Equity Markets volatile

What should you do??

Factors
Oil Prices

Concern
Oil prices have risen about
35-40% from the low levels
seen in the recent past.
Currently at 66 Dollars per
Barrel.

Rupee

Rupee had depreciated to 64

levels against the Dollar lowest in 20 Months, before
retracing marginally to
current levels of 63.7
10 Year G-Sec Yields had
inched closer to 8%

Bond Yields

Global

Fund Flows

FII outflow in the recent

past.

Flows to
other
countries

Countries like China, Korea,

Taiwan and Japan have been
attracting inflows in the
recent past

Source: Bloomberg, MFI Explorer

Our Take
India has benefitted disproportionately from the sharp
fundamental fall in crude prices. Crude price has fallen from ~110
in the FY 14 to ~65 now. India's crude import bill for FY 14 was
165 Billion USD. The sharp fall has helped the economy save
nearly 50 Billion USD. The budgeted subsidy bill for pertroleum
has been reduced by Rs. 30K Crs. Further, with the fuel reforms,
the pressure on Government from increasing crude prices is far
lower. India will be easily able to manage the current oil prices (or
even a marginally higher level from now). In addition, the
fundamental outlook for crude is for the prices to remain muted.
Therefore, the recent hike in the prices is not a major concern.
However, despite the recent depreciation, Rupee is one of the
Best among EM currencies. Rupee has lost just 1.86% in the
current year, as against Turkish Lira or Brazilian Real, which have
fallen by about 14%. Over the medium term, sustained economic
growth will attract capital flows, and help Rupee.
The movement in gilt yields is in line with sharp sell-off in the
global bonds. US 10 year Yield inched up to 2.27%, a sharp
increase in the recent past, perhaps on the fear that oil prices
could go up further. Our view is that India is one of the few
countries in the world, which could afford to cut interest rates
meaningfully - Current over-night rates are 250 bps above CPI
inflation. Rates across the yield curve far higher. The Central Bank
is targeting a real rate of 1.5-2%, leaving enough headroom to cut
rates. Continuing fiscal prudence, disinflationary trends and
benign liquidity scenario are expected to result in lowering of
interest rates.
FIIs have pulled out nearly Rs. 4000 Crs from equity markets in
the first two weeks of May. However, FIIs have been consistently
investing into India over the longer term. Since 2009, they have
invested 120 Billion USD, an average of 20 Bn USD per year. They
have been net sellers only in 2008-2009 during the global crisis
when they had sold 10.4 Bn USD. With the fundamental outlook
for India remaining strong, we expect FII flows to be robust. In
addition to FII flows, Domestic Flows will also help. Mutual Funds,
for instance, invested 6.6 Bn USD in 2014.
Most investors were heavily underweight in countries like China
because their economy was systemically slowing down. However,
cheap valuations have started attracting fund flows recently. For
instance, since the beginning of August 2014, their markets have
gone up by nearly 85%. Some of the recent IPOs have also
attracted flows into China. However, over the medium to long
term, investors are likely to be guided by fundamentals, and
hence we believe India is well-placed to receive flows. In Dollar
Terms, Indian equity markets are at the same level as in May
2014, around elections, making it particularly attractive for FIIs

19th May 2015

Factors
Sharp runup in
markets

Concern
Indian equities had gone up
by 55% since Sep 2013 (since
Mr. Modi was announced as
BJP candidate), before the
recent correction of 8-10%.

Our Take
There may be a bit of fatigue and profit-booking in some stocks.
However, valuations of Indian equities very attractive. At 19x
trailing P/E on low cyclical earnings, and 15x 2 Yr Fwd PE on
expectations of decent turnaround in earnings, the valuations are
quite attractive. Market Cap / GDP at 75% low in absolute and
relative terms.

Concerns
on MAT

Uncertainty around MAT

may also be playing on the
minds of investors

It has been clarified in the Budget that MAT will not be applicable
from Apr 1, 2015. However, the claim from past transactions and
the uncertainty about the applicability has spooked the FIIs. The
amount involved is expected to be small - the amount that is
being mentioned are anywhere between Rs. 500 - Rs. 5000 Crs.
Stay has been granted to Aberdeen, one of the largest FII
investors. Government is also setting up a committee to resolve
the issue at the earliest. We believe the issue will be addressed
very soon.

Earning
Growth

Subdued earnings growth

Corporate Indias growth was subdued because no meaningful

investment was made in the past average capex from 20122014 has been 1.75%. In addition, the persistently high-interest
rate scenario resulted in subdued earnings, despite a reasonably
good sales growth (16% CAGR between 2008-2014). We expect
this to turn around, and corporate earnings to grow
meaningfully on the back of operating leverage and financial
leverage.

Policy
Issues

Reforms being implemented

Government is firmly committed to bringing about key reforms

and implementing them. GST has been passed in the Lok Sabha,
diesel price has been deregulated, gas price revision, targeted
subsidy, hiking FDI limit in critical sectors of Railways, Defence
and Insurance, etc., to name a few. We are confident that more
such reforms will get implemented, benefiting the economy.

Global

Bottom line: India is extremely well-placed for long-term economic growth and to generate
attractive equity returns. The current market correction should be used as a good
opportunity to increase allocation to equities

Source: Bloomberg, MFI Explorer

19th May 2015

Is the India-story intact? Should investors invest into equities now?

Yes, we believe investors should invest in Equity with a long term view. The basis for the same is as
follows:
1. The Fundamental Story
o Building blocks in place. Rapid growth round the corner.
Financial Inclusion with almost ~100% of eligible India under UIDAI (Unique
Identification Authority of India) to lead to (Direct Benefit Transfer) DBT of all social
sector schemes, Banking & Insurance penetration
Project Monitoring Group clearing high impact projects. Almost ~$100bn worth till
Dec.14
Goods & Services Tax : The most awaited and ambitious indirect tax reform
Power sector reforms : Coal mine auctions, Increase transmission network &
substantially reduce distribution losses
Railways reforms : Proposes to spend over $100bn over next 5 years to expand &
upgrade
Large infrastructure projects : Dedicated Freight corridors, River Linking project,
Metros
Road Sector reforms : Efforts to fast track & execute almost $60bn+ of road projects
Make-in-India Initiative : with emphasize on Defence & Electronics manufacturing
All-round Business-easy reforms: Establishing NITI Establishing National Institution
for Transforming India, single window clearances, online approval systems, etenders leading to substantial reduction in bureaucracy
Digital India : To spend over $15bn over next 5 years; e-governance services across
spectrum, in addition to complete urban digitization - to connect over 2.5 lac
villages
Agriculture reforms : Restructuring FCI (Food Corporation of India), APMC
(Agricultural Product Market Committee) reforms, Soil health cards, Farmer
insurance, proposal for National Irrigation scheme, Easing supply side bottle necks
Housing for all : Aims for housing for all by 2022, Affordable housing mission
Ambitious foreign trade policy : to grow exports from $466bn in FY14 to $900bn in
2020
o Subsidy savings and innovative revenues give Government financial muscle to spend on the
economy.
Coal and spectrum auctions have been highly successful (Auction and allotment of
67 blocks has unlocked over $55bn ( 335k crs ) for states / Telecom spectrum
auctions raised $17.6bn - Over 1 lac cr )
Disinvestments : CY15 targeting to raise Rs. 55k crs i.e $9bn (Several other big ticket
disinvestments in pipeline Hind. Zinc, SUUTI (Specified Undertaking of the Unit
Trust of India), Coal India, ONGC etc with cumulative potential of $20bn+ )
Banks allowed to raise funding for infrastructure with minimum SLR / CRR
requirement
Fuel Reforms has reduced the budgeted fuel subsidy bill by Rs. 30,000 Crs, a drop of
50%
Source: Bloomberg, MFI Explorer

19th May 2015

Rationalized subsidies and trimmed wasteful expenditure like MNREGA (Mahatma

Gandhi National Rural Employment Guarantee Act). LPG subsidy through Direct
Transfer. In the long-term (>3 years), subsidy rationalization could result in savings
of $5 Bn+
GST implementation will result in improved tax collection, and is expected to add to
the GDP growth
Huge investments totaling Rs. 24 Lakh Crs envisaged
Railways to invest over ~600,000 crores over next 5years on expansion & up
gradation
Digital India - ~1,13,000 crores (Over next 5 yrs)
Roads ~5,00,000 crores (Over next 5 yrs)
Healthcare (National Health Assurance Mission): ~1,60,000 Crore (Over next 4 yrs)
Swacch Bharat Mission : ~2,00,000 crore (Over next 4 yrs)
National Rural Housing Mission: ~3,45,000 crores (by 2022, next 7 yrs)
Solar ( Renewable Energy ) : ~6,00,000 crore ( In next 7 yrs for 100,000 MW )

These initiatives envisage about Rs. 24 lac crores ($400bn ) of investment, entailing both Govt. &
Private , Domestic & Foreign Investors
o

Combination of low interest rate and economic recovery will lead to higher profit growth for
Indian companies
India is one of the few countries in the world, which could afford to cut interest
rates meaningfully
Current over-night rates are 250 bps above CPI inflation. Rates across the
yield curve far higher. The Central Bank is targeting a real rate of 1.5-2%,
leaving enough headroom to cut rates
Continuing fiscal prudence, disinflationary trends and benign liquidity
scenario are expected to result in lowering of interest rates
Corporate Indias growth was subdued because no meaningful investment was
made in the past average capex from 2012-1014 has been 1.75%. In addition, the
persistently high-interest rate scenario resulted in subdued earnings, despite a
reasonably good sales growth (16% CAGR between 2008-2014)
We expect this to turn around, and corporate earnings to grow meaningfully on the
back of operating leverage and financial leverage

We believe equity markets would capture the growth in earnings, to provide reasonable returns
over the medium to long term.
2. The Valuations story
o Reasonable Valuations The market has risen ~55% in ~18 months, before this short-term
correction. Market is nowhere close to bubble valuations. At 19x, based on cyclical low past
earnings and given our expectations of structural high RoE & enormous growth potential, it
is very reasonable.
o Indias market cap / GDP is ~75%. During the peak of 2008, it was over 100%
o In the previous growth cycle, Earnings became ~3 times in less than 6 years.. Sensex grew
6 times.
Source: Bloomberg, MFI Explorer

19th May 2015

o
o

If EPS could grow by 15% till FY 2020, and if we were to assign similar PEs as now, then
Sensex would be at 55,000 levels! (~2 times) by 2020
If EPS actually grows by 20%, Sensex would be nearly at 70,000 levels by 2020!! (~3 times)

3. The Sentiment story

Brand India has never been more vibrant and appealing than now, which will augur very well in
attracting foreign flows, both FIIs and FDI.
o
o
o
o
o
o
o

A total of 16 foreign trips made by the PM (5 of these for multi-lateral meetings like BRICS,
G-20, SAARC )
Barack Obama & China supports India's bid for permanent UNSC seat
$35bn investment by Japan over 5 years & expertise in high speed trains
Australia for supplying Nuclear Power fuel - ~500 tns of uranium
Canada First visit in 40 years by sitting PM. Agrees to supply 3,000mt of uranium to power
Indian atomic reactors
CXOs of global corporations for investment in India: Satya Nadella (Microsoft), Indra Nooyi
(Pepsico), Mark Zuckerberg & Sheryl Sandberg (Facebook), Jeff Bezos (Amazon)
$20 billion investment from China

Summary what should you do??....

We believe investors should add Equities to their portfolio with a long term view. We have summarized
our views below:
o

The India story is strong and intact.

Building blocks in place. Rapid growth round the corner.
Subsidy savings and innovative revenues give Government financial muscle to spend
on the economy.
Huge investments totaling Rs. 24 Lakh Crs envisaged.
Combination of low interest rate and economic recovery will lead to higher profit
growth for Indian companies.
Valuations are reasonable.
19x on trailing basis and 15x on 2 year fwd basis
Market Cap to GDP ~75% low
Short-term volatility not-withstanding, Indian equities could generate enormous wealth for
investors.
Even reasonable earnings growth could result in Sensex growing by 2-3 times from
the current levels in the next 4 years
Corrections such as that happening now should be used as opportunities to add more
equities.
Do not get swayed by short term volatility, nor attempt to time the markets. On the
other hand, look at the direction in which we are headed, take confidence from the
fact that things are already happening, and invest for the long-term into equities!

Source: Bloomberg, MFI Explorer

19th May 2015

Disclaimer
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Source: Bloomberg, MFI Explorer

19th May 2015