Wider Choices, Smarter Development

Rise and fall of stock markets/prices is guaranteed!

A Basic Reminder

• Invest for the Long term • Price of the company will change daily but not

the value of the company. It’s the value that finally drives the price.

• Do not follow the herd – draw your own path• Be disciplined• Markets in the long run will depend upon a)

Macro Factors – Economy

b) Corporate India performance

Boom…bang…crash!!

Disbelief

Belief

Euphoria

Crash

Sensex under 13000 in Apr 2007

Sensex crosses 18000 in Oct 2007

(sharp rally of 4000 pts in 1 ½ mths)

Sensex peaks at 21000 levels in Jan 2008

Sensex crashes to 15332 on Jan 22 2008 thereby retracing to Aug 2007 levels

(within 7 trading sessions of achieving a peak)

Sensex back at 15000 levels in Mar 2008

- Liquidity

- Leverage

- Rumour mongering

- Huge Retail participation

But was not backed by FUNDAMENTALS

Last Leg for Up Move was backed by

2000 - Statistics

• Dotcom bubble

Feb 2000 – Sensex Peak 5933 6026

3920May 2000 – Trough

Jan 2004 – Sensex Bounce back

4 yrs

Flows•FIIs – Rs 43 bn

•Domestic –Rs 4 bn


•Domestic – Rs (75) bn

% of Stock Fall

> Sensex

54%

% of Stock Rise

> Sensex

51%

Source: Bloomberg

2001 - Statistics

• September 9 /11

Aug 2001 – Sensex Peak 3318 3322

2600Sep 2001 – Trough

Nov 2001 – Sensex Bounce back

3 months

Flows•FIIs – Rs (4.5) bn

•Domestic –Rs 1.1 bn

Flows•FIIs – Rs 9.6 bn

•Domestic – Rs (10.7) bn

% of Stock Fall

> Sensex

33%

% of Stock Rise

> Sensex

56%

Source: Bloomberg

2004 - Statistics

• NDA government collapsed

Apr 2004 – Sensex Peak 5925 5973

4505May 2004 – Trough

Nov 2004 – Sensex Bounce back

7 months

Flows•FIIs – Rs (25) bn

•Domestic –Rs 13.3 bn


•Domestic – Rs (17) bn

% of Stock Fall

> Sensex

29%

% of Stock Rise

> Sensex

69%

Source: Bloomberg

2006 - Statistics

• Concerns that US will raise rates and draw overseas investors away from emerging markets and surging commodity prices will hurt company earnings.

May 2006 – Sensex Peak 1261

212736

8929Jun 2006 – Trough

Oct 2006 – Sensex Bounce back

5 months




•Domestic – Rs 17 bn

% of Stock Fall

> Sensex

80%

% of Stock Rise

> Sensex

34%

Source: Bloomberg

2008 - Statistics

• Sub-prime crisis

Jan 2008 – Sensex Peak 2081

2

15357Mar 2008 – Trough

Sensex Bounce back - ??

?? months



% of Stock Fall

> Sensex

81%

Source: Bloomberg

2008 Crash – Most Vicious Date SENSEX INDEX change

From To From To %

1 Jan-08 Mar-08 21206 14677 -30.79%

2 Feb-07 Mar-07 14723 12316 -16.35%

3 May-06 Jun-06 12671 8799 -30.56%

4 Apr-04 May-04 5979 4227 -29.30%

Date BSEMDCAP Index change

From To From To %

1 Jan-08 Mar-08 10113 5805 -42.60%

2 Feb-07 Mar-07 6187 5114 -17.34%

3 May-06 Jun-06 6033 3721 -38.32%

4 Apr-04 May-04 2337 1768 -24.35%

Source: Bloomberg

Key Question in Investors Mind

• Is the 2008 stock market crash similar to 2000 crash and would this mark the beginning of the bear market?

2000 v/s 20082000-01 *2007-08

Fwd P/E ratio 35x 16x

Savings

(as a % of GDP)

23.7% 34.7%

Investments

(as a % of GDP)

24.3% 35.9%

GDP growth 4.35% 8.73%

Inflation 7.16% 7.21%

Earnings growth 4.43% 17-20%

* estimates

Other comparisons:

• Only driver of markets in 2000 was the TMT sector

• Rally & the crash now much more broad based

• Tata Motors, Tata Steel, M&M making losses in 2000

• IT cos much stronger and much bigger

Corporate Profits Surpass Index Growth

Date Sensex Agg BSE 500 Net Profit (Rs Crs)

Apr-98 3993 33755

Apr-99 3519 31101

Apr-00 5053 37019

Apr-01 3566 45487

Apr-02 3506 45371

Apr-03 3117 70028

Apr-04 5788 90077

Apr-05 6604 119719

Apr-06 11747 136909

Apr-07 12455 195769

Mar-08 16217 254500

10 yr growth 4.1 times 7.5 times

10 year data reveals that ….

…profits in the broader market have grown faster than the SensexSource: Bloomberg; Edelwiess

Consistent Earning Growth

• Indian corporates have been delivering consistent growth for last 5-6 years

• Markets have been rising from levels to 1200 in Fy01 to 4900 in Fy08 at a CAGR of 20% p.a.

• In FY07 and FY08; Sensex has grown slower than the Sensex EPS growth; thereby anticipating a slowdown in future earnings

• As the growth outlook improved; Sensex likely to give disproportionate returns

EPS Growth (%) Sensex Sensex growth

FY98 247.0 6.9 3,969.6 15.8%

FY99 240.5 (2.6) 3,686.3 -7.1%

FY00 274.4 14.1 5,001.3 35.7%

FY01 235.8 (14.1) 3,604.4 -27.9%

FY02 251.3 6.6 3,500.2 -2.9%

FY03 293.7 16.9 3,081.0 -12.0%

FY04 354.1 20.6 5,740.9 86.3%

FY05 435.7 23.1 6,605.0 15.1%

FY06 478.4 9.8 11,280.0 70.8%

FY07 653.3 36.6 13,072.1 15.9%

FY08 865.0 32.4 15,800.0 20.9%

FY09E 1,012.1 17.0 ? ?

Source: Bloomberg; Edelwiess

Economic Fundamentals - Robust

Real GDP Inflation

Investments as a

% of GDPSavings as a % of GDP

% Y-o-Y % Y-o-Y % %

1997-98 4.30 4.40 25.3 23.80

1998-99 6.68 5.95 23.3 22.26

1999-00 6.44 3.27 25.9 24.81

2000-01 4.35 7.16 24.3 23.74

2001-02 5.81 3.60 22.8 23.47

2002-03 3.84 3.41 25.2 26.40

2003-04 8.52 5.46 28.2 29.81

2004-05 7.45 6.48 32.2 31.77

2005-06 9.40 4.38 35.5 34.28

2006-07 9.62 5.42 35.9 34.77

2007-08 8.73 7.21 36.3 * 35.05*Source: CSO, CMIE, RBI, Edelweiss, * estimates

• Economic fundamentals have been robust and key metrics have consistently improved

• Current level of Saving and investments can sustain 8% growth

Is There Enough Liquidity?• Record US$100bn of outflows from global equity funds, 80% of which

pertains to developed markets, 20% to emerging markets • Taiwan, Russia, Middle East, Africa are the only market-funds that saw

inflows • Money is moving to money market funds that saw inflows of US$140bn. MM

funds have ballooned to US$3.5trn in the US. A lot of money is thus now on the sidelines; these will flow into riskier assets once climate improves

• Commodity funds saw inflows of US$3bn, 3x YoY. There is over-heating here, commodities look very vulnerable

• More than 50% of the 25-top US mutual funds have seen outflows in their equity funds

• The above statistics show that the risk aversion is at a peak in equities• Liquidity is ample but there seems to crisis of confidence• Commodities cooling will release liquidity into oversold equity markets

- Low Liquidity - Heavy Shorting/hedging activity - Rumour mongering - Problems with US financial system

But again driven more by fear than only fundamentals

Fundamentals are still strong

The Crash and Carnage was backed by

Where can the Sensex go?

Pls note: the above calculations are based on hypothetical assumptions about the EPS growth rate and the P/E ratio

FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018

EPS growth 20 20 20 17 17 17 15 15 15 12

Sensex EPS 1010 1212 1454 1702 1991 2329 2679 3081 3543 3968

P/E

12 12120 14544 17453 20420 23891 27953 32146 36967 42512 47614

13 13130 15756 18907 22121 25882 30282 34824 40048 46055 51582

14 14140 16968 20362 23823 27873 32611 37503 43129 49598 55550

15 15150 18180 21816 25525 29864 34941 40182 46209 53141 59517

16 16160 19392 23270 27226 31855 37270 42861 49290 56683 63485

17 17170 20604 24725 28928 33846 39600 45539 52370 60226 67453

18 18180 21816 26179 30630 35837 41929 48218 55451 63769 71421

19 19190 23028 27634 32331 37828 44258 50897 58532 67311 75389

20 20200 24240 29088 34033 39819 46588 53576 61612 70854 79357

21 21210 25452 30542 35735 41809 48917 56255 64693 74397 83324

22 22220 26664 31997 37436 43800 51246 58933 67773 77940 87292

Technical View - Crude oil

•The crude oil prices are looking heavily overbought on the charts•The most likely scenario is a correction to USD 90 levels•A breach of this level is likely to take crude oil to USD 80 levels•Crude oil would lead the fall in other industrial metals and gold

Source: Reuters

Technical View - BSE 500

•The BSE 500 index has climbed back after breaching the long term support line in early March•A move above the trend line will indicate that the long term trend remains intact

Source: Reuters

Technical View - BSE Midcap

•The BSE Midcap index has breached the long term trend line thrice over the last three years•Typically this happens during times of panic•The index is looking oversold in term of stochastics•The index should bounce back over the long term trend line over the next three weeks

Source: Reuters

Technical View - MSCI Emerging Markets Index

•The Morgan Stanley emerging markets index is showing the formation of a double bottom on the charts•This reflects that the index might have bottomed out in the near term

Source: Reuters

Technical View - BSE Sensex Index

•The long term chart of the sensex reflects that the index has been able to come back into the long term channel•As long as this index remains in the channel the positive trend will remain intact and the index should rally to the upper end of the channel over the next few weeks

Source: Reuters

Higher September - Way to go?

Sensex Values

Year 31-Mar 30-Sep growth

2003 3,049 4,453 46.1%

2004 5,591 5,584 -0.1%

2005 6,493 8,634 33.0%

2006 11,280 12,454 10.4%

2007 13,072 17,291 32.3%

Source: Bloomberg; Edelwiess

Synopsis

• Indian markets are cheap and trading below fair value• Indian markets can move up by 20% in the next 3-4

months• Subsequently, markets will be driven by movements in

commodity prices and RBI’s credit and monetary measures

• Q1 results in developed economies should bring out the most of the losses in the balance sheets of the global financial majors.

• Thus we believe that the worst of the sub-prime crisis will be behind us post the Q1 results

• There is no change in the long term trend of the market

Wider Choices, Smarter Development

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