India politicsMarket strategy

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Mahesh Nandurkar, CFAmahesh.nandurkar@clsa.com+91 22 6650 5079

Abhinav Sinha+91 22 6650 5069

Rohit Kadam+91 22 6650 5037

12 May 2014

IndiaMarket Strategy

www.clsa.com

Exit polls predict a Modi winAll the 5 exit polls indicate the BJP lead National Democratic Alliance (NDA) will emerge victorious in the elections by winning estimated 249-289 seats. We believe that even the lower-end number of 249 is in line with the market expectations. The exit polls indicate that NDA will be able to form the next Government without much trouble and will leave enough flexibility with Mr Modi to pursue his growth policies. As highlighted in our earlier note, what to do on the 16th May, we reiterate that exit poll results are subject to errors. A potential strong Government will be a positive for investment plays viz. ICICI Bank, Axis, SBI, L&T, Ultratech and Maruti. The next Government, however, will have the difficult task of managing inflation, fiscal deficit and a weak monsoon which might keep the market in a consolidation phase in the short term immediately after the election results.

Exit polls predict a near NDA majorityq The exit polls released post market close on 12th May, show BJP led NDA achieving

near majority with a mid-point of 269 seats (range 249-289), close to the 272 majority mark.

q News24-Today's Chanakya Exit Poll has predicted NDA gaining 340 seats (BJP 291), however we haven’t included this in the above average calculation.

q BJP on its own is expected to show its strongest performance yet, with 200+ seats.q The ruling Congress led UPA is expected to achieve an average 123 seats. Debutant

AAP will likely have a single digit tally.q The above raises the possibility of a strong and stable government at the centre

with Modi as Prime Minister.

Even the lower end meets market expectationsq Even at lower end of the exit polls NDA is projected to achieve 249 seats. This is

still in-line with current market expectations and should be enough for the NDA to form the government.

q Opinion polls predict non-NDA Andhra parties viz. TRS and YSR to win c.20+ seats in the elections. Their support to the NDA is likely as both the newly formed states in which the two parties are dominant vie for central government aid.

q Additionally, other independent candidates / single seat parties (~10 seats) will also likely join with the largest group.

Exit polls not a final wordq Strong exit polls notwithstanding, we reiterate that ‘exit polls’ are not the final word

on the elections. In 2009, the exit polls had moved farther way away from the actual results vis-à-vis opinion polls.

q With the market having already run up 5% in the last two trading sessions on rising expectations of stable government, we believe this reduces the possibility of a large market pop on the upside.

Strong and stable Government would be a positive for investment cycle playsq National Democratic Alliance (NDA) led by the BJP winning 260 seats or more will

be a potential positive for investment cycle stocks. Our research team believes that ICICI, Axis, SBI, L&T, Ultratech, Sesa and Maruti will have a 30%+ upside from a 12-m view in a favourable election outcome scenario.

q We note that a potentially strong new government would still have to deal with issues like potentially weak monsoon, inherited fiscal burden of 65-70bps of GDP (advanced PSU dividends, food bill etc) and persistently high inflation. These issues may cause the market to consolidate until earnings upgrade cycle starts from Sep’14 onwards.

Exit polls predict a Modi win India politics

12 May 2014 mahesh.nandurkar@clsa.com 2

Results of the exit polls for 2014 - BJPFigure 1

Exit Polls summary (projected seats)

2009 (actual) Opinion polls Exit polls range Exit polls average

NDA 159 240-275 249-289 269

UPA 262 111-117 97-148 123

Others 122 151-192 146-170 158

Source: CLSA, ABP news, CNN IBN, Times Now, C Voter, Aaj Tak, India Today; News24-Today's Chanakya Exit Poll predicts 340 for the NDA(excluded from the above)

Figure 2

Individual Exit poll wise summary (projected seats)

C Voter ORG - Times Now

Aaj Tak/ India Today -Cicero

CNN-IBN CSDS ABP-Nielsen Polls Average

NDA 289 249 272 276 281 269

UPA 101 148 115 97 97 123

Others 153 146 156 170 165 158Source: CLSA, ABP news, CNN IBN, Times Now, C Voter, Aaj Tak, India Today; News24-Today's Chanakya Exit Poll predicts 340 for the NDA

Exit polls versus actual results in 2009Figure 3

2009 National elections: Exit polls vs opinion polls vs actual seats

Source: CLSA, Various media

216

195

262

187178

159

125

145

165

185

205

225

245

265

285

UPAOpinion polls

UPAExit polls

UPAActual

NDAOpinion polls

NDAExit polls

NDAActual

Exit polls were actually more off-

the mark than opinion polls

Exit polls actually suggested lower seats for

UPA than opinion polls, getting the trend wrong!

Markets declined 1.3% following release of exit

polls in 2009

Exit polls predict a Modi win India politics

12 May 2014 mahesh.nandurkar@clsa.com 3

Stock targets under election scenariosFigure 4

Stock upside / downside under various election outcomes

Stock CMP (Rs) Scenario 1: Strong and

decisive govt

Upside / (downside)

(%)

Scenario 2: Weak and unstable

coalition

Upside / (downside)

(%)

Axis 1,646 2,250 37 1,410 (14)

Bharti 318 400 26 370 16

HDFC 893 1,070 20 830 (7)

HDFC Bank 792 910 15 690 (13)

ICICI Bank 1,399 1,800 29 1,230 (12)

ITC 359 404 13 404 13

L&T 1,387 1,700 23 1,200 (13)

M&M 1,130 1,335 18 1,080 (4)

Maruti 2,051 2,750 34 2,020 (2)

NTPC 121 150 24 118 (3)

RIL 1,029 1,250 21 1,100 7

Sesa Sterlite 190 250 32 170 (10)

SBI 2,244 3,100 38 1,730 (23)

Sun Pharma 613 582 (5) 750 22

Tata Motors 445 468 5 450 1

Tata Steel 420 360 (14) 285 (32)

Ultratech 2,158 2,850 32 1,800 (17)

Source: CLSA

Markets at average valuationsFigure 5

Sensex earnings growth and PE chart

Source: CLSA

0

5

10

15

20

25

30

(15)(10)(5)05

10152025303540 (x)% Earnings Growth (LHS) P/E (RHS)

Sensex trading at below average PE

Exit polls predict a Modi win India politics

12 May 2014 mahesh.nandurkar@clsa.com 4

Figure 6

MSCI India PE vs MSCI EM PE

Source: CLSA, Bloomberg

Figure 7

Cyclical valuations vs. their historical average

Source: CLSA. Cyclical stocks: L&T, Maruti, M&M, BHEL, ICICI Bank, PNB, Hindalco, Thermax, Crompton, Ashok Leyland. * PE or PB as applicable.

0

10

20

30

40

50

60

70

80

Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13

% Premium MSCI India PE vs. MSCI EM PE

0

50

100

150

200

250

Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13

Discount of cyclical valuation to historical average

Periods of cyclicals sustaining premium

valuations

Indian relative valuations to EMs are at historical

average

Cyclicals trading near their historical valuations

Exit polls predict a Modi win India politics

12 May 2014 mahesh.nandurkar@clsa.com 5

Figure 8

CNN IBN CSDS - Exit poll summary for select states

Delhi (7) Vote Share (%) Seat share 2009 seats

Congress 17 0 7

BJP 45 5-7 0

AAP 31 0-2 0

Punjab (13) Vote Share (%) Seat share 2009 seats

Cong 29 3-5 8

BJP+SAD 40 6-9 5

AAP 21 1-3 0

Others 10 - 0

Uttarakhand (5) Vote share (%) Seat share 2009 seats

BJP 49 - 0

Congress 38 - 5

BSP 7 - 0

Others 6 - 0

Haryana (10) Vote share (%) Seat share 2009 seats

BJP 38 - 0

Congress 24 - 9

INLD 20 - 1

AAP 4 - 0

Others 14 - 0

Tamil Nadu (39) Vote share (%) Seat share 2009 seats

DMK+ 26 7-11 18

AIADMK 39 22-28 9

Congress 9 0 8

BJP+ 16 4-6 0

Others 10 - 4

Telangana (17) Vote share (%) Seat share 2009 seats

TRS 37 8-12 -

Cong 31 3-5 -

BJP+TDP 21 2-4 -

Seemandhara (25) Vote share (%) Seat share 2009 seats

Congress 7 0 -

BJP+TDP 43 11-15 -

YSRC 40 11-15 -

Others 10 -

Kerala (20 seats) Vote share (%) Seat share 2009 seats

UDF 45 11-14 16

LDF 40 6-9 4

BJP+ 10 0 0

AAP 3 0 0

Others 2 0 0

Karnataka (28) Vote share (%) Seat share 2009 seats

BJP 38 10-14 6

Congress 43 12-16 19

JDS 5 1-3 3

West Bengal (42) Vote share (%) Seat share 2009 seats

TMC 38 25-31 19

Left 24 7-11 15

Congress 13 2-4 6

BJP 15 1-3 1

Jharkhand (14) Vote share (%) Seat share 2009 seats

Exit polls predict a Modi win India politics

12 May 2014 mahesh.nandurkar@clsa.com 6

BJP 44 - 8

CONG+ 21 - 1

JVM 11 - 2

Others 24 - 3

UP (80) Vote share (%) Seat share 2009 seats

BJP+ 40 45-53 10

SP 24 13-17 23

BSP 21 10-14 20

Congress 10 3-5 26

Bihar (40) Vote share (%) Seat share 2009 seats

BJP+ 43 21-27 12

Congres+ 29 11-15 6

JDU 15 2-4 20

Others 13 - 2

Maharashtra (48) Vote share (%) Seat share 2009 seats

Congress+ 34 11-15 25

BJP+ 44 33-37 20

MNS 3 - -

AAP 3 - -

Gujarat (26) Vote share (%) Seat share 2009 seats

BJP 53 21-25 15

Congress 35 1-5 11

Others 21 - -

Rajasthan (25) Vote share (%) Seat share 2009 seats

BJP 50 22-24 4

Congress 34 1-3 20

Madhya Pradesh (29) Vote share (%) Seat share 2009 seats

BJP 50 24-28 15

Congress 34 1-5 12Source: CLSA, CNN IBN CSDS voter survey

Exit polls predict a Modi win India politics

12 May 2014 mahesh.nandurkar@clsa.com 7

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