brica report (market cycle)

ENAM Securities India Research

Sensex: 15109

India Strategy

ENAM Research is available on Bloomberg (ENAM <Go>), Reuters.com and Firstcall.com October 2009

SENSEX RISES 74%!

As balloons go up this 52w high of 15K+ Sensex this Ecstatic Diwali (Oct 2009),we take you in this report through what led to this 74% rise from the Agony oflast Diwali (Oct 2008).

Nandan Chakraborty Head Research Email: [email protected] Tel: 9122 6754 7601

Sachchidanand Shukla Economist Email: [email protected] Tel: 9122 6754 7648

RIL

156%ICICI158%

Tata Steel80%Bharti

82%

RCOM154%

SBI60%

ITC38%

ONGC108%

HDFC40%

Infosys

33%

RIL

156%ICICI158%

Tata Steel80%Bharti

82%

RCOM154%

SBI60%

ITC38%

ONGC108%

HDFC40%

Infosys

33%

India Strategy

OCTOBER 2009 ENAM Securities 2

We summarize below how & why this 12 month Sensex journey happened: Top 10 Contributors to Sensex’s 74% move of 6408 points !

CM P CM P U pside ContribnO ct-09 O ct-08 (% ) to rise

RIL 2,600 1,016 156% 1,753

ICICI 800 310 158% 767

ONGC 1,375 660 108% 430

Bharti 971 534 82% 408

RCOM 491 193 154% 302

SBI 1,850 1,156 60% 279

Infosys 1,655 1,249 33% 278

ITC 220 159 38% 226

HDFC 2,200 1,573 40% 213

Tata steel 321 178 80% 103

Sensex 15,109 8,701 74% 4757 Prices as on October 24, 2008 & 2009

Compare this with our narrow vision in Oct 08, of a paltry Sensex move of 47% – which was reached in Mar 09 itself – & the Top 10 Contributors to that upside:

CMP Upside ContribnTgt pr Oct-08 (%) to rise

RIL 1810 1,016 78% 864ICICI 720 310 132% 631Bharti 811 534 52% 254SBI 1740 1,156 50% 231HDFC 2200 1,573 40% 209ONGC 977 660 48% 188HDFC Bk 1310 973 35% 169Sterlite 597 209 186% 152Tata steel 385 178 116% 146ITC 195 159 22% 131Sensex 12,807 8,701 47% 2,974

Agony to Ecstasy: Arrangements for global hedge fund liquidation/ redemptions completed in Nov 08, marking the market’s Mariana Trench. Next few months of a benumbed & Apathy-filled market period would also see the Real operating world embroiled in corrective actions,even as we focus on deteriorating fundamentals.

Q1 of CY 09 insurance purchases of $5 bn, saw a market-vertigo as it moved from severe undervaluation to astress-case valuation level (8 to 12K). As we entered mid-CY 09, an invigorating new Govt & global macrorealignments brought the “West to East” theme intosharper focus. Markets entered a scattered-buying “return to Sanity” period. And by Diwali 09, we haveentered a whole new World-view. Hence, the Price-Nadir was Nov 2008!

West to East Power shift: With the worst of asset bubble breaking and credit crisis, the economic global de-growth, & hence the West’s efforts to monetarily & fiscally pump-prime the same played out.

As the West tried to grapple with Bretton Woods III &various Protectionisms on its own initially, the BRICAeconomies responded through counter-intuitive moves eg significant currency appreciation, to prevent the West’schronic disease from resulting in acute economic growthdistress in the East. Even as BRICA pumped its ownmonetary & fiscal stimuli, investors demanded higherinterest rates & depreciation of OECD currencies !

MSCI re-balancing: Despite representing ~24% of world GDP (PPP), Chindia + S Korea’s MSCI World Indexweight was <5% while US enjoyed 42% muscle with19% of GDP! – & decreasing ! Global slowdown notwithstanding, will this not change as economic purging plays out fully and Chindia emerge as largest globalgrowth contributors?

Inflexion of India 2010-20+: India will transform the next decade – just as the US did last mid-century with its massive Infra creation, & the middle East with its oil finds (India’s KG Basin…). India would also reach its demographic inflexion points just as US/ China reached theirs in the 80s & 90s respectively. This point usuallymarks the take-off of consumption to the next scalar level, in turn driving more demand for commodities, manufacturing, infra & services to meet the same.

Appendix II provides stock wise details as we thought back in Oct 08.

Appendix I provides for each Sensex 30 stock, their market performance upto Diwali 09, and why I didn’t buy them in Oct 08 vs what I feel about them now in Oct 09.

Appendix III: Chill ! is as important to your financial well-being as footnotes in balance sheets.

India Strategy


How the Sensex retraced gains

0

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6,000

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15,000

18,000

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n-93

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07

Jan-

08

Jan-

09

82% 66% 115% 138%

180%

64%

68%

74%

Source: Bloomberg, ENAM Research

From a feeling of Razlyubit to one of Torchlusspanik ! At Liquidation stages we proceed to project just the next stage in the market cycle. Like, now it’s a Razlyubit feeling (Russian: “the one I loved once, but don’t anymore”) – but as Columbus said, the following world-is-round chart starts again from its left, to its acme of Torchlusspanik (German: “fear of being left on the shelf/ the gate closing/ the last chance at hand ….. !!!”)

The Market Cycle

Easy credit, slack earnings

One sector takes off, later entire Mkt takes off. Sentiment improves even as EPS expectations rise

Boom spreads, widespread prosperity, Mkts rise due to EARNINGS

Error of optimism

- PE expansion- Credit too easy- Long term investing !- Ends in a sudden shock

Leading sectors fail, credit tightens, gen. environment of profits OK, but PE falls

Money really tight, fear. Demand & EPS starts falling

Easy credit to try & kick start profits

Diwali Oct 08

Panic Hope Fear & thenrevulsion

ApathyScattered Buying

Apathy Envy-buying

Greed-buying

Diwali Oct 09

Easy credit, slack earnings

One sector takes off, later entire Mkt takes off. Sentiment improves even as EPS expectations rise

Boom spreads, widespread prosperity, Mkts rise due to EARNINGS

Error of optimism

- PE expansion- Credit too easy- Long term investing !- Ends in a sudden shock

Leading sectors fail, credit tightens, gen. environment of profits OK, but PE falls

Money really tight, fear. Demand & EPS starts falling

Easy credit to try & kick start profits

Diwali Oct 08

Panic Hope Fear & thenrevulsion

ApathyScattered Buying

Apathy Envy-buying

Greed-buying

Diwali Oct 09

… And the Valuation Cycle

BEAR MARKET BULL MARKET BUBBLE MARKET

Value GARP/ Trading mkt Momentum

Dividend YieldPrice/ BVReplacement CostTobin’s Q

PaybackP/EEV/ EBITDADCF

ReflexivityPE/GOption Value

Trading mkt in Bear Rallies

Technical Charts

Value


BEAR MARKETBEAR MARKET BULL MARKET BUBBLE MARKET

Value GARP/ Trading mkt Momentum


PaybackP/EEV/ EBITDADCF

ReflexivityPE/GOption Value

Trading mkt in Bear Rallies

Technical Charts

Value


BEAR MARKET

Source: ENAM Research

15109

OCt

-09

-

India Strategy


We describe these events over 3 approx phases, ie the Agony of Oct-Dec 08, the Apathy of Jan-Jul 09 & the stirrings of Ecstasy post-Aug 09

AGONY OF OCT- DEC 2008 Global liquidity surged even as Markets continued to reel under Global hedge fund liquidation, and Domestic redemptions & insurance slowdown While the globe shivered due to global demand slackening (US trade linkages), fears on India related

to its growth being vulnerable to continuing liquidity drought, due to its twin deficits. Even as global Central banks eased liquidity conditions & RBI cut CRR, SLR & Repo rates, India still bore

the brunt of EM equity liquidation, as global Hedge funds closed & liquidated positions.

Liquidity shrank… Calling for rate cuts

(Rs bn)

0

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Repo Fed ECB BOJ

Source: Enam Research, Bloomberg

Finance ministry doubled FII investment limit in corporate bonds from USD 3 bn to USD 6 bn. Payment of farm loan waiver amount of Rs. 250 bn released as the first installment to ease liquidity.

SEBI relaxed rules for indirect investments by FIIs through P Notes. Govt couldn’t get anything substantial passed due to inter-party AND inter-ALLY machinations.

Indian Markets: Distressed Selling – Yet, when else will you invest? Confidence was at its lowest, even as dividend yield was at its highest. Market cap/ GDP almost halved

from a high of 1.7x. Earnings yield beat bond yields !

Sensex fwd PBR at 1.4x while RoE at ~17% Earnings yield now > 10yr bond !!!

1.5

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22

PBR (x) -1 STD+1 STD MeanROE (%) - RHS

11.6

7.8

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Earnings yield 10yr bond

Source: Enam Research, Bloomberg

India Strategy


Oil marketing and fertilizer cos started moving up from bottom as subsidy pressure eases (oil @ 63, INR@ 48= no under-recoveries on petrol/ diesel) & Govt put pressure on RBI/ PSBs to lend to them.

Even fundamentally sound Indian stocks sank to ridiculous valuations. Market bottom was made in Nov 08, by HDFC @ 1480 & SBI @ 970 ! Public banks were the only sector which cracked after this market bottom with news of their realty exposures, etc – they had stood “like a bank” as they say in India, all thru the FII carnage – FIIs had minimal exposure to PSBs

Something had to give way: Bretton Woods III in mid-Nov 08? Conventionally, raising interest rates & letting the currency depreciate is the best defense for a central

bank to attract capital flows and fight a slowdown. However, exactly the opposite had been playing out in the US. Despite aggressive rate cuts and expansion of dollar-denominated liquidity by the US Fed, the USD continued to strengthen.

Arguments in favour of a strengthening dollar were difficult to sustain: The global supply of the greenback was upped considerably (~$1.5trn if $700bn bail out plan + Fannie/ Freddie loss underwriting + bailouts of Bear Sterns & AIG is included). Also, the US fiscal deficit ballooned as a result of monetization of these losses. Moreover, tax revenues fell in a recession-hit US. Lastly, the shrinkage of US CAD due to slowing consumption was jeopardized by a strong USD.

Despite economic head winds & falling intt rates, USD was appreciating – how long could this last?

0

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(%)

Source: Bloomberg

USA was trying to print its way out of trouble again

Source: Barry Bannister, Stifel Nicolaus

1.5%

The easy money policy being pursued in the US had its own limits and soon hit the “Zero hour” – a point beyond which lower interest rates lost their incremental positive effect on US GDP growth:

India Strategy


Bretton Woods III?: A G20 meeting in the US in Nov 08 was an unprecedented event, where the current AND the US presidential nominee attended the meeting. The ingredients of tectonic shifts in power, to Liquidity Providers vs Controllers, had been in place in 2008 itself. Here, Asian, European & American leaders shed their differences, to sow the seeds of a new world order.

Thus, like all other bubbles the “fantasy of safety” USD bubble finally burst in 2009 !

Source: BCA Research

India Strategy


APATHY OF PRE-ELECTION/JAN-JUL 09: Liquidity surge started to effectuate parts of India Inc. Populist dole outs infused ~Rs 1200bn in the economy, which started reflecting in consumption (see

chart). Repo cut by another 50 bps by Jan 2009 pushed up lending to critical sectors and thus could cushion the economy. But this raised the spectre of unleashing the inflation genie. And RBI announced unwinding of MSS that has to be completed through FY10.

Consumption perks up Fiscal doleouts prop consumption …

(%)

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p-08

Consumer Goods Capital Goods

Rs/person Rs bn

Rural pockets Agri debt waiver 15,000 600 NREGS 10,000 160

Urban pockets IT exemption ~30mn tax payers 4,000-45,000 130-260 Senior citizens 30,000 Women 35,000 ~1.6mn out of the tax net 40,000 6th Pay commission 31,000 150

Total - ~1100-1200 Source: ENAM Research, CMIE

Financial pages of Indian newspapers were trimmed & mostly related to financial bets on the next ruling party. Stories mostly related to who will dive next. One of the oldest, largest & most stolid Indian houses, which became hyper-aggressive in the last 3 yrs, was rumoured to be on the brink of default.

Media piled on the agony Crisil downgrades preceded bankruptcies

(Nos)

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1,000

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2009

0.60.70.80.91.01.11.21.31.4

Upgrade Downgrade MCR (RHS)

Source: Media sources

New US President unleashes massive tax-breaks & other fiscal pump-priming measures. RoW kept easing interest rates (their fiscal programs were yet to be unleashed).

INR/USD: While the INR worsened till end CY08 due to hedge fund liquidation, from January 09 onwards, falling commodity prices started showing up on India’s twin deficit woes, and it ended FY 09 at~ Rs 45. The RBI intervened to stop further appreciation as exports were slumping. But meanwhile, USD was falling v/s other currencies ie Yen & Yuan etc.

Every $10 fall in crude oil shrank our CAD by ~0.4% and the fiscal deficit by 0.25%. Moreover, a ~25% depreciation in INR from its peak propped export growth. India’s relative growth rate in a slowing world, along with its demographics, high savings and relatively safer saner banking system started to attract required capital inflows.

INDYA TODAYINDYA TODAY

India Strategy


Indian Markets: Strange! Refused to fall even as fundamentals worsened ! Quarterly results, especially of Engineering, Infra/ Realty & Private sector financials hit a 5 yr low in

growth. There was a 3rd round of de-rating & stress valuation reports by brokers. However, while some of these stocks fell, overall markets acted strangely! Sensex refused to fall further on bad news.

Pulped down Value sectors (Cement, PSU banks, Oil OMCs) actually rose, even as Engg/ Realty etc refused to fall further with bad news flow. After dismal Diwali consumption figures, Rural consumption data perked up as NREGS & debt waiver schemes loaded money into pockets & pre-election Govt spending began to show itself in the real economy.

Spate of bankruptcies in smaller Realty & Engg cos gathered momentum even as there were rumours, but no actual acquisitions, completed yet.

Low floating stock & many sub-5 PE cos seen to be constantly on upper circuit. Creeping acquisitions seen by some cash-rich cos and buy-backs announced by a few.

February 09 saw massive inflows by domestic insurance players & markets touched a new high, crossing 12K in March. April however, saw a retrace almost back to 10K levels

The world did not stop lending & consuming, it moved on! Global ‘trust’ started getting restored, with policy intervention on an unprecedented scale. Developed world saw aggressive monetary easing, eg US interest rates were brought down to close to

Nil ! Financial losses of 5% of global GDP (~$ 54 trn) were absorbed by Global savings (~ US$ 10 trn), but it left OECD fiscs dangerously out of sync. This led to a big change in cross-currency rates.

The liquidation of inventories of Nov- Dec 08 as banks refused to lend, was reversed in Q1 CY 09. This led to sharp corrective moves in product prices that had slumped to 30% below marginal production. Just like financial markets, product prices also recovered from panic-bottoms, but remained subdued. Analysts stopped the fallacy of forecasting ever-downwards in a cyclical downtrend

East to West Power shifts: Superior macro fundamentals= EMs revert to their structural trend: Cyclical Deviation from trend GDP growth but reversion to structural trends inevitable

(4.0)

(2.0)

0.0

2.0

4.0

1964

1969

1974

1979

1984

1989

1994

1999

2004

2009

(%)

Developing countries High-income countries

02468

10

1964

1969

1974

1979

1984

1989

1994

1999

2004

2009

(%)

High-income countries Developing countries Source: World Bank, DECPG.

Exporters of capital

Other Countries

21%Taiwan2%

Singapore2%

Sweden2%

UAE3%

Netherland3%

Kuwait3%

Switzerland4%

Russia5%

Norway4%

Japan13%

China21%

Germany11%

Saudi Arabia6%

Source: Company, ENAM Research

EMs have both Savings & Consumption, while the West has Control on deployment of both – thru asset managers & brand owners respectively. In time, geo-pol power kept shifting to the East, to reflect eventual unbundling of the same. Eg Sovereign Wealth Funds continued to favour EMs, eg >50% of their total trades of $27bn were executed in BRIC and non-OECD countries for the 2nd consecutive quarter as of Sept 2008.

India Strategy


THE ECSTASY OF POST ELECTION JUL- OCT 09: The New Govt’s main imperative was Employment generation. Hence it announced a slew of Infra

projects and massive E&P programs via NELP IV. In order to attract capital flows to enable the same, it divested PSUs, relaxed FDI limits for insurance & retail, and passed telecom & mining reforms.

Normal Monsoons buoyed demand conditions & improved inflationary outlook.

Inflation tamed!

02468

101214

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07

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Mar

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Jun-

08

Sep-

08

Dec

-08

Mar

-09

Jun-

09

(%)

`

Source: ENAM Research, OEA

Even as the OECD fought stagnation with massive Govt programs, Indian growth forecasts, revised upwards of 7%, stood out starkly. India & China were seen as the biggest contributors to global growth. And as the world cut rates, and crude & other commodities rose from their abysses of 2008, India’s Twin Deficit seemed much more under control now than a year back, as the INR dented their impact and KG Basin flows came in line.

Cash-rich Indian Cos acquired great businesses across US & Europe at distress valuations, RIL acquired Dow Chem while Sterlite acquired Asarco at just $1 bn, and Oz minerals of Canada.

Record FDI figs for FY09 were released. INR had its sharpest rise in 9 mons. While the USD still remains the world currency standard, oil is now denominated in Yuan.

The RBI unwound MSS ($41 bn) to prevent pressure on the BoP (lower capital infllows & exports) as well as on domestic interest rates (higher borrowing requirement to plug the budget deficit). This substantially eased the liquidity pressures in India.

RBI also intelligently used the Fx reserves to calibrate the exchange rate. And cut Repo, CRR and SLR to keep local liquidity conditions benign.

Ex-Guv’nor Dr Reddy is to be awarded Padma Vibhushan on Jan 26, 2010 for his foresight in 2007/ 08.

INR rises as FIIs rush in.. ... but DFIs beat them riding on equity demand

(USD bn)

(4)

(2)

0

2

4

6

8

Q1F

Y07

Q4F

Y07

Q3F

Y08

Q2F

Y09

Q1F

Y10

Q4F

Y10

38

40

42

44

46

48

(INR)

FII investment (LHS)INR/USD (RHS)

(USD bn)

01234567

Q1F

Y08

Q3F

Y08

Q1F

Y09

Q3F

Y09

Q1F

Y10

Q3F

Y10

Source: ENAM Research, Bloomberg

(USD bn) 09E 10E

Gross Dom Savings 418 445

Total Fin.l savings : 221 250

Bank deposits 122 138

Eqty/MF* 07 13

Insurance* 20 23

Prov & PF* 22 25

Source: ENAM estimates* Note: ~ 50% of incremental insurance money & ~5% of provident & PF money has been moving into equities

India Strategy


Indian Markets: Kick yourself thrice! Indian markets crossed a 52 week high even as prospects of global economic peace seemed to be

limping back and India Inc’s Q1 FY 09 quarterly results were disastrous. LIC was the champion of market performance with its best ever Annual performance. FIIs started

to pour into scalar sectors such as infra/ realty/ media/ pvt sector BFSI. Pricing power of banks & cash rich companies showed up in latest qtrly results (weaker players were

financially squeezed out). Defensives started faltering at last, off their 52w highs, while Infra/ engg stocks touched 52w highs (with much more to go), with Govt’s infra announcements & expectations of rising order books. Expectedly, interest rate sensitives out-performed.

Prognosis of Sector rotation now in Oct 09: In 2007, we had abandoned the concept of Cyclicality, with every sector from Commodities to Engineering being defined as Secular. Now that we have been knocked down enough to think more rationally, we expect the sector-rotation over the market cycle to evolve text-book fashion as:

Derived demand:Commodities & Engineering

Almost defensive:Telecom/ IT

Interest sensitives: Banking/ Auto

New projects:Infra/ Realty/ Retail/ Media

WC intensives:Manufacturing

Pillars:FMCG, Pharma

Currently pulped out sectors: Cement, OMCs

Utilities

Derived demand:Commodities & Engineering

Almost defensive:Telecom/ IT

Interest sensitives: Banking/ Auto

New projects:Infra/ Realty/ Retail/ Media

WC intensives:Manufacturing

Pillars:FMCG, Pharma

Currently pulped out sectors: Cement, OMCs

Utilities

Themes for the next decade: As we perform the Muhurat-trading this Diwali, we ask ourselves what will be the transformational drivers over the next decade, leading to the next cycle’s multi-baggers ! We discuss that overleaf.

India Strategy


India 2010- 20: Energy sufficiency + Infra backbone creation + Demographic J-curve India will transform the next decade – just as the US did last mid-century with its massive Infra creation, & the middle East with its oil finds (India’s KG Basin…). India would also reach its demographic inflexion points, just as US/ China reached theirs in the 80s & 90s respectively. This point usually marks the take-off of consumption to the next scalar level, in turn driving more demand for commodities, manufacturing, infra & services to meet the same.

1. Gas supply to jump to ~260 mmscmd by 2012 Enabling huge savings to the economy

0 50 100 150 200 250 300

FY06

FY07

FY08

FY09E

FY10E

FY11E

FY12E

(mmscmd)

Existing fields RIL-KG Basin Other New SuppliesLNG Supplies CBM

Source: ENAM Research, OEA

2. India’s Infra backbone creation:

Energy

2008 2009 2010 2011 2012 2013 2014 2015

Airports

Roads

Power

SEZs

Rail

Ports

Freight Corridors Delhi-Mumbai, Delhi-

Howrah

KG Basin phase-I

GQ 6 laning

NSEW Corridor

Rural roads

Hyderabad Ph-I

Bangalore Ph-I

Mumbai- Ph I

Delhi- Ph I35 non-metros

Adani 2015-2016

DLF 2010-2015

Unitech 2010-2015

Further capacity increase at all major ports

Reliance 2012-15

Other EventsGeneral Elections Commonwealth Games

NHDP - Ph III

Overall capacity to almost double to 800MTin 6 yrs!

~50% jump (66,000 MW) in installed base in 5 yrs !!

National VAT: Revolutionize Consumer industry

Energy

2008 2009 2010 2011 2012 2013 2014 2015

Airports

Roads

Power

SEZs

Rail

Ports

Freight Corridors Delhi-Mumbai, Delhi-

Howrah

KG Basin phase-I

GQ 6 laning

NSEW Corridor

Rural roads

Hyderabad Ph-I

Bangalore Ph-I

Mumbai- Ph I

Delhi- Ph I35 non-metros

Adani 2015-2016

DLF 2010-2015

Unitech 2010-2015

Further capacity increase at all major ports

Reliance 2012-15

Other EventsGeneral Elections Commonwealth Games

NHDP - Ph III

Overall capacity to almost double to 800MTin 6 yrs!

~50% jump (66,000 MW) in installed base in 5 yrs !!

National VAT: Revolutionize Consumer industry

Source: ENAM Research; * All projects - estimated year of completion

USD bnGas replacement 39 - Govt subsidy 9 - Household fuel savings 4 - Rest of economy 26 Gas value chain players 9 - Upstream (E&P) 6 - Midstream (Pipeline & LNG terminals) 2 - Downstream (CGD Networks) 1 Total 48

India Strategy


3. India’s Demographic Change: Dependancy Ratio= (Youth+ Elderly)/ Working age group

(%) 2005 2010 2015

Youth Dependency Ratio (A) 49 45 41

Elderly Dependency Ratio (B) 8 8 9

Total Dependency Ratio (A+B) 56 53 50

Jr.Working Age Population 38 39 40

- Youth Dependency Ratio= pop <15 yrs/ pop 15 to 64 yrs. - Elderly Dependency Ratio =pop> 65/ pop 15-64 yrs. - Jr Working age population= pop% of age-group 20 to 45 yrs.

Source: NCAER, ENAM Research

As this transformation occurs, industry-specific investment themes can be used to identify sectors/companies with above-average market growth in the following classes:

Luxury GoodsRetailTourismTelecomMediaHealthcare

Financial ServicesInsurance ProductsAsset ManagementHousingEducation

Capital GoodsPorts, Airports, Rail, Roads, SEZs, etcConstructionEnergy; Power“Shovel providers”

IT/ ITESAuto ComponentsEngineering goodsPharmaceuticalsMetals / Resources

LIFESTYLES “INVESTMENT” INFRASTRUCTURE GLOBALIZING

Luxury GoodsRetailTourismTelecomMediaHealthcare

Financial ServicesInsurance ProductsAsset ManagementHousingEducation

Capital GoodsPorts, Airports, Rail, Roads, SEZs, etcConstructionEnergy; Power“Shovel providers”

IT/ ITESAuto ComponentsEngineering goodsPharmaceuticalsMetals / Resources

LIFESTYLES “INVESTMENT” INFRASTRUCTURE GLOBALIZING

Source: ENAM Research

With this gentle reminder of the structural pillars of the India story for the next decade, we leave you with our best Diwali wishes

Don’t miss Appendix III: Chill ! for your financial & otherwise well-being !

When TDR cuts below 50% while Jr working age population crosses 40% is typically when the demographic J curve operates, ie consumption growth takes off exponentially. This happened in the US in the 80s & China in the 90s. And is expected for India by 2015

With India’s heavy bottom pyramid characteristic, the effect would be more accentuated.

India Strategy


APPENDIX I: SENSEX 30: Note these are NOT our Target Prices! – for which, see next Appendix CMP CMP Upside Sensex Contribn Why I didn't buy in Expectations underlying

Co name Oct-09 Oct-08 (%) Wtgs to rise Diwali 08 current prices in Nov 09RIL 2,600 1,016 156% 12.9 1,753 RIL-RNRL gas dispute could

delay KGD6 gas production; fear of delay in RPL refinery commissioning; Bleak Petchem, Refining segment outlook due to global slowdown & overcapacity

Govt increases gas purchase rate to $7, Cash rich RIL acquires global distressed assets. Drilling success in other exploratory blocks (D3/D4/D9)

Infosys 1,655 1,249 33% 9.8 278 Concerns on CY09 IT spend, yet a safer bet due to high cash flow generating busines model

Earnings lower than mkt expectations, makes EU acquisition

ITC 220 159 38% 6.8 226 A defensive hideout, but Earnings may underperform

Who wants such low growth these days?

L&T 700 779 -10% 6.6 (59) Credit crunch & fall in comm prices may lead to deferral in key infra/ metals expansion projects, thereby leading to lower execution & increasing WC

Passes through a rough patch in CY09, but transitioning order book.

HDFC 2,200 1,573 40% 6.1 213 Conversion of HDFC bank warrants could put pressure

Mortgage business continues to be on a firm foot

Bharti 971 534 82% 5.7 408 Concerns on rising spectrum charges & no time frame in unlocking of tower entity (Rs 181 per share)

Tower Co unlocked at > Rs 180 per share. WC fully vendor financed as no other global need ex China. Wireless a near duopoly in India. Pace of telecom reforms to accelerate

HDFC Bank 1,300 973 34% 5.7 166 CBOP assets might see some further deterioration

Continuing the high quality growth

ICICI 800 310 158% 5.6 767 Concerns on further deterioration in retail asset quality & slowdown in insurance

Insurance lists

SBI 1,850 1,156 60% 5.3 279 Less prone to global crisis, but stock price not fallen enough

Consolidates other PSU banks

ONGC 1,375 660 108% 4.6 430 Falling crude & fixed subsidy means lower net realization. Stagnant production. Lower profitability for OVL

Oil costs passed on by new Govt. to consumer. Overseas acquisitions by OVL supported by Russia/ Gulf nations

HUL 280 225 24% 4.0 84 Best defensive hideout, but best may be priced in!

Who wants such low growth these days?

BHEL 1,000 1,092 -8% 3.0 (22) Clients may ask to delay/ defer execution due to credit crunch, leading to earnings disappointment & higher WC requirements

LT worries despite strong ST visibility

Satyam 401 287 40% 3.0 103 Started undercutting, lower employee additions

Earnings lower than mkt expectations, gets acquired by MNC

NTPC 180 131 38% 2.6 85 New tariff policy may reduce earnings by 7-8%

A) Visibility enhances from 75 GW to 100 GW by 2017, given its unlevered b/s. B) Favourable Tariff policy i.e. 16% RoE and higher incentives. C) Allocated Coal blocks to supplement higher capacity & allowed nuke entry, D) Risk: Merger of inefficient PSUs

RCOM 491 193 154% 2.3 302 Concerns on higher capex Integrated TMT player, unlocked tower, GlobalCom. Pace of telecom reforms

TCS 835 490 70% 1.9 119 Concerns on CY09 IT spend, selling by Tata group due to TAMO rights issue


Prices as of Oct 24th 2008 & 2009

India Strategy


… SENSEX 30 CMP CMP Upside Sensex Contribn Why I didn't buy in Expectations underlying

Co name Oct-09 Oct-08 (%) Wtgs to rise Diwali 08 current prices in Nov 09Tata Power 1,000 625 60% 1.6 82 5GW projects under

development besides 5GW under construction) may not come up due to difficulty in raising equity. Co may buy coal assets overseas at expensive valuations

Acquires fuel/ coal assets abroad, thereby enhances visibility. RoE of 4GW Mundra UMPP up from 12% to 20%+

Tata steel 321 178 80% 1.5 103 Crash in steel prices and high gearing to adversely impact profitability

Most under owned stock. Benefit from pricing rebound

Maruti Suzuki

907 534 70% 1.2 76 Increased competition, unclear about new products

New product successes, financing conditions better

Grasim 2,905 1,053 176% 1.2 179 Negative on VSF outlook and cement oversupply concern to impact the profit growth

Consolidates UltraTech & Group's Cement assets. Valuations@USD 100 / Ton

Wipro 356 235 51% 1.1 50 Concerns on CY09 IT spend, not a broad based management team


M&M 559 287 94% 1.0 79 Tractor demand to be under pressure to tight liquidity, VOI eroded due to mkt conditions

Transitioning product mix, IPO of subsidiaries successful

Sterlite 595 209 185% 1.0 154 Falling commodity prices could impact profitability

Commodity boom re-starts, listing of power, buys BALCO/ HZL and acquires global assets

Reliance Infra

1,000 381 162% 0.9 131 Timing of resolution of gas supply for Rel Power. Execution of large project portfolio in a volatile macro environment

A) Crack in comm. prices in 08 used i to lock in prices for power equipment supplies for Rel Power. B) Acquire Skoda Power at FAR less than 1x sales. C) Wins a couple of large Infra projects at IRRs of 30%+, in an environment where every one is cash strapped. D) Raises its stake in Rel Power beyond 50%, so that it can consolidate with its earnings and eliminate hold Co discount while valuations.

Hindalco 133 43 207% 0.9 155 Poor performance of Novelis, falling aluminium prices & high gearing to adversely impact profitability

Commodity boom re-starts, was severely under owned

DLF 550 204 170% 0.8 124 Lack of funding from DAL, high debtors & borrowing costs & downturn in realty sector

Listing of DLF Assets, Residental demand to pick up again, early exit in under construction office segment to PE investors

Ranbaxy 330 189 75% 0.8 0 Sharp fall in US sales if FDA issues not resolved soon

Out of sensex

ACC 1,050 423 148% 0.8 99 Lack of Holcim's interest & cement oversupply concerns to impact profit growth

Merges with Ambuja, plus acquires few cement cos @ USD 100/ ton valuation

Tata Motors

300 163 84% 0.7 52 3bn$ Fund raising for JLR + aggressive capex in domestic biz. Inadequate cashflows

Passes thru a rough patch in CY09, but transitioning product mix

JPA 60 0.7 0 Execution delays across power, cement & real estate biz, financial closure on projects not received

Out of sensex

Total 15109 8701 74% 100 6415 Prices as of Oct 24th 2008 & 2009

India Strategy


Appendix II: Sensex 30: based on target prices CMP Upside Sensex Contribn Tgt PE (x)

Co name Tgt pr Oct-08 (%) Wtgs to rise FY09e FY10e FY10eRIL 1,810 1,016 78% 12.9 864 108 164 11Infosys 1,406 1,249 13% 9.8 106 100 110 13ITC 195 159 22% 6.8 131 9 11 18L&T 927 779 19% 6.6 107 52 59 16HDFC 2,200 1,573 40% 6.1 209 88 110 20Bharti 811 534 52% 5.7 254 45 54 15HDFC Bk 1,310 973 35% 5.7 169 52 67 19ICICI 720 310 132% 5.6 631 37 46 16SBI 1,740 1,156 50% 5.3 231 150 176 10ONGC 977 660 48% 4.6 188 116 105 9HUL 260 225 16% 4.0 53 11 11 23BHEL 1,295 1,092 19% 3.0 48 69 80 16Satyam 272 287 -5% 3.0 (13) 34 38 7NTPC 188 131 44% 2.6 98 10 11 17RCOM 301 193 56% 2.3 107 28 34 9TCS 613 490 25% 1.9 42 58 66 9Tata Power 780 625 25% 1.6 33 70 77 10Tata steel 385 178 116% 1.5 146 80 64 6Maruti Suzuki 697 534 31% 1.2 33 60 65 11Grasim 2,041 1,053 94% 1.2 94 233 240 9Wipro 265 235 13% 1.1 12 24 26 10M&M 576 287 100% 1.0 83 36 38 15Sterlite 597 209 186% 1.0 152 52 67 9Reliance Infra 821 381 115% 0.9 92 40 44 19Hindalco 107 43 147% 0.9 108 14 16 7DLF 380 204 86% 0.8 62 46 51 7Ranbaxy NA 189 NA 0.8 0 12 22 NAACC 521 423 23% 0.8 15 59 61 9Tata Motors 300 163 84% 0.7 51 23 26 11JPA 61 60 2% 0.7 0 6 8 8Total 12,807 8,701 47% 100 4,104 923 1,071 12

EPS (INR)

India Strategy


APPENDIX III: Chill ! : The Ferrari & the Hatchback both stop at the next red light ! It doesn’t matter what we really did this year – the Ferrari & the hatchback were both stopped out at the next red light ! If I didn’t buy at 18K, I did so at 15K. And if I didn’t at 15, I did at 12. And in either case, I ANGRILY averaged down, down, down till 9K, or till at some point I was fully invested. Most went in at some point & then AGAIN at every ALTERNATE (retrospectively) top in the Sensex sequence this year of 21K/ 18/ 15/ 12/ 9 …. And if I felt smug at some point for holding cash for whatever time period, saying “am tempted to tell u …, but I won’t, as I already did”, well, those who held cash the longest got impatient the earliest. Same difference ! Stock-selection, sector-selection,…. nothing really mattered. As only the very very dumb would have converted everything into HUL (price 205) in Jan 08 – at its then PE of 26 !!! – read next in small letters – its 225 today at sub-9K!!! Not dumb, actually ABNORMAL people – Mongoloid from birth or something like that – they will anyway get lucky once in 42 years & keep suffering for each 41 year period – so there ! And. Those who invested elsewhere instead of India, …. Russia, Brazil, whatever, … lost money elsewhere … even alternative commodities … oil, gold, … So Chill ! Am not finished! Most of those prigs who sat on CASH in 2008, also sat on cash most of 2007 – so imagine THEIR BOTH years of stress – missing those wonderful rallies, not knowing what to do – the fretting & fuming. Far more stress than ALL the others who played & kept busy, mentally active, losing money, you see! Instead these guys, they became Attaccabottonis (Italian: a bore who corners people with sad, pointless tales) – everyday they woke up feeling the world would end… slapped their kids, tore wings off butterflies & cheated on their … dogs … not taking them for walks. So these CASH-types got constipation ! whooping cough !!! And piles !!! So, the first Raaga below is dedicated to them, who deserve our pity-most ! STILL not finished! And, and, and, … those who sold all in Jan 07 & left all this investing stuff & retired to a beach house … they r not safe either ! One day in 2020, they’ll all drown in their sleep in their beach mansions, ‘coz they aren’t alert anymore … so smug in their wife’s bosom, they haven’t read up, that Global warming will flood them as the polar caps heat up in anger at their lack of team spirit & camaraderie in Jan 2007 !!! So chill ! … Ferrari …. hatchback … beach house …. all the same … Soothing Raagas & what they do for you To help you chill, we have tabulated below, some of the therapeutic Raagas (Indian musical scales) which are supposed to evoke chill-out feelings as you listen to them. Do say thank you !!!

Raga How it affects you Hindi song where used

Jaunpuri Resonates parts below the stomach - no, no, meant it cures constipation

Jaan sake to jaan mere man mein chipkar baithe…

Rathipathipriya Helps you have a happy married life: all ill-feelings vanish

Does any such song exist?

Asavari Reduces hypertension Mujhe gale se lagalo bahut udas hun main

Kaafi Remedy for worry, distress and neurotic disorders Bairan neend na aaye

Kalyan Gives motherly comfort & increases confidence Chandansa badan chanchal chitavan

Alhaiya Bilawal Ensures vigour and good health Sare ke sare ga ma ko lekar gaate chale

Bhairav Neutralizes toxins in the body Jaago mohan pyare jaago

Bhoop Filters out ill-effects of lust and anger Dekha ek khvab to yeh silsile hue

Charukesi Rejuvenates mind and helps you adjust to how old you are getting gradually

Teri ummeed tera intezaar karte hai

Desh Gives a sense of freedom, elevates the senses Vande Mataram

India Strategy


NOTES

India Strategy


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