EquityMarketOutlook

VetriSubramaniam,
ChiefInvestmentOfficer
December2015

EquityMarketOutlook
Indias economic indicators are exhibiting mixed outcomes
The investment cycle trends have weakened
Indias twin deficit Fiscal Deficit and Current account deficit are exhibiting stable trends
Inflation Supportive of the RBIs accommodative stance
Indias earnings cycle continues to be weak with hope of recovery in FY17
While visibility of earnings recovery is poor, high degree of operating and financial leverage
provide scope for disproportionate uptick in earnings
Valuations are at 8% premium to the long term average. It is within our comfort zone (+ or
10% of the long term average)

IndiaMacro MixedBag

12%

60

10%

58

8%

56

6%

54

4%

52

2%

50
49.1
48

0%
2%
4%

3.20%

6%
06/11

ManufacturingPMI

IIPGrowth

IIPGrowth(%)andPMI

46
44

10/11

02/12

ManufacturingPMI

05/12

09/12

12/12

04/13

07/13

11/13

02/14

06/14

09/14

01/15

05/15

08/15

12/15

IIP

India'sIndexofIndustrialProduction(IIP)growthwasrecordedat3.2%inNov15,afterhitting
a60monthhighof9.8%inOct15
India'sDecembermanufacturingPMIdippedbelow50forthefirsttimeinovertwoyears,
cominginat49.1versus50.3inNovember,asbothoutputandneworderflowscontracted.

Source:Bloomberg.

IndiaLeadIndicators MixedBag
RailwayFreightGrowth

ExportGrowth

15%

80%

10%

60%

5%

40%

0%

20%

5%

0%
20%

10%

24.43%

10.37%

CommercialVehiclesSalesGrowth

CreditGrowth

80%

30%

60%

25%

40%

20%

20%

15%

Nov15

Jul15

Mar15

Jul14

Nov14

Mar14

Nov13

Jul13

Mar13

Nov12

Jul12

Nov11

Mar12

Nov15

Jul15

Mar15

Nov14

Jul14

Mar14

Nov13

Jul13

Mar13

Nov12

Jul12

Mar12

Nov11

Jul11

Mar11

Jul10

9.79%

Nov10

Nov15

Jul15

Mar15

Jul14

Nov14

Mar14

Nov13

Jul13

Mar13

Nov12

Jul12

Mar12

Nov11

Jul11

Mar11

0%
Nov10

40%
Jul10

5%
Apr10

20%

Jul11

10%

Apr10

7.03%

0%

Mar11

Nov10

Jul10

Nov15

Jul15

Mar15

Nov14

Jul14

Mar14

Nov13

Jul13

Mar13

Nov12

Jul12

Mar12

Nov11

Jul11

Mar11

Nov10

Jul10

Apr10

15%

Apr10

40%

Commercial Vehicles Sales Growth, Passenger Vehicles growth and petroleum products consumption growth have recovered
and report healthy trends whereas all other parameters like Railway Freight Growth, Export Growth, Credit and Deposit Growth,
2 wheeler growth continue to report weakness

4 Source:Kotak

IndiaInvestmentCycle Weaknesspost
initialrebound
QuarterlyNewProjectannouncements(Rsbn) fallfromearlierrebound

Projectsunderimplementationbutstalledas%oftotalO/SProjects

After initial rebound in first 2 quarters of FY16 new projects announcement fell sharply by 74%
YoY and 65% qoq in 3q16
For 9 months FY16, new project announcement is down 34% YoY
Projects under implementation but stalled also continue to inch up by 11% YoY and 3% qoq.

Source:CMIE,Citi

India TwinDeficit Broadlystable

CurrentAccountDeficit
0%

FiscalDeficit(12MTrailingSum%ofGDP)

1%

1.12%

2%
3%
4%
5%
Sep15

Jun15

Mar15

Dec14

Sep14

Jun14

Mar14

Dec13

Sep13

Jun13

Mar13

Dec12

Sep12

Jun12

Mar12

6%

FiscalDeficitincreased46.4%inNov15vsadeclineof11.5%inOct15.
Onatrailing12monthbasisfiscaldeficitincreasedto3.5%ofGDPvs3.3%inOct2015
trackingbelowthetargetof3.9%
Whilefiscaldeficitiscurrentlytrackingthetarget,theremightbea4th quarterchallengedue
tofallinNominalGDPandfailuretomeetdivestmenttargets
Currentaccountdeficitat1.12%ofGDPremainsincomfortzone.

Source:Bloomberg.ControllerGeneralofAccounts(GovernmentofIndia),MorganStanleyResearch

Inflationtrendssupportaccommodative
policy
RepoRate

CPI

9.00%

12%
11%

8.50%

10%
9%

8.00%

8%
7%

7.50%

6%
5.41%

5%

7.00%
6.75%
6.50%

4%

CurrentCPIofaround5%remainscomfortable
IndiamayachieveitsCPItargetof4%earlierthantargetedduetocommoditytailwinds
Currentdemand,Inflation interestratedynamicsoffersomescopeformonetaryeasing

Source:Bloomberg

Nov15

Aug15

May15

Feb15

Nov14

Aug14

May14

Feb14

Nov13

Aug13

May13

Feb13

Nov12

Aug12

May12

Jan12

Nov15

Aug15

May15

Feb15

Nov14

Aug14

May14

Feb14

Nov13

Aug13

May13

Feb13

Nov12

Aug12

May12

Jan12

3%

EarningsSeason Neartermweakbut
hopesofaRevival
Niftyearninggrowthandexpectation

Niftyearningexpectation
20%

60%

18%

50%
40%

15%

30%
20%
10%

10%

0%

9%

10%
20%

5%

30%
1q11
2q11
3q11
4q11
1q12
2q12
3q12
4q12
1q13
2q13
3q13
4q13
1q14
2q14
3q14
4q14
1q15
2q15
3q15
4q15
1q16
2q16
3q16E

40%
0%
FY16E

FY17E

Consensusgrowthexpectationof3Q16Eearningsis2%implyingaweakearningsseasonforthe
upcomingquarter
Howeverconsensusisexpectingastronggrowthrevivalfrom4Q16EonwardsimplyingFY17EEPS
growthof18%
GrowthexpectationforFY17mightbeatariskconsideringthecurrenttrends

Source:Bloomberg.

Earnings LeversforRecovery

FinancialLeverage

CapacityUtilisationvs EBITDAMargintrends
17

79

16.48
15.77

16
15

77.90
15.43

78

77.00

77

77.68

14

14.09

13.19

13.05

13.24

13
73.93

12

73.50

11
72.15

10

22%

75

20%

16%

72

14%
12%

70

10%

69
FY10

FY11

EBITDAMargins(RHS)

FY12

FY13

FY14

6%

6%

5%

7.50%
7.00%
6.50%
6.00%

23%

5.50%

21%

18%

73

26%
7%

24%

71

FY09

7%

26%

76

74

74.50

28%

5%

5.00%
18%

4.50%

13%

4.00%

13%

3.50%
3.00%

2010

FY15

CU(LHS)

2011

2012

2013

2014

2015

InterestExp/EBIT(LHS)
CostofBorrowing(InterestExpense/AvgBorrowings)(RHS)

Whilecurrentearningcycleisweak,thereareleverstoearningsrecovery
IndiasIncorporationscapacityutilisation isa6yearlow
ResultantlyEBITDAmarginsare 120bpslowerthanaverageduringtheperiodFY09 FY15
InterestexpenseinFY15forms26%ofEBITascomparedto13%in2010representingsignificant
financialleverage
Anycyclicaluptickindemandshouldresultintomorethanproportionateuptickinearningsdue
tooperatingandfinancialleverage
9

Source:RBI,IIFL,Capitaline,ReligareInvescoAMCResearch

EarningsROEssubdued

NiftyROE
30

25

20

15
13
10

Dec15

Oct14

Aug13

Jun12

May11

Mar10

Jan09

Nov07

Oct06

Aug05

Jun04

Apr03

Mar02

Jan01

CurrentROEsofNiftycompaniesareata15yearlowand500bpsbelowlongterm
average

10 Source:ReligareInvescoAMCResearch,Bloomberg,Dataason31st December2015.

Valuations PremiumtoLongtermAverage

SensexPERatio(trailingtwelvemonths)
30

25
21.69x
20

AveragesinceJan95:16.3x
17.6x

15

10

Jan95
Jul95
Jan96
Jul96
Jan97
Jul97
Jan98
Jul98
Jan99
Jul99
Jan00
Jul00
Jan01
Jul01
Jan02
Jul02
Jan03
Jul03
Jan04
Jul04
Jan05
Jul05
Jan06
Jul06
Jan07
Jul07
Jan08
Jul08
Jan09
Jul09
Jan10
Jul10
Jan11
Jul11
Jan12
Jul12
Jan13
Jul13
Jan14
Jul14
Jan15
Jul15
Jan16

Recentpricecorrectionhasresultedintomeaningfulvaluationcorrectiondespiteweak
earnings
Sensexnowtradesata8%premiumtoitslongtermtrailing12monthsaverageP/Emultiple
ascomparedto22%premiuminMarch2015
11 Source:MOSL,ReligareInvescoAMCResearch,Bloomberg,Dataason8th January2016

RelativevaluationofMidcaps

ValuationofMidcapv/sLargeCaps(trailingtwelvemonths)
40%
28%

(Discount)/Premium

20%

0%
9YearsAverage:15%

20%

40%

60%

Jan06
Apr06
Jul06
Oct06
Jan07
May07
Aug07
Nov07
Feb08
Jun08
Sep08
Dec08
Mar09
Jun09
Oct09
Jan10
Apr10
Jul10
Nov10
Feb11
May11
Aug11
Nov11
Mar12
Jun12
Sep12
Dec12
Apr13
Jul13
Oct13
Jan14
Apr14
Aug14
Nov14
Feb15
May15
Aug15
Dec15

80%

MidcapIndexvaluationiscurrentlyata28%premiumtoitslargecappeer(Nifty),as
comparedtoalongperiodaverageof15%discount

12 Source:ReligareInvescoAMCResearch,Bloomberg,Dataason31st December2015.

MarketOutlook

13

In India macroeconomic parameters like current account deficit, fiscal deficit and inflation
are in the comfort zone
Local demand indicators are mixed while global growth is a dampener
The investment cycle is recovering slower than earlier expectations, but the process of de
leveraging by companies is now clearly underway
The Sensex is now trading at a P/E of 17.6x trailing twelve months EPS; an 8% premium to
long term average (as of January 8, 2016). It has corrected significantly from early 2015
when it was a premium of nearly 30% to the long term average in. It is within our valuation
comfort zone (+ or 10% of long period average)
Earnings growth still remains weak but both operating leverage and financial leverage will
kick in and support faster profit growth when economic trajectory strengthens
Sectors such as financials, consumer discretionary and industrials will benefit from cyclical
recovery in growth. Based on valuations we prefer consumer discretionary and Financials
over Industrials
We have added exposures to utilities and global cyclicals due to attractive valuations
We favour a pro cyclical stance to benefit from a recovery in the economic cycle. But our
portfolio strategy is focused on bottom up stock picking

Disclaimer: This presentation is for information purposes only and is not an offer to sell or a solicitation to buy any mutual fund units/securities. The
information alone is not sufficient and shouldnt be used for the development or implementation of an investment strategy. It should not be
construed as investment advice to any party. All opinions, figures, charts/graphs and data included in this presentation are as on date and are subject
to change without notice. The sectors referred in this presentation are for illustrative purposes only and should not be construed as
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Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

14

MKTG / RoundupEquity/1215/ C03177

Disclaimer

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