IndiaThe Structural and Secular Bull Story

Time for Introspection

Outline

• The Bull Market • The Correction• Drivers of the Bull Market• Deductions• Risks• Possibilities• Investment Attitudes

The Bull Market

May 03 June 06

The top so far

The beginning

May 03 June 06

The top so far

The beginning

The Correction

• Corrections always have two dimensions - Price and Time – Price correction: 35% of the

gains upto May-06– Gains of last 5 months out of

the 37 months have been lost in the correction

– Time correction: Underway

• Worst Excesses – IPOs, Real Estate stocks, Micro

Caps

• Sensex Delta DecompositionSensex EPS PE

Mar-03 3049 272.0 11.2

Mar-06 11280 544.0 20.7

Jun-06 9800 662.0 14.8

From Mar-03 Mar-06 Jun-06

Sensex growth 270% 221%

EPS contribution 58% 65%

PE contribution 42% 35%

Note: For Jun-06, forward EPS for FY07E is considered

Drivers of the Bull Market

• India’s economic growth• Superlative corporate performance• Market architecture and infrastructure in

place• The tectonic shift of imperatives to invest in

emerging markets• Vast under-exposure to equities in India

All major drivers for the structural and secular

bull market are in place, are they?

Drivers of the Bull Market

• India’s economic growth• Superlative corporate performance• Market architecture and infrastructure in

place• The tectonic shift of imperatives to invest in

emerging markets• Vast under-exposure to equities in India

Deductions

• After the unprecedented rise from 6000 to 12600 in 12 months, and excesses becoming apparent; it was rational that the exuberance was corrected

• The intrinsic structural and secular bull market story is very much alive and kicking

• Corrections / Consolidations are part and parcel of all bull markets and they cleanse interim excesses

• How far and how deep the price correction, and how long the time correction / consolidation will last are anybody’s guess

• Historical valuations range suggests that in absence of earnings damage, Sensex would trade with the 9250-9750 range acting as a strong support

• Markets are not going to make a new high in a hurry

Risks

• Risks to Earnings Growth– Input prices– Global slowdown– Interest rates– Politics in India

• Risks to Valuation and Sentiment– Global Asset Allocation shift– Global and Domestic liquidity– Growth perceptions – Currency and Current Account deficit– Interest rate

All these risks can only

temporarily impact, and not

reverse, the basic direction

of earnings, valuation and

sentiment

Possibilities

Base case 2007 Sensex EPS of Rs 662

Sensex possibilites - 2010

PE (x) 12% 15% 18% 20%12.5 11,626 12,585 13,596 14,299

15.0 13,951 15,102 16,315 17,159

17.5 16,276 17,619 19,035 20,019

20.0 18,601 20,136 21,754 22,879

22.5 20,926 22,653 24,473 25,739

25.0 23,252 25,170 27,192 28,598

EPS Growth

Investment Attitudes

• Despite all-round optimism and unprecedented gains, never forget the 4-letter word associated with equities – RISK.

• As a trader, react to Price. As an investor, react to fundamentals.• Don’t always react to the apparent, or with the herd.• Investing success is not a one way street. Its not about buying the optimism

and selling the pessimism.• Superior Investment returns are not gained without pain, time, introspection

and doubt.• Expect realistic returns, this is not a Casino.• Be Greedy, But be Long-term Greedy.• Despite All-round pessimism, never forget the opportunity in equities.

“I believe that the secular and structural bull market is very much alive and kicking.

Although factors known / unknown may slow it, it will really need God’s wrath for it to be

reversed prematurely”

Thank You

India’s Economic growth• Democracy• Skill-sets• Entrepreneurship• Demographics

7.8%

4.8%

6.5%6.1%

4.4%

5.8%

4.0%

8.5%

6.9%

8.4%

3.0%

4.5%

6.0%

7.5%

9.0%

FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06

Real G

DP

Gro

wth

%

India’s Economic Growth – So far• Structural and Secular Change driving growth

– Productivity: Airfares half, Passengers manifold– Lowest Costs: Mobile costs lowest, Mobile companies profitable– Confidence: Indian companies acquiring globally– Consumption: Discretionary spends rising, Organised retail exploding, Brands

flourishing– Savings: Driven by better demographics, lower Govt deficits

• Growth is a result of above factors, not prices of natural resources (eg. Russia, Australia)

• Growth in spite of Constraints– Infrastructure– Policy environment

• Change Irreversible and Inevitable– Temporary blips possible, which may lower pace, or create doubt

Superlative Corp Performance

Superlative Corp Performance

0%

5%

10%

15%

20%

25%

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

RoE

%

-25%

0%

25%

50%

75%

100%

Increm

ental R

oE%

RoE (LHS)

Earnings yield (LHS)

Incremental RoE (RHS)

Market Infrastructure in place

• Infrastructure for equity flows in place– Modernised trading system + Dematerialisation– Competitive private sector Mutual Fund industry– Effective Regulatory environment – Corporate governance thru market’s sword

• Tax paradise– Short term capital gains at 10%– No Long term capital gains tax– Dividend tax free

Tectonic shift to Emerging markets

• Developed countries have an ageing population with rising life-expectancies and prohibitive healthcare costs resulting in huge pension deficits make the quest for superior returns imperative

• Superior economic growth, Globalisation, better capital access, freer movement of capital, improving corporate governance and regulation in emerging markets, market influenced exchange rates, converging and aligned interest rates have made emerging countries an asset class that cannot be ignored by asset managers

Tectonic shift to Emerging markets

0.00 2.00 4.00 6.00 8.00 10.00 12.00

Brazil

Mexico

China

Turkey

Singapore

HongKong

Russia

India

Malaysia

USA

UK

EU

Australia

Japan

France

Germany

Real GDP Growth Rates Comparison – Developed Countries vs. Emerging Countries

Under-exposure to equities in India

0%

20%

40%

60%

80%

100%

FY92 FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04

Cash Bank DepositsClaims on Government Contractural savingsInvestment in shares & debentures

23.3% Allocation to equities has consistently been falling through the decade 1.4%

SOURCE : RBI

0%

20%

40%

60%

80%

100%

FY92 FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04

Cash Bank DepositsClaims on Government Contractural savingsInvestment in shares & debentures

23.3% Allocation to equities has consistently been falling through the decade 1.4%

SOURCE : RBI

Under-exposure to equities in India

• Savings explosion combined with poor equity exposure• Limited investment alternatives• Equities are most tax efficient asset class for investors

Under exposure to equities will be inevitably corrected

Rs. Bn FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12

Re/$ 44 44 44 44 44 44 44 44

Savings $ bn 206 241 281 328 383 445 518 602

Equity $ bn 5 8 12 18 24 33 44 57

HH Savings $ bn 175 202 232 268 308 355 408 470