Mirae India Outlook 2012

8/13/2019 Mirae India Outlook 2012

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For Professional Investors Only

India Market Outlook - 2012

EmergingMarketExperts

Sailing Through Global Headwinds


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In 2011 most of the global indices headed southwards, the Indian bourses were among the worst performing

indices in Asia and among major indices globally, with negative performance of -24.6%. BSE Sensex hit a 28

month low in December (15,175). On a dollar indexed basis, performance was even worse as Rupee

depreciated (by 18% YTD).

In 2011 the BRIC countries were down 18-25%, but there 3 year returns are quite good (except China) in the

late teens (15-23%)

The US Markets (Dow Jones) was the best performing market and the one of the only developed market which

has delivered positive returns of 5.5% in 2011.

Global Equity Market UpdateCY 2011

Country Equity Markets 3 Month 6 Month 1 year 3 year

IndiaSENSEX -6.07% -17.99% -24.64% 17.01%

NIFTY -6.45% -18.12% -24.62% 16.04%

Hong Kong Hang Seng 4.79% -17.70% -19.97% 8.61%

Korea KOSPI 3.17% -13.09% -10.98% 17.53%

Brazil BOVESPA 8.47% -9.05% -18.11% 14.76%

Japan NIKKEI -2.82% -13.86% -17.34% -1.54%

Russia MSCI Russia 6.08% -26.84% -20.95% 22.89%

USDow Jones 11.95% -1.59% 5.53% 11.66%

NASDAQ 7.86% -6.07% -1.80% 18.21%

ChinaShanghai Composite Index -6.77% -20.37% -21.68% 6.50%

MSCI China 7.79% -19.84% -20.41% 9.06%

Germany DAX 7.20% -20.04% -14.69% 7.03%

France CAC 5.96% -20.65% -16.95% -0.61%

UK FTSE 8.65% -6.28% -5.55% 7.91%

Source: Bloomberg, December 31st2011

2. Will 2012 be abetter year ?

3. Market Outlook

1. Update on CY 2011


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Returns 3 Month 6 Month 1 YearSENSEX -6.07% -17.99% -24.64%

NIFTY -6.45% -18.12% -24.62%

BSE 200 -8.75% -20.04% -26.95%

BSE Midcap -16.23% -25.08% -34.19%

BSE SmallCap -19.34% -31.96% -42.61%

BSE Health Care 0.05% -8.24% -12.83%

BSE Realty -21.97% -31.89% -51.84%

Bankex -15.64% -28.61% -31.59%

BSE Consumer Durables -16.93% -20.58% -16.87%

BSE Oil & Gas -11.36% -18.23% -28.98%

BSE PSU -14.03% -25.49% -32.72%

BSE Power -15.50% -31.24% -39.91%

BSE Auto -4.17% -7.44% -20.44%

BSE FMCG 3.19% -0.25% 9.53%

BSE Metal -15.48% -38.30% -47.19%

BSE IT 9.04% -5.71% -15.72%

Year 2011 has been a challenging year for Indian Equity Markets. Investors have seen the Sensex correct by 24.

6%. In fact the highest level on the market (Sensex) has been 20,561 hit on the 1st trading session. The equity

market hit a 28 month low on 20th December (15,175).

The broader market corrected more in 2011 with the BSE Midcap and Small cap corrections of 34% and 43% re

spectively.

BSE FMCG is the only Sector which has delivered positive returns of 9.53% in 2011.

The laggard sectors for 2011 were BSE Real Estate and BSE Metals with 52% and 47% correction.

Indian Market IndicesCY 2011

Source: Bloomberg, 30th December. 2011


3. Market Outlook



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12,000

13,000

14,000

15,000

16,000

17,000

18,000

19,000

20,000

21,000

Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11

SensexLevel

RBI hikes

Repo &

Reverse

Repo by

25bps

Japan

Earth

Quake

China hikes

RRR by 50 bps

EU Summit: 50%

debt written down

for Greece, Bank r

ecap & EFSF

leverage

FDI in Multibrand

retail and 100%

in single brand

retail

INR vs USD at

record lows

FY12 Union

Budget S&P downgrades US

credit rating to AA+

Land Acquisition Bill

approved by Cabinet

Cabinet Approves

Mining Bill

FDI in Multiband

Retail put on hold28 month lowof 15,175

Indian Markets in 2011 at Glance

Highest level in 2011



3. Market Outlook



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Does 2012 Hold Any Hope for Equity Investors???

Yes

No

Not Sure


3. Market Outlook



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History has shown to Indian investors, that whenever the equity markets have delivered negative returns in a

calendar year (as per table below), the investor is handsomely rewarded over the next 2 years.

Source: Bloomberg. Data as on 20th December 2011.

Note: The table above shows the returns generated if the investor had made investment on 1stJanuary ofthe next calendar and remains invested for 2 year.

This will be only the 8thyear (out of 32 years) in the Sensex history since 1979 that the Sensex has delivered

negative returns above 1%.

History had shown the average absolute returns generated over the next 2 years is 56% (CAGR returns of 24.98%

, whenever the market has delivered negative returns in the calendar year.

There is no guarantee or assurance that the trend depicted above with respect to returns will be reflectedin the coming years as well.

Year Calendar Year ReturnsAbsolute Returns after

2 year

1979 -4.3 91.7

1987 -15.7 76.2

1995 -20.9 17.7

1998 -16.5 30.1

2000 -20.6 -15

2001 -17.9 79

2008 -52.4 112.5

2011 -24.6 ???

Will History Repeat Itself


3. Market Outlook


f


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Will History Repeat Itself 2001 vs. 2011

Year 2001 Year 2011

2001 2011Average Inflation (WPI) 7.10% 9.60%

Average Interest Rates (1 yr. Govt Sec Yield) 7.95 8.09

Combined Fiscal Balance (FY02) -9.50% -8.30%

Equity Market Returns - 17.9% - 24.6%

INR change (2 Year) -10.80% -14.80%

Year 2001 was a year of high inflation, high cost of debt and limited room for Government same as year

2011. The currency also behaved in same way in 2001.

After consolidation in market in 2002, Investors enjoyed a very secular bull from 2003 to 2007, where the markets moved from 3,000 odd levels to 21,000 levels in 4 years...will 2012 onwards reflect what h

appened from 2002 onwards.

10,000

12,000

14,000

16,000

18,000

20,000

22,000

2,000

2,500

3,000

3,500

4,000

4,500

5,000

Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 Nov-01 Dec-01

2001 2011

Sensex Performance in year 2001 and 2011


3. Market Outlook


Source: Data from ACE MF& Bloomberg, for all data December 31st2011

E S d


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Economy Scorecard

The above tables plots the current economic environment in India based on few economic parameters.

The 2012 table highlights the change we expect in the economic parameters in CY 2012. A number of economic

concerns will recede and hence we feel the current Indian economic environment will change for the better in

CY 2012.

The improvement in the overall economic environment will definitely have a very positive impact on the equity

market sentiments.

How 2011 looked like

How 2012 may look like

The Good The Not So Good The Bad

FDI Flows GDP Growth Fiscal Deficit

Remittances Corporate Earnings InflationService Sector Growth Banking Sector NPA Interest Rates

FII Flows Currency Depreciation

Economic Reforms

Industrial Growth

Current Account Deficit

The Good The Not So Good The BadRemittances GDP Growth Fiscal Deficit

Service Sector Growth Corporate Earnings Current Account Deficit

Banking Sector NPA Inflation

Interest Rates

Currency Depreciation

Industrial Growth

FII Flows

FDI Flows


3. Market Outlook


I fl ti Sh i Si f E i


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Inflation Showing Signs of Easing.

With respect to monetary policy, we believe that the RBI is likely done for the time being with rate hikes. Inflation is expecte

d to come down from the current 9.1% to about 7% by March 2012 on the back of falling commodity prices and base effect

Inflation as measured by the WPI has been sticky at 9%+ levels for the last 20 months, however, MoM increases do

indicate abating pressures.

Food inflation which has been a key culprit in keeping overall inflation at elevated levels for an extended period. With food

Inflation falling faster & hitting a 6 year low of -3.36% for week ended 24th December we feel it will have a very positive

impact on WPI. (Food Inflation has 14% weightage in WPI). (Source: data points taken from RBI.org)

Easing growth rates across the world, along with absence of additional QE measures, augurs well for a cool off in

commodity prices and should provide relief on imported inflation.

Once inflation cools down the focus of the central bank will be on the slowing growth in the economy & we believe thatreduction in WPI will set the tone for reversal of monetary policy regime in CY12-13.

Source: Office of Economic Adv isory, Bloomberg


3. Market Outlook


(% yoy)

GDP G th d i b d ti C ti


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GDP Growth driven by domestic Consumption

We see a GDP growth rate in India of around 7% to 7.5% for fiscal year 2012 (March-end) and around 7% fofiscal year 2013.

The growth rates forecasts for 2012- 13 are lower than in previous years, but India would still be the secondfastest- growing economy in the world after China, with a GDP of at least $1 trillion.

Domestic demand will be the key driver for GDP growth.

2010 2011E 2012E 2013E

US 3.0 1.7 1.9 1.9

Japan 4.0 -0.4 1.8 1.3

Euro Area 1.8 1.5 -1.2 -0.2

Australia 2.7 1.5 3.7 4.0

Switzerland 2.7 1.9 1.0 1.2

India 8.5 7.1 7.0 7.7

China 10.4 9.1 8.4 8.6

Korea 6.2 3.6 3.7 4.4

S. Africa 2.8 3.1 2.9 4.0

Brazil 7.5 3.2 3.5 4.5

Russia 4.0 4.0 2.5 4.2

Source: CSO, CIRA Estimates; 31stDecember 2011

Though growth in urban India has been slowing down because of global interlinking, but rural Indi

continues to grow on back of trickle-down effect of massive social sector spending, appreciation (an

liquidation) of latent assets (land, gold etc.). This coupled with buoyant agriculture production is likely to

keep the rural consumption strong.


3. Market Outlook



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Other Possible Positive Triggers

Elevated Inflation for an extended period of time led to aggressive monetary policy and took toll on

growth rates. However, inflation is now exhibiting signs of reversal and with the right signals from

the central bank along with improving liquidity will have a positive effect on India Inc. especially on

capex implementation front and also mitigate worries on NPA formation for the banking system. While runaway rupee depreciation is a worrisome factor, it is largely linked to global pain rather

than India specific factors and thus would normalize in coming few months.

The political deadlock and policy making log-jam seems to have dealt a severe body blow to India

Inc.scapex cycle.

Some of the key bills critical for accelerating Indiasgrowth cycle are reforms like GST, Direct TaxCode, Companies Act, FDI in multi-brand retailing, electricity distribution reforms. If the

government starts the economic policy reforms it will be the game changer and will change the

overall sentiments for the equity market.


3. Market Outlook


G S & S R l ti hi


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G-Sec & Sensex Relationship

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

-1

-0.5

0

0.5

1

1.5

2

2.5

3

3.5

Dec-03

May-04

Oct-04

Mar-05

Aug-05

Jan-06

Jun-06

Nov-06

Apr-07

Sep-07

Feb-08

Jul-08

Dec-08

May-09

Oct-09

Mar-10

Aug-10

Jan-11

Jun-11

Nov-11

Sensex

Percentage(%)

10 yr - 1 yr GSec SENSEX (RHS)


3. Market Outlook



R ili t US M D t


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Resilient US Macro Data .

Payroll gains in the U.S. improved which helped push the jobless rate down to 8.6 percent, the lowest level sin

ce March 2009. Employment climbed by 120,000 workers in November, with more than half the hiring coming f

rom retailers and temporary help agencies, after a 100,000 gain the prior month

US home building climbed to the highest level in 19 months during November as home construction grew 9.3%

to a seasonally adjusted rate of 685,000 from October, the results being better than the forecast of 0.3% rise.

Newly issued building permits, a gauge of future construction too rose 5.7% from a month earlier against a fore

cast of 1.7% fall by economist.

Other better-than-expected consumer confidence & macroeconomic data from US

- US Conference Board says its consumer confidence index rose almost 10 points to 64.5 in December, u

p from a revised 55.2 in November

- Thomson Reuters/University of Michigan preliminary index of consumer sentiment rose to a 6

month high of 67.7 in December from 64.1 in November

- US ISM manufacturing index rose to 52.7in November from 50.8 in October.

Housing market improvingManufacturing on rebound

Source: Bloomberg as of December 30, 2011

Unemployment trending downwards


3. Market Outlook


Valuation Check


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PE Multiple

The PE for the Indian Equity Markets has been moving lower across CY 2011. The forward P/E of the market is

close to 12. The 10 year average forward PE multiple for Sensex is 14.7 times earnings (20% discount to the 10

year average). At current valuations; the risk reward looks favorable for making fresh investments.

Valuation Check

Source: Bloomberg; 31stDecember 2011

FY13E FY14EEPS 1325 1470P/E (x) 11.72 10.56


3. Market Outlook


Sensex

Levels

Valuation Check


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Valuation Check

From FY04-05 till FY07-08, Sensex companies have shown a robust earnings growth of nearly 24%. This laid

the foundation for the bull market rally from 2004. EPS grew from twice during this period, while the equity markets rallied from 6,000 odd levels to 21,000.

Earning growth has been muted from FY 09-11 due to emergence of global financial crisis and companies trying

to adjust to the dynamic global and domestic environment. Despite a robust growth in revenues in FY12, corpor

ate earnings have been under pressure because of higher raw material prices and the interest rate burden.

As per Bloomberg estimates, earnings growth will go back to the early teens over the next 2 years (FY 13, 14) w

hich will support the attractive equity market valuations. The positive catalysts for FY 13 will come from decliningraw material costs and interest rates.

FY13E FY14EEPS 1325 1470EPS growth (%)

13.76 10.98P/E (x) 11.72 10.56Div. yield (%) 2.03 2.26P/B (x) 1.88 1.79



3. Market Outlook


Valuation Check


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Sensivity Analysis

The Sensivity Analysis will help provide the valuation levels the market can trade at, based on future ear

nings of Sensex earnings and forward PE ratio .

Valuation Check


12 14 16 18 20

8% 15,098 17,615 20,131 22,648 25,164

10% 15,378 17,941 20,504 23,067 25,630

12% 15,658 18,267 20,877 23,486 26,096

14% 15,937 18,593 21,250 23,906 26,562

16% 16,217 18,920 21,622 24,325 27,028

18% 16,496 19,246 21,995 24,745 27,494

20% 16,776 19,572 22,368 25,164 27,960

Sensi tivity Anal ysi s

Sensex Levels at Different Earning Growth Assumptions and PE Multiples

EPSGrowth*

PE***

**Base for Earning growth is Bloomberg Sensex Estimates for FY12 EPS of 1,165*Earning Growth CAGR for FY13


3. Market Outlook



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Mirae India Outlook 2012