ENAM Securities
India Research
CNBC Investor Camp
Market cycles
Nandan Chakraborty
MD – Institutional Equity Research
September 1, 2012
1
Table of contents
The Market Cycle
Market Phases in India
Dreaded times in the past
Hope
Personal Investing and the Balance of Life
2
The Market Cycle
3
The market cycle – why
4: Bubble
Towards Over valuation
PE rises due to derived
demand and rising
expectations
At these level of expectations & valuations,
anything can bring down the house of cards
5: Correction & bear rally
Towards Fair valuation
EPS growth due to remedial
measures by Govt and
Industry)
6: Bear Phase
Rally, as the business cycle has not
cracked yet
1: Deep Undervaluation
Abundant but reluctant
liquidity
Tentative Buying, without
triggers/ outlook/ timehorizon, but based on
absolute valuation
measures
Business cycle
down: virtuous to
vicious cycle
Bust
Phase 0 Phase 1
Inflation (demand-supply squeeze)
Phase 2
Phase 3
Momentum of
Stock returns
Corporate profits
Phase 4
Phase 5
Acceleration in
Corporate profits
Phase 6
Phase 0
Inflation
Abundant
liquidity again,
but initially
reluctant to be
deployed
Market returns. Hence this is anticipated & plays out exactly in reverse
The length, height and constituents of each phase may vary widely in each cycle, as Lord Nataraj improvises in
each cycle, but the sequence and nature of the overall Nritya stays the same
Source for Market cycle Phases: Marc Faber – “Tomorrow’s Gold”
4
The market cycle – symptoms
4: Bubble
2-3: Fair to Over valuation
1: Undervaluation
Asset & Cost inflation
Capex/ IPO/ Credit cycle
revives
Boom spreads, initially
earnings driven (phase 2),
later multiples-driven (ph 3)
Leading stocks fall sharply, followed
by pull back as “Left outers” jump in
& earnings still growing
Leadership narrows
Profits OK, but P/E falls
Sharp, swift, short-lived “no-reason”
rallies
Phase 1
Phase 2
Phase 3
Phase 4
Valuation methods across the mkt phases
BEAR MARKET
Value
Dividend Yield
Price/BV
Replacement
Cost
6: Bear Phase
5: Correction & Bear rally
Easy & cheap Liquidity
Value buying
Catalysts: Regulatory,
Commodities
Phase 0
P/E expansion, Easy credit
New Themes and Valuation Paradigms
“Virility” Symbols (Towers, diversification/ M&A)
Capex > near-future requirements
Retail & IPO euphoria
Shock/ Leaders in trouble
BULL MARKET
GARP
Payback
EV/EBIDTA
P/E
DCF
Source for Market cycle Phases: Marc Faber – “Tomorrow’s Gold”
BUBBLE MARKET
Momentum
Technical Charts
Reflexivity
PE/G
Option Value
Phase 5
Phase 6
Earnings crack
Tight money
demand & EPS fall
Bust
Phase 0
Easy credit to
revive growth
Each phase has no particular time-period/ height.
Symptoms identify phase, or at least what’s just
over/ what next
Characteristics, ie shape of the curve, become
meaningful and easier to digest and plan for
5
Stages of the Bear market: No easy Construct
Franz Kafka's "Metamorphosis“: a family member transforms into a giant insect – changing sentiments of family
members in 4 stages, each stage taking longer than the preceding one (liberties taken from the original version):
Stages
Story
Stages
Market
HORROR
Rush to the bank to withdraw
money for an operation
UNWINDING
Need to unwind all momentum & leveraged positions. The
shortest time-horizon
PITY
Search for worms to feed him
GREED-BUYING
a) At first, this is looking backwards at the highs, & saying 40%
down, this is fantastic!!! BUY!!!
b) Stage 2b= breaking the 52 week low/ lowest PE, etc BUY !!!
SHAME/
DISGUST
Fed up with the effort to look after
his needs. Fed up with well-wishers
head-wagging innovative ayurvedic
& astrological remedies
PORTFOLIO
INTROSPECTION
For eg how much should I have in stocks v/s bonds, cash, etc?,
how much in India vs EMs, etc. A bird's eye view of entire
assets under management, not just individual stocks. Then, the
weeding out of stocks which form a decimal of one's portfolio,
irrespective of valuations, or those mid/ small caps which may
not have sustainable competencies/ dominance to emerge
stronger in such a difficult market
APATHY
His bedroom door to the living room
is sealed off, & a separate outer
door created for his bedroom, so he
can freely go in/ out & consort with
fellow insects outside the house
TIME HORIZON
STRETCHING
The REAL treasure hunt time, when you DON’T expect a nearterm revival, but at current valuations, are willing to sacrifice
short term volatility. People are liquid of stocks, so the rise
starts again
6
Living in phase 6
Inflation should peak out and Earnings growth bottom out, leading to interest rates easing off with a lag
New bull market doesn’t emerge simply as the worst is over. Rounded bottom phase 6 has to be painfully
lived through
There will be deceptive savage bear-rallies (sharp, short-lived, swift), usually “no-reason” rallies (based on
hope & under-ownership), which can each time tempt that a new bull market is on
Even after phase 6, there’s phase 1 to cross – the symptoms at that stage are still to emerge, ie abundant
(though reluctant) liquidity, cheap valuation and catalyst (eg regulatory/ commodities)
7
Market Phases in India
8
Market phases to study and learn from
25,000
What we live for!:
Liquidity driven Bull run
20,000
15,000
High RoE Bull run
10,000
Dark period Bear run
Frustratingly flat
Whipsawing bear rally
5,000
0
J-95
J-96
J-97
Source: Bloomberg; ENAM Research
J-98
J-99
J-00
J-01
J-02
J-03
J-04
J-05
J-06
J-07
J-08
J-09
J-10
J-11
9
RoE Bull market of Jan-97 to Feb-00 (Sensex +84%)
Sec tor/ Company
Banks
HDFC Bank
HDFC
FMCG
Dabur
Hindustan Unilever
ITC
Tata Global Beverages
Glaxo Consumer
Pharma
Cipla
Novartis
Wockhardt
Ranbaxy
Glaxo Pharma
Technology
Infosys
NIIT
Positive
PE ( x)
Start
End
Stoc k
Perf ( %)
20
12
38
10
460
51
18
28
20
18
23
46
48
32
21
24
374
337
186
151
111
14
46
13
18
32
52
34
30
56
68
623
335
320
281
150
17
14
230
83
11,377
1,653
Sec tor/ Company
Auto/ Engg
ABB
Tata Motors
Thermax
Crompton Greaves
SKF India
Banks
OBC
IDBI Bank
Commodities/ Others
GSFC
SAIL
Tata Chem
Usha Ispat
Essar Steel
GE Shipping
Negative
PE ( x)
Start
End
Stoc k
Perf ( %)
31
12
20
23
21
32
NM
7
NM
35
(52)
(53)
(65)
(67)
(68)
9
6
3
3
(52)
(62)
4
19
14
12
84
8
17
NM
10
24
NM
8
(51)
(54)
(71)
(80)
(46)
(50)
Multiples of high RoE sectors got MASSIVELY stretched. Bull run ended with a narrow segment blowing off (TMT)
Note: Initial and ending valuation multiples in these slides provide an idea of how much of the stock returns were earnings-growth driven.
NM= Not meaningful, as loss-making
Source: CMIE; ENAM Research
10
Bear market of Feb-00 to Apr-03 (Sensex -51%)
Sec tor/ Company
Banks
HDFC
HDFC Bank
PSU
ONGC
HPCL
BPCL
GAIL
BHEL
SBI
Pharma
Dr Reddy's
Positive
PE ( x)
Start
End
Stoc k
Perf ( %)
10
38
11
18
76
50
8
6
7
6
17
6
4
6
5
4
40
5
86
55
40
29
29
13
61
18
87
Sec tor/ Company
TM T ( Tec h, M edia, Telec om)
DSQ Software
Silverline Tech
PVP Venture
Pentamedia Graphics
Himachal Fut
NIIT
Visualsoft Tech
Zee Ent
Hexaware Tech
GTL
Tata Comm
Rolta
Mastek
Wipro
MTNL
Satyam Computer
Infosys
Dabur
N egative
PE ( x)
Start
End
90
108
316
82
96
83
181
626
73
27
34
44
382
421
19
152
230
46
Stoc k
Perf ( %)
NM
NM
9
5
15
105
8
29
25
5
3
3
15
25
7
17
21
13
(99)
(99)
(98)
(98)
(97)
(96)
(95)
(95)
(94)
(94)
(93)
(89)
(86)
(85)
(76)
(75)
(71)
(69)
While stratospheric PE sectors collapsed, HDFC group continued to shine despite multiples falling,
while PSUs got catalysed by disinvestments
Source: CMIE; ENAM Research
11
… And in more recent memory: 03-08/ 08- 11
Bull market Apr-03 to Jan-08 (Sensex +614%)
Bear market Jan-08 to Oct-11 (Sensex -19%)
N egative
Positive
Sec tor/ Company
Banks
ICICI Bank
HDFC
SBI
HDFC Bank
PNB
Commodities
SAIL
Tata Steel
Reliance Inds
Grasim
Neyveli Lignite
Ambuja Cement
ACC
Engg/ Inf ra
L&T
BHEL
Reliance Infra
Tata Power
Telec om
Bharti Airtel
End
Stoc k
Perf ( %)
7
11
4
18
3
50
36
14
38
10
1,734
1,080
782
779
629
NM
6
11
12
4
8
21
15
77
23
10
41
13
16
2,873
1,284
1,084
871
756
746
742
13
40
24
4
60
53
77
30
2,564
2,105
1,904
1,408
NM
28
3,072
PE ( x)
Start
Sec tor/ Company
Banks
Reliance Capital
IDFC
PFC
Commodities
Aban Offshore
Essar Oil
SAIL
Hind Copper
Sterlite Inds
NALCO
Reliance Inds
Engg/ Inf ra
Unitech
Suzlon
Punj Lloyd
HDIL
IBREL
Reliance Infra
DLF
GMR Infra
JP Associates
ABB
Telec om
RCOM
MTNL
Tata Comm
PE ( x)
Start
End
Stoc k
Perf ( %)
65
40
25
37
14
7
(87)
(40)
(33)
516
NM
15
185
12
20
23
3
17
9
91
8
15
14
(91)
(71)
(59)
(53)
(45)
(50)
(37)
51
57
55
18
45
72
25
185
73
64
13
NM
NM
5
19
8
26
NM
9
230
(92)
(90)
(89)
(84)
(84)
(81)
(79)
(77)
(71)
(54)
25
44
NM
12
NM
NM
(90)
(85)
(73)
Liquidity driven boom & bust: Banks, Commodities, Infra
Source: CMIE; ENAM Research
12
And in case we again revisit this stage:
Flat market Apr-95 to Apr-97 (Sensex +3%)
Sec tor/ Company
Auto
M&M
TVS Motors
Tata Motors
Banks
SBI
HDFC
Commodities
NALCO
Hindalco Inds
BPCL
Engg
ABB
BHEL
Cummins
FM CG / Pharma
ITC
Hindustan Unilever
Wockhardt
Glaxo Pharma
Positive
PE ( x)
Start
End
Stoc k
Perf ( %)
15
15
19
16
15
12
101
59
53
9
14
10
14
127
58
10
14
15
13
18
13
109
63
29
37
71
22
34
22
20
35
174
40
37
43
NM
55
21
34
12
32
27
69
38
20
Sec tor/ Company
Auto
Ashok Leyland
Banks
Reliance Capital
IFCI
Cement
JK Lakshmi
ACC
Grasim
India Cement
Engg/ Inf ra
Alfa Laval
CESC
Lakshmi Machine
Siemens
Crompton Greaves
FM CG / Pharma
Videocon
Whirlpool
IPCA Labs
Torrent Pharma
Dr Reddy's
Textiles
Bombay Dyeing
Raymond
Negative
PE ( x)
Start
End
Stoc k
Perf ( %)
26
8
(45)
30
6
7
6
(53)
(47)
22
24
14
16
NM
25
10
5
(78)
(48)
(41)
(41)
34
11
17
49
15
NM
6
14
NM
17
(66)
(65)
(57)
(42)
(30)
12
38
24
23
22
2
NM
7
5
15
(87)
(81)
(72)
(69)
(43)
12
13
39
59
(62)
(35)
‘Twas an analyst’s paradise: Earnings growth PURELY drove stock prices without re-rating them
(ex-fmcg/ pharma), while earnings-laggards’ multiples were punished severely
Source: CMIE; ENAM Research
13
The speculative bubble in Defensives: Spread of
valuations of Defensives & Aggressives at mkt bottoms
Sensex PE – Trough dates
Oct-9 8
Sep-0 1
Mar-0 9
D ec-1 1
Nuke test - Intl
sanctions
TMT bust
Post Lehman
Eurozone fears
2 ,7 6 4
2 ,6 0 0
8 ,1 6 0
1 5 ,1 7 5
1 5 ,9 8 8
FMCG
37
22
20
28
27
HDFC Bank
13
20
15
19
18
IT
24
13
10
20
17
Pharma
31
23
11
23
20
Sensex
13
11
10
14
12
8
3
6
9
9
Engg
12
12
16
11
12
Infra
8
9
11
NA
NA
Metals
8
8
3
11
10
Event
Aggressive
Defensive
Sensex Index
State Bank
C urrent
FIIs exited/ inflows choked and even family jewels sold; Note clustering of Valuations of Def And
Aggs in Sept 01 & Mar 09
Flight to Quality seen in Oct 98 & Dec 11/ now, when there’s no en masse exit in mind
Comment: PE calculation; EPS that year itself; eg. (1) Sep’01 is 6m fwd for Mar’02, (2) Dec’11 is 3m fwd for Mar’12; NA – Sector not part of Sensex
Risk-reward for Defensive sectors varies:
When investors exit en masse, even quality gets smashed and is not defensive any longer.
At other “flight to quality” times, they under-perform subsequently (ref similar slide for Bull peaks: last slide of Appendix 1 )
Source: ENAM Research
14
Clustering or spread of valuations of Defensives
& Aggressive seen in earlier mkt tops
Sensex PE - Bull Peaks
Date
Aug-97
Feb-00
Jan-08
Event
Chidambaram's
dream budget
TMT boom
EM boom
4,548
5,934
20,873
21,005
FMCG
37
40
28
28
IT
NA
150
21
24
Pharma
27
36
26
29
HDFC Bank
23
38
38
28
Sensex
18
21
23
20
State Bank
17
6
14
23
Engg
22
18
51
26
Infra
13
12
74
17
Metals
34
13
13
12
Aggressive
Defensive
Sensex Index
Nov-10
SAIL reported losses due to correction in steel prices post the Asian currency crisis
ROE fuelled bull rally; hence Defensive valuations stretched
Liquidity driven capex boom; hence valuation of Aggressives stretched while those of Defensives compressed
Source: Bloomberg; ENAM Research
15
Holy grail of market predicting ☺
Initial expectations (PE) most important
1,500
(x)
INR
1,200
Low initial expectation,
followed by massive
growth
High expectations
(initial PE), weak
growth
IT-led boom
40
30
900
High initial
expectations (PE)
offsets huge EPS
growth in
1994-1996, leading
to tumbling of
multiple and Sensex
20
600
10
300
A TIME TO FORGET,
OR LEARN FROM
0
Fwd EPS (LHS)
Source: ENAM Research;
Mar-11
Mar-10
Mar-09
Mar-08
Mar-07
Mar-06
Mar-05
Mar-04
Mar-03
Mar-02
Mar-01
Mar-00
Mar-99
Mar-98
Mar-97
Mar-96
Mar-95
Mar-94
0
Fwd PE (RHS)
Note: Chart is based on standalone nos
3 Takeaways: a) Importance of initial expectations, b) Range of multiple has generally been between 12 &
20, c) Sensex EPS has been flat for long periods and India needs an impetus or 2 every decade
16
Recap: Lessons from prior bear/ flat markets
8,000
Co. performance is severely punished/ rewarded, hence sector calls are
less relevant during these periods
7,000
HD F C Bank
Risk-reward of “quality sectors” turns unfavourable after a point, as either
investors exit even these sectors, OR they under perform subsequently
6,000
Some stocks have outperformed in both bull and bear phases so far
The problem plaguing the period contains the seeds of the leaders of the
next phase. This time, govt inaction and inflation is THE problem. Hence
current asset owners may command an advantage in the next few years:
Replacement Cost Hypothesis
4,000
3,000
HD F C
We are at the bottom quartile of our historic multiples. One of the Catalysts is
simply the Valuation bottom – UNLESS the country is perceived to have a
chance of going into anarchy
Source: Bloomberg, ENAM Research
May-12
May-10
May-09
Sensex
May-08
May-07
May-06
May-05
May-04
May-03
May-02
May-01
May-00
May-99
May-98
0
May-97
1,000
May-96
Sensex EPS has been flat for a time in various periods in our past; India needs
an impetus or 2 every decade for continuous EPS growth. We had an “Indiapenetration” thrust under the BJP-rule, a “Consumer stimulus” under the
Congress rule, and now await major reforms
May-11
2,000
May-95
(Index ed to 1 0 0 )
5,000
17
Dreaded times in the past - India
18
Looking back at dreaded times
Common characteristics
Politics
25,000
INR, Fisc Deficit & CAD
20,000
Interest & Inflation rates are
just symptoms, & may vary
15,000
10,000
5,000
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
0
1988
Looking back
Global events
Each phase of utter hopelessness had a scary macro environment, a vicious cycle
Source: Bloomberg, ENAM Research
19
The first mkt cycle of our generation: 88- 91
4,500
4,000
PM: Rajiv Gandhi
PM: Shri V P Singh
Bofors scandal breaks out
PM: Chandra Shekhar
PM: P V Narasimha Rao
India forced to pledge gold
Gulf war I
Politics: 4 PMs in 4 years!, India forced to liberalize in 91
3,500
INR: BoP crisis as CAD rose to ~3%. India forced to pledge gold. INR depreciated by 11% pa from ’88 to ’91
to reach Rs 20
3,000
Inflation: High teen Primary & Fuel inflation
Intt rates: Thus, market interest rates at >20%
2,500
2,000
The bull market of 1991-92 was against the backdrop of the Gulf war, liberalisation (incl INR devaluation
from Rs 20 to 29), culminating in the market scam
Sx returns: INR: 9%/ $: -0.3%
1,500
GDP: 6.1%
1,000
500
Sx returns: INR: 79% / $: 49%
Sx returns: INR: 50% / $: 31%
Sx returns: INR: 267% / $: 150%
GDP: 10.1%
GDP: 5.3%
GDP: 1 .4%
0
Apr-88
Source: Bloomberg; ENAM Research
Apr-89
Apr-90
Apr-91
20
Sensex in Rollercoaster 1996- 99
PM: H.D. Deve Gowda
6,000
PM: Inder Kumar Gujral
PM: Atal Bihari Vajpayee
S.E Asian crisis
International sanctions
Politics: Coalition politics at its worst: 3 PMs in 3 yrs
Global: SE Asian crisis & Russian debt default vitiate global flows
5,500
INR: Depreciates sharply from Rs 36 to 42 as international sanctions imposed post India’s peaceful nuke tests
Inflation: Subdued (4-5%)
5,000
Intt rates: Thus, PLR fell from 16.5% in 96 to 13% by 99
Fiscal deficit: Jumps sharply from ~4% in 96 to >6% of GDP by 99
4,500
4,000
3,500
3,000
2,500
Sx returns: INR: -0.2% / $: -5%
Sx returns: INR: 16% / $: 5%
Sx returns: INR: -4% / $: -11%
GDP: 7.9%
GDP: 4.3%
GDP: 6.7%
Apr-96
Source: Bloomberg; ENAM Research
Apr-97
Apr-98
21
Sensex: The SADIM* touch: 2000-03
8,000
PM: Atal Bihari Vajpayee
9/11
Gulf war II
Politics: Finally, a stable govt!
7,000
Global: TMT bubble bursts, 9/11, Gulf war II
INR: Orderly depreciation from ~44 to 47 through 2003
Inflation: Remained ~6% despite two severe droughts in 2001-03. Fuel prices jumped
20% as global oil prices nearly doubled to $28/ bbl
6,000
Intt rates: PLRs dropped to lowest levels of ~10% as policy rates fell, laying the
foundations of the biggest bull run
5,000
4,000
3,000
2,000
Sx returns - INR: -21% / $: -26%
Sx returns - INR: -18% / $: -21%
Sx returns - INR: 4% / $: 4%
GDP FY01: 4.3%
GDP FY02: 5.5%
GDP FY03: 3.9%
Jan-00
Source: Bloomberg; ENAM Research
Jan-01
* whatever you touch turns to mud (except PSUs & HDFC gp)
Jan-02
Jan-03
22
Vicious to virtuous cycles
INR
INR
Sx returns - INR: 614% /
$: 761%
Fisc
Fisc
CAD
CAD
Major reforms
Major reforms
Sx returns - INR:
19% / $: 5%
Sx returns - INR: 113% /
$: 108%
Sx returns - INR: 367% /
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
Macro variable
1988
$: 200%
CAD (% of GDP)
Æ 3%
Å0
Æ 1-2
1
Å surplus to 1
Æ 4% est in FY12
Fiscal Deficit
(% of GDP)
Æ 7%
Å5
Æ 4 rose to 7
Æ6
Å 5 fell to 4
Æ 4 rose to 6
INR depn (%)
Æ 11 pa
Æ 14*
Æ 5 pa
stable
Å rose 2.3 pa despite crude
trebling
Æ @ 56
* Devaluation
Crisis invokes self-correcting institutional action. This, along with our demographics trajectory and
under-valuations, inevitably attracts capital again ….
So, the “everything seems utterly hopeless” turns to “everything looks great”, as the INR, Fisc & CAD
simultaneously improve
Source: Bloomberg, ENAM Research
23
Hope
24
India’s growth closely related to reforms
12
(YoY %)
Green
revolution
White
revolution
Liberalization
Financial
reforms
Wait on for Factor
market reforms ie
Land, Labour etc
9
6
3
0
(3)
Source: CMIE
2012
2008
2004
2000
1996
1992
1988
1984
1980
1976
1972
1968
1964
1960
(6)
25
LT India Opportunity story remains unchanged
Rapid GDP growth v/s a slowing world
8%
CA
11 GR
.5
%
(USD Trillion)
12
Indian GDP as % of Global GDP
10
GR
CA .6%
13
R
CAG %
9
12.
4
2
7%
6%
5%
5%
4%
3%
5.8
4%
3%
2%
3.6
1%
1.9
0.5
0
10
GR
CA .7%
12
8
6
7%
2%
0%
2000
2011
2016
2020
2025
2000
Growing prosperity
>1,000
4 Mn
500-1,000
6 Mn
200-500
22 Mn
90-200
75 Mn
>1,000
18 Mn
CAGR (%)
30%
2025
13%
20%
200-500
50 Mn
9%
10%
90-200
120 Mn
<90
82 Mn
2010E
2020F
27%
33%
34%
FY06
FY10
26%
16%
500-1,000
20 Mn
<90
114 Mn
Source: IMF, RBI, Govt of India, DPPP
2020
India’s Savings Rate as a % of GDP
40%
290
221
2016
High Savings rate
Distribution of Households (mn) by Income Categories
HH income
(Rs ‘000
per annum)
2011
0%
FY00
5%
-10%
3%
FY03
HH Physical Savings
Corporate savings
gross domestic saving
HH financial saving
Public sector savings
26
Wealth effect in India: Realty & gold
Urban Housing stock ~$ 5.6 trn
59
60
61
62
64
66
68
70
71
72
74
6.0
5.0
Mortgages o/s
~ USD 100 bn
4.0
2.0
1.0
CY11
CY10
CY09
CY08
CY07
CY06
CY05
CY04
CY03
CY02
0.0
Source: Crisil, NHB, ENAM Research
2100
Real Estate: Low mortgage penetration (~7% of GDP)
implies lower speculative demand and non-vulnerability to
interest rate swings v/s developed countries
Gold: Has gone through a huge up cycle only to falter with
the rise of the USD. Indians had turned to Gold as a store
of value and as a hedge against inflation
3.0
CY01
V a l of h sg stoc ks ( USD trn )
H sg stoc ks ( mn units)
Gold: 18,000 tons = ~ $900 bn
However, INR depreciation led to higher domestic prices
and higher import duty and moderation in inflation level
will bring down the craving for gold
(USD/troy ounce)
1800
1500
1200
900
c
600
300
Apr-12
Apr-11
Apr-10
Apr-09
Apr-08
Apr-07
Apr-06
Apr-05
Apr-04
Apr-03
Apr-02
Apr-01
0
Source: Bloomberg, ENAM Research
Indian citizens have witnessed a generational wealth effect due to a high housing stock and rising gold value
27
Multiple sectors set for high compound growth
Consumption to boom across categories
Industry
Units
Organised Retail
Flow of Domestic savings
2010
2020
C AGR (%)
US$ bn
24
266
27
Air Conditioners
mn p.a.
3
18
22
Home Mortgage^
US$ bn
88
646
22
Cars
mn p.a.
2
12
20
Digital Pay TV*
mn subs
24
116
17
Refrigerators
mn p.a.
6
25
16
Packed foods
US$ bn
22
89
15
2-Wheelers
mn p.a.
9
35
14
HPC Products
US$ bn
10
34
13
DOMESTIC Savings
($ 490 bn)
Household savings: $ 340 bn
Financial: $ 170 bn
BFSI
Opportunity
Bank Deposits: $ 90 bn
Stocks & MF: $ 25 bn
Insurance & Pensions: $65 bn
Source: ENAM Research, Angus Maddison
Note: * DTH is expressed as total subscriber base,
^ Mortgage expressed as total housing loan outstanding
Low penetration implies room for growth
(mortgages as a % of GDP)
100
(%)
80
86
Source: ICICI Bank
32
REAL ESTATE: $ 134 bn
Gold: $ 17 bn
Internal
accruals for
reinvestment
48
Corporate sector: $ 120 bn
Denmark
UK
USA
Germany
HK
Taiwan
Govt.: $ 30 bn
Singapore
China
India
0
17
Malaysia
12
Korea
7
Thailand
25
26 29
39 41
Physical: $ 170 bn
93
75
50
Realty
Opportunity
Source: ENAM Research
28
Major Infra expansion plans over 2011-17
India is visibly under-invested in infrastructure
Infrastructure spend is barely 5-6% of GDP (incl energy, telecom, power, transport) v/s 8-12% in China
Major hurdles in creating infrastructure, even given the PPP framework
Unclear policy framework and lack of political/bureaucratic thrust
Land acquisition is increasingly difficult
Absence of long term debt market
XIIth Plan envisages major growth (may be back-ended due to above)
Sector
Power generation
Power T&D
U nits
2011
(current)
2017
(planned)
F unding Reqmt
GW
174
370
240
Transmission Lines ( 000 ckm)
255
380
Substation (000 MVA)
346
630
11
30
133
227
42
~USD 10-15 bn
Dedicated Freight Corridor
tenders expected soon
USD 4 bn
HVDC (GW)
(U SD bn)
C urrently being
implemented
100 bn USD
N.A.
142
Highways
Lane km ('000)
Railways #
km ('000)
10
13
10
Ports
mn tonnes
850
1,300
35
Airports
mn passengers
124
200
8
USD 2 bn
# Length of Golden Quadrilateral linking 4 Metros: carries 75% of freight & most of the expansion is here
Unique opportunity to own annuity assets in a reflating economy
Source: ENAM Research
29
Three 2015 themes
Regulatory catalysts
Demand blow out Sectors
Consumer
ConsumerDiscretionary:
Discretionary:Autos,
Autos,
Durables
Durables
Lifestyle/
Lifestyle/Development
Developmentand
and
Financing
it:
Retail,
Media,
Financing it: Retail, Media,Leisure
Leisure
Resources:
Resources:Oil,
Oil,Gas,
Gas,Power
Power
GST:
GST:Auto,
Auto,FMCG,
FMCG,Logistics,
Logistics,Retail
Retail
UID=
UID=Deficit
Deficitcut:
cut:Energy,
Energy,and
andBanks
Banks(intt
(inttrate
rate
pressures
easing)
pressures easing)
Land
LandAcquisition
AcquisitionAct:
Act:Infrastructure
Infrastructure
SEB
SEBreforms:
reforms:Power
Powerfinancing
financing
Companies which can Scale
Great
Greatmanagement,
management,well
wellfunded,
funded,ininunder-penetrated
under-penetratedindustries:
industries:eg
eglarge
largePvt
PvtBanks,
Banks,Ports,
Ports,2-2wheelers
wheelers
Discretionary Consumption and Banking could lead the next cycle and stay expensive, and Infra with a lag
30
The US has ENGAGED with its Problems
NOTE: As the dominant source of global equity funds, US eco conditions are important both as the size of the equity pie
and the share of it that it itself consumes
Shale gas explosion: Supercheap gas to make USA a great place to invest again for energy-intensive industries.
Erosion of the low-cost advantage: Wages in China and India rising at 15-20% over the past 5 years. Rising yuan has
devalued USD on a trade-weighted basis. Productivity per manufacturing worker is also better in the US than widely
assumed. For eg, Hyundai has car plants in South Korea, the USA, China, and India and "unit per hour" production is
highest in Alabama!
The burden of aging populations: The increase in China's working population has shrunk from 10 million to 3 million
per year. Within 20 years, its retired (60-plus) population will double from 180 million to 360 million (bigger than
the entire U.S. population). A professional family already worries about having to take care of four elderly parents
The smartphone revolution: Within 5 years, several billion people will be "addicted" to smartphones. Interestingly
China is falling behind in its telecom infrastructure. Additionally, despite competition from the clones, in the
premium-brand sector, Apple's iPhone has become a status symbol in China and even in Seoul's "Samsung city“
The fighting spirit of smarter competition: A lot of key innovation remains in the United States, Japan, and Europe.
Apple, Qualcomm, Google, Amazon, Facebook, YouTube, Twitter, and Bloomberg are just some examples of new
"brands" that are at the leading edge of innovation
Infrastructure: After falling behind, America has regained ground in the global infrastructure race – local projects to
come on stream and shale gas is being developed
Source: Antoine Van Agtmael in a recent paper – he originally coined the term “Emerging markets” while at IFC in the 80s
31
Investment takeaways for Personal investing
Huge speculative positions being built up in so-called defensive assets, eg US bonds, gold,
FMCG. These could unwind with equal destruction
OTOH, highly levered stocks may not have the staying power till the cycle recoves – it could
get worse before it gets better – Valuation multiples may mask wrong EPS/ BV projections
or their absolute downside potential
Diversification is a key, as the future is inherently unpredictable
Don’t double discount problems – eg Japan/ China problem= Europe problem. Be instead
sensitive to Remedial actions that emerge, which can change the cycle
What can double by 2015 without a very high absolute downside
32
Personal Investing and the Balance
of Life
33
Personal Investing
Me
Market
Stock
34
Time period, Leveraging your Convictions
Time period:
HOW LONG A PERIOD of decent (need NOT be high) ABSOLUTE returns – even if (& esp) by being NOT invested periodically: Start
investing EARLY
Discipline … chosen style over LONG periods (acting at apt times/ outlays ONLY)
Leveraging convictions: Buy: Pick on hypothesis, Quantity as per conviction
Put apt masses of money at apt times, as per conviction, ie go-fer-it as conviction rises – ignore bias of initial purchase price
Bad LT returns of intelligent stock-pickers is due to: Inability to put adequate outlay, & concentrating on what involves emotions &
mind, eg picking great stocks continuously
90% of total LT returns of good investors is due to adequate positions in just 10-20% of no. of stocks – but impossible to know
which – HENCE, the rules: Cut your Losses and let your Profits run, Average up/ not down, etc etc.
As you won’t know in advance, those 20%, What you DO AFTER Buying over time eg NOT sell at much higher/ much lower prices,
add/ subtract, as per conviction, that will give you your luck.
Leveraging convictions: Sell: When material adverse changes in argument, ie conviction decreases –irrespective of
price. Let price, tax, other people’s opinions, & other irrelevant issues not cloud either this, or the previous point
Bases to cover before you start equity investing:
Financial Security (eg adequate debt funds for X months’ expenses); eg value of Diversifying asset classes; eg of own house –
security v/s time period
Emotional Security
35
Learnings from Panchtantra’s “The 3 Fishes”
Panchatantra story on 3 fishes – Foolish, Clever & Wise: Overhearing fishermens' intent to fish in their lake tomoro:
Wise Fish: one cut through a sluice the same day, to the next lake
Clever was confident of handling any situation as it arose, & didn't leave. Next day, he acted dead on being caught & was thrown
back to the lake – alive
Foolish said que-sera-sera (fatalism); that dangers have been averted so far in life. So he was caught the next day & died.
Moral:
Define Wise= a) planning ahead &/ or b) thinking of ALL your chess-pieces, not just the attacked one, ie to think of ALL resources/
possibilities, even if not in advance
Clever= Think Fast!= what best to do under current conditions
Is it necessarily better to plan in advance? And what if one can’t? One could choose to be Clever OR Wise. There is nothing wrong
in being EITHER –test your Personality and Market Conditions.
Being too wise gets hit by a) the large number of variables which spoil the story if you think too far ahead, and b) in
not considering the corrective/ balancing actions taken by ACTUAL physical players
Being too clever is emotionally draining for some of us on a continuous basis
Second interpretation of the story: Foolish/ Clever/ Wise fish= a focus on Past/ Present/ Future respectively. It is
WRONG to say that wise investors are ALWAYS future-focussed. Markets at various times are focussed on 1 of these
3 time-periods. And one could be Clever, ie MORE focussed or QUICKER anticipation on the CURRENT market
theme. OR alternatively, choose to be Wise, ie think of the OTHER 2 time-slices instead!
36
The 4 pillars of modern life
1.
PERSONAL FAMILY RELATIONSHIPS: Includes immediate family+ aged parents & physically distant siblings –
who we ignore unintentionally. Iron out creases if any, till the point that you are convinced, that ALL reasonable
attempts/ actions have been “completed” – if the “loop” remains open in mind & heart, its ghost remains in the
background - subconsciously but constantly tearing out character
2.
PERSONAL HEALTH
3.
SOMETHING TO KEEP THE MIND ACTIVE, eg any professional occupation or hobby
4.
MINIMAL LEVEL OF WEALTH-BASE, TO TAKE CARE OF ONE’S RESPONSIBILITIES
COROLLARIES OF THE 4 PILLARS:
If TOO MANY of these 4 are GOOD at any stage (or 1 of them TOO good)= COMPLACENCE & UNPREPAREDNESS for next stage of
life, in which any of the 4 may falter (thru simple fate/ waves of life-time).
If TOO MANY R BAD= humanly too testing & one crumbles. But DUTY towards self & those responsible for, to NOT crumble. Ref
the Gita: there is a correlation of one's actions & their "rewards", but not a 1:1 specific one, ie NOT reward X for action X.
If any of them are SINGULARLY AT ABYSS/ PEAK= becomes a dominant influence, & makes u complacent/ crumble.
So, one must feel BLESSED IF ONLY 1 PILLAR IS A PROBLEM at any given time. And THANK GODS FOR WHAT WE ALREADY HAVE
– whose VALUE WE REALIZE ONLY WHEN THEY ARE TAKEN AWAY
How to do so: the BASIC lesson of the Gita: PTO
37
LESSONS OF THE GITA
Life EVENTS ARE SIMPLE FATE-WAVES OF LIFE, which are
actually Nothing to do with us personally – just waves of
actions & resulting thoughts affecting us each moment,
which will continue to do so….
Perspective of HOW TO REACT TO THESE WAVES: This is
what life is all about. As the waves of events happen to
you, which are in essence, & in isolation, INDEPENDENT of
what You do. Hence:
HOW YOU REACT IS YOUR CIRCLE OF CONTROL &
DECIDES THE REST OF YOUR LIFE.
38