $ saved today will grow to be worth more than a $ tomorrow
The greatest shortcoming of the human race is our inability to understand the exponential function
DID YOU KNOW -> It's hard to believe that $65.7
billion of Warren Buffett's $66 billion net worth came after
his 50th birthday. But it did.
Compound Interest: The Eighth Wonder of World
He
Hewho
whounderstands it, earns it…
doesn’t…pays it! - Albert Einstein
11STRATEGY | October 2016
INDIAN EQUITIES – TIME IN OR TIMING?
STRATEGY | October 2016 12
India Macro The missing "G" (QLP are in place!)
India Corporate The worst is behind
India Valuations Quite reasonable
India Flows The tide has turned
India Outlook Best is ahead
16E FY
1F
6Y1F 6
Y
6Y1FE 16
E FY
16FY
Y1E
6
F
Macro: On a very strong footing Government steadfast on the fiscal consolidation roadmap CAD-GDP ruling well within sustainable level of 3%
Fiscal deficit (Centre, %) CAD/GDP (%)6.55.9
4.1 3.93.5
-1.7
-4.2-4.7
Inflation came down to decadal lows; deflationary conditionprevails for the wholesale prices
Comfortable forex reserves built up while allowing INR todepreciate nominally
Forex reserves INRCPI Inflation (YoY%) WPI Inflation (YoY%)67
6512.4 61
10.5 10.5 10.2 9.5
6.04.9
3.5
2.2
13STRATEGY | October 2016
FY10
FY10
FY11
FY11
FY12
FY12
FY13
FY13
FY14
FY14
FY15
FY15
FY16
FY16
FY17
EFY
17E
FY10
FY10
FY11
FY11
FY12
FY12
FY13
FY13
FY14
FY14
FY15
FY15
FY16
FY16
FY17
EFY
17E
3.6
9.6 8.97.4 6.0
2.0-2.5
360
60
351
54
341
4746
305
48
304294 293279
-1.1 -1.4
-1.3
-2.8 -2.6
4.9 4.9 4.5
16E FY
16E FY
Growth: Is the only missing linkWitnessing deflation (nominal GDP near real) first time in fourdecades
Nominal GDP growth has collapsed
Nominal GDP growth (YoY%)20.2
20
15
10
5
0
-5
Real indicators of volume growth of industrial productionremains weak
New projects have dried up, moderate increase in projectsunder implementation
New projectsIIP (YoY%) Increase in under implementation projects
15.5 5000
11.08.2 2500
2.9 2.8 2.51.1 0
-0.1-2500
14STRATEGY | October 2016
FY05
FY10
FY06
FY07
FY11
FY08
FY12
FY09
FY10
FY13
FY11
FY12
FY14
FY13
FY15
FY14
FY15
FY16
FY16
FY60
Jun-
10Se
p-10
Dec-
10M
ar-1
1Ju
n-11
Sep-
11De
c-11
Mar
-12
Jun-
12Se
p-12
Dec-
12M
ar-1
3Ju
n-13
Sep-
13De
c-13
Mar
-14
Jun-
14Se
p-14
Dec-
14M
ar-1
5Ju
n-15
Sep-
15De
c-15
FY64
FY68
FY72
FY76
FY80
FY84
FY88
FY92
FY96
FY00
FY04
FY08
FY12
FY16
12.9
8.65.3
2.5
15.1 15.713.9 13.3
10.88.7
40 years!
Global & Domestic cyclicals: Earnings collapse PAT (INR b)
17STRATEGY | October 2016
But, diversity of corporate India has come to rescue PAT (INR b)
18STRATEGY | October 2016
Share of Domestic Cyclicals witnesses sharp improvement QoQ Global Cyclicals and Defensives share largely flat
19STRATEGY | October 2016
Defensive includes Consumer, Healthcare, Technology, Telecom and UtilitiesGlobal cyclicals includes Metals, Oil & Gas and JLRDomestic cyclicals includes Automobiles, Banks, Capital Goods, Cement, Media, NBFCs, Real Estate and Retail
Corporate Profit to GDP has halved Corporate Profit to GDP (%)
20STRATEGY | October 2016
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
E
4.3
7.8 Average7.3 of 5.5%
6.2
5.4 5.5 6.5
4.7 6.2
4.94.6
4.0 3.9
And Corporate profitability has collapsed
21STRATEGY | October 2016
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
14.3
Corporate PAT Margin (%)
Average:14.3%
17.216.3 16.3 16.4 16.1
14.8 14.6
13.112.5
11.911.6 11.0
Markets valuations below averages, on lowest margins Sensex Trailing P/E (x)
Market Cap to GDP (%)Trend in India's contribution to world market cap (%)Peak market cap to GDP of
Average of 66% forthe period
3.395
88 8174706664
1.8
22STRATEGY | October 2016
Aug-
06
Feb-
07Ju
l-07
Dec-
07M
ay-0
8O
ct-0
8Ap
r-09
Sep-
09Fe
b-10
Jul-1
0De
c-10
Jun-
11N
ov-1
1Ap
r-12
Sep-
12Fe
b-13
Aug-
13Ja
n-14
Jun-
14N
ov-1
4Ap
r-15
Oct
-15
Mar
-16
Aug-
16
Sep-
06
Sep-
07
Sep-
08
Sep-
09
Sep-
10
Sep-
11FY
02
FY03
FY04
Sep-
12FY
05
FY06
FY07
Sep-
13FY
08
FY09
FY10
Sep-
14FY
11
FY12
FY13
Sep-
15FY
14
FY15
FY16
Sep-
16FY
17E
103149% in Dec 2007
82 83
5552
71
4226 23
India's Contribution to World Mcap (%)3.60
2.952.5
2.30Average of 2.3%
1.65
1.00
Current Sensex P/E (x) Sensex PE on Normalised PAT Margin (x) +1SD 10 Year Avg (x)
27
22 21.018.3 20.1
1717.0
12
7
24STRATEGY | October 2016
Crystal ball gazing the Future
Short term hazy, Long term clear
Case for India emerging as an asset class
Top 10 GDP countriesIndia GDP (USD b)
Dec 2015GDP (USD
b)Rank Country
1
2
3
4
5
6
United States
China
Japan
Germany
United Kingdom
France
17,968
11,385
4,116
3,371
2,865
2,423
8
9
Italy
Brazil
1,819
1,800
10 Canada 1,573
25STRATEGY | October 2016
7 India 2,183
Domestic buying would dwarf FII flows Trend in DII Flows (USDb)
14.913.312.1 11.8
3.2
26STRATEGY | October 2016
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
E
FY18
E
FY19
E
FY20
E
13.1 Avg DII/FS of 1.2%Avg DII/FS of 4.4%
-4.1 -3.7
DII Flows (USD b) DII as % to Financial Savings
0.4 0.2 3.3 6.0 12.3 10.5 3.1 -2.4 -0.7 -9.7 -6.6 -2.3 7.0 6.0 6.0 6.0 6.0
USD 28b 17.7 USD -12b 16.7
6.4 5.1
0.3 0.1
-0.9
-8.9-12.7
DII as % to Financial Savings
Sub-par earnings growth for 8 years now Sensex EPS: Rebound in FY16-18 with 17% CAGR Versus 6% CAGR during FY08-16
1% CAGR
1,024
446
291 278 280 272266 236216
27STRATEGY | October 2016
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
E
FY18
E
FY93-96:45% CAGR
250
FY96-03: FY03-08: FY08-16: FY16-18E:
1,807
FY93-FY16: 1,490
1,337 1,356
1,120 1,181
720 833 820 834
540
361
25% CAGR
13% CAGR
6% CAGR 17% CAGR
1,330
81 129 181
Corporate Profit to GDP has hit the bottom
Corporate Profit to GDP 7.8
7.0 High:7.8%
6.2
5.2 5.5
5.0 4.64.7 4.6
4.34.0
28STRATEGY | October 2016
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
E
FY18
E
FY19
E
FY20
E
Corp Profit to GDP (%) Average Average Plus
8.0
7.3 Average: 5.5% Average Plus: 6.6%
6.5 6.5
6.26.0
5.9
5.4
5.5 5.1
4.9
4.7
4.0 4.3
3.9
3.0
REVERSION TO MEAN = 24% EPS CAGR
4,187
3,216
2,077
Note: Nominal GDP Growth & Sales Growth estimate of 11-12% in FY17-FY20
29STRATEGY | October 2016
FY04
361
FY05
446
FY06
540
720
FY07
833
FY08
820
FY09
834
FY10
1,02
4FY
11
1,12
0FY
12
1,18
1
FY13
1,33
7FY
14
1,35
6FY
15
1,33
0FY
16
FY17
E
FY18
E
FY19
E
FY20
E
Sensex EPS (INR) Average Average Plus
4,50033% CAGR
3,600 24% CAGR
3,1542,700 2,439
2,567
1,8201,800
1,669
900
0
And stocks are slaves of earnings! Sensex Index
85,000 Trailing PE 80,643
61,774 21% CAGR
46,724
30STRATEGY | October 2016
FY04
5,59
1
FY05
6,49
3
FY06
11,2
80
13,0
72FY
07
FY08
15,6
44
9,70
9FY
09
17,5
28FY
10
FY11
19,4
45
17,4
04FY
12
FY13
18,8
36
FY14
22,3
86 27,9
57FY
15
25,3
42FY
16
FY17
E
FY18
E
FY19
E
FY20
E
Sensex (INR) Average Average Plus
34% CAGR
Average: 17.5x Average Plus: 19.2x High:25.2x
65,000
55,223
45,000 45,950
34,77637,986
25,000 31,165
5,000
Corporate Profit Margins have hit the bottom
16.1 15.7
14.6
14.3 13.1 14.3
12.211.6
Note: Nominal GDP Growth & Sales Growth estimate of 11-12% in FY17-FY20
31STRATEGY | October 2016
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
E
FY18
E
FY19
E
FY20
E
Corporate PAT Margin (%) Average Average Plus
20.0Corporate PAT MarginAverage: 14.3%
17.2 Average Plus: 15.7%
17.0 16.3 16.3 16.4 High:17.2%
14.8 14.6
14.0 13.4
13.5
12.5 12.7
11.0 11.9 11.8
11.0
8.0
REVERSION TO MEAN = 25% EPS CAGR
3,000
1,867
2,081
32STRATEGY | October 2016
FY04
361
FY05
446
FY06
540
FY07
720 83
3FY
08
820
FY09
834
FY10
1,02
4FY
11
1,12
0FY
12
1,18
1FY
13
FY14
1,33
7
1,35
6FY
15
1,33
0FY
16
FY17
E
FY18
E
FY19
E
FY20
E
Sensex EPS (INR) Average Average Plus
6,000
39% CAGR5,000 4,907
4,000 25% CAGR
3,581
3,201
2,5962,586
2,000
1,6671,000
0
And stocks are slaves of earnings!
Trailing PE 94,513
33STRATEGY | October 2016
FY04
5,59
1
FY05
6,49
3
FY06
11,2
80
13,0
72FY
07
FY08
15,6
44
9,70
9FY
09
FY10
17,5
28
19,4
45FY
11
FY12
17,4
04
18,8
36FY
13
22,3
86FY
14
27,9
57FY
15
25,3
42FY
16
FY17
E
FY18
E
FY19
E
FY20
E
Sensex (INR) Average Average Plus
105,00039% CAGR
Average: 17.5x85,000 Average Plus: 19.2x
High:25.2x
68,78665,000 22%
CAGR
49,729 56,044
45,000 46,27535,669
38,047
25,000 31,134
5,000
Indian Markets: Up 103x in 32 years
BSE Sensex
35000
30000
25,34225000
103x in 32 Years(16% CAGR)
20000
15000
10000
5000
2450
36STRATEGY | October 2016
Mar
-84
Mar
-85
Mar
-86
Mar
-87
Mar
-88
Mar
-89
Mar
-90
Mar
-91
Mar
-92
Mar
-93
Mar
-94
Mar
-95
Mar
-96
Mar
-97
Mar
-98
Mar
-99
Mar
-00
Mar
-01
Mar
-02
Mar
-03
Mar
-04
Mar
-05
Mar
-06
Mar
-07
Mar
-08
Mar
-09
Mar
-10
Mar
-11
Mar
-12
Mar
-13
Mar
-14
Mar
-15
Mar
-16
The Best is Ahead
37STRATEGY | October 2016
REFORMS: GST, Bankruptcy Code, Strategic Sale of PSUs
DEMOGRAPHICS: ~50% of population below age of 26 years =>20% of worlds working population will live in India by 2025
INFRASTRUCTURE: Roads, Rail, Power - Reqd investment of $1.5tn
FINANCIAL SAVINGS – DII Flows $17.7b in FY08, $34b in FY20?
INDIA IN WORLD - 18% of population, 3% of GDP, 2% of Market Cap
GLOBALISATION - Technology, Health Care, Chemicals, Autos
CORPORATE PROFIT TO GDP: 3.9% in FY16 vs 5.5% avg & 7.8% peak
MARKET CAP TO GDP – 50% below peak
ADJUSTED PE - 7% below average (~25% upside), 32% below peak (~75% upside)
INVESTMENT OPPORTUNITIES GALORE
38STRATEGY | October 2016
Diagnostic Chains
Hospitals
Staffing companies
New Consumption
Flavors & Fragrances
Gas chain
Small Finance Banks
Payment Banks
Insurance
NBFC's
E-Commerce
STRATEGY | October 2016
S – Du
INDIAN EQUITIES BEST IS AHEAD
Thank You