India – Everything to play for

April 2008
 Agenda

z Market : What Happened ?

z Global Outlook

z India Growth Story ?

z Market Outlook

2
 Market : What Happened ?

3
 What Happened ?
Begin Jan 2008
FII Allocation Hope
21000 levels

Sept 2007
FED Cuts Rate
16000 levels

Feb 2007
Sub Prime Crisis
Erupted
14000 levels
4
 What Happened ?
Begin Jan 2008
FII Selling
End Jan 2008
19000 levels
Recovery
18000 levels

Mid Jan 2008 Feb 2008

Retail Margin Selling Budget Blues
16500 levels 16000 levels

March 2008
Bear Stearns, Inflation
15500 levels

5
 What Now ?
• Farm Loan Write-Off
• Funded out of Budget

• Bear Stearns Bail-Out

• Fed is the Guarantor

• Rising Inflation
• They are Revision of Past Data, Not the
Reflection of Current Trend

• Broken Sentiment
• Logic and Rationality

6
 Global Outlook

7
 Huge Losses All Over

8 Source : Bloomberg; Internal Estimates

 Global Outlook

z Sub prime is an issue

z Loss Estimate USD 400-600 Billion
z Provision USD 231 Billion
z Fresh Capital Raised USD 100-150 Billion

z For Every $ 1 Written Off, B/S Needs to

be cut Down by $ 12.5

z Credit Crunch
z Interest Rate Cuts
z Liquidity Provision

9 Source : Internal Estimates

 Is Sub prime a Concern ?
z Yes and No

z Yes - for global flows determine the short

term level of market

z No - for India’s Exports To GDP ratio at

15% is the lowest in the Peer Group

z India’s Exports - Less than 10% of its

exports to USA

z India will be a beneficiary of US recession

as the Cos will look to cut costs

10 Source : Internal Estimates

 G 7 to E 7

11 Source : Enam
 G 7 to E 7

z Savings will chase profitable investment

options.

z The World has “Global Savings Glut”.

z Growth is driven by Emerging Markets.

z Money like water will find its own level.

12
 Go for the Oil Money

India has cultural relationship with Gulf

13 Source : Enam
 India Growth Story ?

14
 Growth is Slowing Down

15
 Slowing Growth

16
 Slowing Growth ???

We expect growth at 7-8 % for FY O9

17
 Money is scarce and Rates
are rising.

How will you fund growth ?

18
 Globally Rising Rates

19
 We Save Enough

20
 We have enough FX

It is also 4th Largest in the World

21
 Liquidity Surplus

We have cash to fund our growth

22
 India has very high deficit

23
 High Deficit

24
 Budget 2009
Rs in Crore

2008/09 FY 08 Bond ESTIMATE

BE Issue Size FOR FY 09
Food 32667 16200 15000

Fertilizer 30986 7960 20000

Oil 2884 61640 49000

Pay Commission 0 0 25000

Farm loan 0 0 60000

Total 71431 85800 169000

Off Budget items are 3.5 % of GDP

Source : Budget FY 2009, Internal Estimates

25
 Budget 2009
Rs in crore
1999/2000 % 2008/ %
ACTUALS SHARE 2009 BE SHARE
Corporation 30692 23. 9 % 228361 44.6 %
tax
Income tax 25654 20.0 % 138614 27.3 %

Customs 48420 37.7 % 118930 23.5 %

Excise 61902 48.3 % 137874 27.2 %
Service 2128 1.7 % 64460 12.7 %
Dividend 9553 7.4 % 43204 8.5 %

Service and Corporate Tax Growth

are saviour
26
Source : Internal Estimates
 Yes this is a serious issue.

Our tax to GDP ratio at 12 % is

lowest in the peer group.

If people will pay tax, deficit will

come down.

27
 Why people pay tax?

28 Source : Enam
 Inflation is Rising

29
 Analysing the Inflation factor
z Inflation is supply side problem.

z We ( and the world ) don’t have enough food

grains, natural resources etc.

z Inflation is also a function of falling dollar.

z Inflation will remain a concern for some time

to come.

z Equity is the hedge against inflation

30
 Interest rates are rising

31
 Maths Reveals….
z Non Food Credit
z Rs. 22,29,028 cr ( as on March 14,2008 )
z Expected Corporate Tax in FY 09
z Rs. 226,361 cr
z Corporate Profit in FY 09
z Rs 754,537 cr (Assuming 30 % tax rate)
z Impact of 2 % increase in interest rates
z Rs. 44,580 cr
z Net of tax impact
z Rs. 31,206 cr
z Interest rate hike impact
z Rs. 31,206 cr on Rs. 754,537 cr

32
Source : Internal Estimates
 Treasury losses are very high

33
 Maths Reveals….

z Treasury loss estimated at USD 5 bln

z Assume it to be USD 10 billion over 3 years
z Corporate tax in FY 09
z Rs. 226,361 cr
z Corporate Profit in FY 09
z Rs. 754,537 cr (Assuming 30 % tax rate)
z Impact of Annual Treasury Loss
z Rs. 13,333 cr
z Net of tax impact
z Rs 9,333 cr
z Impact of Treasury Losses
z Rs 9,333 cr on rs 754,537 cr

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Source : Internal Estimates
 US and the World is in
Big Trouble

35
 Analysing the US factor

z US markets are not down as much as India.

z There is more problem in US but less panic.

z There
is not much of a problem in India but
more panic.

z Genetic problem of Indians ?

36
 India Growth will slow down

37
 Twin engines of growth

Consumption Infrastructure

38
 Consumption Pattern
42

17
12
9
7 8
5

FOOD HOUSING TRANSPORT HEALTH EDUCATION PERSONAL OTHERS

PRODUCTS

• Support from the budget

• Tax cuts and farm write offs

39
Source : Internal Estimates
 Infrastructure Spending
Area Current Addition Growth
Installed over 3-5
Capacity years
Electricity (GW) 136 70 51 %
Ports (MT) 456 485 106 %
Refining (MMTPA) 147 88 60 %
Gas ( MTOE) 29 54 180 %
Cement (MT) 173 80 46 %
Steel (MT) 45 40 89 %
Coal (MT) 430 250 58 %
Aluminium (KTPA) 1470 1330 125 %
Spending ( $ Bln ) 220 500 125 %
What India build in last 60 years is now
being planned in next 3-5 years
40
Source : IIFL
 India Growth Story

z Fundamentals are in place.

z There are concerns for the short to

medium term.

z The long term story is still intact

provided the event based risks does
not create permanent eclipse

41
 You know who said this?

“ When we were young kids growing up in

America, we were told to eat our vegetables at
dinner and not leave them. Mothers said, think of
the starving children in India and finish the
dinner.”

And now I tell my children: 'Finish your

homework. Think of the children in India who
would make you starve, if you don't?'
THE WORLD IS FLAT
- BY THOMAS FRIEDMAN

42
 Elephant’s
walk slow…..

BUT

Elephant’s
don’t
Walk
backwards

43
 Market Outlook

44
 Market Outlook
z Indian fundamentals are in
place

z Valuation is fair
z Rs 1000 EPS of SENSEX for FY 09
z Embedded value of 1500 points
z Markets at fair value of 14 time
FY 09.

z Lot of the bad news is already

in the prices
45
Source : Internal Estimates
 Market Outlook

Indian market will be volatile for

event risks

46
 Risks

z Event risks
zRBI Policy review (CRR hike by
RBI of 50bps already priced in)
zMonsoon
zElection
zGlobal uncertainty
zTreasury losses

47
 Liquidity

z Market will be tight on liquidity

z Retail
z Speculator
z Operator
z Arbitrager

48
 Market Outlook

49
 See Differently

50
 Where is the Bottom
Lowest Valuations What Now?
z Since 9/11
z GDP growth > 4.6 % z GDP Growth > 7 %
z Earnings growth > 6 % z Earnings Growth > 12 %
z Interest < 9.90 % z Interest Rate < 7.90 %
z FII flows > $ 0.5 z FII flow : ????
billion
z Panic and Fear ?
z Panic and Fear
z Sensex EPS Rs 1000 for
z 10 times 1 year fwd FY 09
earning of Rs. 260 in
FY 02

Your guess on Bottom will be as good as ours

51 Source : Internal Estimates

 Valuations are Fair

52
 We are Cheap

53 Source : DB Global Markets Research, Haver, MSCI, Factset

 Catch the Rebounce

Security Market crash of 92

54 Source : Internal Estimates

 WHERE CAN SENSEX GO ?
FY FY FY FY FY FY FY
YEAR 2008 2009 2010 2011 2012 2013 2014
BSE SENSEX
EPS 875
GROWTH
12% 980 1098 1229 1377 1542 1727
15% 1006 1157 1331 1530 1760 2024
18% 1033 1218 1438 1696 2002 2362
20% 1050 1260 1512 1814 2177 2613
P/E RATIO 15
12% 14700 16464 18440 20652 23131 25906
15% 15094 17358 19961 22956 26399 30359
18% 15488 18275 21565 25446 30027 35432
20% 15750 18900 22680 27216 32659 39191

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INTERNAL CALCULATIONS
 Recommendations
•Back to Basics
•Long term
•Asset allocation
•Systematic investment
•Buy large cap funds/stocks
•Below 16000 sensex overweight
equity
•Be ready for volatility

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 THANK YOU

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