India Market Outlook - 2012

Emerging Market Sailing Through Global Headwinds Experts

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Global Equity Market Update CY 2011

1. Update on CY 2011

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.

2. Will 2012 be a better year ?

3. Market Outlook

Country India

Equity Markets SENSEX NIFTY Hang Seng KOSPI BOVESPA NIKKEI MSCI Russia Dow Jones NASDAQ Shanghai Composite Index MSCI China DAX CAC FTSE

3 Month -6.07% -6.45% 4.79% 3.17% 8.47% -2.82% 6.08% 11.95% 7.86% -6.77% 7.79% 7.20% 5.96% 8.65%

6 Month -17.99% -18.12% -17.70% -13.09% -9.05% -13.86% -26.84% -1.59% -6.07% -20.37% -19.84% -20.04% -20.65% -6.28%

1 year -24.64% -24.62% -19.97% -10.98% -18.11% -17.34% -20.95% 5.53% -1.80% -21.68% -20.41% -14.69% -16.95% -5.55%

3 year 17.01% 16.04% 8.61% 17.53% 14.76% -1.54% 22.89% 11.66% 18.21% 6.50% 9.06% 7.03% -0.61% 7.91%
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Hong Kong Korea Brazil Japan Russia

US China

Germany France UK

Source: Bloomberg, December 31st 2011

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Indian Market Indices CY 2011

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).
1. Update on CY 2011

The broader market corrected more in 2011 with the BSE Midcap and Small cap corrections of 34% and 43% re spectively.
2. Will 2012 be a better year ?

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.

3. Market Outlook

Returns
SENSEX NIFTY BSE 200 BSE Midcap BSE SmallCap BSE Health Care BSE Realty Bankex BSE Consumer Durables BSE Oil & Gas BSE PSU BSE Power BSE Auto BSE FMCG BSE Metal BSE IT

3 Month
-6.07% -6.45% -8.75% -16.23% -19.34% 0.05% -21.97% -15.64% -16.93% -11.36% -14.03% -15.50% -4.17% 3.19% -15.48% 9.04%
Source: Bloomberg, 30th December. 2011 For Professional Investors Only

6 Month
-17.99% -18.12% -20.04% -25.08% -31.96% -8.24% -31.89% -28.61% -20.58% -18.23% -25.49% -31.24% -7.44% -0.25% -38.30% -5.71%

1 Year
-24.64% -24.62% -26.95% -34.19% -42.61% -12.83% -51.84% -31.59% -16.87% -28.98% -32.72% -39.91% -20.44% 9.53% -47.19% -15.72%
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Indian Markets in 2011 at Glance

Highest level in 2011

1. Update on CY 2011

Sensex Level 21,000

2. Will 2012 be a better year ?

20,000

RBI hikes Repo & Reverse Repo by 25bps

China hikes RRR by 50 bps

Japan Earth Quake

19,000

3. Market Outlook
18,000

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

17,000 FY12 Union Budget

16,000

S&P downgrades US credit rating to AA+ Cabinet Approves Mining Bill Land Acquisition Bill approved by Cabinet

15,000

14,000

FDI in Multiband Retail put on hold

28 month low of 15,175

13,000

12,000 Jan-11

Feb-11

Mar-11

Apr-11

May-11

Jun-11

Jul-11

Aug-11

Sep-11

Oct-11

Nov-11

Dec-11

Source: Bloomberg, December 31st 2011

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1. Update on CY 2011

2. Will 2012 be a better year ?

3. Market Outlook

Does 2012 Hold Any Hope for Equity Investors???

Yes

No
Not Sure

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Will History Repeat Itself

1. Update on CY 2011

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. Absolute Returns after 2 year
91.7 76.2 17.7

2. Will 2012 be a better year ?

Year
1979

Calendar Year Returns

-4.3 -15.7 -20.9

3. Market Outlook

1987 1995

1998
2000

-16.5
-20.6

30.1
-15

2001
2008 2011
Source: Bloomberg. Data as on 20th December 2011.

-17.9
-52.4 -24.6

79
112.5 ???

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

This will be only the 8th year (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 reflected 5 in the coming years as well.
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Will History Repeat Itself 2001 vs. 2011

Sensex Performance in year 2001 and 2011
Year 2001 5,000 Year 2011 22,000

1. Update on CY 2011
4,500 4,000 3,500 20,000 18,000 16,000

2. Will 2012 be a better year ?

3. Market Outlook

3,000 2,500 2,000 Jan-01

14,000 12,000 10,000

Feb-01

Mar-01

Apr-01

May-01

Jun-01

Jul-01

Aug-01

Sep-01

Oct-01

Nov-01

Dec-01

2001

2011

2001
Average Inflation (WPI) Average Interest Rates (1 yr. Govt Sec Yield) Combined Fiscal Balance (FY02) Equity Market Returns INR change (2 Year) 7.10% 7.95 -9.50% - 17.9% -10.80%

2011
9.60% 8.09 -8.30% - 24.6% -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 th e markets moved from 3,000 odd levels to 21,000 levels in 4 years...will 2012 onwards reflect what h appened from 2002 onwards.
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Source: Data from ACE MF& Bloomberg, for all data December 31st 2011
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Economy Scorecard
How 2011 looked like
1. Update on CY 2011

The Good
FDI Flows

The Not So Good

GDP Growth

The Bad
Fiscal Deficit

Remittances
2. Will 2012 be a better year ? Service Sector Growth

Corporate Earnings
Banking Sector NPA FII Flows

Inflation
Interest Rates Currency Depreciation Economic Reforms Industrial Growth

3. Market Outlook

Current Account Deficit

How 2012 may look like

The Good
Remittances Service Sector Growth Banking Sector NPA

The Not So Good

GDP Growth Corporate Earnings Inflation Interest Rates Currency Depreciation Industrial Growth FII Flows FDI Flows

The Bad
Fiscal Deficit Current Account Deficit

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. 7
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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
1. Update on CY 2011

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.

2. Will 2012 be a better year ?

3. Market Outlook

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

(% yoy)

Source: Office of Economic Advisory, Bloomberg

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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% for fiscal year 2013.
1. Update on CY 2011

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.

2. Will 2012 be a better year ?

3. Market Outlook

US Japan Euro Area Australia Switzerland India China Korea S. Africa Brazil Russia

2010 3.0 4.0 1.8 2.7 2.7 8.5 10.4 6.2 2.8 7.5 4.0

2011E 1.7 -0.4 1.5 1.5 1.9 7.1 9.1 3.6 3.1 3.2 4.0

2012E 1.9 1.8 -1.2 3.7 1.0 7.0 8.4 3.7 2.9 3.5 2.5

2013E 1.9 1.3 -0.2 4.0 1.2 7.7 8.6 4.4 4.0 4.5 4.2

Source: CSO, CIRA Estimates; 31st December 2011

Though growth in urban India has been slowing down because of global interlinking, but rural India continues to grow on back of trickle-down effect of massive social sector spending, appreciation (and liquidation) of latent assets (land, gold etc.). This coupled with buoyant agriculture production is likely to keep the rural consumption strong.
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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.s capex cycle. Some of the key bills critical for accelerating Indias growth cycle are reforms like GST, Direct Tax Code, 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.

1. Update on CY 2011

2. Will 2012 be a better year ?

3. Market Outlook

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G-Sec & Sensex Relationship

1. Update on CY 2011
3.5 20,000

2. Will 2012 be a better year ? Percentage (%)

3 18,000 2.5 2 1.5 1 0.5 0 -0.5 -1 Apr-07 Oct-04 Aug-05 Sep-07 Oct-09 May-04 May-09 Aug-10 Mar-05 Dec-03 Nov-06 Dec-08 Mar-10 Nov-11 Feb-08 Jan-06 Jun-06 Jul-08 Jan-11 Jun-11 16,000 14,000 12,000 10,000

3. Market Outlook

8,000
6,000 4,000

10 yr - 1 yr GSec

SENSEX (RHS)

Source: Bloomberg, December 31st 2011

Sensex

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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
1. Update on CY 2011

2. Will 2012 be a better year ?

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. Manufacturing on rebound Unemployment trending downwards Housing market improving

3. Market Outlook

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Source: Bloomberg as of December 30, 2011 For Professional Investors Only

Valuation Check
PE Multiple
1. Update on CY 2011

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.
FY13E EPS P/E (x)
Source: Bloomberg;
Sensex Levels

2. Will 2012 be a better year ?

FY14E 1470 10.56

1325 11.72
31st December 2011

3. Market Outlook

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Valuation Check

1. Update on CY 2011

FY13E EPS EPS growth (%) P/E (x) Div. yield (%) P/B (x)
1325

FY14E
1470

13.76
11.72

10.98
10.56

2. Will 2012 be a better year ?

2.03
1.88
Source: Bloomberg; 31st December 2011

2.26
1.79

3. Market Outlook

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 mark ets 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 declining raw material costs and interest rates.

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Valuation Check

1. Update on CY 2011

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 .

2. Will 2012 be a better year ?

3. Market Outlook

Sensex Levels at Different Earning Growth Assumptions and PE Multiples Sens itivity Analys is 8%
EPS Growth*

12 15,098 15,378 15,658 15,937 16,217 16,496 16,776

14 17,615 17,941 18,267 18,593 18,920 19,246 19,572

PE*** 16 20,131 20,504 20,877 21,250 21,622 21,995 22,368

18 22,648 23,067 23,486 23,906 24,325 24,745 25,164

20 25,164 25,630 26,096 26,562 27,028 27,494 27,960

10% 12% 14% 16% 18% 20%

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

*Earning Growth CAGR for FY13

Source: Bloomberg; 31st December 2011

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Disclaimer
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Thank You

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