MOSL MANB 20160624 MOSL Initiating Coverage

India Strategy
India Equity Research | India Strategy

December 4, 2018
India Strategy Emkay
Your success is our success
©
Refer to important disclosures at the end of this report
Market’s volte-face on Fed’s future

path is a risky trade
A presumed dovish Fed stance in the last week testimony and the correction in crude Our picks
prices have been interpreted as signs of a relapse in excess global liquidity and risk- Sector Stocks
on trade. In our view, it is a false signal as we believe that the Fed will stay put on its
Auto & Anc Maruti
normalization path. The recent gains in INR/USD and the softening in G-sec yields could
BFSI ICICI Bank, HDFC Bank
reverse, precluding a full maturation of the risk-on trade. We still see the INR/USD at 75,
10-year G-sec at 8%, the Nifty target range at 10400-11000, and are underweight on the Consumers Nestle, United Breweries
broader markets. Engineering &
ABB
capital goods
Deflationary fears prompt expectations for an early end of Fed normalization IT Services HCL Tech, Mphasis
The steep 29% decline in global crude prices since early Oct’18 and the concerns about US Aurobindo Pharma,
Pharma
growth have suddenly shifted the consensus views back to deflationary risks, prompting Dr Reddys
increased expectations for an early end of the Fed’s rate normalization. This is recreating a Metals Tata Steel
belief that the relapse of a weak USD and easy liquidity will propel portfolio flows to emerging
Cement UltraTech Cement
markets, including India. We see considerable risks to this trade.
Oil & Gas Petronet, GSPL
We see the Fed as staying put on its gradual normalization path Specialty
SRF, Naveen Florine
Consensus expectations now price in only two or three more rate hikes until 2019-end. This Chemicals
contrasts with the Fed’s guidance of four more hikes to 3.25% by 2019-end. Our estimate for
a fair value of the Fed rate is closer to 4%, and we expect it to breach 3% in the next 12
months. At those levels, the Fed rate will just be above the estimated neutral level of 3%.
US solidity is in contrast with the market’s volte-face

The concomitant occurrence of positive output gap (real GDP growth of 3.0-3.4% compared
with a potential 2%), negative unemployment gap (unemployment rate of 3.7% is less than the
non-inflationary level of 4.6%) and the decline in initial jobless claims to 40-50-year lows
suggest a strong and sustainable growth traction. Households have refrained from leveraging
the wealth effect of the increase in net worth. The phenomenon of wage growth outpacing
productivity gains should push up core inflation. Indeed, core PCE inflation has been moving
up gradually to 2% from ~1% in 2016. This is higher than the long-period average of 1.7%
during 1997-2018. The receding fiscal impulse in 2019 will likely be counterbalanced by
corporate investments and a pick-up in credit demand.
Business sector exhibits confidence and banks’ willingness to lend rises

Small business surveys exude confidence not seen since mid-1980s. They demonstrate a
strong intent to hire, pay more wages, and an increase product prices. Senior banker surveys
also suggest that there is an increasing willingness to lend to firms and households.
Fed will ignore market volatility; financial stability resilient

A normal correction in equity prices is unlikely to change the Fed’s stance. The Fed’s latest
assessment of financial vulnerabilities indicates only a moderate degree of risk across 1)
leverage of financial institutions; 2) their fund mismatches; 3) debt levels of corporates and
households; and 4) valuations across asset classes.
Indian G-sec curve flattening and the INR strengthening is expected to reverse This report is solely produced by Emkay Global. The
following person(s) are responsible for the production
The recent softening in India 10-year G-sec yields to 7.60% is largely contributed by global of the recommendation:
factors, which is likely to reverse. Our model fair-value for 10-year G-sec still stands at 8.4% and
expect it to harden toward 8% by Mar’19. We also maintain our INR/USD target at 75. Dhananjay Sinha
dhananjay.sinha@emkayglobal.com
Maintain base-case Nifty at 10400-11000; the broader market still vulnerable +91-022-66242435
We believe that the short-term shift in market views may reverse. The market is still above the
fair value and the likelihood of global liquidity relapsing into a significant surplus is low. Our Kruti Shah
base-case for the Nifty stands at 10400-11000 over the next 12 months vs. 10900 currently. kruti.shah@emkayglobal.com
Hence, our sectoral position is: Overweight on IT services, Pharmaceuticals, BFSI (primarily +91-022-66121391
private banks) and Speciality Chemicals; Equal weight on Auto & Auto Ancillaries, Consumers,
Oil & Gas and Metals & Mining; and Underweight on Capital Goods, Construction & Infra, Emkay Research
Cement, Telecom, and Fertilizers & Agro Chem.
Emkay Research is also available on www.emkayglobal.com, Bloomberg EMKAY<GO>, Reuters and DOWJONES. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd,its respective connected and associated corporations and affiliates are the distributors of the research reports, please refer
to the last page of the report on Restrictions on Distribution. In Singapore, this research report or research analyses may only be distributed to Institutional Investors,Expert Investors or Accredited Investors as defined in the Securities and Futures Act, Chapter 289 of Singapore
ED: ANISH MATHEW SA: DHANANJAY SINHA

India Strategy India Equity Research | India Strategy
We see the Fed as staying put on its gradual normalization path
Exhibit 1: Conventional Taylor rule estimates based on backward Exhibit 2: Forward-looking Taylor rule estimate also indicates
looking data indicate the Fed rate higer than 5.0% further normalization (current fair value ~4%)
10 12
8 10
6 8
4 6
4
2 2
0 0
-2 -2
-4 -4
-6
-6
Oct-04
Oct-90
Oct-92
Oct-94
Oct-96
Oct-98
Oct-00
Oct-02
Oct-06
Oct-08
Oct-10
Oct-12
Oct-14
Oct-16
Oct-18
Oct-98
Oct-90
Oct-92
Oct-94
Oct-96
Oct-00
Oct-02
Oct-04
Oct-06
Oct-08
Oct-10
Oct-12
Oct-14
Oct-16
Oct-18
FED Rate Avg. 2 Emkay forward looking models
FED Rate Emkay Baseline model
Based on various estimates of Taylor Rule reaction function for US Fed rate which is Model incorporates future expectation variables (10-year US Treasury yield-core
modeled on variables like inflation gap, output gap, unemployment gap, estimated desired inflation) is a better predictor
real interest rate and inflation target; Emkay estimate based on Core PCE inflation, Source: Bloomberg, Emkay Research
Unemployment gap=unemployment rate-natural rate of unemployment (NAIRU);
Source: Bloomberg, Emkay Research
Exhibit 3: Fed’s normalization is resulting in a moderation in primary liquidity in emerging markets

(USD bn)
Change in Fx Reserves
1200
800
400
0
-400
-800
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018E
2019E
2020E
EM Asia LatAm Mid East & N Africa All
Source: IMF, Emkay Research
Exhibit 4: Portfolio flows into EMs have been contracting with Fed normalization (USD bn)
200 Portfolio flows in EMs
100
0
-100
-200
-300
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018E
2019E
LatAm EM Asia LatAm All

Source: IMF, Emkay Research
Emkay Research is also available on www.emkayglobal.com, Bloomberg EMKAY<GO>, Reuters and DOWJONES. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd,its respective connected and associated corporations and affiliates are the distributors of the research reports, please refer to the
last page of the report on Restrictions on Distribution. In Singapore, this research report or research analyses may only be distributed to Institutional Investors,Expert Investors or Accredited Investors as defined in the Securities and Futures Act, Chapter 289 of Singapore
ED: ANISH MATHEW SA: DHANANJAY SINHA December 4, 2018 | 2

Most leading indicators suggest much higher Fed rate

for the current set of economic data
The broad outlook on inflation is that cyclical factors such as the tightening in labor
market conditions are now coinciding with US GDP growth higher than the potential 2%.
Structural contributors to low US inflation since 1990s are fading out with rising
protectionism and lower average labor productivity growth. Overall, therefore, there is a
stronger case for US core inflation sustaining closer to the Fed’s target of 2%.
Core inflation moving higher: Core PCE inflation has been moving up gradually to 2% from
~1% in 2016, with the average over Mar-Sep standing at 2.2%. This is comparatively higher than
the long-period average of 1.7% during 1997-2018 (the average prior to the 2008 GFC is 2.2%).
US headline inflation and core PCE inflation are dependent significantly on unit labor cost growth
(it captures the net impact of wage cost and labor productivity), import price inflation, and trade
openness (Exhibit 16).
Labor market suggests increasing labor costs: From a cyclical stand point, the drop in
unemployment level to 3.7% in Oct’18, lower than the non-inflationary level of unemployment of
4.6%, is gradually resulting in higher growth in weekly hourly earnings (3.4% YoY in Oct’18, the
highest since 2009). With labor productivity rising by 1.4-1.5%, the unit labor cost has been
increasing by ~1.8-1.6% YoY, which is lower than core PCE inflation (Exhibits 12, 14-15).
In our view, leading indicators suggest a strengthening in wage growth outlook arising from the
tightening in labor markets, as the growth cycle progresses the wage growth may outpace
productivity gains. This will result in higher unit labor cost.
Structural factors behind the decline in US inflation since 1990s are receding: Importantly,
the reduction in import tariffs since early 1990s and the sustained improvement in productivity
growth, led by growth in technology, were the major factors behind the structural decline in US
inflation from the highs of 3-4% during 1990-1994.
Current trends indicate that these structural supporting factors are fading. First, increased
protectionist measures of the US is leading to higher domestic costs. Import price inflation has
been hovering around 3.0-3.5% for the most part of 2018. Second, average labor productivity
growth has declined to 1-2% since the 2008 GFC from an average range of 3-4% in the late-
1990s and 5% immediately after the post crisis bounce back.

Exhibit 5: Fed rate vs. Unemployment gap (UR-NAIRU) - (%) Exhibit 6: Fed rate vs. Core PCE inflation (%)
10 5
10 -2
-1 8 4
8
0
6 1 6 3
4 2 4 2
3
2 2 1
4
0 5 0 0
Oct-00
Apr-90
Oct-91
Apr-93
Oct-94
Apr-96
Oct-97
Apr-99
Apr-02
Oct-03
Apr-05
Oct-06
Apr-08
Oct-09
Apr-11
Oct-12
Apr-14
Oct-15
Apr-17
Oct-18
Jul-94
Jul-11
Jan-03
Jun-04
Sep-91
Dec-95
Aug-01
Nov-05
Sep-08
Dec-12
Aug-18
Apr-90
Feb-93
Oct-98
Mar-00
May-97
Apr-07
Feb-10
May-14
Oct-15
Mar-17
Fdfd UR gap (reverse axis, rhs) Fdfd PCE core
Source: Bloomberg, Emkay Research Source: Bloomberg, Emkay Research
Exhibit 7: Fed rate vs. Core CPI inflation (%) Exhibit 8: Fed rate vs. imported inflation (%)
10 6 10 30
8 5 20
8
4 10
6 6
3 0
4 4
2 -10
2 1 2 -20
0 0 0 -30
Oct-00
Apr-90
Oct-91
Apr-93
Oct-94
Apr-96
Oct-97
Apr-99
Apr-02
Oct-03
Apr-05
Oct-06
Apr-08
Oct-09
Apr-11
Oct-12
Apr-14
Oct-15
Apr-17
Oct-18
Apr-90
Oct-91
Apr-93
Oct-94
Apr-96
Oct-97
Apr-99
Oct-00
Apr-02
Oct-03
Apr-05
Oct-06
Apr-08
Oct-09
Apr-11
Oct-12
Apr-14
Oct-15
Apr-17
Oct-18
Fdfd CPI core Fdfd Import price inflation ((rhs)

Exhibit 9: Average weekly hour worked back to 2007 levels Exhibit 10: GDP growth has remained resilient at 2-4%
10 35 10 6
8 35 8 4
34 2
6 6
34 0
4 4
33 -2
2 33 2 -4
0 32 0 -6
Apr-90
Oct-91
Apr-93
Oct-94
Apr-96
Oct-97
Apr-99
Oct-00
Apr-02
Oct-03
Apr-05
Oct-06
Apr-08
Oct-09
Apr-11
Oct-12
Apr-14
Oct-15
Apr-17
Oct-18
Oct-12
Apr-90
Oct-91
Apr-93
Oct-94
Apr-96
Oct-97
Apr-99
Oct-00
Apr-02
Oct-03
Apr-05
Oct-06
Apr-08
Oct-09
Apr-11
Apr-14
Oct-15
Apr-17
Oct-18
Fdfd Avg weekly hrs non-farm payroll Fdfd GDP real (YoY)
Exhibit 11: Productivity growth of labor has remained low; Exhibit 12: Weekly earnings growth at 3.4% is a decadal high and is
improving moderately in recent periods outpacing improvement in labor productivity growth at 1.3%
10 -2 6 5
-1 5
8 0 4
Reverse axis
1 4
6 3
2 3
4 3 2
2
2 4 1
5 1
0 6 0 0
Oct-12
Apr-06
Oct-06
Apr-07
Oct-07
Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
Oct-10
Apr-11
Oct-11
Apr-12
Apr-13
Oct-13
Apr-14
Oct-14
Apr-15
Oct-15
Apr-16
Oct-16
Apr-17
Oct-17
Apr-18
Oct-18
Apr-90
Oct-91
Apr-93
Oct-94
Apr-02
Oct-03
Apr-96
Oct-97
Apr-99
Oct-00
Apr-05
Oct-06
Apr-08
Oct-09
Apr-11
Oct-12
Apr-14
Oct-15
Apr-17
Oct-18
Fdfd Labor productivity (YoY, rhs) Fdfd Avg weekly hrs earning (YoY)

Upside risk to core inflation from gaining wage growth net of labor productivity
Exhibit 13: Core CPI inflation at 2%, dependence on unit labor cost Exhibit 14: ULC is growing 1.8-2.0% since 2014, higher than LT
average of 1.4%; while this should be sufficient to achieve the 2%
Fed target, PCE inflation is depressed by lower import inflation
8 6
6
4
4
2
2
0 0
-2 -2
-4 -4
Nov-12
Nov-91
Nov-94
Nov-97
Nov-00
Nov-03
Nov-06
Nov-09
Nov-15
Nov-18
May-05
May-90
May-93
May-96
May-99
May-02
May-08
May-11
May-14
May-17
Nov-97
Nov-09
Nov-91
Nov-94
Nov-00
Nov-03
Nov-06
Nov-12
Nov-15
Nov-18
May-90
May-93
May-96
May-99
May-02
May-05
May-08
May-11
May-14
May-17
CPI core Unit Labor cost (6mma) PCE core Unit Labor cost (6mma)
Exhibit 15: Decline in labor productivity growth leads to higher core Exhibit 16: Decline in import inflation has depressed core PCE
inflation if accompanied by rising unit labor cost inflation at 1.2%, but core CPI inflation at 1.8% is close to the 2%
Fed target
6 6 6 30
5 5 5 20
4 4 4 10
3
3 3 0
2
2 2 -10
1
1 0 1 -20
0 -1 0 -30
Nov-91
Nov-94
Nov-97
Nov-00
Nov-03
Nov-06
Nov-09
Nov-12
Nov-15
Nov-18
May-90
May-02
May-14
May-93
May-96
May-99
May-05
May-08
May-11
May-17
Nov-18
Nov-91
Nov-94
Nov-97
Nov-00
Nov-03
Nov-06
Nov-09
Nov-12
Nov-15
May-90
May-93
May-96
May-99
May-02
May-05
May-08
May-11
May-14
May-17
CPI core Labor productivity (6mma) CPI core Import price inflation ((rhs)

Strengthening labor markets, improved household

conditions imply sustainable consumption growth
The gradual tightening in the labor markets along with improved pricing power of firms
The gradual tightening in the can result in a wage-price feedback loop, sustaining personal consumption expenditure
labor markets and improved in 2019 and eventually leading to higher investments. The dissipation of the fiscal boost
pricing power of firms can result of 2018 is a worry for growth as we move ahead, but there is a potential counter balance
in a wage-price feedback loop, of a relapse in credit demand-led growth if household conditions remain strong.
sustaining personal consumption
Improving wage growth outlook: The concomitant occurrence of a positive output gap (real
expenditure in 2019 and
GDP growth of 3.0-3.4% compared with potential 2%), negative unemployment gap (actual
eventually leading to higher
unemployment rate of 3.7%, less than the non-inflationary level of 4.6%) and the decline in initial
investments. The dissipation of
jobless claims to 40-50 years low suggest better traction in household income growth (Exhibits
the fiscal boost of 2018 is a worry
17-19). Indeed, the gradual tightening has resulted in a rise in average weekly hourly wages,
for growth as we move ahead,
which are now growing 3.4% YoY even as labor participation rate has stopped declining. While
there is a potential counter
the productivity of labor has improved in the recent quarters to an average 1.3%, compensation
balance of a relapse in credit
growth of labor (3.0-3.5%) is rising faster, resulting in a firming-up of growth in labor cost per unit
demand-led growth if household
of output (or unit labor cost).
conditions remain strong.
Firm-level surveys confirm pricing power; investments and credit growth to
counterbalance receding fiscal impulses in 2019: Separately, NFIB's Small Business
Optimism Index at 107 in Oct’18 is the highest since 1984, reflecting better sales, pricing power,
and hiring. The assessment of small business survey indicator suggests that firms are optimistic
about future economic and demand outlook, which is reflecting in their strong willingness to hire,
pay higher compensation, and undertake compensating price hikes. While investment plans
have improved, it is still lower than that of the pre-crisis levels (Exhibits 21-22).
These indicators suggest that a gradual tightening in labor markets along with improved pricing
power of firms can result in a wage-price feedback loop, sustaining personal consumption
expenditure in 2019, and eventually leading to higher investments.
The dissipation of the fiscal boost of 2018 is a worry for growth as we move ahead, there is a
counter balance of a relapse in credit demand-led growth if household conditions remain strong.
We also note that, unlike the previous cycles, the spillover impact of the regain in household net-
worth on household leverage is lacking (Exhibits 25-26). So, the critical thing to watch is the
development in the US labor market, as well as wage and productivity growth.
Exhibit 17: Unemployment rate at 3.7% (Oct’18) falls significantly Exhibit 18: Real GDP growth has recovered to 2006 levels and
below the natural rate of unemployment at 4.6% output gap has narrowed substantially compared with 2009
11 6
10 4
9
2
8
7 0
6 -2
5 -4
4
3 -6
1990Q3
1992Q3
1994Q3
1996Q3
1998Q3
2000Q3
2002Q3
2004Q3
2006Q3
2008Q3
2010Q3
2012Q3
2014Q3
2016Q3
2018Q3
Oct-04
Oct-90
Oct-92
Oct-94
Oct-96
Oct-98
Oct-00
Oct-02
Oct-06
Oct-08
Oct-10
Oct-12
Oct-14
Oct-16
Oct-18
Unemployment rate Natural rate of unemployment Real GDP (% YoY) Potential GDP (% YoY)
Source: US. Bureau of Labor Statistics, Emkay Research Source: Bloomberg, Emkay Research

Exhibit 19: Initial weekly jobless claims (nos) declined to the lowest Exhibit 20: US House price index has risen since mid-2012, without
level in 50 years much HH leveraging; currently, close to the 2006 peaks
250
800000 Inital jobless claims
700000 200
600000
500000 150
400000
300000 100
200000
100000 50
Oct/90
Oct/92
Oct/94
Oct/96
Oct/98
Oct/00
Oct/02
Oct/04
Oct/06
Oct/08
Oct/10
Oct/12
Oct/14
Oct/16
Oct/18
0
Nov-76
Nov-88
Nov-00
Nov-12
Nov-67
Nov-70
Nov-73
Nov-79
Nov-82
Nov-85
Nov-91
Nov-94
Nov-97
Nov-03
Nov-06
Nov-09
Nov-15
Nov-18
Case Shiller 10 cities (SA) Case Shiller 20 cities (SA)
Source: US. Employment and Training Administration, Emkay Research Source: Bloomberg, Emkay Research
Exhibit 21: Small business survey - optimism rising to 30-year highs Exhibit 22: Small business survey - hiring and compensation plans
to feed into compensating product price hikes
60 120 40
40 110 30
20
100 20
0
90 10
-20
-40 80 0
-60 70 -10
Sep-94
Sep-85
Sep-88
Sep-91
Sep-97
Sep-00
Sep-03
Sep-06
Sep-09
Sep-12
Sep-15
Sep-18
Sep-91
Sep-85
Sep-88
Sep-94
Sep-97
Sep-00
Sep-03
Sep-06
Sep-09
Sep-12
Sep-15
Sep-18
Expect Economy to Improve Small Business Optimism Price Plans Compensation Plans
Source: NFIB, Emkay Research Source: NFIB, Emkay Research
Exhibit 23: Personal consumption expenditure nominal (% YoY); Exhibit 24: Personal consumption expenditure real (% YoY) has
steady rise with rising inflation remained resilient
10 6
8 5
4
6
3
4 2
2 1
0
0
-1
-2 -2
-4 -3
Sep/03
Sep/04
Sep/05
Sep/06
Sep/07
Sep/08
Sep/09
Sep/10
Sep/11
Sep/12
Sep/13
Sep/14
Sep/15
Sep/16
Sep/17
Sep/18
Sep/04
Sep/90
Sep/92
Sep/94
Sep/96
Sep/98
Sep/00
Sep/02
Sep/06
Sep/08
Sep/10
Sep/12
Sep/14
Sep/16
Sep/18
Exhibit 25: Ballooning household net worth (assets-liabilities) since Exhibit 26: US households restrain consumption, prefer to save (%)
the GFC (2008) has not boosted consumption, unlike earlier phase
800 90 18 88
US household personal consumption and networth (%
personal income) 16 86
85 14 84
600 82
12 80
80 10 78
8 76
400 6 74
75 72
4 70
2 68
200 70 0 66
Apr-83
Apr-48
Apr-53
Apr-58
Apr-63
Apr-68
Apr-73
Apr-78
Apr-88
Apr-93
Apr-98
Apr-03
Apr-08
Apr-13
Apr-18
Apr-58
Apr-63
Apr-68
Apr-73
Apr-78
Apr-83
Apr-88
Apr-93
Apr-98
Apr-03
Apr-08
Apr-13
Apr-18
Networth/PDI PCEC/Personal income (rhs) Personal saving/PDI PCEC/Personal income (rhs)

Source: Federal Reserve, Emkay Research Source: Federal Reserve, Emkay Research

Rise in net worth of US households did not induce

leveraged consumption; the Fed won’t worry much
about market volatility
To the extent that the swelling of the value of financial assets is detached from household
behavior, we believe the Fed will not be unduly worried about financial market volatility
Economic recovery, The buoyancy in financial markets, especially equities, has propelled the value of financial assets
improvements in employment and held by the US households. The total assets of the US households increased to 553% of their
rise in wages appear to be the annual personal disposable income (PDI) by Q2 2018 even when their financial liabilities
primary driving forces behind continued to decline to 103% of PDI from a peak of 134% prior to the 2008 GFC. Hence, the net
better household consumption; it worth of the US households (asset-liabilities) has risen to 700% of PDI, surpassing the earlier
is not propelled by historically peak in 2008 (Exhibits 27-29).
high net-worth or leveraging. This
is starkly in contrast with the However, contrastingly, the steep rise in net worth has not resulted in a wealth effect-induced
behavior seen since 1980. leveraging of households and the resulting consumption. Hence, while personal consumption
appears to be the key driver of the recent growth recovery, the PCE/GDP ratio of 79% in Q2 is
still much lower than 83-84% in 2004-2006. In addition, the financial debt servicing/PDI for the
US households is still at a 40-year low despite the 200bp hike in the Fed rate in the current cycle
To the extent that the recent (Exhibit 35).
household behavior is detached The household saving rate has more than doubled from 3.4% of personal income in 2006 to
with net-worth, we believe that 7.2% (Exhibit 26). Data from senior banker surveys suggest that the decline in households’
Fed will not be unduly worried leverage (relative to their income) is not because of the unwillingness of banks to lend to them
about financial markets volatility (Exhibits 30, 32-34).
Hence, an important conclusion is that the gains in economic recovery, improvements in

employment, and the rise in wages appear to be the primary driving force behind the better
consumption of US households; it is unlikely to have been propelled by the historically high net-
worth or debt. This is starkly in contrast with the behavior seen since 1980 (Exhibits 23-24).
As a corollary, therefore, to the extent that the swelling of the value of financial assets is detached
with household behavior, which appears to be linked more to the labor market outlook, we believe
that the Fed will not be unduly worried about financial market volatility. The upshot is that it is the
strength in the labor market that continues to propel higher wage growth and inflation, so the Fed
will continue on its normalization path, in our view.
Exhibit 27: Unlike in the past, the rise in wealth of US households did Exhibit 28: Recovery in housing sector since 2008 not backed by
not lead to higher leverage borrowings, expansion
Balancesheet of US Households (% PDI) US HH liabilities (% PDI)
800 150
600
100
400
200 50
0
-200 0
1954:Q4
1998:Q4
1952:Q1
1957:Q3
1960:Q2
1963:Q1
1965:Q4
1968:Q3
1971:Q2
1974:Q1
1976:Q4
1979:Q3
1982:Q2
1985:Q1
1987:Q4
1990:Q3
1993:Q2
1996:Q1
2001:Q3
2004:Q2
2007:Q1
2009:Q4
2012:Q3
2015:Q2
2018:Q1
1952:Q1
1954:Q4
1957:Q3
1960:Q2
1963:Q1
1965:Q4
1968:Q3
1971:Q2
1974:Q1
1976:Q4
1979:Q3
1982:Q2
1985:Q1
1987:Q4
1990:Q3
1993:Q2
1996:Q1
1998:Q4
2001:Q3
2004:Q2
2007:Q1
2009:Q4
2012:Q3
2015:Q2
2018:Q1
Total Liabilities, Nonfinancial assets Financial Assets Home Mortgages Consumer Credit Other Liabilities

Exhibit 29: US households’ financial assets have risen to an all-time Exhibit 30: Consumer behavior indicates simultaneous
high, significantly on the back of rising equity markets deleveraging, higher savings and a decline in consumption rate (%)
600 US Household financial assets/Personal disposable 160 90

income (%) 140
85
120
400 100 80
80
200 60 75
40
70
0 20
0 65
1985:Q1
2018:Q1
1952:Q1
1954:Q4
1957:Q3
1960:Q2
1963:Q1
1965:Q4
1968:Q3
1971:Q2
1974:Q1
1976:Q4
1979:Q3
1982:Q2
1987:Q4
1990:Q3
1993:Q2
1996:Q1
1998:Q4
2001:Q3
2004:Q2
2007:Q1
2009:Q4
2012:Q3
2015:Q2
Apr-58
Apr-48
Apr-53
Apr-63
Apr-68
Apr-73
Apr-78
Apr-83
Apr-88
Apr-93
Apr-98
Apr-03
Apr-08
Apr-13
Apr-18
Deposits Pension entitlements Others Equities HH Debt/PDI PCEC/Personal income (rhs)
Exhibit 31: Change in net worth: Household and non-profit organizations
Source: Federal Reserve, Emkay Research
Exhibit 32: US households leveraging has moderated since 2008, it Exhibit 33: Recovery in credit demand from small US firms
is unlikely to have occurred due to banks’ lack of willingness to lend
Bank survey: % of banks reporting increased willingness 60 Bank survey: % of banks reporting strong corporate &
40 to make consumer loans industrial loans-small firms
40
20
20
0 0
-20
-20
-40
-40 -60
-60 -80
1990Q2
1991Q2
1992Q2
1993Q2
1994Q2
1995Q2
1996Q2
1997Q2
1998Q2
1999Q2
2000Q2
2001Q2
2002Q2
2003Q2
2004Q2
2005Q2
2006Q2
2007Q2
2008Q2
2009Q2
2010Q2
2011Q2
2012Q2
2013Q2
2014Q2
2015Q2
2016Q2
2017Q2
2018Q2
1990Q2
1991Q2
1992Q2
1993Q2
1994Q2
1995Q2
1996Q2
1997Q2
1998Q2
1999Q2
2000Q2
2001Q2
2002Q2
2003Q2
2004Q2
2005Q2
2006Q2
2007Q2
2008Q2
2009Q2
2010Q2
2011Q2
2012Q2
2013Q2
2014Q2
2015Q2
2016Q2
2017Q2
2018Q2
Exhibit 34: Moderate pick-up in credit demand from large US Exhibit 35: Household financial obligation remains at a multi-decade
corporates low, aided by deleveraging and low real interest rates
Bank survey: % of banks reporting strong C&I loans-
medium & large firms Household financial service obligations/personal
60 18.5
disposable income (%)
40
20 17.5
0
16.5
-20
-40
15.5
-60
-80
14.5
1990Q2
1991Q2
1992Q2
1993Q2
1994Q2
1995Q2
1996Q2
1997Q2
1998Q2
1999Q2
2000Q2
2001Q2
2002Q2
2003Q2
2004Q2
2005Q2
2006Q2
2007Q2
2008Q2
2009Q2
2010Q2
2011Q2
2012Q2
2013Q2
2014Q2
2015Q2
2016Q2
2017Q2
2018Q2
Apr-80
Apr-82
Apr-84
Apr-86
Apr-88
Apr-90
Apr-92
Apr-94
Apr-96
Apr-98
Apr-00
Apr-02
Apr-04
Apr-06
Apr-08
Apr-10
Apr-12
Apr-14
Apr-16
Apr-18

US financial conditions remain strong despite the Fed’s

normalization thus far; Asia, ex-Japan, experiences
some tightening
Despite eight rate hikes thus far since 2015, financial condition indicators for the US economy
remain fairly strong despite the recent corrections in the US stock markets. In addition, as per
the latest assessment of the Fed, all the four blocks of financial assessments viz. a moderate
degree of risk across 1) leverage of financial institutions; 2) their fund mismatches; 3) debt levels
of corporates and households; and 4) valuations across asset classes.
It reflects in a gradual rise in financial leverage indicators of non-financial companies, which

remain fairly comfortable (Exhibit 36 & 37). This indicates that the Fed rate normalization since
late-2015 has been orderly despite the intermittent volatility. In the current scenario, it is unlikely
that a continued gradual normalization will create major financial market dislocations in the US
market that could endanger the macroeconomic recovery. The fact that the US has sustained a
solid recovery despite the steep appreciation in the US dollar and the Fed rate normalization is
enough evidence to indicate that the US economy has attained sufficient resilience.
In contrast, financial conditions in emerging markets have weakened, reflected in the sharp
currency depreciation and policy rate hikes amid an outflow of portfolio investments and a decline
in central banks’ forex reserves. The financial condition indicators for Asia, ex-Japan, have
worsened to levels seen in 2013, in the aftermath of the taper tantrum. The carry trade confidence
indicators have also dipped since Mar’18. But notwithstanding the recent corrections in equity
markets and higher rates, financial indicators for Asia are still significantly better than the 2008
GFC levels (Exhibits 38-39).
Overall, it appears that the continued normalization in the US Fed rate will sustain financial
market volatility, including in the US. But the tightening financial conditions for the emerging
markets, including in India, could be more pronounced.
Exhibit 36: US financial conditions currently as conducive as they Exhibit 37: US Financial leverage-Non finance sector, rise showing
were in early 1990s improvement in business confidence
3.0 Chicago Fed National Financial Conditions Index 3 Financial leverage-Non finance sector
2.5
2.0 2
1.5
1.0 1
0.5
0
0.0
-0.5 -1
-1.0
-1.5 -2
Oct/93
Oct/13
Oct/90
Oct/91
Oct/92
Oct/94
Oct/95
Oct/96
Oct/97
Oct/98
Oct/99
Oct/00
Oct/01
Oct/02
Oct/03
Oct/04
Oct/05
Oct/06
Oct/07
Oct/08
Oct/09
Oct/10
Oct/11
Oct/12
Oct/14
Oct/15
Oct/16
Oct/17
Oct/18
Oct/00
Apr/90
Oct/91
Apr/93
Oct/94
Apr/96
Oct/97
Apr/99
Apr/02
Oct/03
Apr/05
Oct/06
Apr/08
Oct/09
Apr/11
Oct/12
Apr/14
Oct/15
Apr/17
Oct/18
Exhibit 38: Financial confidence index has moderated for Asia Exhibit 39: Asian financial carry trade confidence has tapered in
recent years but still significantly higher than pre-2008 crisis
4 215
2
195
0
175
-2
155
-4
-6 135
-8 115
-10 95
-12 75
Nov/04
Nov/11
Nov/99
Nov/00
Nov/01
Nov/02
Nov/03
Nov/05
Nov/06
Nov/07
Nov/08
Nov/09
Nov/10
Nov/12
Nov/13
Nov/14
Nov/15
Nov/16
Nov/17
Nov/18
Nov-02
Nov-15
Nov-99
Nov-00
Nov-01
Nov-03
Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-16
Nov-17
Nov-18
EU Asia ex Japan Financial confidence in carry trade-Asia

Source: Bloomberg, Emkay Research Denotes the confidence of carry trade if USD is invested for three months in
countries including India, Indonesia, Philippines & Thailand
ED: ANISH MATHEW SA: DHANANJAY SINHA December 4, 2018| 10

Recent curve flattening is temporary; maintain 10-year

G-sec fair value at 8.4%, March end at 8%, INR/USD at 75
We believe that the softening in India G-sec 10-year yields to 7.60% from a peak of 8.20%
in early Oct’18 is largely contributed by global factors, with domestic impulses
contributing modestly. The steep 30% decline in global crude prices to USD60/bbl, the
decline in US 5-year break even inflation spilled over to dovish market perception on the
Within our model framework, the
Fed. While the RBI also conducted aggressive OMO purchases since Sep’18, it was more
explanatory variables are moving
in response to the tightening liquidity conditions. Within our model framework, the
broadly in line with our projections.
explanatory variables are moving broadly in line with our projections. Hence, if our thesis
Hence, if our thesis of unchanged
of unchanged Fed rate normalization trajectory holds true (Fed rate at 3.0-3.25% by end
Fed rate normalization trajectory
of 2019), we believe that the recent softening in G-sec yields and the INR strength can
holds true (Fed rate at 3.0-3.25% by
reverse. Our model projection for 10-year fair value is maintained at 8.4%, and we expect
2019-end), we believe that the recent
it to harden toward 8% by Mar’19. In addition, we maintain our medium-term INR/USD
softening in G-sec yields and the INR
target at 75 factoring slower GDP growth and US dollar. A sustained normalization in the
strength can reverse.
US Fed rate is likely to see a lagged normalization in other countries; India will also head
toward higher policy rates. While the headline CPI inflation for India has declined to 3.3%
in Oct’18, the core inflation has inched up to over 6%.
Global trends dominate India G-sec softening and INR strength

US 5-year breakeven inflation has declined from 2.1% to 1.7% in tandem with the slide in crude
oil prices to sub-USD 60/bbl levels. India yield curve has also flattened synchronously (Exhibit
41-42). Indeed, the combination of USD weakening and the expectation for an early end to the
Fed normalization cycle has induced renewed FII flows into the Indian debt market.
Average weekly net purchases of FII in India debt increased to USD42mn following outflows
during most of the earlier part of FY19. This has been the primary reason for the decline in 10-
year G-sec yield to 7.6% (Exhibit 45).
OMO purchases of G-secs by RBI not the factor driving yields down
We reiterate our earlier view that the OMO purchases of G-secs by the RBI (Rs850bn YTD till
Nov'18) are not the real cause for softening in yields. In fact, historical data indicate a positive
correlation between the RBI’s OMO purchases and the changes in G-sec yields (Exhibit 43-44).
Fundamental determinants for G-sec yields moving in line with our assumptions
The continued gains in bank credit growth to 15% by the end of Nov’18 is building up toward our
year-end target of 16% (Mar’19). However, deposit growth has been lagging behind at 9.1%,
much lower than our year-end projection of 14.5% (Exhibit 49). This has led to a quicker rise in
bank credit deposit ratio (C/D) to 77%.
The combination of a larger seepage in the form of currency absorption in the economy and a
reduction in the RBI’s forex reserves to USD393bn (down from the peak of USD426bn in Mar’18)
has resulted in slower money supply growth of 10.3%, reducing the money multiplier (M3 to base
money supply ratio) to 5.5x, which is lower than our expectation of 5.8x by the year-end.
The resultant tightness in systemic liquidity has prompted aggressive OMO purchases of G-secs
by the RBI, totaling up to Rs1.25tn by Dec’18. But we expect the OMO purchases to move up
further to Rs1.9-2.0tn by FY19-end.
We maintain our 10-year G-sec yield fair value at 8.4%, could end up at 8% by
FY19-end
Sustained normalization by the Fed to relapse the hardening bias for India yields: Our estimates
indicate that for every 100bp hike in the US Fed rate, India 10-year G-sec yield goes up by 43bp,
which is what we expect for the Fed rate trajectory. Long-term trends also show that the Fed's
monetary policy leads to actions by other major central banks (Exhibit 47-48). And, there are
clear indications from the ECB to start a tapering in bond purchases in 2019. The gaining pace
in growth in Europe has further to run, but with it gradually increasing core inflation to 1.0-1.1%
from the lows of 0.6% in 2015, the ECB has decided to end its QE from Dec'18. Hence, this
leading behavior of the US monetary policy will also ensure sustained strength in the USD in
2019.

In our view, the fundamental variables for a hardening of G-sec yield remains intact. The risk of
a slippage in fiscal deficit/GDP ratio for the Government of India from the targeted 3.3% has risen
with the fiscal deficit standing at Rs6.48tn till Oct’18, which has already exceeded the FY19
budget estimate of Rs6.24tn.
Exhibit 40: Gains in EM currencies is partial, the pivotal Chinese Yuan has not moved
40
Emerging markets currency performance (% change)
18
20
7
7
6
3
2
1
1
0
0
0
0
0
0
-1
-1
-1
-1
-1
-1
-2
-2
-2
-3
-4
-5
-5
-5
-6
-6
-6
-6
-7
-9
-9
-9
-20
-10
-11
-12
-12
-13
-13
-14
-14
-14
-15
-20
-40
-33
ARS-45
-60
KRW
TWD
HKD
PLN
TRY
INR
IDR
PHP
BRL
THB
ZAR
MYR
RON
CZK
PEN
COP
MXN
CLP
SGD
CNY
RUB
HUF
BGN
9-Oct 30-Nov 31-Jan 31-Oct
Exhibit 41: India G-sec yields softened from Oct peak on relapse of Exhibit 42: Dovish view on US inflation and decline in crude fueling
dovish market view on Fed rate risk-on trade
8.3 2.1 90 2.1
2.0 85 2.0
8.1 80
1.9 75 1.9
7.9 1.8 70 1.8
1.7 65 1.7
7.7 60
1.6 55 1.6
7.5 1.5 50 1.5
6-Nov
2-Oct
9-Oct
16-Oct
23-Oct
30-Oct
13-Nov
20-Nov
27-Nov
4-Sep
28-Aug
11-Sep
18-Sep
25-Sep
13-Nov
20-Nov
6-Nov
2-Oct
9-Oct
16-Oct
23-Oct
30-Oct
27-Nov
4-Sep
28-Aug
11-Sep
18-Sep
25-Sep
India Gsec 10 year (%) US 5-Yr breakeven Inflation (%, rhs) Brent (USD/bbl) US 5-Yr breakeven Inflation (%, rhs)
Source: CMIE, Emkay Research Source: CMIE, Emkay Research
Exhibit 43: RBI’s OMOs were not the cause of softening G-sec yields Exhibit 44: Positive correlation: RBIs OMO purchases – G-sec yields
300
2000 12
12 1500 200
10 1000 10
100
500
8 8 0
0
-500 6
6 -100
-1000
4 -1500 4 -200
FY19YTD
FY11
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19YTD
FY08
FY11
FY14
FY17
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY09
FY10
FY12
FY13
FY15
FY16
FY18
Net OMO purchase (Rs bn) Gsec yield (average) Net OMO purchase/Change in base money Gsec yield (average)

Exhibit 45: FII turned net buyers in India debt with weak USD view, Exhibit 46: Our net liquidity indicators support yield-hardening view
but the yields appear to have soften on shallow conviction
150 Net FII purchases (weekly, INR bn) 8.5 3.45 430
100 3.40 420
50 8.0
3.35 410
0 3.30
7.5 400
-50 3.25
-100 3.20 390
7.0
-150 3.15 380
-200 6.5 3.10 370
5-Dec
23-Dec
19-Sep
7-Oct
30-Oct
17-Nov
21-Jun
3-Jun
25-Oct
12-Nov
30-Nov
10-Jan
28-Jan
5-Mar
23-Mar
16-May
14-Aug
1-Sep
9-Jul
15-Feb
27-Jul
10-Apr
28-Apr
10-Nov
8-Dec
9-Nov
12-Oct
13-Oct
27-Oct
24-Nov
22-Dec
5-Jan
19-Jan
6-Jul
26-Oct
29-Sep
2-Feb
16-Feb
11-May
8-Jun
22-Jun
2-Mar
16-Mar
30-Mar
25-May
20-Jul
3-Aug
17-Aug
31-Aug
14-Sep
28-Sep
13-Apr
27-Apr
Debt Equity Gsec 10 year (%) Bank credit/Fx Currency reserves Fx reserves (USD bn, rhs)
Exhibit 47: Rising in global policy rates will sustain INR/USD weakening if India growth lags
8 37
7 42
6 47
5 52
4 57
3 62
2 67
1 72
0 77
Feb-17
Feb-06
Feb-07
Feb-08
Feb-09
Feb-10
Feb-11
Feb-12
Feb-13
Feb-14
Feb-15
Feb-16
Feb-18
Feb-19
Euro Japan UK US Aus INR/USD (reverse scale, rhs)
Exhibit 48: Global central banks tend to follow Fed rate actions; India will be no different
%
13
11
9
7
5
3
1
-1
Nov-00
Nov-01
Nov-02
Nov-03
Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Nov-16
Nov-17
Euro Japan UK US Aus India 1-yr Gsec Nov-18


Exhibit 49: Our calculation suggests RBI’s OMO purchases in FY19 is still falling short of our estimate of Rs1.9tn
FY19
Monetary aggregate projections FY16 FY17 FY18 FY19E
(YTD Nov’18)
Sales growth of companies (%) 1.0 5.0 10.0 12.0 16.1
Credit growth (%) 10.9 8.2 10.3 16.0 14.9
Deposit growth (%) 9.3 15.3 6.7 14.5 9.1
Credit Deposit (CD) ratio 77.7 72.9 75.4 76.5 77.0
Incremental CD ratio 89.8 41.4 117.3 83.3 121.6
Currency/Deposit ratio 15.9 11.0 14.4 16.4 15.4
Time deposit/total deposit 90.0 87.7 87.6 88.0 89.4
Cash reserve ratio (R/M3) 5.0 4.7 4.6 4.4 3.5
Money multiplier (M3/H) 5.3 6.7 5.8 5.6 5.5
Stock (Rs bn) Growth % YoY
FY19
FY19E FY16 FY17 FY18 FY19E
(YTD Nov’18)
Deposits 140331 9.3 15.3 6.7 14.5 9.1
Money Supply (M3) 163345 10.1 10.1 10.5 15.6 10.3
Reserve money (H) 29992 13.0 13.1 27.3 24.0 17.6
Incremental
change (Rs bn)
Change in reserve money (H) 2523 -2803 5182 5826 3,832
RBI: Change in Rupee assets
RBI Lending 1625 -4180 2278 4446
Lending to government 605 1958 -1448 2955 2,568
Lending to banks 968 -6010 3659 1421 1,262
Change in FX assets 2562 137 3636 1380 2,368
less Net non-monetary liabilities of RBI 1689 -1208 736 0 2,379
867
OMO (Net purchase of G-sec) 523 1104 -887 1921
(+400bn in Dec’18)
Others including repo, WMA etc 82 854 -561 1034 1632
OMO % of change in Reserve money 20.7 -39.4 -17.1 33.0 22.6
Source: CMIE, Emkay Research
Exhibit 50: Predictive model estimates suggest increasing pressure on Indian G-sec yields
Dependent variable 10 year G-sec yield
Model I Model II Model III
Variable
Coefficient t-Stats Coefficient t-Stats Coefficient t-Stats
Bank credit/FCA 1.04 4.34 2.10 10.72 1.31 6.19
Fed rate 0.43* 4.53* 0.46 3.17 0.35 4.43
US 10YR 0.29* 1.87* 0.42 2.08
G-sec 10 yr (t-1) 0.49 6.35 0.46 5.69
R-squared 0.95 0.88 0.94
Adjusted R-squared 0.94 0.87 0.93
* Used slope dummy variable in Model I for Fed rate (=1 for FY98-FY08, =0 for FY09-FY15) and US 10 Yr (=0 for FY98-
FY08, =1 for FY09-FY15); Assumptions- Bank credit/FCA at 3.4 to 3.7, Fed rate rising to 3.0-3.25% from current 2.25%
and US 10 Yr treasury yield at 3.5% and 10 Yr G-sec (-1, average in past one year) at 7.0%; Model1 projection for 10Yr G-
sec for in next 12 months is 8.4%; Coefficients are Statistically significant if t-Stats >=2
Source: CMIE, Bloomberg, Emkay Research

Market outlook: tapering domestic and global liquidity is

a risk to market multiples amid earnings downgrades
Earnings outlook: maintain 8-10% growth as a likely scenario; consensus at
20%+ is too optimistic; downgrade cycle to continue
In our view, the core earnings growth trajectory stands at ~10%. Consensus estimates for the
Nifty and the BSE 500 companies have undergone an earnings downgrade for FY19 by ~7%,
and yet the expected growth stands at 20%, which is considerably optimistic. We expect earnings
downgrades to continue.
India’s reflationary recovery may have peaked

Q2FY19 results of companies reflect a combination of a deceleration in sales growth, rising cost
pressure, a sharp depreciation in the Indian rupee and rising interest rates. These factors have
adversely affected the earnings growth of Indian companies. Core earnings growth for
benchmark indices (Sensex-NIFTY companies, ex-Oil & Gas and financials) has been a modest
6-7% yoy. With H1FY19 growth rates for all the Nifty companies averaging at 10-11% (Exhibit
54), the full-year consensus growth estimate for FY19 and FY20 at more than 20% looks very
optimistic (Exhibt 53). Hence, even after the 5% downgrade in earnings for FY19E and FY20E
post Q2 results, we believe that there is still room for a steep downgrade in the coming quarters.
Earnings growth boosters are: 1) higher central and state government spending in the run-up to
the upcoming elections (boosting consumption in both urban and rural areas); 2) a relapse of the
INR/USD weakening; and 3) the recent easing in commodity prices. In contrast, challenges might
emerge from the recent deceleration in global trade volumes, the fading-out of the fiscal multiplier
impact, higher financial costs, and uncertainty on government capital outlay. Beyond the
expectations of continued earnings downgrades, we believe that a tightening in global liquidity
conditions will have a tapering impact for market multiples, keeping the equity markets volatile.
Exhibit 51: Moderation in both domestic and global liquidity imply lower valuation multiple for the Nifty in response to earnings downgrades
Nifty projections FY18 FY19 FY20 FY21
EPS (10% growth)
430 473 520 572
Multiple
26 22 22 22
Base case* Index projection
11000 10406 11440 12584
Variation
0 -5.4 9.9 10.0
Multiple
26 25 25 25
Optimistic case Index projection
11000 11825 13000 14300
Variation
0 7.5 9.9 10.0
Multiple
26 19 19 19
Pessimistic case Index projection
11,000 8987 9880 10868
Variation
0 -18.3 9.9 10.0
+1SD -1SD
Long term average PE 19 21.6 16.4 Trailing 12m 23
In our base case, we are assuming that the trailing multiple will still be above the long-term average
Consensus projection = 24% compounding during FY18-FY21
Actual Long-term average EPS growth (FY08-FY18) = 4.1%
Maintain base-case for the Nifty at 10400-11000; the broader market still
vulnerable
In the context of a likely earnings downgrade, we believe that market multiples will be at risk due
to the fading liquidity scenario, both at the domestic and global levels. In addition, the renewed
hardening of risk-free rate (both domestic and global) should nudge market valuations to move
closer to the long-term average.
The quick turn of global sentiment has seen the Nifty rebounding 9% to 10900 and has ranged
mostly around our target range of 10400-11000 (as per our Oct 1, 2018 report) over the past two
months.
Based on our assessment, the market is still above the fair value and it will require the liquidity
conditions to turn favorable. We believe that the likelihood of global liquidity relapsing into
renewed surplus is low, given our view of the progression of rate normalization by the Fed,
expected renewed hardening in India yields and a weak INR outlook. Hence, we also maintain
that the broader market will remain volatile.

The following points highlight the persisting overvaluation conditions:
 For the Nifty, EPS has remained mostly flat over the past four years and in a likely scenario
of 8-10% in FY19-20, the current multiples of 24x PE and P/B of 3.4x (12-month trailing)
are high compared with the historical 10-year average. The Nifty PE average for the past
10 years is 19x, while the 20-year average is close to 16x (Exhibit 62-63).
 Currently, the ROEs for benchmark indices are hovering around 12-13% — much lower
than the 20% average during 2004-08 — and are similar to the levels seen in the aftermath
of the dotcom bubble bust (Exhibits 58-59).
 The uncertainty relating to higher risk-free rates, moderating global liquidity, INR
depreciation, and the ambiguity ahead of the general election in 2019 are likely to keep
investor conviction vulnerable.
 FII outflows from equities are to the extent of USD11.3bn until now (Apr-Nov’19). In Sep-
Oct’18, net sales of equity MFs have improved to an average of Rs 130bn, but it is still a
decline over the robust average of Rs180bn during Aug-Dec’2017 (Exhibit 67). This
recovery is largely led by a revival in wholesale flows, while net purchases under SIP
remains steady. We believe that this reversal is possibly because of the redemption in the
money market funds and could be temporary.
 Our base-case for the Nifty stands at 10400-11000 over the next 12 months vs. 10900
levels currently (Exhibit 51).
Even after the 19% decline in the mid-cap index, the trailing PE from 51x in Dec’17 to 33x in
Nov’18, it is still trading at a 38% premium to the benchmark Sensex and Nifty indices. The risk
is that it can go back to an average discount of 12-15%, instead of a premium, as it existed prior
to May’14.
Since we believe that the short- We maintain our sector positioning

term shift in global views may The quick change in market sentiment engendered from change in views on the Fed, gains in
reverse (we maintain a strong INR amid weak USD and softening in domestic yields. As a result, the market has shifted focus
dollar view and continued US Fed back to mid- and small-cap space, with many stocks bouncing over 20%. Battered sectors like
rate normalization), we consider Cement, Construction & Infrastructure, Engineering & Capital Goods and Transportation saw
the recent shift in market considerable recovery in response. In contrast, the underperformers were Auto & Auto
perception as an opportunity to Ancillaries, Banks & Financial Services, Consumer Goods, IT Services, Metals & Mining, and
strengthen our earlier stance. Pharmaceuticals.
Hence, we remain Overweight: Since we believe that the short-term shift in global views may reverse (we maintain strong dollar
IT services, Pharmaceuticals and view and continued US Fed rate normalization), we consider the recent shift in market perception
BFSI; Equal weight on Auto & as an opportunity to strengthen our earlier stance.
Auto Ancillaries, Power, Oil &
Gas, Consumers, Metals & Hence, our sectoral position is: Overweight on IT services, Pharmaceuticals, BFSI (primarily
Mining and Underweight on private banks) and Speciality Chemicals; Equal weight on Auto & Auto Ancillaries, Consumers,
Construction & Infra, Cement, Oil & Gas, Consumers, Metals & Mining; and Underweight on Construction & Infra, Cement,
Telecom, and Fertilizers & Agro Telecom, and Fertilizers & Agro Chem.
Chem. We remain cautious on
Exhibit 52: Our picks
the NBFC space.
Sector Stocks Sector Position
Auto & Anc Maruti EW
BFSI ICICI Bank, HDFC Bank OW
Consumers Nestle, United Breweries EW
Engineering & capital goods ABB UW
IT Services HCL Tech, Mphasis OW
Pharma Aurobindo Pharma, Dr Reddys OW
Metals Tata Steel EW
Cement UltraTech Cement UW
Oil & Gas Petronet, GSPL EW
Specialty Chemicals SRF, Naveen Florine OW
Source: Emkay Research

Exhibit 53: EPS growth 5% during FY09-17; FY19E consensus Exhibit 54: Modest recovery in earnings since the dip in FY16, future
estimate of 24% is optimistic trajectory seen at ~10%
50%
680
800 Nifty EPS (Rs/ Share) APAT growth (NIFTY)
700 40%
560
600 30%
466
439
427
422
421
391
500 20%
364
322
288
274
400 271 10%
229
188
300
167
0%
127
200 -10%
91
100 -20%
Q2FY08
Q4FY15
Q4FY07
Q4FY08
Q2FY09
Q4FY09
Q2FY10
Q4FY10
Q2FY11
Q4FY11
Q2FY12
Q4FY12
Q2FY13
Q4FY13
Q2FY14
Q4FY14
Q2FY15
Q2FY16
Q4FY16
Q2FY17
Q4FY17
Q2FY18
Q4FY18
Q2FY19
0
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19E
FY20E
Source: Capitaline, Emkay Research Source: Capitaline, Emkay Research
Exhibit 55: Recent rise in costs imply moderation margins in future Exhibit 56: Emkay universe: more earnings downgrades but target
price upgrades
25% EBITDA Margin (NIFTY ex BFSI, O&G) Target Prices - No of Upgrades (+)/Downgrades (-)
23% 100%
21% 50%
19% 0%
17% -50%
15% -100%
Q2FY08
Q2FY13
Q2FY18
Q4FY07
Q4FY08
Q2FY09
Q4FY09
Q2FY10
Q4FY10
Q2FY11
Q4FY11
Q2FY12
Q4FY12
Q4FY13
Q2FY14
Q4FY14
Q2FY15
Q4FY15
Q2FY16
Q4FY16
Q2FY17
Q4FY17
Q4FY18
Q2FY19
Q2FY13
Q2FY09
Q4FY09
Q2FY10
Q4FY10
Q2FY11
Q4FY11
Q2FY12
Q4FY12
Q4FY13
Q2FY14
Q4FY14
Q2FY15
Q4FY15
Q2FY16
Q4FY16
Q2FY17
Q4FY17
Q2FY18
Q4FY18
Q2FY19
NIFTY: Ebitda margin MA 4Qr Upgrades Downgrades
Source: Capitaline, Emkay Research Source: Company, Emkay Research
Exhibit 57: Progression of consensus estimates for NIFTY earnings (Rs)- Downgrades to continue in FY19E and FY20E
800 Nifty Forward EPS (Rs)

700
600
500
400
300
200
Jul-10
Jul-11
Jan-07
Jan-08
Dec-08
Dec-09
Nov-10
Nov-11
Jun-12
Jun-13
Jun-14
Jan-15
Jan-16
Sep-06
May-07
Sep-07
Aug-08
Apr-09
Aug-09
Apr-10
Oct-12
Oct-13
Dec-16
Dec-17
Nov-18
Sep-14
Sep-15
Aug-16
Apr-17
Aug-17
Apr-18
Aug-18
May-06
May-08
Mar-11
Mar-12
Feb-13
Feb-14
May-15
May-16
FY08 FY09 FY10 FY11 FY12

FY13 FY14 FY15 FY16 FY17
FY18 FY19E FY20E

Valuations still fairly rich

Exhibit 58: Nifty P/B vs. RoE (12-month trailing) Exhibit 59: Nifty PE vs. RoE (12-month trailing)
7 25 30
6 25
5 20
20
4
15
3
15 10
2
5
1
0 10 0
Nov-03
Nov-06
Nov-09
Nov-96
Nov-97
Nov-98
Nov-99
Nov-00
Nov-01
Nov-02
Nov-04
Nov-05
Nov-07
Nov-08
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Nov-16
Nov-17
Nov-18
Nov-02
Nov-96
Nov-97
Nov-98
Nov-99
Nov-00
Nov-01
Nov-03
Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Nov-16
Nov-17
Nov-18
P/B (x) - LHS ROE (%) - RHS P/E (x) ROE (%)
Exhibit 60: Nifty valuation long-term trend vs. RoE (12-month Exhibit 61: Mid-cap index still trading at a premium relative to
trailing) benchmark indices
Nifty valuation (PE/PB, x)/ROE(%) 60
0.30 2.0
50
0.25
1.5 40
0.20
0.15 1.0 30
0.10 20
0.5
0.05 10
0.00 0.0 0
Nov-96
Nov-97
Nov-98
Nov-99
Nov-00
Nov-01
Nov-02
Nov-03
Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Nov-16
Nov-17
Nov-18
Nov-15
Nov-03
Nov-06
Nov-09
Nov-12
Nov-18
Aug-04
May-11
May-05
Aug-07
Feb-06
May-08
Aug-10
Aug-13
Aug-16
Feb-09
Feb-12
May-14
Feb-15
May-17
Feb-18
P/B (x)/RoE PE (x)/RoE Sensex PE BSE mid cap PE
Exhibit 62: Nifty PE (trailing) long-term trend Exhibit 63: NIFTY PB (trailing) long-term trend
27 Nifty Index 4 Nifty Index

24
21 3
18
15 2
12
9 1
Nov-10
Nov-08
Nov-09
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Nov-16
Nov-17
Nov-18
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Nov-16
Nov-17
Nov-18
May-13
May-09
May-10
May-11
May-09
May-10
May-11
May-12
May-14
May-15
May-16
May-17
May-18
May-12
May-13
May-14
May-15
May-16
May-17
May-18
P/E Mean Mean+1SD Mean-1SD P/BV Mean Mean+1SD Mean-1SD

Exhibit 64: Premium/discount: Mid-cap PE/Sensex PE Exhibit 65: Indian equities susceptible to risk of concomitant decline
in FII and MF flows
3,000 Monthly net purchases Equity (USD mn)
100% PE: Midcap/Sensex (12 MMA)
80% 2,000
60%
1,000
40%
20% 0
0%
-1,000
-20%
-40% -2,000
Nov-05
Nov-02
Nov-03
Nov-04
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Nov-16
Nov-17
Nov-18
-60%
Nov-15
Nov-03
Nov-06
Nov-09
Nov-12
Nov-18
Aug-04
Aug-07
Aug-10
Aug-13
Aug-16
May-05
Feb-06
May-08
Feb-09
May-11
Feb-12
May-14
Feb-15
May-17
Feb-18
FII (12 ma) MF (12 ma)

Source: CMIE,, Emkay Research Source: CMIE, Emkay Research

Exhibit 66: Net sales of equity MFs decline also corresponds to the Exhibit 67: Net sales of equity MFs recovered on the back of a
fall in midcap index (net of redemptions) pullback in wholesale investors, SIP flows remained steady
Net Purchase of MF: Equity, ELSS, Arbitrage Funds (Rs bn)
2,000 60
204
203
Net MF purchases (USD mn)
189
1,500 50
Trailing PE (x)
163
250
161
160
154
148
127
124
121
200
112
1,000 40
107
106
101
94
94
91
150
82
82
82
500 30
65
65
52
49
45
37
100
0 20
50
-500 10 0
-1,000 0 -50
Jul-05
Jul-10
Jul-15
Nov-03
Jan-08
Nov-08
Jan-13
Nov-13
Jan-18
Nov-18
Sep-04
May-11
May-06
Sep-09
Sep-14
Mar-07
Mar-12
May-16
Mar-17
Dec-16
Jun-17
Dec-17
Jun-18
Aug-16
Oct-16
Apr-17
Aug-17
Oct-17
Apr-18
Aug-18
Oct-18
Feb-17
Feb-18
MF (12 ma) BSE mid cap PE SIP Wholesale All (Equity, arbitrage, ELSS)
Source: AMFI, Emkay Research Source: AMFI, Emkay Research
Exhibit 68: Mutual funds Equity AUMs at Rs6.8tn is seeing growth Exhibit 69: Net sales of Equity MFs have also tapered
deceleration
120 Equity MF AUM (% YoY) 700 Equity Net sale of all schemes (% YoY)
100 600
80 500
400
60
300
40
200
20 100
0 0
Jul-14
Jul-15
Jul-16
Jul-17
Jul-18
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Oct-18
Oct-13
Apr-14
Oct-14
Apr-15
Oct-15
Apr-16
Oct-16
Apr-17
Oct-17
Apr-18
Jul-14
Jul-15
Jul-16
Jul-17
Jul-18
Jan-16
Jan-14
Jan-15
Jan-17
Jan-18
Oct-13
Apr-14
Oct-14
Apr-15
Oct-15
Apr-16
Oct-16
Apr-17
Oct-17
Apr-18
Oct-18
-20 -100
Source: AMFI, Emkay Research Source: AMFI, Emkay Research

Exhibit 70: Summary of sector stance and picks

Sectors Stance Drivers
We expect the agri-input industry to benefit from: 1) a high degree of backward integration; 2) improved realizations in key
technical; 3) higher MSP on certain agri outputs; 4) government initiatives such as crop insurance, soil health cards would
Agri & continue to support farm economics. However, weaker-than-expected rainfall in some key regions may lead to lower traction in
UW
Chemicals agri inputs consumption in the rabi season. This, in turn, could lead to higher channel inventory in the system, resulting in weaker
outlook for the next season. We prefer backward-integrated players with a higher pie of the exports. Our top picks are
Coromandel and GSFC in the fertilizer space, and UPL Ltd and PI Industries in the agrochemicals.
The automobile sector is facing near-term concerns due to increasing cost of ownership and selective financing by some of the
NBFCs, which have led to tapering of volume growth in the recent months. We believe that these concerns are temporary and
volume growth will gradually improve driven by: 1) strong rural demand; 2) new launches; and 3) the government’s persistent
focus on infrastructure spending and rural economy. In addition, pre-buying before the transition to BS6 emission norms should
Automobiles EW
support volume performance in FY20. We expect double-digit volume growth in both Passenger vehicle and Two-wheeler
segments in FY20E. Ancillaries are expected to mirror performance of OEMs. We prefer ancillaries with exposure to both OEM
and replacement segments, such as Tyre companies, which have strong revenue growth and margin expansion prospects. Our
top picks are Maruti Suzuki, Eicher Motors, and Apollo Tyres.
Volume of Tiles and Plywood had been under pressure in FY18 due to 1) GST transition issues; 2) higher taxes under GST-
28%, which was later reduced to 18%; and 3) a delay in the implementation of E-Way bill. GVT tiles prices also fell after the
summit of Tiles players in Gujarat. Pressure on volumes, pricing and increasing raw material costs (Gas prices) impacted margins
Building
UW of Tiles and Plywood. Going forward, with the implementation of E-Way bill, we expect market share gain for organized players
Material
and expect volume growth to pick up. Gas price is also expected to reduce due to the recent decline in crude prices. Tiles prices
have also stabilized and we expect price hikes in Q3/Q4FY19E. Our preferred names in the building material space are Kajaria
and Century Ply.
While the government-induced spending on infrastructure capex aided many companies to post robust growth in order accretion
and backlog in the last few quarters, the trend is now slowing down. Although order flows from domestic T&D markets have
declined, the Railways and Construction segments have maintained the momentum. Private sector capex remains weak as the
industry is focused on improving productivity gains by sweating the existing assets and acquiring stressed assets. The recent
Capital
UW optimism around the revival in domestic investment cycle in the last 2-3 quarters has now waned. The slackness in concluding
Goods
the orders with advance payments, the slowdown in tendering and order finalization ahead of major elections, and the recent
liquidity crunch are likely to affect inflows in the next 2-3 quarters. We have a bias for companies having significant exposure to
overseas T&D, Infrastructure projects and international business. Our preferred picks are ABB, KEC International, and
Kalpataru Power.
Cement demand remained robust for the last few months led by government infrastructure projects; however, the tendency of
cement manufacturers to increase capacities and fight for market share gains put pressure on cement prices. The pressure on
cement prices and higher costs (coal, diesel and packaging costs) put pressure on margins of cement companies. Going forward,
Cement UW we expect an improvement in cement prices, which coupled with the softness in input costs (pet coke price is down by US$14/tn
compared with Q2 average, diesel prices are reducing and full benefits of relaxation in axle load norms have not yet materialized)
would lead to a margin expansion. We prefer UltraTech, ACC and Shree Cement among the large players. In small-cap, our
preferred picks are JK Cement and Star Cement.
Consumer companies’ recent performances and our channel checks suggest volume trends remain strong, supported by the
recovery in demand as well as the normalization in trade channels. Rural demand can see further improvement, driven by
government spending which are likely to support the recovery in volumes in future, in our view. Despite the recent steep hikes
Consumer EW
in MSPs, farm sector income is still under pressure; we expect further government support on this front in 2019. The competitive
scenario remains moderate but rising input inflation, driven by crude and higher crop prices, will restrict margin expansion in
FY20. Our preferred picks include Nestle, Marico and United Breweries.
Source: Company, Emkay Research

Exhibit 70: Summary of sector stance and picks (Contd…)

Credit growth to accelerate, led by retail and substitution demand from NBFCs: Credit growth for banks has improved
(~15%), underlined by healthy core retail growth, disintermediation from money markets to credit market and the recent liquidity
squeeze in NBFCs, providing another leg to growth. We expect banks (mainly private banks and SBI) to gain market share in
credit markets from non-bank players, particularly in the retail segment via direct lending and portfolio buyouts. On the corporate
front, green-field capex cycle is still far away, although there is some pick-up in brown field project funding and asset buyout
under NCLT resolutions, which coupled with slower corporate deleveraging and continued working capital demand, is likely to
accelerate corporate credit growth and thereby, supporting banks’ overall credit growth at 16% in CY19.
Margins/fees set to improve, leading to better PPoP growth: We believe that the margin outlook is set to improve on the
back of improving credit growth (LDR), lagged benefit of MCLR reset, reduced price-irrationality from non-bank players and the
absence of interest derecognition due to NCLT resolutions. The recent softness in G-sec yield could provide relief on treasury
front for PSBs, but could be short-lived. A pick-up in credit flow, higher forex volatility and TPD business should lead to better
fee growth, more so for private banks and SBI in the PSB space. PSBs may see some cost pressures on wage hike/retirement
cost, but digitally strong private players have started benefiting due to digitization, which coupled with an improvement in
margin/fees, should lead to better PPoP growth (from 8% in FY18 to 20% in FY20E).
Resolutions to drive down corporate NPAs; full-blown fresh retail NPA cycle unlikely to start barring a few spots: On
the corporate front, we believe that the peak of new NPA formation is behind and most corporate banks are guiding toward
moderating pace of NPA formation. Concerns around high-risk sectors such as real-estate/NBFC may remain for some time,
Financials OW with some possibility of some stray cases in real estate sector turning bad; however, the risk of any further big-ticket default in
NBFCs (ex-IL&FS) looks remote. NPA recognition in the power sector is largely done, with possibly a tail-left, but the provisioning
needs to accelerate. On an overall basis, we believe that corporate resolutions under NCLT lined up in 2HFY19 and beyond and
accelerating credit growth should lead to lower NPA ratios across corporate banks. The probability of a full-blown NPA formation
in retail segment looks low at this point. However, some of the segments such as LAP, PL, Education loans, and Affordable
housing may remain asset quality suspect.
NBFC turmoil, an opportunity for select private banks: Amid the NBFC turmoil, banks (mainly private banks) are likely to not
only gain credit/earnings momentum, but also re-rate further. We continue to like private banks with preference toward bell-
weather HDFCB and also ICICI Bank - underlined by its healthy capital ratios, growth/margin outlook, improving return ratios,
reasonable valuations and most importantly new MD & CEO with cleaner track record. We continue to prefer IndusInd post the
recent correction and believe that the BFIL merger should largely help absorb IL&FS shock; however, the past premium
valuations will take time to return. Yes Bank is struggling with a spate of board resignations/corporate asset-quality risks. We
believe that the appointment of new MD & CEO with retail orientation may provide some visibility. The softness in G-sec yields,
news around additional capital infusion and lumpy NPA resolution via the NCLT could generally bring some interest back in
PSBs; however, we prefer to remain selective with SBIN (attractive valuations, better growth outlook and heavy line-up of NPA
resolutions). Fundamentally, BOB too looks attractive from a long-term perspective (strong growth, better capital, reasonable
valuations); however, a merger with Dena/Vijaya Bank and higher IL&FS exposure is likely to remain an overhang in the near
term. We remain UW on the NBFC sector and EW on insurance (top pick Max Financial)
Cyclical pricing pressure is expected to abate from 2HFY19, as the impact of PBM consolidation starts to wane with further PBM
consolidation unlikely given that the industry has shrunk from well over 8-9 players to ~2-3 over 4-5 years. In the past, each
round of PBM M&A prompted generic companies to take a fresh round of pricing cuts even in portfolios where there was no
incremental increase in competition. Industry is at the beginning of a cyclical upturn due to the following factors: 1) A low earnings
base of 2-3 years for most Large-Cap companies. Combined with the fast pace of approvals, this means a window of 12-18
months where earnings can show a rapid recovery; 2) Several companies with significant USFDA-related regulatory issues
Healthcare- appear to be coming close to finally rectifying their deficiencies. This should boost approvals and growth in the short term.
OW
Pharma However, structural trends in the sector do not give any long-term comfort, although overall earnings decline is expected to
bottom out in the near term. Apart from the PBM consolidation and the impact on pricing dynamics, we see a proactive USFDA
as another structural headwind that is likely to diminish the long-term value of opportunities in the Complex Generics space in
the coming years. Overall, most generic companies are in effect left groping for a long-term viable business model. Top picks:
Our preferred picks are ARBP (Aurobindo Pharma), DRRD (Dr. Reddys) and LPC (Lupin) in the large-cap space, while we like
SVLS (Suven Life) and GRAN (Granules India) in the mid-cap space. To play the cyclical recovery, Lupin and Dr Reddys remain
our large-cap picks.
NHAI awarding momentum to continue with a strong pipeline of Rs700-800bn projects to be awarded in 2HFY19. The order book
to-sales ratio is strong in 3.5-4.5x range and companies are quite confident of achieving the financial closure of recently awarded
Infrastructure UW HAM projects by Sep-Oct’18, strengthening our belief for strong earnings growth in FY19 and FY20. We continue to prefer
players with low debt, controlled working capital cycle and 2-3 years of revenue visibility. Our top picks are Sadbhav Engg, PNC
Infra, KNR, and ITD Cementation.

Exhibit 70: Summary of sector stance and picks (Contd…)

There has been significant noises on IT spends recovery based on Gartner’s estimates and some macro-data points that have
been extrapolated into a structural growth recovery narrative for the Indian IT vendors. Three key drivers of growth for IT Services
vendors are: 1) increased spends, 2) enhanced market share and 3) growing outsourcing in new areas. However, data
across the three factors suggest no meaningful growth recovery for the Indian IT vendors. We do not see any anecdotal evidence
Information to back the ‘IT spends recovery’ thesis and continue to believe that select vendors with differentiated capabilities (growth-
OW
Technology oriented, client stickiness, differentiated Digital offerings, etc) would continue to maintain financial outperformance. As growth
performance remains skewed, we continue to remain selective in our approach and will go overweight by considering options
beyond the Nifty names. Maintain HCL Tech and Mphasis as our preferred picks with Buy rating given the comfort on sustained
growth prospects and reasonable valuations. Apart from these names, we like TCS, Intellect Design (INDA), L&T Infotech
(LTI), and Oracle Financial (OFSS).
Although broadcasters are expected to see healthy advertisement and subscription revenue growth over the 3-4 quarters,
structurally companies will get impacted due to the changing landscape. The implementation of the new tariff order and the
consolidation in distribution space with JIO’s entry will result in structural changes for the broadcasters in terms of negotiating
power. Further, aggressive investments and rising competition in the OTT segment could result in higher-than-estimated content
Media UW and marketing spends, resulting in lower cash generation. Traditional broadcasters and distributors are expected to get impacted
with the impeding changes in the media landscape. We have a Sell rating on Zee Entertainment and Dish TV and Reduce on
SUN TV. We prefer both PVR and Inox as recently the companies did favourable convenience fee deals with the third-party
ticket vendors and continued content investments. Further, the overhang of F&B issue is already behind as the companies are
proactively lowering F&B prices and bringing more affordable options on the menu.
Despite the concerns on trade war and the strengthening in the USD and their impact on the stock prices, domestic steel prices
remained stable. The 18% decline in China HR steel prices since Oct’18 was matched by India prices declined only by 5%. The
expected improvement in global crude prices will likely strengthen India price outlook as well. Domestic demand is supported by
government spending-led construction activities; this scenario is expected to sustain till the 2019 general elections. Among raw
Metals &
EW materials, iron ore prices are likely to remain stable backed by higher pellet prices while, and coking coal is likely to remain firm.
Mining
In the case of non-ferrous metals, we expect prices to remain vulnerable. However, Aluminium is likely to outperform due to
production cuts by Alcoa (US) and Alurnote (Brazil). We expect coal prices to remain firm supporting Coal India; manganese ore
prices also are likely to remain firm. Stainless steel demand is support by railways and infra sectors and likely to remain strong
going forward. We prefer Tata Steel, Hindalco, and JSL.
With oil prices correcting to US$60/bbl, Indian scenario pertaining to downstream marketing margin and subsidy has improved.
We believe that at US$65-70/bbl, the Oil & Gas sector would remain stable. In the intermediate period, however, the sector would
see inventory losses, post which core earnings would strengthen. The refining scenario has however weakened due to adverse
Oil & Gas EW
fundamentals though we expect same to improve. We hence see the Oil & Gas sector heading toward improved performance.
But due to election-related risks and macro volatility, we would still prefer the gas space and maintain our positive view on
Petronet LNG and GSPL.
Retailers will continue to see benefits of increasing consumer shift toward organized retailing post the GST. QSR and jewellery
players are likely to post robust growth going ahead whereas trends in fashion appear mixed. Channel checks suggest strong
Retail OW festive season, indicating buoyancy in discretionary spends which should drive better growth in the coming quarters. Margin
benefits from operating leverage, benign rentals and a reduction in discounting should improve profitability of the sector. Our
preferred picks include Jubilant FoodWorks, Titan and ABFRL.
Chinese environmental norm issues have benefitted many chemical companies in the recent time in the back drop of rising prices
in related chemicals. However, situation may even out in the near term as large complaint Chinese players are expanding
capacity which may take some time (12-18 months). Hence, we recommend investors to play three broad theme in chemicals
Speciality
OW space: 1) niche/speciality chemistries which are backward integrated and does not attract major competition from imports or
Chemicals
china, 2) Large size companies who had built sizeable capacity and has balance sheet strength to attract business from
developed countries, 3) Commodity chemicals which are at the initial stage of the price cycle due to difference in the demand
supply dynamics. Our top picks are SRF, Navin Fluorine, and GHCL.
Although the industry has seen consolidation in the last 12-24 months, the competitive intensity from Jio has not reduced. Jio is
expected to remain aggressive to gain both subscriber and revenue market share, which could keep industry revenues and
operating profits under pressure. Further, rising cost pressures and elevated capex spends along with falling revenues would
Telecom UW continue to push debt levels. Bharti is relatively better compared with VIL as it is focusing on balance sheet de-leveraging through
fund-raising in Africa and potential stake sale in BHIN. We maintain negative on Vodafone Idea (VIL) despite the merger as the
risk of RMS loss and it is still not fully invested to compete with Bharti and Jio on 4G capacity. For Bharti Infratel, the majority of
tenancy cancellation from VIL is largely behind but it continues to lack any trigger for revenue growth.
Reforms execution continues to remain an issue. Positive result from UDAY is still not visible even after 2.5 years of its launch.
AT&C loss (either by opting for Franchisee route or by DISCOMs) is progressing slowly. States are unwilling to enter into any
fresh long term PPAs and commit themselves into payment of fixed charges. Coal supply issue continue to impact plant utilisation
Utilities- with ~ 20 plants facing subcritical level of inventories. Lack of PPAs is now turning majority of the stranded projects into NPAs
EW
Power and with RBI's new guideline, the sector face the threat of witnessing 40GW-50GW of power capacity turning into NPAs. Also,
the expected level of consolidation in the sector is disappointing. We continue to refer regulated return entities-Power Grid, NTPC
and CESC for its demerger story which is likely to be consummated by Oct-Nov’18. Except for these 3, the sector offers event
specific trading opportunities rather than any serious investment options.

Emkay Rating Distribution

BUY Expected total return (%) (Stock price appreciation and dividend yield) of over 25% within the next 12-18 months.
ACCUMULATE Expected total return (%) (Stock price appreciation and dividend yield) of over 10% within the next 12-18 months.
HOLD Expected total return (%) (Stock price appreciation and dividend yield) of upto 10% within the next 12-18 months.
REDUCE Expected total return (%) (Stock price depreciation) of upto (-) 10% within the next 12-18 months.
SELL The stock is believed to underperform the broad market indices or its related universe within the next 12-18 months.
Completed Date: 04 Dec 2018 23:49:33 (SGT)

Dissemination Date: 04 Dec 2018 23:50:33 (SGT)
Sources for all charts and tables are Emkay Research unless otherwise specified.
GENERAL DISCLOSURE/DISCLAIMER BY EMKAY GLOBAL FINANCIAL SERVICES LIMITED (EGFSL):

Emkay Global Financial Services Limited (CIN-L67120MH1995PLC084899) and its affiliates are a full-service, brokerage, investment banking, investment
management and financing group. Emkay Global Financial Services Limited (EGFSL) along with its affiliates are participants in virtually all securities trading
markets in India. EGFSL was established in 1995 and is one of India's leading brokerage and distribution house. EGFSL is a corporate trading member of
Bombay Stock Exchange Limited (BSE), National Stock Exchange of India Limited (NSE), MCX Stock Exchange Limited (MCX-SX). EGFSL along with its
subsidiaries offers the most comprehensive avenues for investments and is engaged in the businesses including stock broking (Institutional and retail),
merchant banking, commodity broking, depository participant, portfolio management, insurance broking and services rendered in connection with
distribution of primary market issues and financial products like mutual funds, fixed deposits. Details of associates are available on our website i.e.
www.emkayglobal.com
EGFSL is registered as Research Analyst with SEBI bearing registration Number INH000000354 as per SEBI (Research Analysts) Regulations, 2014.
EGFSL hereby declares that it has not defaulted with any stock exchange nor its activities were suspended by any stock exchange with whom it is registered
in last five years, except that NSE had disabled EGFSL from trading on October 05, October 08 and October 09, 2012 for a manifest error resulting into a
bonafide erroneous trade on October 05, 2012. However, SEBI and Stock Exchanges have conducted the routine inspection and based on their
observations have issued advice letters or levied minor penalty on EGFSL for certain operational deviations in ordinary/routine course of business. EGFSL
has not been debarred from doing business by any Stock Exchange / SEBI or any other authorities; nor has its certificate of registration been cancelled
by SEBI at any point of time.
EGFSL offers research services to clients as well as prospects. The analyst for this report certifies that all of the views expressed in this report accurately
reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will
be, directly or indirectly related to specific recommendations or views expressed in this report.
Other disclosures by Emkay Global Financial Services Limited (Research Entity) and its Research Analyst under SEBI (Research Analyst) Regulations,
2014 with reference to the subject company(s) covered in this report
EGFSL and/or its affiliates may seek investment banking or other business from the company or companies that are the subject of this material. Our
salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients that reflect opinions that
are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that may be
inconsistent with the recommendations expressed herein. In reviewing these materials, you should be aware that any or all of the foregoing, among other
things, may give rise to real or potential conflicts of interest including but not limited to those stated herein. Additionally, other important information
regarding our relationships with the company or companies that are the subject of this material is provided herein. This report is not directed to, 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 or regulation or which would subject EGFSL or its group companies to any registration
or licensing requirement within such jurisdiction. Specifically, this document does not constitute an offer to or solicitation to any U.S. person for the purchase
or sale of any financial instrument or as an official confirmation of any transaction to any U.S. person. Unless otherwise stated, this message should not
be construed as official confirmation of any transaction. No part of this document may be used by private customers in United Kingdom. All material
presented in this report, unless specifically indicated otherwise, is under copyright to Emkay. None of the material, nor its content, nor any copy of it, may
be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of EGFSL . All trademarks,
service marks and logos used in this report are trademarks or registered trademarks of EGFSL or its Group Companies. The information contained herein
is not intended for publication or distribution or circulation in any manner whatsoever and any unauthorized reading, dissemination, distribution or copying
of this communication is prohibited unless otherwise expressly authorized. Please ensure that you have read “Risk Disclosure Document for Capital Market
and Derivatives Segments” as prescribed by Securities and Exchange Board of India before investing in Indian Securities Market. In so far as this report
includes current or historic information, it is believed to be reliable, although its accuracy and completeness cannot be guaranteed.
 This publication has not been reviewed or authorized by any regulatory authority. There is no planned schedule or frequency for updating research
publication relating to any issuer.
 Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets
Disclaimer for U.S. persons only: This research report is a product of Emkay Global Financial Services Limited (Emkay), which is the employer of the
research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report 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 Financial Institutions Regulatory Authority (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. This report is intended for distribution 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 report and return the
same to the sender. Further, this report 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.

GENERAL DISCLOSURE/DISCLAIMER BY DBS BANK LTD AS DISTRIBUTOR OF THE RESEARCH REPORT

This report is solely intended for the clients of DBS Bank Ltd,its respective connected and associated corporations and affiliates only and no part of this
document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd.
The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank
Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS
Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other factors which we
may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or warranty as to the accuracy,
completeness or correctness of the research set out in this report. Opinions expressed are subject to change without notice. This research is prepared for
general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and
the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the
exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever
for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or
further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any
securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities
mentioned in this document. The DBS Group, may have positions in, and may effect transactions in securities mentioned herein and may also perform or
seek to perform broking, investment banking and other banking services for these companies. Any valuations, opinions, estimates, forecasts, ratings or
risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent
with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice,
its accuracy is not guaranteed, it may be incomplete or condensed, it may not contain all material information concerning the company (or companies)
referred to in this report and the DBS Group is under no obligation to update the information in this report. This publication has not been reviewed or
authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned schedule or frequency for updating research publication
relating to any issuer.
The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and
assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the
valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results.
Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as
a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that: (a) such valuations, opinions,
estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or
events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments stated therein. Please contact the primary
analyst for valuation methodologies and assumptions associated with the covered companies or price targets. Any assumptions made in this report that
refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as
recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report.
DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering
of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-
making.
ANALYST CERTIFICATION BY EMKAY GLOBAL FINANCIAL SERVICES LIMITED (EGFSL)

The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and
their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is,
or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s) primarily responsible of the
content of this research report, in part or in whole, certifies that he or his associate 1 does not serve as an officer, director or employee of the issuer or the
new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real estate investment
trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the management of the issuer or the
new listing applicant). The research analyst(s) primarily responsible for the content of this research report or his associate does not have financial interests2
in relation to an issuer or a new listing applicant that the analyst reviews. EGFSL has procedures in place to eliminate, avoid and manage any potential
conflicts of interests that may arise in connection with the production of research reports. The research analyst(s) responsible for this report operates as
part of a separate and independent team to the investment banking function of the EGFSL and procedures are in place to ensure that confidential
information held by either the research or investment banking function is handled appropriately. There is no direct link of EGFSL compensation to any
specific investment banking function of the EGFSL.
1
An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse,
minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions
or instructions of the analyst.
2
Financial interest is defined as interest that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or
financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at the
arm’s length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in
securities in respect of an issuer or a new listing applicant.

COMPANY-SPECIFIC / REGULATORY DISCLOSURES BY EMKAY GLOBAL FINANCIAL SERVICES LIMITED (EGFSL):

Disclosures by Emkay Global Financial Services Limited (Research Entity) and its Research Analyst under SEBI (Research Analyst) Regulations, 2014
with reference to the subject company(s) covered in this report-:
1. EGFSL, its subsidiaries and/or other affiliates do not have a proprietary position in the securities recommended in this report as of December 4,
2018
2. EGFSL, and/or Research Analyst does not market make in equity securities of the issuer(s) or company(ies) mentioned in this Research Report
Disclosure of previous investment recommendation produced:
3. EGFSL may have published other investment recommendations in respect of the same securities / instruments recommended in this research
report during the preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment
recommendations published by EGFSL in the preceding 12 months.
4. EGFSL , its subsidiaries and/or other affiliates and Research Analyst or his/her relative’s does not have any material conflict of interest in the
securities recommended in this report as of December 4, 2018.
5. EGFSL, its subsidiaries and/or other affiliates and Research Analyst or his/her relative’s does not have actual/beneficial ownership of 1% or more
securities of the subject company at the end of the month immediately preceding the December 4, 2018
6. EGFSL, its subsidiaries and/or other affiliates and Research Analyst have not received any compensation in whatever form including
compensation for investment banking or merchant banking or brokerage services or for products or services other than investment banking or
merchant banking or brokerage services from securities recommended in this report (subject company) in the past 12 months.
7. EGFSL, its subsidiaries and/or other affiliates and/or and Research Analyst have not received any compensation or other benefits from securities
recommended in this report (subject company) or third party in connection with the research report.
8. Securities recommended in this report (Subject Company) has not been client of EGFSL, its subsidiaries and/or other affiliates and/or and
Research Analyst during twelve months preceding the December 4, 2018

COMPANY-SPECIFIC / REGULATORY DISCLOSURES BY DBS BANK LTD AS DISTRIBUTOR OF THE RESEARCH REPORT
1. DBS Bank Ltd., DBS HK, DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”) or their subsidiaries and/or other affiliates do not have a proprietary
position in the securities recommended in this report as of 30 Apr 2018.
2. Neither DBS Bank Ltd nor DBS HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.
Compensation for investment banking services:

3. DBSVUSA, does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager
or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including
any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA
exclusively.
Disclosure of previous investment recommendation produced:

4. DBS Bank Ltd. DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), their subsidiaries and/or other affiliates may have published other investment
recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact
the primary analyst listed in the first page of this report to view previous investment recommendations published by DBS Bank Ltd. DBS Vickers Securities
(Singapore) Pte Ltd (“DBSVS”), their subsidiaries and/or other affiliates in the preceding 12 months.
RESTRICTIONS ON DISTRIBUTION
This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or
General located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be
contrary to law or regulation.
Australia This report is not for distribution into Australia.
Hong Kong This report is not for distribution into Hong Kong.
Indonesia This report is being distributed in Indonesia by PT DBS Vickers Sekuritas Indonesia.
Malaysia This report is not for distribution into Malaysia.
This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 16800306E) or DBSVS (Company Regn. No.
1860024G) both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary
Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities,
Singapore
affiliates or other foreign research houses pursuant to an agreement under Regulation 32C of the financial Advisers
Regulations. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with
the report.
Thailand This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd.
This report is disseminated in the United Kingdom by DBS Vickers Securities (UK) Ltd, ("DBSVUK"). DBSVUK is authorised
and regulated by the Financial Conduct Authority in the United Kingdom.
In respect of the United Kingdom, this report is solely intended for the clients of DBSVUK, its respective connected and
United Kingdom associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any
form or by any means or (ii) redistributed without the prior written consent of DBSVUK. This communication is directed at
persons having professional experience in matters relating to investments. Any investment activity following from this
communication will only be engaged in with such persons. Persons who do not have professional experience in matters relating
to investments should not rely on this communication.
This research report is being distributed by DBS Bank Ltd., (DIFC Branch) having its office at units 608-610, 6th Floor, Gate
Dubai International
Precinct Building 5, PO Box 506538, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank
Financial Centre
Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for
professional clients (as defined in the DFSA rulebook) and no other person may act upon it.
This report is provided by DBS Bank Ltd (Company Regn. No. 196800306E) which is an Exempt Financial Adviser as defined
in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. This report is for information purposes
only and should not be relied upon or acted on by the recipient or considered as a solicitation or inducement to buy or sell any
financial product. It does not constitute a personal recommendation or take into account the particular investment objectives,
United Arab Emirates
financial situation, or needs of individual clients. You should contact your relationship manager or investment adviser if you
need advice on the merits of buying, selling or holding a particular investment. You should note that the information in this
report may be out of date and it is not represented or warranted to be accurate, timely or complete. This report or any portion
thereof may not be reprinted, sold or redistributed without our written consent.
DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research
analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule
2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities
United States held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for
its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to
such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report
who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate.
In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified,
Other jurisdictions
professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.
Emkay Global Financial Services Ltd.

CIN - L67120MH1995PLC084899
7th Floor, The Ruby, Senapati Bapat Marg, Dadar - West, Mumbai - 400028. India
Tel: +91 22 66121212 Fax: +91 22 66121299 Web: www.emkayglobal.com

SINGAPORE
DBS Bank Ltd
Contact: Janice Chua
12 Marina Boulevard, Marina Bay Financial Centre Tower 3
Singapore 018982
Tel. 65-6878 8888
Fax: 65 65353 418
e-mail: equityresearch@dbs.com
Company Regn. No. 196800306E
THAILAND
DBS Vickers Securities (Thailand) Co Ltd
Contact: Chanpen Sirithanarattanakul
989 Siam Piwat Tower Building,
9th, 14th-15th Floor
Rama 1 Road, Pathumwan,
Nagkok Thailand 10330
Tel. 66 2 857 7831
Fax: 66 2 658 1269
e-mail: research@th.dbs.com
Company Regn. No 0105539127012
Securities and Exchange Commission, Thailand
INDONESIA
PT DBS Vickers Sekuritas (Indonesia)
Contact: Maynard Priajaya Arif
DBS Bank Tower
Ciputra World 1, 32/F
JI. Prof. Dr. Satrio Kav. 3-5
Jakarta 12940, Indonesia
Tel. 62 21 3003 4900
Fax: 62 21 3003 4943
e-mail: research@id.dbsvickers.com

Dhananjay Sinha, MA (Economics)

dhananjay.sinha@emkayglobal.com
+91-022-66242435

MOSL MANB 20160624 MOSL Initiating Coverage

Încărcat de

Informații document

Drepturi de autor

Formate disponibile

Partajați acest document

Partajați sau inserați document

Opțiuni de partajare

Vi se pare util acest document?

Este necorespunzător acest conținut?

Drepturi de autor:

Formate disponibile

MOSL MANB 20160624 MOSL Initiating Coverage

Încărcat de

Drepturi de autor:

Formate disponibile

India Strategy

India Equity Research | India Strategy

Refer to important disclosures at the end of this report

Market’s volte-face on Fed’s future

US solidity is in contrast with the market’s volte-face

Business sector exhibits confidence and banks’ willingness to lend rises

Fed will ignore market volatility; financial stability resilient

ED: ANISH MATHEW SA: DHANANJAY SINHA

We see the Fed as staying put on its gradual normalization path

Exhibit 3: Fed’s normalization is resulting in a moderation in primary liquidity in emerging markets

200 Portfolio flows in EMs

LatAm EM Asia LatAm All

ED: ANISH MATHEW SA: DHANANJAY SINHA December 4, 2018 | 2

Most leading indicators suggest much higher Fed rate

ED: ANISH MATHEW SA: DHANANJAY SINHA December 4, 2018 | 3

Fdfd CPI core Fdfd Import price inflation ((rhs)

ED: ANISH MATHEW SA: DHANANJAY SINHA December 4, 2018 | 4

ED: ANISH MATHEW SA: DHANANJAY SINHA December 4, 2018 | 5

Strengthening labor markets, improved household

ED: ANISH MATHEW SA: DHANANJAY SINHA December 4, 2018 | 6

Source: Bloomberg, Emkay Research Source: Bloomberg, Emkay Research

Networth/PDI PCEC/Personal income (rhs) Personal saving/PDI PCEC/Personal income (rhs)

ED: ANISH MATHEW SA: DHANANJAY SINHA December 4, 2018 | 7

Rise in net worth of US households did not induce

Hence, an important conclusion is that the gains in economic recovery, improvements in

ED: ANISH MATHEW SA: DHANANJAY SINHA December 4, 2018 | 8

600 US Household financial assets/Personal disposable 160 90

Exhibit 31: Change in net worth: Household and non-profit organizations

Source: Federal Reserve, Emkay Research

ED: ANISH MATHEW SA: DHANANJAY SINHA December 4, 2018 | 9

US financial conditions remain strong despite the Fed’s

It reflects in a gradual rise in financial leverage indicators of non-financial companies, which

Source: Bloomberg, Emkay Research Source: Bloomberg, Emkay Research

EU Asia ex Japan Financial confidence in carry trade-Asia

ED: ANISH MATHEW SA: DHANANJAY SINHA December 4, 2018| 10

Recent curve flattening is temporary; maintain 10-year

Global trends dominate India G-sec softening and INR strength

ED: ANISH MATHEW SA: DHANANJAY SINHA December 4, 2018| 11

ED: ANISH MATHEW SA: DHANANJAY SINHA December 4, 2018| 12

Euro Japan UK US Aus India 1-yr Gsec Nov-18

ED: ANISH MATHEW SA: DHANANJAY SINHA December 4, 2018| 13

ED: ANISH MATHEW SA: DHANANJAY SINHA December 4, 2018| 14

Market outlook: tapering domestic and global liquidity is

India’s reflationary recovery may have peaked

ED: ANISH MATHEW SA: DHANANJAY SINHA December 4, 2018| 15

The following points highlight the persisting overvaluation conditions:

Since we believe that the short- We maintain our sector positioning

ED: ANISH MATHEW SA: DHANANJAY SINHA December 4, 2018| 16

800 Nifty Forward EPS (Rs)

FY08 FY09 FY10 FY11 FY12

ED: ANISH MATHEW SA: DHANANJAY SINHA December 4, 2018| 17

Valuations still fairly rich

27 Nifty Index 4 Nifty Index

P/E Mean Mean+1SD Mean-1SD P/BV Mean Mean+1SD Mean-1SD

FII (12 ma) MF (12 ma)

ED: ANISH MATHEW SA: DHANANJAY SINHA December 4, 2018| 18

Source: AMFI, Emkay Research Source: AMFI, Emkay Research

ED: ANISH MATHEW SA: DHANANJAY SINHA December 4, 2018| 19

Exhibit 70: Summary of sector stance and picks

ED: ANISH MATHEW SA: DHANANJAY SINHA December 4, 2018| 20

Exhibit 70: Summary of sector stance and picks (Contd…)

ED: ANISH MATHEW SA: DHANANJAY SINHA December 4, 2018| 21

Exhibit 70: Summary of sector stance and picks (Contd…)

ED: ANISH MATHEW SA: DHANANJAY SINHA December 4, 2018| 22