Post on 08-Jul-2020
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.
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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
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%
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
200
250
300
350
Dec
-04
Sep-
05Ju
n-06
Mar
-07
Dec
-07
Sep-
08Ju
n-09
Mar
-10
Dec
-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
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
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
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
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
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
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
1
Jul-0
2
Jul-0
3
Jul-0
4
Jul-0
5
Jul-0
6
Jul-0
7
Jul-0
8
Jul-0
9
Jul-1
0
Jul-1
1
Jul-1
2
Jul-1
3
Jul-1
4
Jul-1
5
Jul-1
6
Jul-1
7
Jul-1
8
Jul-1
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
-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%
-8%
-3%
2%
7%
12%
17%
22%
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
Mar
-17
Mar
-18
Mar
-19
WPI CPI
12
-40%
-20%
0%
20%
40%0
100
200
300
400
Mar
-03
Nov-
03Ju
l-04
Mar
-05
Nov-
05Ju
l-06
Mar
-07
Nov-
07Ju
l-08
Mar
-09
Nov-
09Ju
l-10
Mar
-11
Nov-
11Ju
l-12
Mar
-13
Nov-
13Ju
l-14
Mar
-15
Nov-
15Ju
l-16
Mar
-17
Nov-
17Ju
l-18
Mar
-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
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
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-
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
9
Manufacturing PMI Services PMI
-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
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
2003
2004
2005
2006
2007
2008
2009
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. A Portuguese version of the policy can be found atwww.morganstanley.com.brImportant US Regulatory Disclosures on Subject CompaniesAs of June 28, 2019, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies covered in Morgan Stanley Research: Ashok Leyland Ltd., HDFC Bank, ICICI Bank, ICICIPrudential Life Insurance, IndusInd Bank.Within the last 12 months, Morgan Stanley managed or co-managed a public offering (or 144A offering) of securities of HDFC Bank.Within the last 12 months, Morgan Stanley has received compensation for investment banking services from HDFC Bank, IndusInd Bank.In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from Bajaj Auto Ltd., Dabur India, HDFC Bank, ICICI Bank, ICICI Prudential Life Insurance, IndusInd Bank,InterGlobe Aviation, Larsen & Toubro Ltd, Mahindra & Mahindra, Reliance Industries, Shriram Transport Finance Co. 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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Equity Research analysts' or strategists' compensation is not linked to investment banking or capital markets transactions performed by MorganStanley or the profitability or revenues of particular trading desks.Morgan Stanley and its affiliates do business that relates to companies/instruments covered in Morgan Stanley Research, including market making, providing liquidity, fund management, commercial banking, extension of credit,investment services and investment banking. Morgan Stanley sells to and buys from customers the securities/instruments of companies covered in Morgan Stanley Research on a principal basis. Morgan Stanley may have a positionin the debt of the Company or instruments discussed in this report. Morgan Stanley trades or may trade as principal in the debt securities (or in related derivatives) that are the subject of the debt research report.Certain disclosures listed above are also for compliance with applicable regulations in non-US jurisdictions.STOCK RATINGSMorgan Stanley uses a relative rating system using terms such as Overweight, Equal-weight, Not-Rated or Underweight (see definitions below). Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover.Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold and sell. Investors should carefully read the definitions of all ratings used in Morgan Stanley Research. In addition, since Morgan StanleyResearch contains more complete information concerning the analyst's views, investors should carefully read Morgan Stanley Research, in its entirety, and not infer the contents from the rating alone. 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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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