INDIA WATCH

Copyright © 2008 Boston Analytics

INDIA WATCHSTOCK MARKET DIARIES

January 2009

INDIA WATCH STOCK MARKET DIARIES—INDIA

Copyright © 2008 Boston Analytics 1

Overview of the Indian Stock Market

Exhibit 1.1: The Boston Analytics India Market Index (BA IMI) with and without Dividends (Log Scale)

Performance Review of the Boston Analytics India Market Index

The Boston Analytics India Market Index (BA IMI)(1)

fell -4.65% during January 2009 to close at 869 compared to 910 a month ago.

• Exports in January have come in 22% (Year-on-Year) lower than January 2008. This is the biggest decline India has faced since the overall decline started. December exports were down just 1% at $12.69B. Exports had declined 12.1% and 9.9% in October and November (2008) respectively.

• In Dec ’08, India’s trade deficit was $7.6B (vis-à-vis $14.0B registered in August 2008). The fall in the trade deficit is mainly due to a contraction in oil imports.

• IIP growth for November 2008 (released in January 2009) came in at 2.4%. Mining output was up 0.5% vs. 6.3% (Year-on-Year) and manufacturing output was up 2.4% vs. 4.7% (Year-on-Year). Capital goods output is down 2.3% vs. 24.2% (Year-on-Year) and consumer goods output is up 4.4% vs. -2.9% (Year-on-Year). The April-November industrial growth came in at 3.9% vs. 9.2% (Year-on-Year). October industrial output is revised to -0.3% vs. -0.4%. Sub-sectors like rubber, plastic, petroleum and coal products registered a 30.7% Year-on-Year growth, groups clubbed under beverages, tobacco, and related products saw a 14.5% Year-on-Year growth and wood and wood products clocked 8.7% Year-on-Year growth.

• There was no change in rates during the monetary policy meeting 27 January 2009. Repo (Unchanged at 5.5%), Reverse Repo (Unchanged at 4%), Cash Reserve Ratio (Unchanged at 5%), Bank Rate (Unchanged at 6%). In line with the lowering of GDP growth projection by the Economic Advisory Council, the RBI also scaled down its forecast for FY09 to 7% from 7.5-8.0% earlier.

• Inflation based on the wholesale-price-index fell to a 10-month low of 5.91% for the week ended December 27, 2008, and then further dropped to 5.24% for the week ended January 3, before rising to 5.6% for the week ended January 10, and then further moving up to 5.64% for the week ended January 17, 2009.

(1)

Boston Analytics’ suite of indices are total return indices (i.e., Dividend are included in the index computation) unless otherwise stated.

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BA India Market Index (with Dividends) BA India Market Index (without Dividends)

Stock Market Diaries—January 2009

1. Executive Summary


Exhibit 1.3: Performance of the Boston Analytics India Market Indices as of January 31, 2009

Index Index Levels

Recent Performance Long Term Annualized Performance

1 Month 3 Months YTD 1-Year 3-Year 5-Year 10-Year

BA India Market Index 869 -4.65% -0.39% -4.65% -49.81% -2.74% 11.62% 16.10%

BA India Mega Cap Index 830 -2.90% 2.68% -2.90% -41.33% 0.74% 11.21% 13.69%

BA India Large Cap Index 1495 -5.98% -2.01% -5.98% -54.73% -3.51% 10.15% 16.97%

BA India Mid Cap Index 775 -7.41% -2.69% -7.41% -55.82% -7.70% 9.86% 19.91%

BA India Small Cap Index 751 -7.63% -9.93% -7.63% -62.76% -12.01% 14.96% 20.34%

BA India Micro Cap Index 877 -6.43% -7.54% -6.43% -58.30% -8.85% 27.51% 25.64%

• All market capitalization disaggregated indices ended in red, with the BA India Small Cap Index leading the fall.

• The BA India Mega Cap Index fell the least among the indices with returns at -2.90%

Exhibit 1.5: Performance of Boston Analytics India Style Indices as of January 31, 2009

Index Index Levels

Recent Performance Long Term Annualized Performance

1 Month 3 Months YTD 1-Year 3-Year 5-Year 10-Year

BA India Market Index 869 -4.65% -0.39% -4.65% -49.81% -2.74% 11.62% 16.10%

BA India Growth Index 697 -5.61% -3.65% -5.61% -51.86% -4.21% 10.84% 11.82%

BA India Core Index 978 -3.84% 2.76% -3.84% -47.99% -0.49% 13.28% 21.84%

BA India Value Index 1831 1.05% 19.02% 1.05% -26.81% 2.25% 16.58% 33.56%

• All valuation indices except BA India Value Index have ended in the negative territory • The BA India Value Index gave returns of 1.05%, with its past year performance better than other valuaiton

indices

Exhibit 1.2: Disaggregation of the BA India Market Index on Log Scale (Base Index = 100 on July 1, 1991)

Exhibit 1.4: Comparison of the Boston Analytics India Style Indices (Base Index = 100 on July 1, 1991)

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BA India Market Index Mega Cap Index Large Cap Index

Mid Cap Index Small Cap Index Micro Cap Index

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BA India Market Index Growth Index Core Index Value Index


Historical Performance Review of the Boston Analytics India Style Matrix

Exhibit 2.1: Long Term Annualized Performance

GROWTH CORE VALUE GROWTH CORE VALUE

10 YEARS RETURN 5 YEARS RETURN

MEGA 10.27% 20.40% 2.71% 9.25% 11.81% -4.61%

LARGE 13.79% 20.18% 3.20% 11.77% 10.38% -3.34%

MID 12.50% 22.31% 30.76% 9.12% 9.44% 20.48%

SMALL 9.43% 21.84% 33.61% 13.27% 14.68% 22.22%

MICRO 4.45% 24.70% 34.34% 6.03% 27.89% 33.70%

3 YEARS RETURN 1 YEAR RETURN

MEGA -16.52% -14.13% -1.90% -41.81% -36.68% -5.58%

LARGE -27.60% -16.75% -13.49% -62.05% -42.31% -35.26%

MID -25.87% -24.33% 0.87% -59.26% -56.67% 2.63%

SMALL. -25.62% -29.33% -26.10% -58.85% -64.70% -59.64%

MICRO -29.79% -24.56% -24.57% -65.38% -57.07% -57.09%

< -20 -10 0 10 20 >

• On a long-term basis, small and micro capitalization value stocks have mostly outperformed the core and growth stocks by significant margins.

• In comparison, core stocks have outperformed value and growth stocks in the mega and large market capitalization categories.

• Micro capitalization value stocks have been the best performers on a ten-year and five-year basis with high annualized returns of 34.34% and 33.70%, respectively.

• On a three-year basis and one –year basis, mid value stocks have been exceptional performers among all styles.

• Mid Value style has been the only style to post positive returns for both one year and three year period

Exhibit 2.2: Recent Performance

GROWTH CORE VALUE GROWTH CORE VALUE

6 MONTHS RETURN 3 MONTH RETURN

MEGA -37.48% -25.07% 10.69% -1.24% 9.41% 31.88%

LARGE -49.44% -30.07% 0.00% -9.26% 7.14% 0.00%

MID -43.39% -42.79% 2.74% -4.45% -5.33% 30.80%

SMALL -47.28% -50.82% -49.94% -10.46% -9.59% -10.87%

MICRO -47.99% -41.38% -49.21% -12.73% -5.22% -8.84%

1 MONTH RETURN YTD RETURN

MEGA -3.90% -1.48% 4.72% -3.90% -1.48% 4.72%

LARGE -10.49% -0.63% 0.00% -10.49% -0.63% 0.00%

MID -6.06% -9.61% 1.27% -6.06% -9.61% 1.27%

SMALL -7.24% -8.00% -5.77% -7.24% -8.00% -5.77%

MICRO -9.49% -4.40% -8.19% -9.49% -4.40% -8.19%

< -20 -10 0 10 20 >

• Recent performance reflects the prevalent bearish sentiment that had gripped the market.

• Mega Value stocks and Mid Value stocks have been the best performers with returns of 31.88% and 30.80% respectively on a three-month basis

• In the last month, Mega Value has been the best performer with returns at 4.72%.

• On a six month basis, Small Core has been the worst performer with returns at -50.82%.

• Overall recent performance of the Mega Value, Large Value and Mid Value has been good as compared to other styles

2. Boston Analytics India Market Monitoring


Highlights

• All portfolios had negative returns in the current month, vis-à-vis an postivie performance across the board for the last month.

• Since the portfolio reconstitution in July, almost 43% (on an average) of market capitalization across all stocks has been wiped off, indicating the prevalence of a deep bearish environment.

• Portfolio 20 was the best performing portfolio with returns of - 4.11%. • Portfolios with lower market capitalizations have exhibited lower standard deviations and trading

volumes with the exception of Portfolio 18.

Exhibit 3.1: Performance of Market Capitalization Sorted Portfolios as of January 31, 2009

Portfolio

January Return

December Return

YTD Return

Seven Months Return

Avg. Closing Market Cap

(INR M)

Avg. Closing

P/B

Avg. Closing

P/E

Mean of Daily

Return

Standard Deviation of Daily Return

Avg. Daily Traded Volume

(M Shares)

1 -4.40% 14.31% -4.40% -30.01% 254,512.61 4.34 8.07 -0.15% 3.02% 2.07

2 -8.42% 16.71% -8.42% -36.27% 30,755.00 4.13 6.71 0.05% 2.29% 0.50

3 -12.19% 18.47% -12.19% -51.03% 11,807.06 1.56 5.83 -0.75% 2.69% 0.31

4 -7.45% 12.53% -7.45% -41.65% 9,050.99 2.25 5.38 -0.36% 2.04% 0.13

5 -10.28% 11.04% -10.28% -50.09% 4,893.78 2.27 3.86 -0.46% 2.32% 0.09

6 -9.61% 11.49% -9.61% -44.93% 3,410.59 1.91 4.24 -0.50% 2.11% 0.09

7 -10.89% 15.03% -10.89% -55.10% 1,810.10 1.10 3.45 -0.54% 2.32% 0.04

8 -8.64% 14.31% -8.64% -50.21% 1,437.86 1.15 3.60 -0.41% 2.35% 0.04

9 -11.36% 10.91% -11.36% -51.47% 1,042.69 1.15 4.19 -0.60% 1.98% 0.03

10 -11.43% 12.94% -11.43% -49.69% 835.76 1.07 5.53 -0.59% 2.04% 0.02

11 -9.38% 12.09% -9.38% -42.66% 742.29 1.37 3.67 -0.51% 1.97% 0.03

12 -9.28% 12.21% -9.28% -45.08% 563.25 1.06 3.02 -0.50% 2.02% 0.03

13 -10.13% 11.28% -10.13% -44.15% 490.65 1.21 5.78 -0.48% 1.82% 0.01

14 -7.37% 10.72% -7.37% -42.25% 366.44 0.84 14.00 -0.34% 1.90% 0.02

15 -6.05% 10.17% -6.05% -42.73% 287.12 0.94 5.57 -0.24% 1.86% 0.02

16 -6.00% 7.04% -6.00% -38.25% 259.02 0.78 6.00 -0.31% 1.62% 0.01

17 -5.77% 14.67% -5.77% -39.68% 198.81 1.15 4.43 -0.31% 1.70% 0.01

18 -7.10% 30.25% -7.10% -25.52% 157.44 0.74 3.36 -0.37% 1.68% 0.00

19 -5.10% 6.67% -5.10% -41.96% 131.87 0.93 7.05 -0.25% 1.49% 0.01

20 -4.11% 8.63% -4.11% -38.75% 111.85 0.74 5.12 -0.17% 1.43% 0.00

BA India

Market

Index

-4.65% 11.36% -4.65% -33.20%

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Exhibit 3.2: Portfolio Return vs. Standard Deviation (for January 31, 2009)

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Standard Deviation (Daily Returns)

Portfolio

3. Market Capitalization Sorted Portfolios


Highlights • In January, eighteen of the twenty portfolios gave negative returns signifying the change in the

sentiment vis-à-vis the previous month. • Portfolio 17 gave highest returns of 2.33% and was followed by Portfolio 18 with returns of 0.77% while

Portfolio 3 gave the least return figures of 16.59%. • Since the portfolio reconstitution in July 2008, Portfolio 12 and relatively low Price-to-Book stocks

(Portfolios 14 to 18) have performed better vis-à-vis other portfolio clusters.

Exhibit 4.1: Returns of Price/Book Sorted Portfolios as of January 31, 2009

Portfolio

January Return

December Return

YTD Return

Seven Months Return

Avg. Closing

Market Cap (INR M)

Avg. Closing

P/B

Avg. Closing

P/E

Mean of Daily

Return



(M Shares)

1 -8.97% 21.49% -8.97% -31.60% 53,840.55 10.50 36.11 -0.46% 2.10% 0.44

2 -4.20% 7.51% -4.20% -33.00% 56,512.75 3.71 8.62 -0.21% 2.40% 0.35

3 -16.59% 13.02% -16.59% -47.51% 17,556.43 2.39 8.16 -0.49% 4.76% 0.97

4 -1.29% 11.13% -1.29% -45.80% 36,643.27 1.87 4.84 0.02% 4.69% 0.19

5 -9.18% 12.93% -9.18% -38.21% 12,485.69 1.65 6.46 -0.46% 2.43% 0.24

6 -3.23% 18.23% -3.23% -34.93% 21,309.58 1.34 4.30 -0.10% 3.18% 0.24

7 -2.40% 11.74% -2.40% -19.93% 48,406.70 1.34 5.61 -0.07% 2.29% 0.24

8 -3.47% 17.96% -3.47% -44.52% 7,374.66 1.15 4.89 -0.13% 2.99% 0.08

9 -10.49% 19.55% -10.49% -46.05% 3,363.67 1.02 6.23 -0.99% 2.36% 0.06

10 -5.72% 18.33% -5.72% -30.54% 9,918.95 0.84 4.05 -0.24% 2.75% 0.07

11 -7.20% 23.21% -7.20% -37.57% 8,053.29 0.82 3.51 -0.29% 3.80% 0.07

12 -8.85% 16.43% -8.85% -14.62% 12,932.80 0.76 3.59 -0.42% 2.82% 0.10

13 -10.70% 21.15% -10.70% -54.26% 2,355.42 0.57 3.04 -0.56% 2.51% 0.10

14 -12.35% 14.75% -12.35% -14.00% 3,664.27 0.59 3.56 -0.63% 2.28% 0.04

15 -0.12% 4.88% -0.12% 3.84% 8,360.89 0.49 3.11 0.03% 1.74% 0.03

16 -4.88% 13.97% -4.88% -15.39% 3,982.87 0.49 4.48 -0.19% 2.62% 0.08

17 2.33% 11.30% 2.33% -5.07% 3,984.96 0.41 4.02 0.54% 2.60% 0.03

18 0.77% 13.31% 0.77% 1.41% 1,862.81 0.35 5.05 0.02% 1.76% 0.02

19 -1.62% 26.88% -1.62% -38.62% 8,969.01 0.28 4.61 0.07% 5.88% 0.12

20 -14.01% 18.68% -14.01% -45.53% 259.33 0.17 7.60 -0.74% 2.27% 0.03

BA India Market Index

-4.65% 11.36% -4.65% -33.20%

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4. Valuation (Price/Book) Sorted Portfolios


Highlights

• Only five out of the twenty portfolios returns were positive compred to a strong ninety out of twenty last in December 2008 which marks an overall bearish sentiment that prevailed in January 2009.

• Portfolio 3 was the best performing portfolio with returns of 3.63% and Portfolio 1 came in second at 2.01%.

• Portfolio 15 was the worst performer with returns of -26.47% followed by Portfolio 20 which gave a return of -17.54%.

• Ten out of twenty portfolios have outperformed the market and unlike last month, the bottom most portfolios have been among the worst performers in the market.

Exhibit 5.1: Performance of Momentum Sorted Portfolios as of January 31, 2009

Portfolio

January Return

December Return

YTD Return

Seven Months Return

Avg. Closing

Market Cap (INR M)

Avg. Closing

P/B

Avg. Closing

P/E

Mean of Daily

Return



(M Shares)

1 2.01% 4.15% 2.01% -39.09% 69263.77 6.52 14.65 0.11% 1.59% 0.09

2 -5.40% 13.85% -5.40% -36.52% 48415.31 3.35 10.88 -0.25% 2.03% 0.08

3 3.63% 0.84% 3.63% -28.45% 24537.87 1.96 7.23 0.19% 1.61% 0.03

4 -1.92% 11.39% -1.92% -34.95% 30105.60 1.43 4.36 -0.14% 2.16% 0.05

5 -0.92% -3.70% -0.92% -36.60% 13287.55 1.22 5.51 0.00% 2.35% 0.05

6 -6.65% 6.26% -6.65% -27.34% 4109.29 1.34 4.93 -0.30% 1.90% 0.04

7 -12.95% 11.23% -12.95% -35.42% 16366.98 1.20 6.99 -0.23% 4.49% 0.68

8 -10.36% 8.52% -10.36% -45.06% 3946.98 0.98 3.90 1.27% 2.61% 0.03

9 0.49% 42.18% 0.49% -29.32% 33342.52 0.92 4.38 0.10% 4.50% 0.22

10 -14.54% 24.00% -14.54% -41.91% 11155.16 1.28 4.55 -0.18% 4.15% 0.10

11 -3.77% 10.54% -3.77% -49.30% 2699.71 0.72 15.15 -0.13% 3.05% 0.05

12 -7.12% 13.57% -7.12% -49.43% 4815.88 1.32 7.36 -0.34% 2.57% 0.12

13 -1.92% 30.22% -1.92% -38.51% 8303.31 0.98 4.28 -0.05% 3.13% 0.30

14 -6.89% 16.07% -6.89% -44.90% 23945.74 1.60 4.77 -0.28% 4.22% 0.19

15 -26.47% 26.62% -26.47% -56.26% 6442.09 0.91 3.57 -1.47% 4.22% 0.14

16 1.47% 10.66% 1.47% -45.94% 6839.76 0.99 4.84 0.14% 4.04% 0.14

17 -11.35% 11.12% -11.35% -57.11% 6134.71 1.03 4.05 -0.48% 4.06% 0.26

18 -12.91% 17.69% -12.91% -60.94% 4344.27 0.92 4.30 -0.60% 3.73% 0.11

19 -13.80% 32.46% -13.80% -54.91% 10021.64 1.31 2.71 -0.67% 3.72% 0.24

20 -17.54% 39.00% -17.54% -62.99% 5798.26 1.01 2.31 -0.84% 4.04% 0.64

BA India

Market

Index

-4.65% 11.36% -4.65% -33.20%

16,095.48

1.53

4.8

-0.19%

2.80%

0.17


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Portfolio

5. Momentum (Three Months) Sorted Portfolios


Highlights

• In January, 5 out of 18 sectors posted negative returns vis-à-vis 1 out of 18, last month. • Household and Personal Products sector posted the highest returns returns of just 3.06% and

Automobiles sector returned 2.48% • Diversified and Real Estate stocks lost the most in January 2009 and posted deep negative returns of

-22.41% and -21.01% respectively. • Consumer Durables and Apparel Sector which was the best performer last month posted returns of

-16.31%.

Exhibit 6.1: Performance of Economic Sectors Sorted Portfolios as of January 31, 2009

Portfolio

Economic Sector January Return

December Return

YTD Return

Seven Months Return

Avg. Closing

Market Cap (INR M)

Avg. Closing

P/B

Avg. Closing

P/E

Mean of Daily Return



(M Shares)

1 Automobile 2.48% 3.05% 2.48% -19.76% 7781.78 4.43 1.14 0.15% 1.63% 0.022

2 Banks -10.55% 16.70% -10.55% -14.26% 73978.67 5.04 0.95 -0.57% 3.15% 0.329

3 Capital Goods -7.46% 16.98% -7.46% -40.25% 9054.16 4.04 1.40 -0.34% 2.86% 0.113

4 Chemicals 1.52% 7.39% 1.52% -28.31% 27469.59 3.96 1.25 0.15% 3.27% 0.086

5 Consumer Durables and Apparel

-16.31% 51.40% -16.31% -33.54% 6689.57 7.17 2.12 -0.88% 2.39% 0.134

6 Diversified -22.41% 17.47% -22.41% -59.99% 5967.88 2.89 0.87 -1.06% 2.45% 0.043

7 Diversified Financial

-4.21% 14.46% -4.21% -27.38% 10471.82 3.76 2.23 0.77% 2.82% 0.149

8 Food, Beverages and Tobacco

-2.05% 7.68% -2.05% -19.20% 10890.69 12.66 1.80 -0.08% 1.64% 0.070

9 Healthcare -11.77% 6.95% -11.77% -34.55% 11581.29 5.39 1.82 -0.67% 1.58% 0.048

10 Household and Personal Products

3.06% 6.40% 3.06% 19.90% 76926.89 33.04 9.54 0.17% 1.52% 0.055

11 Materials -1.88% 20.79% -1.88% -51.02% 9504.81 4.60 1.07 0.01% 3.84% 0.084

12 Media and Entertainment

-15.10% 30.13% -15.10% -51.15% 5310.03 41.57 1.49 -0.72% 3.45% 0.109

13 Real Estate/ Construction

-21.01% 30.72% -21.01% -62.53% 13204.86 2.81 1.08 -1.08% 4.63% 0.633

14 Services -10.15% 11.72% -10.15% -44.89% 3079.79 5.20 1.80 -0.50% 1.84% 0.024

15 Technology -1.32% -8.35% -1.32% -45.44% 15638.32 4.05 1.14 0.20% 3.13% 0.520

16 Telecommunication -15.67% 10.84% -15.67% -31.22% 95410.26 10.32 1.52 -0.75% 3.82% 0.473

17 Transportation 1.96% 19.74% 1.96% -42.55% 14983.72 7.74 1.34 0.16% 3.13% 0.161

18 Utilities 1.49% 13.50% 1.49% -2.35% 154968.13 11.68 2.08 0.12% 2.62% 0.958

BA India Market Index -4.65% 11.36% -4.65 -33.20% 16,095.48 1.53 4.80 -0.19% 2.80% 0.17

Exhibit 6.2: Portfolio Return vs. Standard Deviation ( for January 31, 2009)

1

234

5

6

7

8910

1112 13

14

15

1617

18

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% 3.50% 4.00% 4.50% 5.00%

Av

era

ge

Da

ily

Re

turn


Portfolio

6. Economic Sectors Sorted Portfolios


Utilities sector consists of very few firms, mostly in larger capitalization portfolios and lacks any observable pattern across the three factors

Majority of firms in the Indian automobile sector lie in the middle rung valuation sorted portfolios and market cap sorted portfolios.

Exhibit 7.1: Distribution of Utilities Companies Across Portfolios

Ventile Portfolios

Sorting Methodology

Market Cap Sorted Price/Book Sorted Momentum Sorted

No. of Firms % of Firms No. of Firms % of Firms No. of Firms % of Firms

1 4 30.8% 2 15.4% - - 2 2 15.4% - - - - 3 2 15.4% - - - - 4 1 7.7% - - - - 5 1 7.7% - - - - 6 - - - - - - 7 - - - - - - 8 1 7.7% 2 15.4% 1 7.7% 9 - - 1 7.7% 1 7.7%

10 - - - - 4 30.8% 11 1 7.7% 2 15.4% - - 12 1 7.7% 1 7.7% 1 7.7% 13 - - 1 7.7% 2 15.4% 14 - - 1 7.7% 1 7.7% 15 - - 1 7.7% - - 16 - - - - 1 7.7% 17 - - 1 7.7% 1 7.7% 18 - - - - - - 19 - - - - - -

20 - - 1 7.7% 1 7.7%

Total 13 100.0% 13 100.0% 13 100.0%

Exhibit 7.2: Distribution of Transportation Companies Across Portfolios

Ventile Portfolios

Sorting Methodology

Market Cap Sorted Price/Book Sorted Momentum Sorted

No. of Firms % of Firms No. of Firms % of Firms No. of Firms % of Firms

1 5 5.38% 4 4.3% 0 0.0% 2 3 3.2% 4 4.3% 4 4.3% 3 2 2.2% 4 4.3% 2 2.2% 4 4 4.3% 7 7.5% 6 6.5% 5 3 3.2% 4 4.3% 3 3.2% 6 1 1.1% 7 7.5% 4 4.3% 7 6 6.5% 8 8.6% 3 3.2% 8 7 7.5% 5 5.4% 3 3.2% 9 8 8.6% 6 6.5% 5 5.4%

10 6 6.5% 6 6.5% 3 3.2% 11 10 10.8% 6 6.5% 8 8.6% 12 8 8.6% 9 9.7% 5 5.4% 13 4 4.3% 5 5.4% 6 6.5% 14 2 2.2% 7 7.5% 9 9.7% 15 9 9.7% 4 4.3% 3 3.2% 16 4 4.3% 0 0.0% 3 3.2% 17 3 3.2% 1 1.1% 5 5.4% 18 2 2.2% 2 2.2% 7 7.5% 19 2 2.2% 0 0.0% 9 9.7% 20 4 4.3% 4 4.3% 5 5.4%

Total 93 100.0% 93 100.0% 93 100.0%

Note: This report covers the Services Sector and the Technology Sector. A comprehensive compilation across various parameters (i.e. sectors, valuation, and market capitalization) is available for purchase in the form of interesting posters and wall charts for each of the previous 17 years (i.e. from 1991). To learn more, please e-mail queries to [email protected]

7. Factor Profiling of Economic Sectors in India


The Boston Analytics India Market Index

Introduction to the BA IMI

In recent years, both the Indian economy and stock market have grown dramatically. Owing to the increased amount of money flowing into the country, new money managers and financial institutions are entering the market. With these developments a true benchmark, monitoring the Indian economy, is necessary to track the performance of investments. The BA IMI series aims to be representative of the Indian stock universe with its computation of the impact of capital gains and dividends. The market index has been carefully designed to comprehensively cover the essential features of the universe of Indian stocks and to be easily disaggregated into style indices based on asset factors such as market capitalization and relative valuation.

Disaggregation of the BA IMI into Style Indices (Based on Market Capitalization)

The BA IMI is disaggregated into five indices based on the distribution of companies in the Indian stock market universe. These broad categories are mega, large, mid, small, and micro capitalization. Classifying stocks according to the market capitalization is done by a proprietary standard deviation rule based methodology. Since inception of the Large Capitalization Index has given annualized returns of 20.18%, higher than other indices. However, since 2003, Micro Capitalization Index has shown a spurt in growth with annualized returns of 56.92%, outperforming other indices. Correspondingly, Small Capitalization Index has shown similar growth pattern in the same period with annualized return of 45.81%.

Introduction to the Boston Analytics India Style Indices (Based on Relative Valuation)

Boston Analytics aims to provide style indices in India to classify stocks based on valuation characteristics for asset allocation and benchmarking purposes. The BA IMI is disaggregated into three valuation based indices—value, core, and growth. The following valuation factors are used to classify stocks: the Price-to-Book Value ratio (P/B ratio), Price-to-Sales ratio (P/S ratio) and Earnings-to-Price ratio (E/P ratio). Back testing shows that the aforementioned valuation factors impact the returns generated by stocks. Sector-specific business characteristics and differences in accounting practices cause variance in valuation factors across sectors. To standardize these ratios across sectors for meaningful comparison, Boston Analytics uses a sophisticated analytical methodology to adjust the valuation factors of individual stocks based on their sectors. The stocks which are in the top 25% for at least two of the valuation factors are classified as growth stocks. The stocks which are in the bottom 25% for at least two of the valuation factors are classified as value stocks. The remaining stocks are classified as core stocks.

Appendix


The Boston Analytics India Style Matrix The Boston Analytics India Style Indices are based on market capitalization and valuation factors to aid asset allocation and portfolio management. The Boston Analytics India Style Matrix, a combination of market capitalization and valuation factors, reflects investment style classification and is designed to form the basis of effective portfolio construction and performance evaluation. The 5 (market cap divisions) x 3 (valuation divisions) grid is a graphical representation of firm characteristics based on size and valuation. Market capitalization, shown on the vertical dimension of the grid, represents the size factor; and the adjusted valuation factors, shown on the horizontal dimension, represents the valuation factor. Each box in the grid represents a particular investment style based on size and value. For example, the top leftmost grid is the intersection of the mega-cap stocks and the value stocks in the stock universe, representing mega value stocks. The methodology is mutually exclusive and avoids overlap of style characteristics.

Boston Analytics Portfolios—Methodology

The BA IMI Universe

The superset from which the BA IMI is created comprises all stocks listed and traded in India. The superset is then truncated to eliminate very small and thinly traded stocks based on the cross sectional distribution of market capitalization of firms in India. Stocks falling within the top 70% by size are retained while stocks in the bottom 30% are truncated.

Extensive back-testing shows that the retained stocks representing the top 70% by market capitalization in India fall within the top 70% of stocks along the dimensions of daily traded volumes and price levels. The reverse, however, does not hold true. The market capitalization based criterion thus captures the essential features of size and liquidity deemed suitable for the purpose of truncating out the less significant part of the Indian universe of stocks.

Creation of Combed Portfolios Based on Asset Pricing Factors

Market capitalization, Price-to-Book, three months momentum, and economic sector classifications are used as sorting factors to comb the components of the BA IMI into 20 (ventile) portfolios per factor in descending order. The intent here is to reveal the landscape of stock performance differences across subsections of the Indian market. The top 5% of stocks in any of the sorted lists is called Portfolio 1, while the bottom 5% of stocks in any list is called Portfolio 20. Note that in case of economic sector classification based portfolios there are only 18 portfolios. These portfolios are created based on generally accepted definitions of 18 common sectors in the Indian economy.

Investment Horizon and Portfolio Rebalancing Period

The investment horizon in the case of market cap, Price-to-Book, and economic sector classification portfolios is one year long—from July 1, 2008 to June 30, 2009

*. Individual portfolios are reconstituted in

order to minimize operational and transaction costs, to be compatible with common fiscal year definitions in India, and to avoid distortion in analysis due to tax implications of realized gains or losses.

Individual portfolio construction and analysis in the momentum portfolio set is carried out using a 3-1-3 framework: Individual portfolios are constructed based on relative momentum of stocks over three months; a lag of one month is then used to account for information dissemination delays and transaction frictions; and then returns for the next three months are tracked and analyzed to assess portfolio performance from the strategy in a conservative manner. This process is repeated cyclically over the year, resulting in the reconstitution of the momentum portfolios four times a year.

Weights of Portfolio Constituents

All the portfolios in our analysis are market capitalization weighted portfolios, so reported portfolio returns can be viewed as buy-and-hold returns with rebalancing occuring once a year based on factor definitions on July 1.


Disclaimer: This document has been prepared by Boston Analytics and does not constitute an offer or

solicitation for transaction (purchase or sale) on any financial instruments. Furthermore, this document does not constitute a confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable, but Boston Analytics does not in any way guarantee the accuracy, completeness and correctness. The opinions, estimates and projections in this report are subject to change without notice. Boston Analytics has no obligation to update, modify, or amend this report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate. Furthermore, past performance is not necessarily indicative of future results. Boston Analytics shall not in any way be responsible for any losses or damages due to inaccuracy of the information herein or any losses or damages that may arise due to transactions carried out based on information in this report. The entire risk of any use made of this information should be borne by the user alone. No matter contained in this document may be reproduced, copied, distributed or published without the consent of the firm and acknowledgement of the source.

The current issue of ‘Stock Market Diaries’ is available for download. Customized disaggregated reports can be produced by Boston Analytics to meet clients' specialized requirements. To learn more, or subscription, visit www.bostonanalytics.com, e-mail at [email protected], or contact

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Kapil Vaswani Boston Analytics 3rd Floor, PI# 19A, Godrej & Boyce Complex LBS Marg, Vikhroli (W) Mumbai 400 079, India +91.22.25182092

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Core Team: Dr. Sam Thomas, Ted Thorbjornsen, Kapil Vaswani, Milind Tataria, Jayant Dongre, Vivek Sanghi Student Intern: Svetlana Tkachenko, Case Western Reserve University


Ted Thorbjornsen [email protected] 175 Federal Street, 14th Floor Boston, Massachusetts 02110 Tel: +1–617-457-7888 (Ext: 302) Fax: +1–617-457-7889 www.bostonanalytics.com

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