2. 9 1 3 5 7 9 1 3 5 7 9 1 3 5 7 9 1 3
7 8 8 8 8 8 9 9 9 9 9 0 0 0 0 0 1 1
r- r- r- r- r- r- r- r- r- r- r- r- r- r- r- r- r- r- a a
a
a a a a a a a a a a a a a a a
M M M M M M M M M M M M M M M M M M
5
1
r-
a
M
Definition of Investing
60
only buy “wor
After factoring in
1
STRATEGY | October 2016
Mar-16
only buy goods “worth”
120
100
100
80
INR100 of 1979 can
INR 5.5 today!
40
the Consumer Price
20
Inflation Index 5.5
0
3. r
5
1
y-
M
a
9 1 3 5 7 9 1 3 5 7 9 1 3 5 7 9 1 3
7 8 8 8 8 8 9 9 9 9 9 0 0 0 0 0 1 1
r- r- r- r- r- r- r- - - - - - - - y- y- y- y-a a a a a a a pr pr pr pr pr pr pr
M M M M M M M A A A A A A A Ma Ma Ma Ma
Fixed deposit would have preserved your Purchasing Powe
2STRATEGY | October 2016
PurchasingPower
Mar-16
100
150
130
104
110
90
70
50
4. 5
1
y-
M
a
9 1 3 5 7 9 1 3 5 7 9 1 3 5 7 9 1 3
7 8 8 8 8 8 9 9 9 9 9 0 0 0 0 0 1 1
r- r- r- r- r- r- r- - - - - - - - y- y- y- y-a a a a a a a pr pr pr pr pr pr pr
M M M M M M M A A A A A A A Ma Ma Ma Ma
Gold would have doubled your Purchasing Power
3STRATEGY | October 2016
PurchasingPower
Mar-16
350
300
250
200
214
150
100
100
50
5. 5
1
y-
M
0
9 1 3 5 7 9 1 3 5 7 9 1 3 5 7 9 1 3
7 8 8 8 8 8 9 9 9 9 9 0 0 0 0 0 1 1
r- r- r- r- r- r- r- - - - - - - - y- y- y- y-a a a a a a a pr pr pr pr pr pr pr
M M M M M M M A A A A A A A Ma Ma Ma Ma
Equities would have multiplied your Purchasing Power 15x
4STRATEGY | October 2016
PurchasingPower
Mar-16
a
1,750 1,570
1,500
1,250
1,000
750
500
250
6. Key Objectives of Investing: Over 36 years --> 18x Vs 38x Vs 476x
50,000 47,508,
Sensex nsex cum Dividend Fixed D
If you had invested Rs100 ...
40,000
25,342,
30,000
ver the last 100 years -- >
S&P 500 rose 273x,
Include dividends, it rose 18,520x!
20,000
3,808,
10,000
1,842,
0
5STRATEGY | October 2016
NominalValue
Mar-79
Mar-81
Apr-83
May-85
May-87
Jun-89
Jul-91
Jul-93
Aug-95
Sep-97
Sep-99
Oct-01
Nov-03
Nov-05
Dec-07
Jan-10
Jan-12
Feb-14
Mar-16
Sen Sensex c eposit Gold 18%
16%
O
I
ver th
9% -->
10%
8%
7. Macros: Read, Discussed, Debated Threadbare!
Feb-07: Rising
default rate hits
subprime mortgage
industry in US
6STRATEGY | October 2016
8. Macros push you out of Time-in & into TIMING
Dec-14:30,000
Sep-08: US
Government takes
over Fannie Mae
and Freddie Mac,
Merril Lynch sold
Rouble
tumbles
May-10:
750b Euro
Stabilization
package to
PIIGS countries
Feb-07:
Rising default
rate hits
25,000 to BoA, Lehmansubprime
mortgage
industry
in US
Brothers
collapse
Mar-15:
Taper tantrum II
(FED rate20,000
hike fear)
Sep-14:15,000
Brent crude
goes below
USD100/bb
Aug-11:
S&P
downgrades
US Sovereign
Oct-09: Greece
public finance
weakness
revealed
10,000 triggering
sovereign
debt
crisis
5,000
7STRATEGY | October 2016
Jan-07
Jul-07
Dec-07
May-08
Sep-08
Mar-09
Jul-09
Dec-09
May-10
Oct-10
Mar-11
Aug-11
Jan-12
Jun-12
Nov-12
Apr-13
Sep-13
Feb-14
Jul-14
Dec-14
May-15
Oct-15
Mar-16
9. Stocks are SLAVES OF EARNINGS
KNOWABLE
UNKNOWABLE
UNIMPORTANT IMPORTANT
8STRATEGY | October 2016
Unknowable
& Unimportant
Important
But Unknowable
Knowable
but Unimportant
Important
& Knowable
10. Earnings growth / Stock Returns captured by -->
Time-In & Not Timing, stupid!
9STRATEGY | October 2016
1984-2013
S&P 500 returned 11.1% CAGR
Avg returns earned by investors in Equity mutual funds was a paltry
3.7%!!
Bond Index returned 7.7% CAGR
Avg returns earned by investors in Bond
funds was a paltry 0.7%!!
11. The most powerful concept of Finance
10STRATEGY | October 2016
The most powerful concept of Finance -> The idea that
a $ saved today will grow to be worth more than a $
tomorrow
The greatest shortcoming of the human race is our
inability to understand the exponential function
DID YOU KNOW -> It's hard to believe that $65.7 billion of
Warren Buffett's $66 billion net worth came after his 50th
birthday. But it did.
12. Compound Interest: The Eighth Wonder of World
He
He
who
who
understands it, earns it…
doesn’t…pays it! - Albert Einstein
11STRATEGY | October 2016
13. INDIAN EQUITIES – TIME IN OR TIMING?
STRATEGY | October 2016 12
India Macro
The missing "G" (QLP are in place!)
India Corporate
The worst is behind
India Valuations
Quite reasonable
India Flows
The tide has turned
India Outlook
Best is ahead
14. 16
E
FY
1
F
6
Y1
F 6
Y
6
Y1
FE 16
E
FY
16
FY
Y1E
6
F
Macro: On a very strong footing
Government steadfast on the fiscal consolidation
roadmap
CAD-GDP ruling well within sustainable level of
3%
Fiscal deficit (Centre, %) CAD/GDP (%)6.5
5.9
4.1 3.9
3.5
-1.7
-4.2
-4.7
Inflation came down to decadal lows; deflationary
condition
prevails for the wholesale prices
Comfortable forex reserves built up while allowing INR
to
depreciate nominally
Forex reserves INRCPI Inflation (YoY%) WPI Inflation (YoY%)
67
65
12.4 61
10.5 10.5 10.2 9.5
6.0
4.9
3.5
2.2
13STRATEGY | October 2016
FY10
FY10
FY11
FY11
FY12
FY12
FY13
FY13
FY14
FY14
FY15
FY15
FY16
FY16
FY17E
FY17E
FY10FY10
FY11FY11
FY12FY12
FY13FY13
FY14FY14
FY15FY15
FY16FY16
FY17EFY17E
3.6
9.6 8.9
7.4 6.0
2.0
-2.5 360
60
351
54
341
47
46
305
48
304294 293279
-1.1 -1.4
-1.3
-2.8 -2.6
4.9 4.9 4.5
15. 16
E
FY
16
E
FY
Growth: Is the only missing link
Witnessing deflation (nominal GDP near real) first time in
four
decades
Nominal GDP growth has
collapsed
Nominal GDP growth (YoY%)
20.2
20
15
10
5
0
-5
Real indicators of volume growth of industrial
production
remains weak
New projects have dried up, moderate increase in
projects
under implementationNew projectsIIP (YoY%)
Increase in under implementation
projects
15.5 5000
11.0
8.2 2500
2.9 2.8 2.5
1.1 0
-0.1
-2500
14STRATEGY | October 2016
FY05
FY10
FY06
FY07FY11
FY08
FY12
FY09
FY10
FY13
FY11
FY12
FY14
FY13
FY15FY14
FY15
FY16
FY16
FY60
FY64
FY68
FY72
FY76
FY80
FY84
FY88
FY92
FY96
FY00
FY04
FY08
FY12
FY16
12.9
8.6
5.3
2.5
15.1 15.7
13.9 13.3
10.8
8.7
40 years!
16.
17.
18. Global & Domestic cyclicals: Earnings collapse
PAT (INR b)
17STRATEGY | October 2016
19. But, diversity of corporate India has come to rescue
PAT (INR b)
18STRATEGY | October 2016
20. Share of Domestic Cyclicals witnesses sharp improvement QoQ
Global Cyclicals and Defensives share largely
flat
19STRATEGY | October 2016
Defensive includes Consumer, Healthcare, Technology, Telecom and Utilities
Global cyclicals includes Metals, Oil & Gas and JLR
Domestic cyclicals includes Automobiles, Banks, Capital Goods, Cement, Media, NBFCs, Real Estate and Retail
21. Corporate Profit to GDP has halved
Corporate Profit to GDP (%)
20STRATEGY | October 2016
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16E
4.3
7.8 Average
7.3 of 5.5%
6.2
5.4 5.5 6.5
4.7 6.2
4.9
4.6
4.0 3.9
23. Markets valuations below averages, on lowest margins
Sensex Trailing P/E (x)
Market Cap to GDP (%)Trend in India's contribution to world market cap
(%) Peak market cap to GDP of
Average of 66% for
the period
3.3
95
88
81
74
7066
64
1.8
22STRATEGY | October 2016
Aug-06
Jul-07
May-08
Jul-10
Nov-11
Aug-13
Nov-14
Mar-16
Aug-16
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
FY02
FY03
FY04
Sep-12
FY05
FY06
FY07
Sep-13
FY08
FY09
FY10
Sep-14
FY11
FY12
FY13
Sep-15FY14
FY15
FY16
Sep-16FY17E
103
149% in Dec 2007
82 83
5552
71
42
26 23
India's Contributionto World Mcap (%)
3.60
2.95
2.5
2.30
Average of 2.3%
1.65
1.00
Current Sensex P/E (x) Sensex PE on Normalised PAT Margin (x) +1SD 10 Year Avg (x)
27
22 21.0
18.3 20.1
17
17.0
12
7
24.
25. 24STRATEGY | October 2016
Crystal ball gazing
the Future
Short term hazy,
Long term clear
26. Case for India emerging as an asset class
Top 10 GDP countriesIndia GDP (USD b)
Dec 2015
GDP (USD
b)
Rank Country
1
2
3
4
5
6
United States
China
Japan
Germany
United Kingdom
France
17,968
11,385
4,116
3,371
2,865
2,423
8
9
Italy
Brazil
1,819
1,800
10 Canada 1,573
25STRATEGY | October 2016
7 India 2,183
27. Domestic buying would dwarf FII flows
Trend in DII Flows (USDb)
14.9
13.312.1 11.8
3.2
26STRATEGY | October 2016
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17E
FY18E
FY19E
FY20E
13.1 Avg DII/FS of 1.2%Avg DII/FS of 4.4%
-4.1 -3.7
DII Flows (USD b) DII as % to Financial Savings
0.4 0.2 3.3 6.0 12.3 10.5 3.1 -2.4 -0.7 -9.7 -6.6 -2.3 7.0 6.0 6.0 6.0 6.0
USD 28b 17.7 USD -12b 16.7
6.4 5.1
0.3 0.1
-0.9
-8.9
-12.7
DII as % to Financial Savings
29. Corporate Profit to GDP has hit the bottom
Corporate Profit to GDP7.8
7.0
High:7.8%
6.2
5.2 5.5
5.0 4.64.7
4.6
4.3
4.0
28STRATEGY | October 2016
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17E
FY18E
FY19E
FY20E
Corp Profit to GDP (%) Average Average Plus
8.0
7.3 Average: 5.5%
Average Plus: 6.6%
6.5 6.5
6.2
6.0 5.9
5.4
5.5 5.1
4.9 4.7
4.0 4.3
3.9
3.0
30. REVERSION TO MEAN = 24% EPS CAGR
4,187
3,216
2,077
Note: Nominal GDP Growth & Sales Growth estimate of 11-12% in FY17-FY20
29STRATEGY | October 2016
FY04361
FY05446
FY06540
720FY07
833
FY08
820
FY09
834
FY10
1,024
FY11
1,120
FY12
1,181
FY13
1,337
FY14
1,356
FY15
1,330
FY16
FY17E
FY18E
FY19E
FY20E
Sensex EPS (INR) Average Average Plus
4,500
33% CAGR
3,600 24% CAGR
3,154
2,700 2,439
2,567
1,820
1,800
1,669
900
0
31. And stocks are slaves of earnings!
Sensex Index
85,000
Trailing PE 80,643
61,774 21% CAGR
46,724
30STRATEGY | October 2016
FY045,591
FY056,493
FY0611,280
13,072FY07
FY0815,644
9,709FY09
17,528FY10
FY1119,445
17,404FY12
FY1318,836
FY1422,386
27,957FY15
25,342FY16
FY17E
FY18E
FY19E
FY20E
Sensex (INR) Average Average Plus
34% CAGR
Average: 17.5x
Average Plus: 19.2x
High:25.2x
65,000
55,223
45,000 45,950
34,776
37,986
25,000 31,165
5,000
32. Corporate Profit Margins have hit the bottom
16.1 15.7
14.6
14.3 13.1 14.3
12.2
11.6
Note: Nominal GDP Growth & Sales Growth estimate of 11-12% in FY17-FY20
31STRATEGY | October 2016
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17E
FY18E
FY19E
FY20E
Corporate PAT Margin (%) Average Average Plus
20.0
Corporate PAT Margin
Average: 14.3%
17.2 Average Plus: 15.7%
17.0 16.3 16.3 16.4 High:17.2%
14.8 14.6
14.0 13.4
13.5
12.5 12.7
11.0 11.9 11.8
11.0
8.0
33. REVERSION TO MEAN = 25% EPS CAGR
3,000
1,867
2,081
32STRATEGY | October 2016
FY04361
FY05446
FY06540
FY07720
833FY08
820FY09
834FY10
1,024FY11
1,120FY12
1,181FY13
FY141,337
1,356FY15
1,330FY16
FY17E
FY18E
FY19E
FY20E
Sensex EPS (INR) Average Average Plus
6,000
39% CAGR
5,000 4,907
4,000 25% CAGR
3,581
3,201
2,596
2,586
2,000
1,667
1,000
0
34. And stocks are slaves of earnings!
Trailing PE
94,513
33STRATEGY | October 2016
FY045,591
FY056,493
FY0611,280
13,072FY07
FY0815,644
9,709FY09
FY1017,528
19,445FY11
FY1217,404
18,836FY13
22,386FY14
27,957FY15
25,342
FY16
FY17E
FY18E
FY19E
FY20E
Sensex (INR) Average Average Plus
105,000
39% CAGR
Average: 17.5x
85,000 Average Plus: 19.2x
High:25.2x
68,786
65,000
22% CAGR
49,729 56,044
45,000 46,275
35,669
38,047
25,000 31,134
5,000
35.
36.
37. Indian Markets: Up 103x in 32 years
BSE Sensex
35000
30000
25,342
25000
103x in 32 Years
(16% CAGR)
20000
15000
10000
5000
245
0
36STRATEGY | October 2016
38. The Best is Ahead
37STRATEGY | October 2016
REFORMS: GST, Bankruptcy Code, Strategic Sale of PSUs
DEMOGRAPHICS: ~50% of population below age of 26 years =>20% of worlds
working population will live in India by 2025
INFRASTRUCTURE: Roads, Rail, Power - Reqd investment of $1.5tn
FINANCIAL SAVINGS – DII Flows $17.7b in FY08, $34b in FY20?
INDIA IN WORLD - 18% of population, 3% of GDP, 2% of Market Cap
GLOBALISATION - Technology, Health Care, Chemicals, Autos
CORPORATE PROFIT TO GDP: 3.9% in FY16 vs 5.5% avg & 7.8% peak
MARKET CAP TO GDP – 50% below peak
ADJUSTED PE - 7% below average (~25% upside), 32% below peak (~75% upside)
39. INVESTMENT OPPORTUNITIES GALORE
38STRATEGY | October 2016
Diagnostic Chains
Hospitals
Staffing companies
New Consumption
Flavors & Fragrances
Gas chain
Small Finance Banks
Payment Banks
Insurance
NBFC's
E-Commerce