unraveling mysteries of the markets

Sample Text

Vinay KhattarHead-Research,

Edelweiss (RCM), Mumbai

UNRAVELING THE OPPORTUNITIES IN CURRENT MARKETS

July 14, 2012

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Sample Text• Why the markets are where they are • Where are they headed • What’s in it for you

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The markets have gone no where in the past 5 years

Markets over the past 5 years

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In Jan 2008, Sensex crossed 21,0005


2009 smart recovery, but 4 years later the Sensex is still at 17,0006

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So why are the markets where they are?

#1 Global Economic Issues

3 Reasons why markets are flat

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1. Global Economic Issues

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Euro Crisis


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Euro Crisis: PIGS countries most affected


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Euro Crisis

Mounting Debts: Excessive spending over income over the years has led to large amounts of debt


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Euro Crisis

Fear of Defaults: Debt repaying abilities of the countries has considerably weakened, thus leading to fear of defaults and consequent stress to the world monetary system

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Euro Crisis

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What went wrong with Greece

Greece – What went wrong

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High Government Expenditure: Generous commitments to government workers (increased pay, pensions, early retirement)

Sharp recession & incomes shrink: Financial collapse of 2007-08 and global recession hurt Greece’s 2 major industries – shipping and tourism, leading to a sharp recession and resultant decline in income


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Inability to roll over debt: Greece could not roll over its debt in the crisis aftermath and that’s when its own crisis started.

S&P downgraded it’s debt to junk status, worsening matters


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US: Post Sub-prime Crisis


US: Post Sub-prime Crisis

Recovery has ensued at a moderate pace

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Global Economic Issues & India

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Impact on India


Impact on India

India is a consumer of foreign capital

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Impact on India

In times of global stress, India gets lesser inflows of global capital

FII and FDI flows dry up

Result: the Rupee loses value

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Reasons why markets are flat

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#2 Slowdown in Domestic Growth

2. Slowdown in domestic growth

Rise in inflation post 2009 and…

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Inflation Rate (%)

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This led to RBI hiking rates by 3.75% points from 4.75% to 8.5%


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Interest rates (Repo %)

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This led to RBI hiking rates by 3.75% points from 4.75% to 8.5%


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Delay in government approvals has resulted in many projects running behind schedule


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Projects running behind schedule (%)

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GDP growth slowed down from over 8% to below 6%


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GDP growth slowed down from over 8% to below 6%


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#3 Rupee depreciates to new low

Reasons why markets are flat

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Rupee depreciates to new low

Rising gold and oil imports at a time when exports are slowing drives up the current account deficit

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India’s current account deficit has risen sharply to 4% of GDP in FY12, up from 1.3% in FY08

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India’s current account deficit has risen sharply to 4% of GDP in FY12, up from 1.3% in FY08

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The global crisis led by the sub prime collapse in the US spurred our government to administer a strong spending stimulus to boost the economy

High deficit due to large subsidies


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What is pulling down the Rupee?

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Rising Twin deficits – Current account and Fiscal account lead to large demand for capital

In current times, where risk aversion has set in globally, it is resulting in Rupee depreciation

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Rupee / US Dollar 1 year

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Lessons from History

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History repeats itself: Are there lessons to be learnt?


Macro Indicators FY92 FY01 FY09 FY12

GDP growth 1.4 4.3 6.8 6.3

Fiscal deficit (% GDP) 5.6 5.7 6 5.8

Inflation (YoY %) 13.8 7.1 8.4 8.6

Import cover in mnts 5.3 8.8 9.8 8.2

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BOP crisis in 1991 - CAGR of 48%


GDP growth 1.4 4.3 6.8 6.3


Inflation (YoY %) 13.8 7.1 8.4 8.6


Market Performance FY92 FY01 FY09 FY12

Sensex level 1168 2962 9650 17000

Sensex Level after 3 years 3800 5590 17000 Time to buy?

Returns (%) over 3years 225% 89% 76% Time to buy?

Annualized returns (%) 48% 24% 21% Time to buy?

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Dot com bust in 2001 - CAGR of 24%


GDP growth 1.4 4.3 6.8 6.3


Inflation (YoY %) 13.8 7.1 8.4 8.6


Market Performance FY92 FY01 FY09 FY12

Sensex level 1168 2962 9650 17000





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US subprime crisis in 2008 - CAGR of over 21%


GDP growth 1.4 4.3 6.8 6.3


Inflation (YoY %) 13.8 7.1 8.4 8.6



Sensex level 1168 2962 9650 17000





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Despite setbacks, India’s nominal GDP has grown at a nominal rate of over 13% over the past 3 decades


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India’s long term prospects remain intact

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Silver Lining To The Dark Clouds: What’s going right for India?

Silver Lining To The Dark Clouds

A young and growing population – high potential for a large amount of consumption

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An underdeveloped infrastructure – means high investment spend on way

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High Consumption + High Investment = Higher Growth

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Current Account Deficit can ease with decline in international crude prices, bringing the fiscal deficit lower 51

Silver Lining To The Dark CloudsBrent Crude Oil Prices (US $)

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Growth momentum restored: Expect RBI to cut interest rates by another 1% point

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Attractive valuations: Price to Earnings

Sensex Price to Earnings Ratio

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Sensex now trades at a PE of 13.6x FY13E earnings

Well below long-term average of 15.5x53

Edelweiss Market View

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Markets may remain flat in the near term; however, we expect the markets to head higher in the long term…

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Flat markets in the past 5 years have delivered stars…Imagine what will happen when they move higher!

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Let’s have a look at these stars from the past 5 years

#1 TTK Prestige

The stock has multiplied by over 30 times during the past 5 years57

#1 TTK Prestige

An annualised return of 97%. From Rs. 100 to Rs. 3,000/share!!58

#2 Page Industries

The stock has multiplied by over 8 times during the past 5 years!59

#2 Page Industries

Annualised returns of 50%. From Rs. 400 to Rs. 3,000/share60

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Not just mid-caps but even large caps have delivered stellar returns…

#1 Asian Paints

The stock has multiplied by over 5 times over the past 5 years62

#1 Asian Paints

An annualised return of 38%. From Rs. 800 to Rs. 4,000/share!63

#2 Bajaj Auto

The stock has multiplied by over 6 times during the past 5 years64

#2 Bajaj Auto

Annualised returns of 45%. From Rs. 250 to Rs. 1,600 per share65

Even flat markets have delivered stars…

Given sound long-term prospects for India, invest today to catch tomorrow’s stars!

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Stocks you could buy

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Stock #1: YES Bank

Strong asset quality, strong growth momentum, superior return ratios, reasonable valuations

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Stock #2: Larsen & Toubro

India’s largest infrastructure contractor, will be the key beneficiary of India’s infra spend

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Stock #3: Maruti Suzuki

India’s largest auto maker, will be the key beneficiary of India’s burgeoning middle class incomes

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Stock #4: Kajaria Ceramics

India’s leading ceramic company… Set to benefit from large spend on home renovation and new housing construction

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Stock #5: Solar Industries

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India’s largest explosive company, set to benefit from rising mining operations, expanding presence abroad further strengthens growth outlook

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unraveling mysteries of the markets

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