f2019 and f2020, respectively. - expro capital · sensex eps 1420 1492 1837 2269 sensex pe 25.7...

[email protected]

[email protected]

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

The Uphill ClimbIndian stocks are jostling weak emerging markets, rising rates,higher oil prices, an election year and relatively rich mid-capvaluations. The large-cap index has support from an improvinggrowth cycle, strong macro stability and local appetite forequities.

What is in favor of Indian equities?

What is against Indian equities?

Portfolio strategy: We prefer large-caps over mid-caps. We like Banks (private

corporate and retail), Discretionary Consumption, Industrials and Domestic

Materials, while avoiding Healthcare, Staples, Utilities, Global Materials and

Energy.

Exhibit 1: India's outperformance continues

-20%

-15%

-10%

-5%

0%

5%

Jul-1

6

Sep-

16

Nov

-16

Jan-

17

Mar

-17

May

-17

Jul-1

7

Sep-

17

Nov

-17

Jan-

18

Mar

-18

May

-18

Jul-1

8

MSCI India performance relative to MSCIEM - USD

MSCI India performance relative to MSCI EM- local currency

Source: RIMES, MSCI, Morgan Stanley Research

Exhibit 2: Interday volatility falls to lows

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

2010

2011

2012

2013

2014

2015

2016

2017

3M change in 3M Rolling InterdayVolatility

Source: Bloomberg, Morgan Stanley Research.

Exhibit 3: Small and mic-cap price drawdown intensebut valuations still rich

-21%-15%

-18%

-80%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

Sep-

05M

ar-0

6Se

p-06

Mar

-07

Sep-

07M

ar-0

8Se

p-08

Mar

-09

Sep-

09M

ar-1

0Se

p-10

Mar

-11

Sep-

11M

ar-1

2Se

p-12

Mar

-13

Sep-

13M

ar-1

4Se

p-14

Mar

-15

Sep-

15M

ar-1

6Se

p-16

Mar

-17

Sep-

17M

ar-1

8

Source: Bloomberg, Morgan Stanley Research.

Morgan Stanley does and seeks to do business withcompanies covered in Morgan Stanley Research. As aresult, investors should be aware that the firm may have aconflict of interest that could affect the objectivity ofMorgan Stanley Research. Investors should considerMorgan Stanley Research as only a single factor in makingtheir investment decision.For analyst certification and other important disclosures,refer to the Disclosure Section, located at the end of thisreport.+= Analysts employed by non-U.S. affiliates are not registered withFINRA, may not be associated persons of the member and may notbe subject to NASD/NYSE restrictions on communications with asubject company, public appearances and trading securities held bya research analyst account.

Strong macro stability evident in a positive BoP and backed by a Central

Bank that is committed to keeping real rates positive.

A bullish steepening of yield curve, which is at post-2010 highs – the yield

curve correlates positively with stocks.

A low and falling beta, which augurs well in a weak global equity market

environment as we have seen over the past few weeks.

India's growth is likely accelerating relative to EM. Our work shows that

corporate confidence is at a multiyear high and profits are likely to mean

revert from below trend.

Strong domestic flows, currently averaging around US$2-2.5 billion a

month, which we believe are in a structural uptrend.

Weaker FPI positioning, now at 2011 levels.

Likely rising crude oil prices, which could put pressure on growth.

Upward pressure on inflation from food price hikes making sure that more

rate hikes are coming.

The election cycle, which brings its own set of uncertainties.

Relatively rich mid-cap valuations (even after the recent drawdown).

Equity valuations relative to bonds is at the top end of its range, indicating

that the market is pricing in some part of the coming growth recovery.

Rising equity supply.

1

July 16, 2018 04:15 AM GMT

mailto:[email protected]

mailto:[email protected]

Summary of Our Views

Risks and Catalysts (Exhibits 1-3, 17-22):

The section in this report, "Known Unknowns", outlines the potential risks and catalysts

for Indian equities in the coming months. We highlight some of the key ones below:

Macro and politics (Exhibits 23-28)

We see strong growth in 2018 and 2019 driven by consumption, exports, government

spending and a nascent recovery in private capex. We see a tighter monetary policy in

2018 as well as the risk of a higher-than-budgeted fiscal deficit as we approach elections

in 2019.

Earnings growth: At current valuations – especially where equities trade vs. bonds

– it is imperative that the growth cycle turns. The market is already anticipating

some turn in the growth cycle and hence a feeble improvement will not help

stocks.

Rates: We need to bear in mind that the RBI now has an explicit mandate to keep

inflation under the lid (unlike the past, when its mandate oscillated between

growth and inflation). This means that the historical relationship between short

rates and equities cannot be relied upon in the coming cycle. At the minimum, there

is likely to be more volatility in stocks as the rate cycle inflects upward. We see a

couple of more rate hikes this year with oil and food prices representing a risk to

the upside for rates. Also note that the yield curve is undergoing bullish steepening,

which correlates positively with equities. The fiscal slippage has been a key source

of worry for the bond markets, but a large part of this is already in play in the bond

market.

Global equities: While global market performance remains a key to the absolute

performance of Indian stocks in the near term, India's beta to the world has

dropped to a 13-year low and possibly sets the stage for India's outperformance in

a low-return world (Where has the India Story Vanished?).

Oil prices: This remains a key risk to equities given its ability to cause pain to the

fiscal deficit and, therefore, growth.

Political cycle: As we approach the 2019 general elections, the market is likely to

shift focus on likely outcomes as a key driver for performance (The World's Biggest

Democratic Elections: How to Forecast Them & What to Do with Portfolios).

Net demand-supply: Household demand for stocks remains strong, although

supply is also rising. There is an active debate on the sustainability of domestic

flows, and the monthly number will be widely tracked (India Equity Strategy:

Dream Run: What Is the Risk to Domestic Equity Flows?).

The policy uncertainty index has been low, but the relative market performance has

underperformed, i.e., diverged. The election calendar thickens in 2018/19, and hence

2

https://ny.matrix.ms.com/eqr/article/webapp/9398bda4-47ae-11e8-adef-6a0a1ce82510?t=1525061368%3A73%3A21545%3Avmias1106669&m=1&ch=autob#

https://ny.matrix.ms.com/eqr/article/webapp/d12393fc-3cae-11e8-b3f7-7a79cfe26848?t=1523872899%3A240%3A24742%3Avmias1106669&m=1&ch=autob#

https://ny.matrix.ms.com/eqr/article/webapp/7a91fd46-2753-11e8-97c7-b3450f688ad8?ch=rpint&sch=sr

Liquidity (Exhibits 29-34)

Liquidity, or the force of the bid, has weakened in recent weeks.

Corporate Fundamentals (Exhibits 35-46)

In our base case, BSE Sensex earnings growth is pegged at 5%, 23% and 24% for F2018,

F2019 and F2020, respectively.

Exhibit 4: Forecasts at a GlanceF2017 F2018E F2019E F2020E

G DP G rowth 5.7% 6.1% 6.3% 6.6%

G DP G rowth (new) 7.1% 6.7% 7.5% 7.7%

IIP G rowth 4.6% 4.4% 4.1% 4.4%

Av erage CPI 4.5% 3.6% 4.5% 4.3%

Repo Rate (year end) 6.25% 6.00% 6.75% 6.75%

CAD% of G DP -0.7% -1.9% -2.2% -1.9%

Sensex EPS 1420 1492 1837 2269

Sensex PE 25.7 24.5 19.9 16.1

EPS growth YoY -0.5% 5.0% 23.1% 23.5%

Broad M arket Earnings G rowth 0.0% 3.0% 20.0% 22.0%

Broad M arket PE 31.0 30.1 25.1 20.5

Source: RIMES, MSCI, Morgan Stanley Research (E) estimates

the market's perception of uncertainty will likely rise in 2018/19.

Growth indicators are turning up.

There are nascent signs of a capex cycle evident in order

books. Our AlphaWise survey points to a recovery in private

capex in the coming months (Corporate Confidence Is Back,

Capex to Follow).

The yield curve has steepened to a post-2010 high and it

augurs well for stocks.

India's macro stability remains strong, and is unlikely to be

threatened by a rise in oil prices. However, rising oil prices can bring growth

problems for India given the limited fiscal flexibility in an election year.

The rupee has suffered some real and nominal depreciation over the past few

weeks, which augurs well for reported earnings.

The pace of the rise in market multiple relative to earnings has fallen in recent

weeks to slightly negative territory.

Our global liquidity proxy is rising and should be tracked closely for a shift in global

liquidity conditions.

Share prices appear neutral relative to M2 growth.

Financial conditions have eased at the margin.

Short yields for India have fallen relative to the US. We feel that the historical

relationship between relative rates and relative equity performance will be

reinforced. Accordingly, India's relative performance should continue to improve.

The yield curve has steepened, which correlates positively with equities.

Our proprietary models point to robust earnings growth in the next three years.

Profits could surprise significantly on the positive side given the low starting point

of profit share in GDP, which is almost at 2002 levels.

Balance sheet recession (which we define as return on capital being lower than the

cost of debt) has also ended and may prompt a private capex recovery. Corporate

balance sheets have delevered over the past two years, and free cash flows are

sitting at all-time highs at over 10% to sales.

3

https://ny.matrix.ms.com/eqr/article/webapp/7625c542-58ab-11e8-ad7b-785616c33cb4?t=1528009373%3A7%3A23834%3Avmias1106668&m=1&ch=autob#

Valuations (Exhibit 47-58)

The absolute P/B is around average, but mid-cap valuations are still looking stretched

despite the recent drawdown. Equities do not look compelling vs. long bonds. India's

recent outperformance has lifted relative valuations above average. Our composite

valuation indicator suggests low double-digit index returns in the coming 12 months.

Valuations, on their own, unless at extreme points, rarely give a clue of where stocks are

heading. We also do not think the narrow indices, such as the Sensex or the Nifty, are

pricing in a multiyear growth cycle, implying meaningful upside potential to stocks over

the next three to five years.

Sentiment (Exhibit 59-70)

Overall sentiment appears to be in neutral territory post the rallies off lows made in

March. Indian equities just about remain in a bull market with the 200DMA slightly

above the 50DMA (golden cross).

Asset turn has hit a post-GFC high and ROE may have troughed for this cycle.

The consensus has held its F2019 and F2020 Sensex numbers, generally speaking.

We think earnings revisions breadth should turn positive in the coming weeks.

Profits have trailed GDP since F2011 and are likely coming out of their deepest and

longest recession in Indian history.

For long-term investors, valuations are still in the comfort zone.

Valuations relative to interest rates are not attractive, so we continue to argue for

even or better performance for long bonds versus equities (unlike 2017).

At this point of the cycle, given how depressed earnings are, P/E could be

misleading and P/B offers a better valuation perspective, in our view.

Shiller P/E and market cap to GDP for the broad market are both off highs after

multiyear highs in January.

Share of India's market cap in global market is below its share in global GDP.

EM positioning in India is also at a multiyear low, and the level of trailing FPI

inflows suggest a bounce in FPI demand for stocks. FPIs have also meaningfully

trimmed exposure in mid-caps relative to large caps. Domestic equity assets to total

assets is close to an all-time high.

Net demand supply for equities is deteriorating due to likely higher supply even as

household balance sheet rebalancing toward equities is unabated. We are expecting

equity issuances of around US$45-50 billion in 2018 compared to US$28 billion in

2017.

4

Portfolio Strategy

We continue to back growth at a reasonable price. The way to construct portfolios is to

buy stocks of companies with the highest delta in return on capital. The market's

character is most evident in the all-time low correlation of returns across stocks. This

tells us that market participants are acutely idiosyncratic in their approach to stocks. A

likely mean reversion in correlations warrants wider sector positions. We continue to

prefer large caps over mid-caps given relative valuations.

Recap of our biggest sector views:

Index Target: On our June 2019 target of 36,000, the BSE Sensex would trade at just

under 16x one-year forward P/E, which below its historical average.

Consumer Discretionary (+500bp): Strong consumer loan growth and rising real

incomes drives our view.

Financials (+500bp): Credit costs are likely to decline, led by M&A activity and a

recovery in economic growth. Recapitalization will also help the Corporate banks.

Loan growth prospects are looking up as the economy gathers pace. The

bankruptcy processes are gaining pace, in our view. Non-banks may face margin

pressure as rates rise.

Industrials (+400bp): Private capex is likely turning and public capex remains strong.

Technology (+0bp): Business momentum is recovering and the sector has done well

over the past few months contrary to market expectations.

Consumer Staples (-600bp): Stocks look rich and profit growth may trail the market

due to lower leverage to an economic recovery.

Healthcare (-200bp): The sector remains challenged by regulatory burden.

Utilities (-200bp): We prefer cyclical exposures.

Energy (-300bp) and Materials (-100bp): Funding source for our overweights.

Base case (50% probability) – BSE Sensex: 36,000: All outcomes are moderate.

Growth accelerates slowly. We expect Sensex earnings growth of 5% YoY in F2018,

23% YoY in F2019 and 24% YoY in F2020.

Bull case (30% probability) – BSE Sensex: 44,000: Better-than-expected outcomes,

most notably on policy and global factors. The market starts believing in a strong

election result. Earnings growth accelerates to 29% in F2019 and 26% in F2020.

Bear case (20% probability) – BSE Sensex: 26,500: Global conditions deteriorate and

the market starts pricing in a poor election outcome. Sensex earnings grow 21% in

F2019 and 22% in F2020.

5

Note: Prices as of July 12, 2018. Past performance is no guarantee of future results. Results shown do not include transaction costs.

Exhibit 5: BSE Sensex Outlook: Risk-Reward for Jun-19

22,00024,00026,00028,00030,00032,00034,00036,00038,00040,00042,00044,000

Jun-

14Ju

l-14

Sep

-14

Oct

-14

Dec

-14

Feb-

15M

ar-1

5M

ay-1

5Ju

l-15

Aug

-15

Oct

-15

Dec

-15

Jan-

16M

ar-1

6M

ay-1

6Ju

n-16

Aug

-16

Sep

-16

Nov

-16

Jan-

17Fe

b-17

Apr

-17

Jun-

17Ju

l-17

Sep

-17

Nov

-17

Dec

-17

Feb-

18A

pr-1

8M

ay-1

8Ju

l-18

Aug

-18

Oct

-18

Dec

-18

Jan-

19M

ar-1

9M

ay-1

9Ju

n-19

36000(-2%)

44000(+20%)Jun 19 Fwd probability-weightedoutcome @ 36500

Base Case(Jun 2019)

Current Price(Jul 12, 2018)

HistoricalPerformance

26500 (-27%)

35600

Source: RIMES, Morgan Stanley Research (E) estimate

Exhibit 6: Sector Model Portfolio

Sector O W /U W (bps) (YT D ) (12M )M SC I Ind ia 0% 11%C onsumer D isc. 500 -7% -6%

C onsumer S tap les -600 11% 6%

Energy -300 1% 12%

Financia ls 500 1% -3%

H ealthcare -200 -5% -18%

Industria ls 400 0% -3%

Techno logy 0 15% 14%

M ateria ls -100 -10% -5%

Telecoms 0 -29% -17%

U tilities -200 -11% -5%

Perform ance re lative to M SC I Ind ia


Exhibit 7: Focus List

YT D Perf 12m Perf

Baja j Auto C ons. D isc. O W 3,097 13.1 -8% 1% 11%M &M C ons. D isc. O W 916 15.9 21% 20% 19%M aruti C ons. D isc. O W 9,347 41.2 -5% 13% 23%Zee Enterta inment C ons. D isc. O W 534 7.5 -9% -5% 21%

Titan C ons. D isc. O W 808 10.5 -7% 38% 29%ITC Stap les O W 277 49.4 4% -24% 13%R eliance Industries Energy O W 1,082 100.1 16% 30% 18%Bharat F inancia l F inancia ls ++ 1,177 2.4 16% 39% 110%H D FC Bank F inancia ls O W 2,166 82.3 14% 17% 24%IC IC I Bank F inancia ls O W 272 25.6 -14% -16% 49%Indusind Bank F inancia ls ++ 1,938 17.0 16% 11% 30%M & M F inancia l F inancia ls O W 479 4.3 0% 19% 47%Shriram T ransport F inancia ls O W 1,213 4.0 -19% 6% 31%D r R eddy's H ealthcare O W 2,357 5.7 -3% -21% 48%

Adani Ports Industria ls O W 369 11.2 -10% -11% 12%H avells Ind ia Industria ls O W 562 5.1 -1% 6% 23%Asian Pain ts M ateria ls O W 1,358 19.0 16% 8% 23%U ltra tech C ement M ateria ls O W 3,947 15.8 -10% -15% 31%U PL M ateria ls O W 582 4.3 -25% -39% 15%Infosys Technology O W 1,294 41.1 24% 21% 2%

Stocks

R el to M SC I Ind ia

R atingSectorPrice as onJul 12, 2018

M C ap ($bn)

2Y Fw d EPSG row th

Source: RIMES, Morgan Stanley Research; ++ Rating and price target for this company have been removedfrom consideration in this report because, under applicable law and/or Morgan Stanley policy, Morgan Stanleymay be precluded from issuing such information with respect to this company at this time.

Exhibit 8: Key Themes in Our Portfolio: We Prefer Growth Stocks andWide Sector PositionsThemes Implications Stocks

M&ABanks, property, infrastructure,materials and telecoms JSW Steel

CapexCompanies that have done capex overthe past 5 years Reliance Industries, JSW Steel

Unloved and under-owned stocks Valuations and momentum Asian Paints

Rising ROCEDelta in ROCE probably more importantthan just the level Asian Paints, MMFS

Earnings revisionsEarnings momentum is a key share pricedriver Maruti Suzuki

Growth at a reasonableprice

As a style growth is likely to leadperformance in the coming months

Bajaj Auto, HDFC Bank, UPL, Zee, ITC

Source: Morgan Stanley Research.

Exhibit 9: Style Performance: GARP in Form

-3000%

-2000%

-1000%

0%

1000%

2000%

3000%

4000%

5000%

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Value Growth Quality Junk Momemtum

Cumulative YoY trailing

Source: RIMES, Morgan Stanley Research

Exhibit 10: Correlation across Stocks

5%

15%

25%

35%

45%

55%

65%

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Explanatory Power of Market Effect

1Y Rolling R-squared

Time for macro, Sep-10Time for macro, Jul-07Time for macro, Jul-05

Time for macro, Aug-03

Stock pickers' time,Apr-04

Stock pickers' time, Jul-06

Stock pickers' time, Jun-09

Stock pickers' time, Feb-11


6

Portfolio Strategy: Stock Screens

Exhibit 11: Capex ScreenCompany MS Rating Stock prices (as

on Jul 12, 2018)Cumulative Capex toTotal Assets

5 year relativeperformance

Colgate-Palmolive Underweight 1,151 0.99 -2%IPCA Overweight 745 0.65 -10%Jindal Steel & Power Overweight 219 0.71 -12%Jubiliant Food Overweight 1,425 0.86 11%JSW Steel Equal-Weight 317 0.61 23%JK Lakshmi Underweight 348 0.51 18%ONGC Underweight 159 0.67 -15%Power Grid Overweight 183 0.71 -2%Reliance Industries Overweight 1,082 0.80 6%Shree Cement Overweight 17,123 0.51 16%

Source: RIMES, Morgan Stanley Estimates, Morgan Stanley Research. Note: Cumulative Capex is sum of capexfrom F2013 to F2017. For important disclosures regarding companies that are the subject of this screen,please see the Morgan Stanley Research Disclosure Website atwww.morganstanley.com/researchdisclosures.

Exhibit 12: Highest 3M Earnings RevisionsCompany Name Sector Stock Rating Prices as on

Jul 12, 20183M Earnings

Revisions(FY19E)

Ashok Leyland Industrials Overweight 134 9.9%Coal India Energy Equal-Weight 265 6.5%Jubilant Food Consumer Disc. Overweight 1,425 16.8%JSW Steel Materials Equal-Weight 317 24.3%MindTree IT Overweight 1,077 7.8%MphasiS IT Overweight 1,167 7.3%Oil India Energy Underweight 210 6.6%SAIL Materials Underweight 75 14.1%Tech Mahindra IT Overweight 648 7.6%HDFC Standard Life Financials Equal-Weight 479 11.5%

Source: RIMES, IBES Estimates, Morgan Stanley Research. For important disclosures regarding companiesthat are the subject of this screen, please see the Morgan Stanley Research Disclosure Website atwww.morganstanley.com/researchdisclosures.

Exhibit 13: Stocks with Best Two-year Forward Delta in ROCE fromOur Coverage Universe – OW Rating

Stock Price as on Jul 12, 2018 2Yr Change in ROCE ROA+Operating Earnings Yield(F19E)

Asian Paints 1,121 6.1% 28%Dabur 338 12.2% 36%Dr. Reddy's 2,111 10.9% 18%Godrej Cons. 1,012 6.7% 24%Havells 504 5.5% 19%Infosys 1,109 10.0% 25%ITC 275 7.7% 53%Titan 784 5.5% 25%IPCA Labs 573 5.9% 26%MindTree 717 11.7% 22%MphasiS 833 7.6% 25%Gujarat Gas 858 13.7% 25%

Source: RIMES, Company Data, Morgan Stanley Research. For important disclosures regarding companiesthat are the subject of this screen, please see the Morgan Stanley Research Disclosure Website atwww.morganstanley.com/researchdisclosures.

Exhibit 14: Growth at a Reasonable Pricing – OW RatingStock Price as on Jul

12, 2018Trailing 36M

BetaEPS Growth (F18-

20E)2Yr Change in ROCE Implied EPS

growth (SD fromavg)

Asian Paints 1,121 0.78 18% 6.1% 0.6

Dabur 338 0.73 8% 12.2% 0.0

Dr. Reddy's 2,111 0.91 39% 10.9% -0.4

Godrej Cons. 1,012 0.95 17% 6.7% 0.9

Havells 504 0.85 22% 5.5% 1.1

Infosys 1,109 0.63 7% 10.0% -1.1

ITC 275 1.00 11% 7.7% -0.7

Titan 784 0.76 39% 5.5% 0.9

IPCA Labs 573 0.63 48% 5.9% -0.3

MindTree 717 0.56 31% 11.7% 1.0

MphasiS 833 0.78 20% 7.6% 0.0Gujarat Gas 858 0.52 61% 13.7% -0.4

Source: RIMES, Bloomberg, Morgan Stanley Research. For important disclosures regarding companies thatare the subject of this screen, please see the Morgan Stanley Research Disclosure Website atwww.morganstanley.com/researchdisclosures.

Exhibit 15: Un-loved and Under-owned Stocks

Company MS RatingPrices as onJul 12, 2018

3M/3Y Avgdaily

tradedvolume 12M Perf Beta

3MChange in12M Beta

200DMADeviation

Institutional Position

Sell-sideReco

ACC Overweight 1,350 149% -21% 1.05 -0.15 -16% 42% 0.24

Ambuja Cements Underweight 202 114% -23% 1.02 -0.18 -18% 57% 0.15

Bank of India Underweight 85 141% -42% 2.17 -0.23 -37% 71% -0.69

Colgate-Palmolive Underweight 1,151 122% 7% 0.38 -0.16 5% 53% 0.18

Cummins India Underweight 656 130% -28% 0.86 -0.22 -19% 71% 0.38

G.E. Shipping Co Underweight 276 39% -33% 0.86 0.04 -25% 72% 0.50

Indraprastha Gas Overweight 262 87% 17% 0.43 -0.22 -11% 66% 0.53

JK Lakshmi Cement Equal-Weight 348 67% -26% 0.68 -0.12 -14% 53% 0.48

JSW Energy Overweight 68 32% 5% 1.30 0.25 -15% 36% -0.27

Oil India Equal-Weight 210 99% 18% 0.36 -0.06 -9% 14% 0.50

IDFC Bank Underweight 39 150% -39% 1.12 -0.15 -23% 42% 0.27

Gujarat Gas Underweight 778 31% 2% 0.60 0.16 -8% 44% 0.43

Dr Lal Underweight 897 47% 7% 0.63 -0.25 4% 55% 0.47

Narayana Hrudyalaya Underweight 247 43% -19% -0.08 0.14 -12% 55% 0.78

Future Consumer Equal-Weight 48 75% 28% 1.25 -0.32 -20% 37% 0.00


Exhibit 16: Over-loved and Over-owned Stocks

Company MS RatingPrices as onJul 12, 2018

3M/3Y Avgdaily traded

volume 12M Perf Beta3M Changein 12M Beta

200DMADeviation

InstitutionalPosition

Sell-sideReco

HCL Tech Overweight 1,006 132% 18% 0.61 0.09 9% 91% 0.55

HDFC Bank Overweight 2,166 145% 29% 0.72 -0.08 13% 57% 0.87

Cyient Overweight 742 217% 41% 0.43 0.16 16% 78% 0.83

Just Dial Underweight 585 226% 57% 1.26 0.11 20% 68% -0.26

Jubilant Food Overweight 1,425 131% 158% 1.06 -0.16 35% 83% 0.59

Kotak Bank Overweight 1,390 100% 45% 0.83 0.09 24% 69% 0.68

MphasiS Overweight 1,167 301% 94% 0.48 -0.01 36% 74% 0.44

Oberoi Realty Overweight 476 130% 25% 1.08 0.04 -3% 93% 0.71

Edelweiss Overweight 298 102% 57% 1.30 0.08 5% 48% 1.00

SAIL Underweight 75 175% 20% 2.12 0.17 -5% 68% -0.20

TCS Overweight 1,971 178% 62% 0.72 0.05 31% 85% 0.27

Yes Bank Overweight 375 84% 24% 1.34 0.35 14% 84% 0.81

Indiabulls Housing Underweight 1,144 759% 3% 1.33 -0.08 -7% 87% 0.63

Future Retail Overweight 560 156% 43% 1.30 -0.03 2% 41% 0.90


7

The Known Unknowns

Why is this important What the market could be pricing in What is our expectation

Growth

High frequencydata

Growth cycle is at an inflexionpoint in our view

Mixed data with some signs ofimprovement

Better improvement than what may be priced in

Earnings season Earnings have persistentlydisappointed since 2010

Modest improvement in growth QoQ We are watching for margin improvement as operatingleverage kicks in

Earnings guidance Will set the stage for earningsrevisions breadth to turn positive

Neutral to positive guidance Positive guidance from tech, autos, other disc consumption,private sector banks and industrials

GST collections GST revenues have been weakand caused fiscal concerns

Likely stabilization of revenues at aroundthe current levels of Rs900-1000 billion

Acceleration possibly to over Rs1 trillion

Loan growth A lagging indicator of growth Modest increase led by retail loan growth Some acceleration in corporate loan growth consistent withour view on the growth cycle

Order books A signal that capex is returning No major increase We think order books are likely to build visibly in the comingmonths

Rates

CPI We expect the RBI to have limitedtolerance to a rise in CPI

Range-bound CPI For the next three months, we expect core inflation to remainstable, food prices should continue to drive the headline CPI.

Upside risk to inflation from the MSP hike could (assuming fullpass-through) be about 66bp.

Monetary policy Crucial to protect India's hardearned macro stability

Market is expecting rate hikes thoughexact quantum is hard to judge

We expect rate hikes at the August and October meetings,with the quantum of rate hikes totaling 75bp for this cycle.

Long bonds Recent change in governmentborrowing program and rumors

about an increase in foreign limitshas calmed the market

Bond prices are likely to be the currentrange given that the growth cycle has hitan inflexion point. Thus the yield curve is

at its highest level since 2010

See: India Equity Strategy: Why and How Long Bond YieldsMatter to Equities (22 Mar 2018)

Politics & Policy

Elections The market believes that thestate elections may provide

insight into the general elections

A difficult election for the BJP We think these elections will have limited bearing on generalelections – if the BJP fares well, the market could react

positively

Fiscal spending Higher spending creates inflationrisk

Market is expecting higher than budgeteddeficit in a an election year

Our economist expects fiscal deficit of 3.4% in F2019, higherthan the government's target of 3.3%, and vs. 3.5% in F2018

Monsoons Rains affect market sentimentmore than growth

Normal rains Normal rains

NCLT process Important for loan growth Some acceleration in the fruition of deals Similar to the market

Source: Morgan Stanley Research

8

https://ny.matrix.ms.com/eqr/article/webapp/09cb6ed2-28dc-11e8-97c7-b3450f688ad8?ch=rpint&sch=sr

Why is this important What the market could be pricing in What is our expectation

Market

Domesticflows

Domestic flows have been a reliablesource of equity demand over the past

three years

Some challenge to the run rate of US$2.5to US$3 billion due to market volatility

See: India Equity Strategy: Dream Run: What Is the Risk toDomestic Equity Flows? (19 Mar 2018)

Corporateactivity

Higher supply will drag down shareprices, while M&A is an offset

Some increase in supply and M&A We also expect net demand-supply to deteriorate in 2018 ascompanies raise growth capital

Global

Fed rates Determines risk appetite for EM One more hike this year Our US economist expects the Fed to raise once more thisyear

EMperformance

India remains highly correlated toglobal equities

NA India's beta has fallen to a 13-year low and thus India isoutperforming global equities

Oil prices Given the fiscal constraints, higher oilcould hurt growth

Oil to have a negative impact on the fiscaldeficit and growth

Key risk to equities given its ability to cause pain to the fiscaldeficit and, therefore, growth. Our oil analyst expects crude to

be US$85/bbl for 2H18.

Source: Morgan Stanley Research

9

https://ny.matrix.ms.com/eqr/article/webapp/7a91fd46-2753-11e8-97c7-b3450f688ad8?ch=rpint&sch=sr

Risks/Catalysts

Exhibit 17: Growth cycle turning? YoY Sensex Revenue and EarningsGrowth

-10%

-5%

0%

5%

10%

15%

20%

25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

Q1F

12Q

2F12

Q3F

12Q

4F12

Q1F

13Q

2F13

Q3F

13Q

4F13

Q1F

14Q

2F14

Q3F

14Q

4F14

Q1F

15Q

2F15

Q3F

15Q

4F15

Q1F

16Q

2F16

Q3F

16Q

4F16

Q1F

17Q

2F17

Q3F

17Q

4F17

Q1F

18Q

2F18

Q3F

18Q

4F18

Q1F

19E

BSE Sensex Revenue growth - RS

BSE Sensex Profit growth

Source: Company Data, Morgan Stanley Research

Exhibit 18: Market anticipating some recovery in growth: Earningsgrowth implied by EY Gap

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

12M fwd Earnings growth implied by EY gapmodel

Trailing Earnings growth pushed back one year

Source: Bloomberg, RIMES, MSCI,, Morgan Stanley Research

Exhibit 19: Sensex at the top end in gold terms: Sensex in Gold Ounces(log scale)

100

270

729

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

Sensex in gold ounces (log scale)

Source: RIMES, Bloomberg, MSCI, Morgan Stanley Research,

Exhibit 20: Oil Could still play spoilsport: Brent Prices and Stocks-20%

-10%

0%

10%

20%

30%

40%-60%

-40%

-20%

0%

20%

40%

60%

80%

Dec-

13

Jun-

14

Dec-

14

Jun-

15

Dec-

15

Jun-

16

Dec-

16

Jun-

17

Dec-

17

Jun-

18

Brent YoY Change MSCI India Rel to EM YoY Returns (on reverse scale)

Source: Bloomberg, RIMES, MSCI,, Morgan Stanley Research

10

Exhibit 21: India's Growth and Performance Relative to EM: GrowthKey to India's Outperformance

-40%

-20%

0%

20%

40%

60%

80%

100%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

3-year fwd India EPS growthrelative to EM3-year fwd India returnsrelative to EM - RS


Exhibit 22: India's beta composition to EM: The Fall in RelativeVolatility

0.90

1.00

1.10

1.20

1.30

1.40

1.50

1.60

1.70

1.80

1.90

20%

30%

40%

50%

60%

70%

80%

90%

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

3-year rolling relative volatility MSCI India vs. MSCI EM

3-year rolling return correlations MSCI India vs. MSCI EM (LS)


11

Politics and Macro

Exhibit 23: India's Policy Uncertainty Index-30%

-20%

-10%

0%

10%

20%

30%

40%0

50

100

150

200

250

300

Jan-

03

Sep-

03

May

-04

Jan-

05

Sep-

05

May

-06

Jan-

07

Sep-

07

May

-08

Jan-

09

Sep-

09

May

-10

Jan-

11

Sep-

11

May

-12

Jan-

13

Sep-

13

May

-14

Jan-

15

Sep-

15

May

-16

Jan-

17

Sep-

17

May

-18

India's economic policy uncertainty index

LTA of Policy Uncertainty Index

MSCI India vs. EM: 12M relative performance - RS (on reverse scale)

Source: Economic policy uncertainty Index, RIMES, MSCI, Morgan Stanley Research

Exhibit 24: REER Movement

96

100

104

108

112

116

120

124

2006

2006

2007

2007

2007

2008

2008

2009

2009

2009

2010

2010

2011

2011

2012

2012

2012

2013

2013

2014

2014

2014

2015

2015

2016

2016

2017

2017

2017

2018

RBI REER Trade Weighted 36 Currencies, LS

10 YearAverage

Mean + st dev

Mean - st dev

MSe for Jun-18, 5.4% above 10Ymean

Source: CEIC, Bloomberg, Morgan Stanley Research

Exhibit 25: Order Book

-40%

-20%

0%

20%

40%

60%

Dec

-08

Jun-

10

Dec

-11

Jun-

13

Dec

-14

Jun-

16

Dec

-17

Order Book, Quarterly

Order Inflows, Trailing 4-quarter sum, RS

YoY%

Source: Company data, Morgan Stanley Research

Exhibit 26: Consolidated Fiscal Deficit

4%

5%

6%

7%

8%

9%

10%F1

982

F198

4

F198

6

F198

8

F199

0

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

8…

F202

0E

Consolidated Fiscal Deficit % of GDP

Source: CSO, Morgan Stanley Research , Morgan Stanley estimates

Exhibit 27: India's External Balance Sheet

-5%

-3%

-1%

1%

3%

5%

7%

9%

Mar

-97

Mar

-98

Mar

-99

Mar

-00

Mar

-01

Mar

-02

Mar

-03

Mar

-04

Mar

-05

Mar

-06

Mar

-07

Mar

-08

Mar

-09

Mar

-10

Mar

-11

Mar

-12

Mar

-13

Mar

-14

Mar

-15

Mar

-16

Mar

-17

Mar

-18

Capital Account Balance

Overall BoP

Current Account Balance

4-quarter trailing sum, as % of GDP

Source: RBI, CEIC, Morgan Stanley Research

Exhibit 28: Supply Shock in Oil Is Bad for Indian Stocks

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

-75%

-45%

-15%

15%

45%

75%

105%

135%

165%

195%

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

Brent YoY Change MSCI India Rel to EM YoY Returns

Source: RIMES, MSCI, Bloomberg, Morgan Stanley Research

12

Liquidity

Exhibit 29: P/E Multiple Relative to Earnings Growth – A Measure ofthe Force of the Bid Over the Offer or Liquidity

-40%

-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

Trailing 3 year CAGR Trailing 5 year CAGR AverageIndex change minusEPS growth for MSCIIndia

Source: RIMES, Bloomberg, MSCI, Morgan Stanley Research,

Exhibit 30: Global Liquidity Proxy: US Treasury Yield Minus India'sEarnings Yield

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Sensex YoY

US 10Y Yield- MSCI India earnings yield (RS)

Source: RIMES, Bloomberg, MSCI, Morgan Stanley Research

Exhibit 31: Financial Conditions Index vs. Share Prices: Measure ofSystem Liquidity

(2.50)

(2.00)

(1.50)

(1.00)

(0.50)

-

0.50

1.00

1.50

2.00

-60%

-40%

-20%

0%

20%

40%

60%

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

6M Sensex change - LS FCI

Source: Bloomberg, RBI, CEIC, RIMES, Morgan Stanley Research

Exhibit 32: M2 Supply Growth Relative to Share Prices

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2018

YoY Sensex change minus YoY M2 supplygrowth

Source: RBI, RIMES, Morgan Stanley Research

Exhibit 33: Fed Rate

0%

1%

2%

3%

4%

5%

6%

7%

8%-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2010

2011

2012

2013

2014

2015

2016

2017

2018

MSCI India vs. EM: 12M relative performance - LSRate Gap (Repo rate - Fed rates) - Inverted RS

Source: Bloomberg, RBI, MSCI, RIMES, Morgan Stanley Research

Exhibit 34: Yield Curve vs. Sensex Returns

-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%

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Yield Curve pushed fwd 2M

Sensex 12M trailing Returns -RS

Source: BSE, Bloomberg, Morgan Stanley Research

13

Corporate Fundamentals

Exhibit 35: Macro Earnings Model Based on Kalecki Equation

-20%-10%

0%10%20%30%40%50%60%70%80%

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

Corporate Profit Growth Based on the Macro model

Actual Broad Market Profit Growth

Source: CEIC, Capitaline, Morgan Stanley Research (E) estimates

Exhibit 36: Proprietary Macro Earnings Model Based on IIP/InflationDifferentials

-60%

-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) * (1+exfood CPI -WPI) as 3MMA-LS

Broad market Earnings Growth (ex Oil PSU)-RS

E E E

Source: CEIC, Capitaline, Morgan Stanley Research (E) estimates

Exhibit 37: YoY Revenue and Profit Growth for Broad Market

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

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

Broad market earnings growth (ex-oil PSU)

Broad market revenuegrowth (ex Oil PSU) - RS

Source: Capitaline, Morgan Stanley Research

Exhibit 38: India vs. US: Corporate Profits to GDP

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

017E

India USCorporate Profits to GDP

Source: CMIE, Morgan Stanley Research (e) estimates

Exhibit 39: Earnings Drawdown or Indicator of Earnings Recession

-25%

-20%

-15%

-10%

-5%

0%

1994

1996

1997

1998

2000

2001

2002

2004

2005

2006

2008

2009

2010

2012

2013

2014

2016

2017

MSCI India EPS drawdown from peak


Exhibit 40: Corporate Confidence Improves to the Highest Level sinceF2013

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

Source: AlphaWise, Morgan Stanley Research

14

Corporate Fundamentals

Exhibit 41: Morgan Stanley Top-down Sensex EPS Estimates

BSE Sensex EPS F17 F18e F19e F20eMS Top Down EstimatesBear Case 1,366 1,387 1,683 2,057

EPS Growth 2% 21% 22%Base Case 1,366 1,435 1,766 2,182

EPS Growth -0.5% 5% 23% 24%Bull Case 1,366 1,496 1,925 2,427

EPS Growth 10% 29% 26%Consensus EPS Estimates 1,366 1,536 1,919 2,255

EPS Growth 12% 25% 18%MS Analyst EstimatesEPS 1,366 1,462 1,892 2,403EPS Growth -0.5% 7% 29% 27%Broad MarketMS Top Down EstimatesEPS Growth 0% 3% 20% 22%

Source: RIMES, MSCI, IBES, Morgan Stanley Research. e= Morgan Stanley estimates except for Consensusestimates, which are IBES estimates

Exhibit 42: India's ROE and Asset Turnover Trend

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

110.0%

10%

12%

14%

16%

18%

20%

22%

24%

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

India

Asset Turn Trend - RS

ROE Trend -LS

Source: Worldscope, RIMES, MSCI, Morgan Stanley Research

Exhibit 43: Free Cash Flow for Corporate India

-15%

-10%

-5%

0%

5%

10%

15%

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FCF to Sales

BSE 500

Ex Financials

Series3

Source: Company Data, Capitaline, Morgan Stanley Research

Exhibit 44: BSE Sensex Consensus EPS Growth Trend

8%

10%

12%

14%

16%

18%

20%

22%

24%

26%

28%

30%

7-Ju

l-16

29-J

ul-1

619

-Aug

-16

8-Se

p-16

30-S

ep-1

621

-Oct

-16

11-N

ov-1

630

-Nov

-16

21-D

ec-1

613

-Jan

-17

7-Fe

b-17

28-F

eb-1

721

-Mar

-17

11-A

pr-1

72-

May

-17

23-M

ay-1

714

-Jun

-17

5-Ju

l-17

26-J

ul-1

716

-Aug

-17

6-Se

p-17

27-S

ep-1

718

-Oct

-17

8-N

ov-1

729

-Nov

-17

20-D

ec-1

710

-Jan

-18

31-J

an-1

821

-Feb

-18

14-M

ar-1

84-

Apr-1

825

-Apr

-18

16-M

ay-1

86-

Jun-

1827

-Jun

-18

BSE Sensex consensus EPS growth trend

F2020E EPS -2268

F2018E EPS -1539

F2019E EPS -1922

F18 to F20 EPSCAGR

Source: Company Data, Capitaline, Morgan Stanley Research

Exhibit 45: Earnings Estimate Revisions Breadth

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

-15%

-10%

-5%

0%

5%

10%

Sep-

01

Sep-

02

Sep-

03

Sep-

04

Sep-

05

Sep-

06

Sep-

07

Sep-

08

Sep-

09

Sep-

10

Sep-

11

Sep-

12

Sep-

13

Sep-

14

Sep-

15

Sep-

16

Sep-

17

MSCI India (yoy, RS)

Analyst Revisions 3MA -LS

Reflexivity in corporate earningsoutlook and share price


Exhibit 46: GDP Growth vs. Earnings Growth

100

1000

FY19

94

FY19

95

FY19

96

FY19

97

FY19

98

FY19

99

FY20

00

FY20

01

FY20

02

FY20

03

FY20

04

FY20

05

FY20

06

FY20

07

FY20

08

FY20

09

FY20

10

FY20

11

FY20

12

FY20

13

FY20

14

FY20

15

FY20

16

FY20

17Cumulative GDP Growth

Cumulative EPS Growth (MSCI India)

on a log scale

Source: RIMES, MSCI, CEIC, Morgan Stanley Research

15

Valuations

Exhibit 47: Average Predicted Performance by All Valuation Tools

-75%

-25%

25%

75%

125%

175%

1996

1997

1998

1998

1999

2000

2000

2001

2002

2002

2003

2004

2004

2005

2006

2006

2007

2008

2008

2009

2010

2010

2011

2012

2012

2013

2014

2014

2015

2016

2016

2017

2018

12M Fwd. Performance Predicted 12M Fwd. Performance


Exhibit 48: Absolute P/B

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

PBLTA+1 Stdev-1 Stdev

MSCI India


Exhibit 49: Share of India in World Market Cap & GDP

1.5%

1.7%

1.9%

2.1%

2.3%

2.5%

2.7%

2.9%

3.1%

3.3%

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

E

Share of India (in WorldMarket Cap)Share of India (in WorldGDP) - RS

Source: IMF, Bloomberg, Morgan Stanley Research

Exhibit 50: MSCI India P/B Relative to MSCI EM

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

PBLTA+1 Stdev-1 Stdev

MSCI India (relative to EM)


Exhibit 51: Cyclically Adjusted P/E

10x

12x

14x

16x

18x

20x

22x

24x

26x

28x

30x

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

in USD

in INR

India Shiller PE


Exhibit 52: Market Cap to GDP

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

Market Cap to GDP ex Sensex

Sensex market cap to GDP

Source: Capitaline, Morgan Stanley Research

16

Valuations

Exhibit 53: Equity vs. Bond Multiple

Feb-00

Jan-08

Dec-08

Jun-14

0.00.10.20.30.40.50.60.70.80.91.01.11.21.31.41.51.61.71.81.92.02.12.22.32.42.5

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

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,, Bloomberg, Morgan Stanley Research

Exhibit 54: Small Cap Price to Book

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

MSCI India Small Cap PB (LS)

MSCI India Small Cap PBrelative to MSCI India (RS)


Exhibit 55: P/B Forecasting 10-year CAGR of 13.0% in Returns

R² = 0.7927

y = -0.0351x + 0.2436

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

1 2 3 4 5 6 7

MSCI India Trailing P/B

Annual 10-year fwdMSCI India returns Current P/B of 3.2 implies a

10-year annual return of 13.0%


Exhibit 56: Value Assigned to Future Growth

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

Value assigned to future growth for MSCI India Index

5 Year trailing average10-yearaverage


Exhibit 57: MSCI India P/E Relative to MSCI US

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

MSCI India PE relative toMSCI US

Source: Bloomberg, RIMES, Morgan Stanley Research

Exhibit 58: Valuation SummaryCurrent Average z-score %ile of current

reading

Trailing PE 23.2 18.1 1.1 91%12M Fwd PE 18.0 14.4 1.2 92%Trailing PB 3.2 3.1 0.1 67%Dividend Yield 1.4% 1.4% -0.2 45%VAFG 64% 54% 0.8 86%Modified EY Gap -2.2% -1.6% -0.3 41%EY Gap -3.6% -1.8% -1.0 30%

Trailing PE 1.7 1.2 1.6 96%12M Fwd PE 1.6 1.2 1.4 99%Trailing PB 1.9 1.7 0.9 81%Dividend Yield 0.5 0.6 -0.4 51%

MSCI India

MSCI India Relative to EM


17

Sentiment

Exhibit 59: Sentiment Indicator

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

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 13

Feb 16Dec 16

Source: RIMES, Bloomberg, ASA, BSE, CDSL, Morgan Stanley Research

Exhibit 60: Market Breadth

0%

20%

40%

60%

80%

100%

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

% stocks above 200 DMA

Buy Zone

Sell Zone


Exhibit 61: GAP between 200 DMA and 50 DMA

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Gap between 200 DMA and 50 DMA as % of Nifty

Source: NSE, Morgan Stanley Research

Exhibit 62: Realized Interday Volatility

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

1 Yr Rolling Interday Volatility

Source: Bloomberg, Morgan Stanley Research

Exhibit 63: Equity Capital Raising vs. Valuations

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

10

15

20

25

30

35

40

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

12M Rolling Equity Issuances/GDP (RS)

MSCI India PE (LS) - Pushed fwd 2 months

Source: Capitaline, CMIE, Morgan Stanley Research

Exhibit 64: Net Equity Demand-supply Likely to Decline in 2018

-40.0

-35.0

-30.0

-25.0

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

EEquity demand supply gap (US$ bn)

Source: Capitaline, CMIE, Morgan Stanley Research

18

Sentiment

Exhibit 65: Domestic Equity: Flows to Stock

-20%

-10%

0%

10%

20%

30%

40%

50%

Sep-

00M

ay-0

1Ja

n-02

Sep-

02M

ay-0

3Ja

n-04

Sep-

04M

ay-0

5Ja

n-06

Sep-

06M

ay-0

7Ja

n-08

Sep-

08M

ay-0

9Ja

n-10

Sep-

10M

ay-1

1Ja

n-12

Sep-

12M

ay-1

3Ja

n-14

Sep-

14M

ay-1

5Ja

n-16

Sep-

16M

ay-1

7Ja

n-18

12-month trailing equity flows to equity mutual fund assets

Source: AMFI, Morgan Stanley Research

Exhibit 66: Margin of Safety for Equity Mutual Fund Investors haswaned

-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

-500

0

500

1000

1500

2000

2500 Cumulative 12M flows inequity mfs (Rs bn)

Margin of safety - RS

Source: AMFI, Morgan Stanley Research

Exhibit 67: Aggregate Institutional Flows

-12000

-7000

-2000

3000

8000

13000

18000

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

3M Rolling FII Flows(US$ mn)

3M Rolling DII Flows(US$ mn)

3M Rolling TotalFlows (US$ mn)

Source: SEBI, CDSL, Morgan Stanley Research

Exhibit 68: Sector FPI Flows

Source: CDSL, Morgan Stanley Research

Exhibit 69: India Ownership in EM Portfolios

Source: EPFR, Morgan Stanley Research

Exhibit 70: Ownership Status (Quarter Ended Mar-18)Overall Institutionalsector positions FPIs DFIs DMFs Total Inst. MSCI Weight

Total InstitutionalPosition over MSCI

weightQoQ Change YoY ̂in Tot

Inst. Position

Cons Disc 10% 10% 9% 10% 12.2% -2.3% 0.1% -0 .2%

Cons Staples 7% 16% 12% 9% 9.7% -0.3% -0.1% -1 .3%

Energy 9% 17% 7% 10% 13.1% -2.9% -0.8% -1 .4%

Financials 41% 18% 35% 36% 23.7% 12.0% -0.5% 0.8%

Healthcare 2% 3% 4% 3% 5.4% -2.7% 0.3% 1.5%

Industrials 4% 9% 8% 6% 6.0% -0.4% 0.0% 0.1%

Materials 7% 8% 7% 7% 9.4% -2.4% 0.0% 0.0%

Technology 14% 11% 10% 13% 15.6% -2.9% 0.7% 0.5%

Telecoms 3% 2% 3% 3% 2.8% 0.0% 0.1% 0.0%

Utilities 3% 6% 6% 4% 2.0% 1.7% 0.0% 0.0%

Source: BSE, Morgan Stanley Research

19

Sectors

Exhibit 71: Sector FundamentalsMSCI Sectors F18 ROE 1Y Fwd

Change inROE

ROE as SDfrom Avg

F17 Net D/E F17 FCF/Sales

Trailing 5YCAGR in

EPS

F18 EPSgrowth

1M Revisionin F18 EPS

growth

6M Revision inF18 EPSgrowth

F19 EPSgrowth



Consumer Disc. 17.8% 3.7% (0.1) 29% 5.4% 2.4% 14.8% 0.0% -2.9% 18.2% -0.7% -9.3%

Consumer Staples 28.9% 2.4% (1.1) -22% 14.3% 0.2% 10.9% 0.0% 0.1% 17.1% 0.0% 1.0%

Energy 15.7% 1.2% (0.7) 34% 3.3% 3.9% 12.7% 0.0% 5.1% 18.1% -0.1% 3.3%

Financials 10.9% 6.2% (1.6) 241% 6.7% -1.0% 2.0% 0.0% -16.1% 47.1% -3.0% 15.0%

Health Care 12.2% 2.0% (1.7) 35% 9.5% 1.7% -27.1% 0.0% -7.2% 21.5% 0.1% -7.6%

Industrials 14.1% 1.4% 0.0 65% 7.6% 2.2% 25.8% 0.0% 7.5% 16.0% -0.5% -3.6%

Technology 24.6% -0.8% 0.0 59% 6.1% 1.9% 2.8% 0.0% 1.6% 10.2% 2.8% 1.9%

Materials 13.1% 2.6% (0.6) -47% 19.0% 1.4% 40.0% 0.0% -0.3% 28.6% -0.3% -0.3%

Telecoms -0.8% -1.1% (1.4) 137% 4.6% -5.2% NM 0.0% -32.8% NM NM NM

Utilities 12.9% 1.4% (0.3) 98% 13.2% 0.9% 15.5% 0.0% -2.6% 15.1% -0.7% -2.8%


Exhibit 72: Sector ValuationsMSCI Sectors Trailing PE PE as SD

from AvgTrailing PB PB as SD from

AvgDiv Yield Div Yield as

SD fromAvg

Long TermImplied EPS

Growth

Long TermImplied Div

Growth

Value Assignedto FutureGrowth

Consumer Disc. 23.3 1.0 4.6 0.8 0.8% (1.3) 9.4% 18.9% 63.7%Consumer Staples 52.7 2.1 15.8 1.4 1.1% (1.0) 21.3% 14.9% 82.0%Energy 13.3 0.2 2.0 (0.3) 1.8% (0.2) -0.8% 9.5% 43.2%Financials 27.1 1.3 2.9 0.6 1.1% (0.8) -9.0% 15.2% 70.3%Health Care 31.8 0.3 3.4 (1.4) 0.7% (0.5) 10.6% 21.0% 76.6%Industrials 27.2 0.8 4.3 0.5 1.0% (0.7) 8.6% 16.5% 70.9%Technology 20.1 (0.4) 4.8 (0.3) 1.8% 1.1 5.4% 9.7% 52.4%Materials 22.1 0.6 2.4 0.3 1.7% (0.1) 9.8% 10.6% 65.6%Telecoms 143.8 3.9 1.7 (0.3) 1.3% (0.2) NM 13.3% 94.2%Utilities 13.8 0.2 1.7 (0.0) 2.8% 0.7 12.0% 5.0% 35.7%


Exhibit 73: Sector Market DynamicsMSCI Sectors Abs 3M perf Abs 12M

perfAbs YTD

perf5 Year CAGR

Perf200DMA

Deviation12M Beta 3M Change in

12M BetaInstitutionalOwnership

Sell Side Reco 3M change inSell Side Reco

Consumer Disc. -5% 2% -10% 11% -2% 0.9 92% 67% 56% 2%Consumer Staples 13% 15% 16% 12% 14% 0.6 65% 54% 46% 7%Energy 7% 21% 3% 11% 2% 1.2 122% 61% 63% 16%Financials 3% 9% 4% 13% 2% 1.1 105% 76% 59% 9%Health Care 7% -9% -4% 3% 2% 1.3 127% 66% 45% 4%Industrials -6% 3% -4% 13% -4% 1.1 110% 63% 59% 16%Technology 12% 34% 22% 14% 18% 0.6 63% 75% 33% 13%Materials -7% -4% -14% 13% -9% 1.2 120% 62% 62% 13%Telecoms -9% -19% -32% -6% -19% 1.0 96% 90% 32% 22%Utilities -7% 1% -14% 4% -8% 0.8 80% 70% 37% 9%Source: RIMES, MSCI, Bloomberg, Morgan Stanley Research

20

Sectors

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 bp) – RS

Exhibit 74: Total Institutional Sector Positions – Absolute and Relative over TimeConsumer Disc. Consumer Staples Energy Financials Healthcare

Industrials Materials Technology Telecoms Utilities

(800)

(600)

(400)

(200)

0

200

400

600

2%

4%

6%

8%

10%

12%

2001

2003

2005

2007

2009

2011

2013

2015

2017

(500)

(300)

(100)

100

300

500

700

900

1,100

0%4%8%

12%16%20%24%28%32%36%

2001

2003

2005

2007

2009

2011

2013

2015

2017

(700)(600)(500)(400)(300)(200)(100)0100200300

0%

5%

10%

15%

20%

25%

2001

2003

2005

2007

2009

2011

2013

2015

2017

(400)(200)02004006008001,0001,2001,4001,600

12%

16%

20%

24%

28%

32%

36%

40%

2001

2003

2005

2007

2009

2011

2013

2015

2017

(700)

(600)

(500)

(400)

(300)

(200)

(100)

0

100

2%

4%

6%

8%

10%

12%

2001

2003

2005

2007

2009

2011

2013

2015

2017

(400)(300)(200)(100)0100200300400500

0%

3%

6%

9%

12%

15%

18%

2001

2003

2005

2007

2009

2011

2013

2015

2017

(1,200)(1,000)(800)(600)(400)(200)02004006008001,000

4%

6%

8%

10%

12%

14%

2001

2003

2005

2007

2009

2011

2013

2015

2017

(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

(150)(100)(50)050100150200250300350

2%

3%

4%

5%

6%

7%

8%

2001

2003

2005

2007

2009

2011

2013

2015

2017

(1,200)(1,000)(800)(600)(400)(200)0200400600

5%

7%

9%

11%

13%

15%

17%

19%

2001

2003

2005

2007

2009

2011

2013

2015

2017

Source: MSCI, Morgan Stanley Research. Historical weights are adjusted for Reliance Ind and Tata Motors, which were earlier classified in Materials and Consumer Disc and later as Energy andIndustrials, respectively. Since Sept, MSCI reclassified Tata Motors to Consumer Discretionary from Industrials.

21

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Alternatively you may contact your investment representative or MorganStanley 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 theyhave not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: RidhamDesai; 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 atwww.morganstanley.com/institutional/research/conflictpolicies.Important US Regulatory Disclosures on Subject CompaniesThe following analyst or strategist (or a household member) owns securities (or related derivatives) in a company that he or she covers or recommends inMorgan Stanley Research: Ridham Desai - Edelweiss Financial Services Ltd.(common or preferred stock), Info Edge (India) Ltd.(common or preferred stock),Infosys Limited(common or preferred stock), ITC Ltd.(common or preferred stock), Kotak Mahindra Bank(common or preferred stock), Nestle India(common orpreferred stock), Tata Communications Ltd(common or preferred stock), Zee Entertainment Enterprise Limited(common or preferred stock); Sheela Rathi - Dr.Lal PathLabs Ltd(common or preferred stock), Edelweiss Financial Services Ltd.(common or preferred stock), Kotak Mahindra Bank(common or preferredstock).As of June 29, 2018, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies covered in MorganStanley Research: Ashok Leyland Ltd., Bharat Financial Inclusion Ltd, HDFC Bank, ICICI Bank, Indraprastha Gas Ltd., IndusInd Bank, Info Edge (India) Ltd.,JSW Steel Ltd., Petronet LNG, Shree Cement Ltd., Shriram City Union Finance Ltd, Zee Entertainment Enterprise Limited.Within the last 12 months, Morgan Stanley managed or co-managed a public offering (or 144A offering) of securities of Cyient Ltd, HDFC Standard LifeInsurance Company Ltd, PNB Housing Finance Ltd, Reliance Industries, Tata Consultancy Services, Tata Motors.Within the last 12 months, Morgan Stanley has received compensation for investment banking services from HDFC Standard Life Insurance Company Ltd,Hindalco Industries, IndusInd Bank, Reliance Industries, Tata Motors.In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from ACC Ltd., Adani Ports andSpecial Economic Zone, Ambuja Cements Ltd., Bajaj Auto Ltd., Cadila Healthcare Ltd., Dabur India, Dr. Reddy's Lab, Future Retail, Godrej ConsumerProducts Limited, HDFC Bank, HDFC Standard Life Insurance Company Ltd, Hexaware Technologies Limited, Hindalco Industries, ICICI Bank, Indian Oil Corp,IndusInd Bank, Infosys Limited, ITC Ltd., Jindal Steel & Power, JSW Steel Ltd., Kotak Mahindra Bank, LIC Housing Finance Ltd., Mahindra & Mahindra,Mahindra and Mahindra Financial Services, Mindtree Ltd., MphasiS Limited, Oil & Natural Gas Corp., PNB Housing Finance Ltd, Reliance Industries, ShriramCity Union Finance Ltd, Shriram Transport Finance Co. Ltd., Tata Consultancy Services, Tata Motors, Titan Company Ltd, UPL Ltd, Vedanta, Vedanta Ltd,Wipro Ltd., Yes Bank, Zee Entertainment Enterprise Limited.Within the last 12 months, Morgan Stanley has received compensation for products and services other than investment banking services from BharatPetroleum Corp., Edelweiss Financial Services Ltd., HDFC Bank, HDFC Standard Life Insurance Company Ltd, Hindalco Industries, ICICI Bank, IDFC Bank,IndusInd Bank, Info Edge (India) Ltd., Kotak Mahindra Bank, Reliance Industries, Tata Motors, Vedanta, Vedanta Ltd, Yes Bank.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: ACC Ltd., Adani Ports and Special Economic Zone, Ambuja Cements Ltd., Bajaj Auto Ltd., Cadila Healthcare Ltd., Cyient Ltd, DaburIndia, Dr. Reddy's Lab, Future Retail, Godrej Consumer Products Limited, HDFC Bank, HDFC Standard Life Insurance Company Ltd, Hexaware TechnologiesLimited, Hindalco Industries, ICICI Bank, Indian Oil Corp, IndusInd Bank, Infosys Limited, ITC Ltd., Jindal Steel & Power, JSW Steel Ltd., Kotak MahindraBank, LIC Housing Finance Ltd., Mahindra & Mahindra, Mahindra and Mahindra Financial Services, Mindtree Ltd., MphasiS Limited, Oil & Natural Gas Corp.,PNB Housing Finance Ltd, Reliance Industries, Shriram City Union Finance Ltd, Shriram Transport Finance Co. Ltd., Tata Consultancy Services, Tata Motors,Titan Company Ltd, UPL Ltd, Vedanta, Vedanta Ltd, Wipro Ltd., Yes Bank, Zee Entertainment Enterprise Limited.Within the last 12 months, Morgan Stanley has either provided or is providing non-investment banking, securities-related services to and/or in the past hasentered into an agreement to provide services or has a client relationship with the following company: Bharat Petroleum Corp., Edelweiss Financial ServicesLtd., HDFC Bank, HDFC Standard Life Insurance Company Ltd, Hindalco Industries, ICICI Bank, IDFC Bank, Indiabulls Housing Finance, Indian Oil Corp,IndusInd Bank, Info Edge (India) Ltd., Kotak Mahindra Bank, Reliance Industries, Tata Motors, Vedanta, Vedanta Ltd, Yes Bank.Morgan Stanley & Co. LLC makes a market in the securities of Dr. Reddy's Lab, HDFC Bank, ICICI Bank, Infosys Limited, Tata Motors, Wipro Ltd..Morgan Stanley & Co. International plc is a corporate broker to Vedanta.The equity research analysts or strategists principally responsible for the preparation of Morgan Stanley Research have received compensation based uponvarious factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment bankingrevenues. 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, providingliquidity, fund management, commercial banking, extension of credit, investment services and investment banking. Morgan Stanley sells to and buys from

22

customers the securities/instruments of companies covered in Morgan Stanley Research on a principal basis. Morgan Stanley may have a position in the debtof the Company or instruments discussed in this report. Morgan Stanley trades or may trade as principal in the debt securities (or in related derivatives) thatare 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). MorganStanley 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 ofbuy, hold and sell. Investors should carefully read the definitions of all ratings used in Morgan Stanley Research. In addition, since Morgan Stanley Researchcontains more complete information concerning the analyst's views, investors should carefully read Morgan Stanley Research, in its entirety, and not infer thecontents from the rating alone. In any case, ratings (or research) should not be used or relied upon as investment advice. An investor's decision to buy or sell astock should depend on individual circumstances (such as the investor's existing holdings) and other considerations.Global Stock Ratings Distribution(as of June 30, 2018)The Stock Ratings described below apply to Morgan Stanley's Fundamental Equity Research and do not apply to Debt Research produced by the Firm.For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside ourratings of Overweight, Equal-weight, Not-Rated and Underweight. 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 but represent recommended relative weightings (seedefinitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspondEqual-weight and Not-Rated to hold and Underweight to sell recommendations, respectively.

COVERAGE UNIVERSE INVESTMENT BANKING CLIENTS (IBC) OTHER MATERIALINVESTMENT SERVICES

CLIENTS (MISC)STOCK RATINGCATEGORY

COUNT % OFTOTAL

COUNT % OFTOTAL IBC

% OFRATING

CATEGORY

COUNT % OFTOTAL

OTHERMISC

Overweight/Buy 1170 38% 292 39% 25% 550 39%Equal-weight/Hold 1343 43% 363 49% 27% 645 46%Not-Rated/Hold 50 2% 5 1% 10% 7 0%Underweight/Sell 544 18% 81 11% 15% 211 15%TOTAL 3,107 741 1413

Data include common stock and ADRs currently assigned ratings. Investment Banking Clients are companies from whom Morgan Stanley received investmentbanking compensation in the last 12 months. Due to rounding off of decimals, the percentages provided in the "% of total" column may not add up to exactly100 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 arisk-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'sindustry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 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 arisk-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 broadmarket 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 marketbenchmark, 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 marketbenchmark, 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 MSCI sub-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 BarneyLLC or Morgan Stanley or any of their affiliates, are available on the Morgan Stanley Wealth Management disclosure website atwww.morganstanley.com/online/researchdisclosures. For Morgan Stanley specific disclosures, you may refer towww.morganstanley.com/researchdisclosures.Each Morgan Stanley Equity Research report is reviewed and approved on behalf of Morgan Stanley Smith Barney LLC. This review and approval is conductedby the same person who reviews the Equity Research report on behalf of Morgan Stanley. This could create a conflict of interest.Other Important DisclosuresMorgan Stanley & Co. International PLC and its affiliates have a significant financial interest in the debt securities of Bharat Petroleum Corp., ICICI Bank,Indian Oil Corp, JSW Steel Ltd., LIC Housing Finance Ltd., Reliance Industries, Vedanta.A member of Research who had or could have had access to the research prior to completion owns securities (or related derivatives) in the Vedanta Ltd. This

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