Unraveling Mysteries Of The Markets

Sample Text

Vinay KhattarHead-Research,

Edelweiss (RCM), Mumbai

UNRAVELING THE OPPORTUNITIES IN CURRENT MARKETS

July 14, 2012

1

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

2

3

The markets have gone no where in the past 5 years

Markets over the past 5 years

4

Markets over the past 5 years

In Jan 2008, Sensex crossed 21,0005

Markets over the past 5 years

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

7

So why are the markets where they are?

#1 Global Economic Issues

3 Reasons why markets are flat

8

1. Global Economic Issues

9

Euro Crisis

1. Global Economic Issues

10

Euro Crisis: PIGS countries most affected

1. Global Economic Issues

11

Euro Crisis

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

1. Global Economic Issues

12

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

13

Euro Crisis

13

What went wrong with Greece

Greece – What went wrong

14

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

Greece – What went wrong

15

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

Greece – What went wrong

16

Greece – What went wrong

17

Greece – What went wrong

18

Greece – What went wrong

19

Greece – What went wrong

20

1. Global Economic Issues

21

US: Post Sub-prime Crisis

1. Global Economic Issues

US: Post Sub-prime Crisis

Recovery has ensued at a moderate pace

22

Global Economic Issues & India

23

Impact on India

Global Economic Issues & India

Impact on India

India is a consumer of foreign capital

24

Global Economic Issues & India

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

25

Reasons why markets are flat

26

#2 Slowdown in Domestic Growth

2. Slowdown in domestic growth

Rise in inflation post 2009 and…

27

Inflation Rate (%)

-2

0

2

4

6

8

10

12

Ap

r-0

9

Jun

-09

Au

g-0

9

Oc

t-0

9

De

c-0

9

Fe

b-1

0

Ap

r-1

0

Jun

-10

Au

g-1

0

Oc

t-1

0

De

c-1

0

Fe

b-1

1

Ap

r-1

1

Jun

-11

Au

g-1

1

Oc

t-1

1

De

c-1

1

Fe

b-1

2

Ap

r-1

2

-2

0

2

4

6

8

10

12

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

2. Slowdown in domestic growth

28

Interest rates (Repo %)

0123456789

Ap

r-0

9

Jun

-09

Au

g-0

9

Oct

-09

De

c-0

9

Feb

-10

Ap

r-1

0

Jun

-10

Au

g-1

0

Oct

-10

De

c-1

0

Feb

-11

Ap

r-1

1

Jun

-11

Au

g-1

1

Oct

-11

De

c-1

1

Feb

-12

Ap

r-1

2

0123456789

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

2. Slowdown in domestic growth

29

Interest rates (Repo %)

0123456789

Ap

r-0

9

Jun

-09

Au

g-0

9

Oct

-09

De

c-0

9

Feb

-10

Ap

r-1

0

Jun

-10

Au

g-1

0

Oct

-10

De

c-1

0

Feb

-11

Ap

r-1

1

Jun

-11

Au

g-1

1

Oct

-11

De

c-1

1

Feb

-12

Ap

r-1

2

0123456789

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

2. Slowdown in domestic growth

30

Projects running behind schedule (%)

0%

10%

20%

30%

40%

50%

60%

70%

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

0%

10%

20%

30%

40%

50%

60%

70%

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

2. Slowdown in domestic growth

31

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

2. Slowdown in domestic growth

32

#3 Rupee depreciates to new low

Reasons why markets are flat

33

Rupee depreciates to new low

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

34

Rupee depreciates to new low

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

35

Rupee depreciates to new low

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

36

Rupee depreciates to new low

37

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

Rupee depreciates to new low

38

What is pulling down the Rupee?

39

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

39

Rupee / US Dollar 1 year

40

45

50

55

60

13

-Ju

n-1

1

13

-Ju

l-1

1

13

-Au

g-1

1

13

-Se

p-1

1

13

-Oct

-11

13

-No

v-1

1

13

-De

c-1

1

13

-Jan

-12

13

-Fe

b-1

2

13

-Mar

-12

13

-Ap

r-1

2

13

-May

-12

13

-Ju

n-1

2 40

45

50

55

60

Lessons from History

40

History repeats itself: Are there lessons to be learnt?

Lessons from History

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

41

Lessons from History

BOP crisis in 1991 - CAGR of 48%

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

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?

42

Dot com bust in 2001 - CAGR of 24%

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

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?

Lessons from History

43

US subprime crisis in 2008 - CAGR of over 21%

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

Macro Indicators 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?

Lessons from History

44

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

Lessons from History

45

Lessons from History

46

India’s long term prospects remain intact

47

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

48

Silver Lining To The Dark Clouds

An underdeveloped infrastructure – means high investment spend on way

49

Silver Lining To The Dark Clouds

High Consumption + High Investment = Higher Growth

50

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 $)

80

90

100

110

120

130

14

-Ju

n-1

1

14

-Ju

l-1

1

14

-Au

g-1

1

14

-Se

p-1

1

14

-Oct

-11

14

-No

v-1

1

14

-De

c-1

1

14

-Jan

-12

14

-Fe

b-1

2

14

-Mar

-12

14

-Ap

r-1

2

14

-May

-12

14

-Ju

n-1

2 80

90

100

110

120

130

51

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

52

Interest rates (Repo %)

0123456789

Ap

r-0

9

Jun

-09

Au

g-0

9

Oct

-09

De

c-0

9

Feb

-10

Ap

r-1

0

Jun

-10

Au

g-1

0

Oct

-10

De

c-1

0

Feb

-11

Ap

r-1

1

Jun

-11

Au

g-1

1

Oct

-11

De

c-1

1

Feb

-12

Ap

r-1

2

0123456789

Silver Lining To The Dark Clouds

52

Attractive valuations: Price to Earnings

Sensex Price to Earnings Ratio

10

15

20

25

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Jan-

11

Jan-

12

10

15

20

25

Sensex now trades at a PE of 13.6x FY13E earnings

Well below long-term average of 15.5x53

Edelweiss Market View

54

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

55

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

56

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

61

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!

66

Stocks you could buy

67

Stock #1: YES Bank

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

68

Stock #2: Larsen & Toubro

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

69

Stock #3: Maruti Suzuki

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

70

Stock #4: Kajaria Ceramics

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

71

Stock #5: Solar Industries

72

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

Disclaimer

73

Broking services offered by Edelweiss Broking Limited under SEBI Registration No. INB/INF/INE231311631 (NSE), INB/INF011311637 (BSE) Name of the Compliance Officer: Mr. T.V. Rangaswami, Email ID: complianceofficer.ebl@edelcap.com;  Corporate Office: Edelweiss House, Off CST Road, Kalina, Mumbai - 400098; Tel. (022) 4009 4400/4088 5757/4088 6278 Broking services offered by Edelweiss Financial Advisors Limited under SEBI Registration No. INB/INF/INE231414534 (NSE); Corporate Office: Edelweiss House, Off CST Road, Kalina, Mumbai - 400098; Tel.: (022) 4009 4400; Compliance Officer: Mr. Jinesh Shah Tel. (022) 40885757/40883737, Email ID- compliance@Edelweissfa.com Disclaimer: This document has been prepared by Edelweiss Web Services Limited (Edelweiss). Edelweiss, its holding company and associate companies are a full service, integrated investment banking, portfolio management and brokerage group. Our research analysts and sales persons provide important input into our investment banking activities. This document does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable, but we do not represent that it is accurate or complete and it should not be relied on as such. Edelweiss or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this document should make such investigation as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult his own advisors to determine the merits and risks of such investment. The investment discussed or views expressed may not be suitable for all investors. We and our affiliates, group companies, officers, directors, and employees may: (a) from time to time, have long or short positions in, and buy or sell the securities thereof, of company (ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as advisor or lender/borrower to such company (ies) or have other potential conflict of interest with respect to any recommendation and related information and opinions. This information is strictly confidential and is being furnished to you solely for your information. This information should not be reproduced or redistributed or passed on directly or indirectly in any form to any other person or published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject Edelweiss and affiliates/ group companies to any registration or licensing requirements within such jurisdiction. The distribution of this document in certain jurisdictions may be restricted by law, and persons in whose possession this document comes, should inform themselves about and observe, any such restrictions. The information given in this document is as of the date of this report and there can be no assurance that future results or events will be consistent with this information. This information is subject to change without any prior notice. Edelweiss reserves the right to make modifications and alterations to this statement as may be required from time to time. However, Edelweiss is under no obligation to update or keep the information current. Nevertheless, Edelweiss is committed to providing independent and transparent recommendation to its client and would be happy to provide any information in response to specific client queries. Neither Edelweiss nor any of its affiliates, group companies, directors, employees, agents or representatives shall be liable for any damages whether direct, indirect, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. Past performance is not necessarily a guide to future performance. The disclosures of interest statements incorporated in this document are provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. Edelweiss Securities Limited generally prohibits its analysts, persons reporting to analysts and their dependents from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. The information provided in these reports remains, unless otherwise stated, the copyright of Edelweiss. All layout, design, original artwork, concepts and other Intellectual Properties, remains the property and copyright Edelweiss and may not be used in any form or for any purpose whatsoever by any party without the express written permission of the copyright holders.   

Disclaimer

74

  Additional Disclaimer for U.S. Persons Edelweiss Web Services Limited (EWSL), Edelweiss Broking Ltd. (EBL) and Edelweiss Financial Advisors Ltd. (EFAL) are not a registered broker – dealer under the U.S. Securities Exchange Act of 1934, as amended (the“1934 act”) and under applicable state laws in the United States. In addition EWSL, EBL and EFAL are not a registered investment adviser under the U.S. Investment Advisers Act of 1940, as amended (the "Advisers Act" and together with the 1934 Act, the "Acts), and under applicable state laws in the United States. Accordingly, in the absence of specific exemption under the Acts, any brokerage and investment services provided by EWSL, EBL and EFAL, including the products and services described herein are not available to or intended for U.S. persons. This document is a product of Edelweiss Web Services Limited. The research analyst(s) preparing the document is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker-dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker-dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account. EWSL, EBL and EFAL, are associate / group companies of Edelweiss Securities Limited. This document is intended for distribution by Edelweiss Securities Limited only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this document and return the same to the sender. Further, this document may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor.  In reliance on the exemption from registration provided by Rule 15a-6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, Edelweiss Securities Limited has entered into an agreement with a U.S. registered broker-dealer, Marco Polo Securities Inc. ("Marco Polo").  Transactions in securities discussed in this document should be effected through Marco Polo or another U.S. registered broker dealer..