29 December 2008 | Strategy

Market Strategy 2009

2008: Wealth erosion - Too fast too furious…
Pains 2008: Castles built in the air
• Lessons to be learnt
• Global Rout - The price we paid
• Global economies going out of gear
• India - No exception
• Indian valuation were at astronomically high levels
• FII sell-off
• Volatility
• Fundamentals deteriorating
o IIP data painting a gloomy picture
o Worsening fundamentals of Indian Corporates
o Other leading macro indicators
o Capex plans getting delayed

Silver Lining 2008: After shock events

• Economies working in tandem
• Falling interest rates
• Inflation now moving southwards
• Commodity prices – at rock bottom

Speed Breakers
• Historical events
Outlook 2009
• Broad theme for 2009
Valuation
• Fundamental perspective
• Technical perspective
• ICICIdirect sectoral outlook
• What an investor should do?
o Look for suggested entry levels

1 | Page
 2008: Castles built in air…
In 2008, the global economy faced its most serious financial crisis and
economic slowdown in decades that has brought free-market
capitalism under fire. The current crisis dispels the notion that free
markets should be self-regulatory as was happening in US. The US
philosophy of allowing banks to chase returns in areas beyond their
core business is under question. There are a few important lessons to
be learnt from the current crisis.

Lessons to be learnt
1. Dispersion of risk should not be construed as reduction of risk as Dispersion of risk should not be
indicated by the demise of complex financial products such as credit construed as reduction of risk
default swaps
2. Leveraging does not always result in credit creation
3. Self market discipline is no substitute for government regulation. The
highly regulated Indian banking sector remained fairly insulated from
the financial meltdown worldwide and is one of the best examples of
the same.

The price we paid - Global rout

Exhibit 1: Global equity melt down
Major indices Closing as on 26-Dec,08 1M 3M 12M
US
Dow Jones 8468.5 -3% -39% -38%
S&P 500 868.2 -2% -28% -42%
Nasdaq 1524.9 0% -30% -44%
Europe
FTSE 100 4216.6 2% -17% -35%
Euro First 1732.4 -4% -27% -45%
CAC 3116.2 -2% -24% -44%
DAX 4629.4 2% -24% -42%
Asia World indices collapsed with
Sensex 9328.9 3% -29% -54% India too losing 54%
Nifty 2857.3 4% -28% -53%
Hang Seng 14184.1 6% -24% -50%
Shanghai Composite 1851.5 -2% -19% -65%
Nikkei 8739.5 6% -27% -44%
Kospi 1117.9 9% -24% -41%
Straight Times 1725.6 1% -28% -51%
Taiwan 4425.1 4% -25% -46%
Others
Russia 644.5 -2% -50% -72%
Brazil 37061.7 2% -27% -42%

Source: Reuters, ICICIdirect.com Research

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Global Economies going out of gear
Some Evident Reasons for Market Mayhem

Exhibit 2: Financial crunch leading to economic slowdown

GDP Growth April Projections November Projections Difference in Projection
2008 2009 2008 2009 2008 2009
World Output 3.7 3.8 3.7 2.2 0.0 -1.6

United States 0.5 0.6 1.4 -0.7 0.9 -1.3

Euro area 1.4 1.2 1.2 -0.5 -0.2 -1.7
Germany 1.4 1.0 1.7 -0.8 0.3 -1.8
Japan 1.4 1.5 0.5 -0.2 -0.9 -1.7
United Kingdom 1.6 1.6 0.8 -1.3 -0.8 -2.9

Emerging and developing economies 6.7 6.6 6.6 5.1 -0.1 -1.5
Russia 6.8 6.3 6.8 3.5 0.0 -2.8
China 9.3 9.5 9.7 8.5 0.4 -1.0
India 7.9 8.0 7.8 6.3 -0.1 -1.7
Brazil 4.8 3.7 5.2 3.0 0.4 -0.7

Source: IMF, ICICIdirect.com Research

Most economies have witnessed erosion in growth to

the extent of 150 bps.

India - No exception
Exhibit 3: India – Not decoupled as yet
160.00
150.00
140.00
130.00
120.00
110.00
100.00
90.00
80.00 From Jan to Dec ‘08, 54% of the
70.00 index value was lost leading to
60.00 erosion of Rs 1449039 cr in
Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 market cap
BSE NSE

Source: BSE, NSE, ICICIdirect.com Research

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Exhibit 4: Pain felt across the board
18,000.00
16,000.00
14,000.00
12,000.00
10,000.00
8,000.00
6,000.00
4,000.00
2,000.00
0.00
Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08

BSE Auto BSE Bankex BSE Consumer Durable

BSE Capital Goods BSE FMCG BSE Healthcare
BSE IT BSE Metals BSE Oil & Gas
BSE Power BSE PSU BSE Realty

Source: BSE, ICICIdirect.com Research

Metals, realty, capital goods, auto, midcaps, small cap indices have been
worst performers with each of them witnessing more than 56% erosion of
their value in 2008

Exhibit 5: Best Performers (BSE Sensex) Exhibit 6: Worst Performers (BSE Sensex)

-34 Infosys -74 Hindalco

-31 Bharati Airtel -75 Sterlite

-29 NTPC -77 Tata Steel

-18 ITC -78 Tata Motors

HUL 20 -82 J P Associates

-40 -30 -20 -10 0 10 20 30 -84 -82 -80 -78 -76 -74 -72 -70

% YTD % YTD

Source: Reuters, ICICIdirect.com Research Source: Reuters, ICICIdirect.com Research

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Global Valuations
Exhibit 7: Global PE multiples

Nasdaq

Dow Jones

Malaysia

Thailand

Nikkie

Mexico

China

Brazil

CNX Midcap

BSE Midcap After the fall Indian stocks are

Sensex trading at one of the lowest
two year forward PE
Nifty

0 2 4 6 8 10 12 14 16

Current P/E One Year Forward P/E Two Year Forward P/E

Source: Reuters, ICICIdirect.com Research

Indian valuations were at astronomically high levels

Exhibit 8: Trailing PE (BSE Sensex) Exhibit 9: Market Cap to GDP
32 200%
180%
28
160%
24 140%
120%
20 100%
80%
16
60%
12 40%
20%
8 0%
Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08
Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08
P/E Ratio
Market Capitalisation as a % to GDP Ratio

Source: Bloomberg, ICICIdirect.com Research Source: Bloomberg, ICICIdirect.com Research

Valuations at 8-10x forward PE, which is cheaper than After seeing exuberant market cap greater than 170% of
GDP in January, markets have corrected sharply to
other Asian peers to instigate fund inflow trade at nearly 67% of GDP

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FII Sell off
Exhibit 10: FII flow from January 2008 and corresponding Sensex levels

25000

20000

15000

10000
Support from MFs not
Rs Crore .

5000
adequate as against FII
0 selling.
-5000

-10000
For CY08
-15000 FII net sold Rs. 52,842
-20000 crore
Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 MF net bought Rs.13,696
crore
FII Sensex MF

Source: SEBI, ICICIdirect.com Research

• FII: Foreign Institutional Investors

• MF: Mutual Funds

Exhibit 11: FII shareholding in terms of no of shares in Sensex components

70%
58%
60% 56%

50%
Percentage of FII
40%
holding has fallen from
30% 21% to 19% in Sensex
21% 19% components
20%
9% 9% 10% 10%
10%

0%
FIIs DII Govt.+Promoters Total Others

Dec-08 Sep-07

Source: BSE, ICICIdirect.com Research

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Volatility
Exhibit 12: Dow Jones vs. CBOE VIX for CY08 Exhibit 13: Nifty vs. India VIX for CY08

90 15,000 90 7000
80 80
6000
70 70
12,000 5000
60 60
50 4000
50
9,000
40 40 3000
30 30
2000
20 6,000 20
1000
10 10
0 0
0 3,000
Jan-08 Feb-08 Mar-08 May-08 Jun-08 Aug-08 Sep-08 Oct-08 Dec-08 Jan-08 Feb-08 Apr-08 May-08 Jul-08 Aug-08 Sep-08 Nov-08 Dec-08

Dow Jones (RHS) CBOE VIX NIFTY Volatility Index

Source: Bloomberg, ICICIdirect.com Research Source: NSE, ICICIdirect.com Research

A higher VIX is always negative for the markets. Despite a fall from
its Oct 08 peak, VIX is still trading above comfortable levels

Exhibit 14: Reuters/Jefferies CRB Index

500
450
400
Most of the commodities
350 are cooling off in
300 anticipation of recession
250 in major economies
200
150
100
Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08

CRB Index

Source: Bloomberg, ICICIdirect.com Research

• CBOE: Chicago Board Option Exchange

• CRB: Commodity Research Bureau
• VIX: Volatility Index

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Fundamentals Deteriorating
Exhibit 15: IIP data painting a gloomy picture

350 15%

300 12%

9%
250
6% For the first time in 15 years,
200 we have seen negative IIP
3%
growth resulting from
150 0% production cuts & demand
slowdown
100 -3%
Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08

IIP %chg (LHS) IIP Value

Source: ICICIdirect.com Research, http://mospi.nic.in

Worsening Fundamentals of Indian Corporate

BSE 200 financial performance excluding banks and financials

Exhibit 16: Strains on topline

16% 15%

14%
12%
10%
9% Slowdown in sales after
7% 7% peaking in March 2008
8%
6%
6%
4%
2%
0%
JAS07 OND07 JFM08 AMJ08 JAS08

Net sales (Q-o-Q growth %)

Source: Capitaline, ICICIdirect.com Research

• JAS- July, August, September

• OND- October, November, December
• JFM- January, February, March
• AMJ- April, May, June

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Exhibit 17: Margins feeling cost pressure

25%
19% 19%
EBITDA margin has
20% declined by more
15% 14% than 800 bps in the
15%
11% last 5 quarters due
10% to sharp rise in
commodity price,
5% with Sept 2008
0%
EBIDTA margins
JAS07 OND07 JFM08 AMJ08 JAS08 crashing to a low of
11%
EBIDTA Margin(%)

Source: Capitaline, ICICIdirect.com Research

Exhibit 18: Depreciation trending down

20% 17%

15%

10% 7% Negative growth in

6%
depreciation
5%
0% indicates slowing of
0% expansion plans/
JAS07 OND07 JFM08 AMJ08 JAS08
-5% Capex.
-9%
-10%

-15%

Depreciation (Q-o-Q growth %)

Source: Capitaline, ICICIdirect.com Research

Exhibit 19: Interest outgo on an uptrend

40% 38%

35% 32% 32%

30%

25% Interest outgo rose

20% 16% significantly
15% amplifying margin
10% 7% pressure
5%

0%
JAS07 OND07 JFM08 AMJ08 JAS08
Interest expense (Q-o-Q growth %)

Source: Capitaline, ICICIdirect.com Research

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Exhibit 20: Declining profitability

20% 13%
Corporate
10% 4%
profitability moves
-2%
0% deeper into the red
JAS07 OND07 JFM08 AMJ08 JAS08 in Sept 2008 due to
-10% combined impact of
-10%
-20%
slowdown in
-31%
revenues, higher
-30% input cost and
increased interest
-40%
outgo.
Net profit (Q-o-Q growth %)

Source: Capitaline, ICICIdirect.com Research

Exhibit 21: Other leading macro indicators

Units Current YoY% MoM(%) Cumulative till date YTD(%)
Automobile
Passenger Car sales (Nov'08) 000 Nos. 100.0 -23.7 -20.7 1,004.9 1.1
CV Sales (Nov'08) 000 Nos. 20.6 -49.5 -26.4 270.2 -9.4
2W Sales (Nov'08) 000 Nos. 567.5 -14.7 -16.3 5,109.8 3.8

Banking*
Advances (5/12/2008) Rs Bn 26421.1 26.3 0.3 26421.1 12.5
Deposits (5/12/2008) Rs Bn 35548.9 21.4 3.0 35548.9 11.4

Cement
Cement Dispatches (Nov08) Mn tonne 14.4 11.2 0.9 114.7 6.9

Power
Electricity Generation (Nov'08) Mn 58024.3 2.7 -5.9 474411.3 2.7
*Total Capacity (Nov'08) MW 146902.8 6.3 0.1 146902.8 2.7

Telecom*
Wireless Subs (Oct'08) Mn 325.7 50.0 3.3 325.7 24.8
Broadband subs (Oct('08) Mn 5.1 87.7 3.1 5.1 29.5
Wireline (Oct'08) Mn 38.2 -3.0 -0.3 38.2 -3.0
Total subs (Oct'08) Mn 369.0 42.3 2.9 369.0 21.2
Penetration (Oct'08) % 31.5
Crude Steel
Production (Nov 08) Mn tonne 4.6 1.2 -5.2 36.22 2.6
*YTD growth over 31 Mar'08 base

Source: CMA, SIAM, CEA, Trai, RBI, JPC, ICICIdirect.com Research

Leading sector sales numbers are depicting

diminishing demand and pressure on corporate
earnings

10 | Page
Capex plans getting delayed
Exhibit 22: Projects under Implementation Exhibit 23: Projects shelved

8,000 35000 60 450

7,500
400
30000 50
350
7,000
25000 40 300
6,500

R s B illio n
250

R s B illio n

N os
30
Nos

6,000 20000 200

5,500 20 150
15000
5,000 100
10000 10
4,500 50
4,000 5000 0 0
Sep-05 Jun-06 Mar-07 Dec-07 Sep-08 Sep-05 Jun-06 Mar-07 Dec-07 Sep-08

Rs Billion (RHS) Nos (LHS) Rs Billion (RHS) Nos (LHS)

Source: CMIE, ICICIdirect.com Research Source: CMIE, ICICIdirect.com Research

Liquidity crunch & demand slowdown forcing

companies to delay capex plans.

Exhibit 24: New Projects Exhibit 25: Projects completed

1500 7000 350 600

6000 300 500

1300
5000 250
1100 400
R s B illio n

4000

R s B illion
200
N os

900
N os

300
3000 150
700 200
2000 100
500 1000 100
50
300 0
0 0
Sep-05 Jun-06 Mar-07 Dec-07 Sep-08 Sep-05 Jun-06 Mar-07 Dec-07 Sep-08

Rs Billion (RHS) Nos (LHS) Rs Billion (RHS) Nos (LHS)

Source: CMIE, ICICIdirect.com Research Source: CMIE, ICICIdirect.com Research

Ratio of projects shelved as a percentage of projects announced is increasing

11 | Page
Silver Lining 2008: After shock events

Economies working in tandem

The current financial crisis evoked an "unprecedented" global coordination as If the Asian financial
there was no country which was immune from its effects. The world has not crisis told us about
seen such massive coordinated action on a global scale, involving not only contagion, this crisis has
the US but also the EU, China, India and other countries. If the Asian financial told us about
crisis told us about contagion, this crisis has told us about coordination. coordination.

Exhibit 26: Rate cuts by major Economies

10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08

US UK India China

Source: Reuters,ICICIdirect.com Research

Key Indian Rates

Exhibit 27: Rates trending southwards again
10 25
9 25
8 25
7
25
6
Falling inflation &
24 interest rates have led to
5
%
%

24 G-Sec yields falling and

4
bonds rallying
24
3
2 24

1 24

0 23
Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08

Repo Rate (LHS) Reverse Repo Rate (LHS) CRR (LHS) SLR (RHS)

Source: RBI, ICICIdirect.com Research

12 | Page
Exhibit 28: Global inter bank lending rates are declining
6

3 Narrowing spread indicates easing

liquidity situation
2

0
Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08

FDTR Index (Fed rate) Libor 3 month

Source: Bloomberg, ICICIdirect.com Research

Exhibit 29: Corporate credit spreads in India

5 25

4 20
AAA Corporate spreads
3 15
after reaching a high of
over 4 % have started
2 10 moving southwards now.

1 5

0 0
Jan-08 Feb-08 Mar-08 May-08 Jun-08 Jul-08 Aug-08 Oct-08 Nov-08 Dec-08

G Sec AAA Corporate Yields AAA Corporate Spreads -LHS

Source: Bloomberg, ICICIdirect.com Research

Exhibit 30: 10 yr G Sec Yields rallying due to fall in inflation Exhibit 31: Inflation rate easing after peaking around 13%

10
14
8 12
10

6 8
%

5.6 6 6.6
4 4
2

2 0
Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08
Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08
Inflation Rate
G Sec Yields

Source: Reuters, ICICIdirect.com Research Source: Reuters, ICICIdirect.com Research

13 | Page
Exhibit 32: Bailout Packages
(In US$, Bn)
Country GDP Bailout Package % to GDP
US 13808 1315 9.5%
Germany 3320 677 20.4%
India 1101 7 0.6%
China 3280 586 17.9%

Source: ICICIdirect.com Research

Exhibit 33: Commodities are at rock bottom

Closing price as on
Commodity Aboslute Change % Change
26-Dec-08 2-Jan-08
Crude Oil
Crude oil WTI (NYMEX active month, USD/ barrel) 37.7 99.6 -61.9 -62%
Crude oil Brent (ICE active month, USD/ barrel) 38.4 97.8 -59.5 -61%
Crude oil WTI (MCX active month, INR/ barrel) 1823.0 3898.0 -2075.0 -53%
Crude oil Brent (NCDEX active month, INR/ barrel) 1823.0 3894.0 -2071.0 -53%
Precious Metals
Gold (International spot, USD/ troy ounce) 867.7 856.8 10.9 1%
Gold (Indian spot, INR/ 10 gm) 13200.0 10815.0 2385.0 22%
Silver (International spot, USD/ troy ounce) 10.7 15.2 -4.6 -30%
Silver (Indian spot, INR/ kg) 17450.0 19750.0 -2300.0 -12%
Base Metals
Copper (LME 3-month, USD/ tonne) 2845.0 6778.0 -3933.0 -58%
Copper (MCX active month, INR/ kg) 146.2 267.9 -121.6 -45%
Aluminium (LME 3-month, USD/ tonne) 1537.0 2438.0 -901.0 -37%
Aluminium (MCX active month, INR/ kg) 73.0 94.3 -21.4 -23%
Zinc (LME 3-month, USD/ tonne) 1158.0 2451.0 -1293.0 -53%
Zinc (MCX active month, INR/ kg) 55.1 96.5 -41.5 -43%
Nickel (LME 3-month, USD/ tonne) 9625.0 27200.0 -17575.0 -65%
Nickel (MCX active month, INR/ kg) 468.7 1067.5 -598.8 -56%
Lead (LME 3-month, USD/ tonne) 850.0 2615.0 -1765.0 -67%
Lead (MCX active month, INR/ kg) 42.6 103.7 -61.1 -59%
Ferrous Metals
CRU Global Steel index 155.2 175.9 -20.7 -12%
CRU Flat Steel Index 145.6 162.3 -16.7 -10%
CRU Long Steel Index 174.5 203.4 -28.9 -14%
Indian HRC (Including excise duty, taxes) 36200.0 34800.0 1400.0 4%

INR/ USD- Depreciation (Bid) 48.4 39.4 -9.0 -23%

Source: Reuters, ICICIdirect.com Research

Depreciating INR has reduced the impact of fall in commodity prices to some extent
in Indian markets

14 | Page
Speed Breakers
Exhibit 34: Major historical events of 2008
Sensex Value

Left withdraws Approval of sixth

Union budget
22000 support to UPA pay commission
announcement (29.02.08) State Assembly
govt (08.07.08) (14.08.08)
elections (08.12.08)
20000

18000 Congress wins

Indo-US Nuke deal
trust vote
signed (05.10.08)
16000 (22.07.08)

14000

12000

10000

8000

6000
1-Mar-08

1-Aug-08

1-Nov-08
1-Jan-08

1-Feb-08

1-Apr-08

1-May-08

1-Jun-08

1-Jul-08

1-Sep-08

1-Oct-08

1-Dec-08
Sensex Value

Source: BSE, ICICIdirect.com Research

In 2008, the market reacted more to international events rather than Indian political events, as shown in Exhibit 36

15 | Page
Outlook 2009
We believe that the following themes such as PSUs, infra, power, pharma,
banks, FMCG, auto, and telecom would find favour among investor in 2009.
Investors could resort to PSU companies for safety ignoring their weakness
on parameters such as capital efficiency and lower return ratios. Also, these
companies are light on the balance sheet as there was lower misallocation of
capital due to government restriction on investments and procedural hassles.
In addition, sectors like infra and associated sectors would be the direct
beneficiary of the government’s stimulus package, which benefits banks as
they act as canalising agents for investment. We prefer defensive domestic
plays like pharma, FMCG and select auto companies as a sharp plunge in
commodity prices would cushion them against margin pressures.

Broad Theme For 2009

Safety overrides Govt. Stimulus Domestic play Liquidity improvement lower

capital efficiency Commodity prices/ Inflation

PSU Infrastructure Auto, FMCG, Pharma, Banks, Power, Capital Goods

Power, telecom

Govt. backing Capex push by Govt. High reliance on Lower interest rate to boost MTM/
Less leveraged domestic market for realised gains on G Sec bonds.
Under owned growth Less pressure on margins ahead

Beneficiaries: SBI, Bhel, NTPC, Hero Honda, Maruti, PowerGrid, Bharti, GAIL, HLL, Sun Pharma,
Glenmark Pharma, Elder Pharma

16 | Page
Valuations – Fundamental & Technical
In all the gloom that engulfs our stock market we now see some positives
coming out of the efforts of global governments. In order to bring sanity back
to the markets governments and authorities pumped in liquidity into the
system. Closer home, the RBI has already lowered rates to ease monetary
policy (the repo rate has been cut by 250 bps to 6.5% and CRR by 350 bps to
5.5%).

The government has announced a stimulus package worth $7 billion, which

has been targeted at the infrastructure space. The government is also
planning to give spending a boost by announcing infrastructure projects.
These measures are aimed at propelling the growth in infrastructure, cement,
and steel consumption back to its previous levels. What comforts us is the
fact that the government is proactive in taking actions and doing everything in
its capacity to stimulate growth and continue India’s GDP growth story.

Fundamental perspective
At the peak, investors across all asset classes were buying for the long term,
those assets which were valued for the short-term. After peaking at a P/E of
22x in January, the benchmark indices tumbled 54% (YTD) to trade currently
at 10.4x on a trailing earnings basis and 10.5x on one year forward earnings.
After touching the historical lows of 8x P/E, the indices saw a sharp bounce
back giving over 40% returns over 10-12 days in October 2008. The credit
contagion, which had its roots in the subprime mortgage has now spread like
an epidemic and affected all economies in one way or the other thereby
placing the global economy in the grip of a recession. Leverage has become
the villain in the global growth story, with the market mercilessly punishing
highly leveraged companies this year. Currently, the Sensex is trading at 2.7x
trailing and 1.8x forward P/B, which is quite attractive.

Exhibit 35: Sensex multiples

20x

18000
16x
Sensex Levels

13000 13x

10x

8000 Current
Valuation

3000
Apr-04

Jul-04

Oct-04

Jan-05

Apr-05

Jul-05

Oct-05

Jan-06

Apr-06

Jul-06

Oct-06

Jan-07

Apr-07

Jul-07

Oct-07

Jan-08

Apr-08

Jul-08

Oct-08

Source: BSE, ICICIdirect.com Research

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We believe India and China being key beneficiaries among other Asian
economies due to expected high GDP growth of 6%-7% and 8%-9%,
respectively, going next year. With US rates sliding to 0%, on a risk- reward
basis, Indian equities are offering better returns to overseas investors. With
Indian exports at just 16% as a percentage of GDP in FY08, the economy is
more resilient to global turmoil. The Indian crude import bill has been falling
drastically in the last few months and with internal supplies building faster,
our trade deficit should also improve, going ahead, as India is a net importer.
We believe these criteria would warrant a re-rating of Indian P/E, going ahead
in spite of earnings slowdown due to easing liquidity and lower rates. Also, as
the process of deleveraging nears its end we would witness the reversal in
fortunes of dollar as a currency, which would again lead to reversal of flows to
regions and asset classes, which offer better growth prospects.

We expect the Sensex to hover between 12000 and 14000 levels by

December 2009 considering a P/E range of 12.6 x to 14.7x, which is still at a We expect Sensex to
discount to the historic average P/E range of 15x-16x at which the index trade in the range of
usually trades. 12000 to 14000 by Dec
2009
However, in the near term, the Sensex would trade depending on various
factors like intensity of hostility between India and Pakistan, latest quarterly
earnings (reaction to over delivery or under delivery in numbers) and
outcome of the Lok Sabha elections. Also, the outcome of gas dispute
between RIL and RNRL can have meaningful implications for the markets in
the near term. Even the trigger of these short-term factors in a positive way
would lead to a re-rating of the index multiple in the long run.

18 | Page
Technical Perspective
2008 Flashback
The year 2008 has brought the four-year-old secular bull market to an abrupt
end, as the Sensex crashed in January 2008 from the highs of 21,207 levels.
The Sensex plummeted to the three-year lows of 7697 losing almost 64%
from its peak at 21207. As the global financial crisis unfolded first in the US
and later engulfed other parts of the world, equity markets across the globe
faced the brunt of it. FIIs went on a selling spree and liquidity, which was in
abundance during the bull run, became scarce. The biggest investment banks
in the US went bankrupt and there are no clear and evident signs that the
worst is over.

Exhibit 36: Major 2008 events impacting the markets

Daily Q.BSESN 01/01/2008 - 26/12/2008 (BOM)
Price
INR
21 Jan- Markets Plunge due to growing fears of US recession 21 Aug - WPI at 13 yr high at 12.63

19,000 15 Sept- Lehman Bros file for Bankruptcy

18,000
26 June- Crude above $145 per barrel
17 Sept- Cash Crunch at AIG

17,000

16,000

15,000

14,000
1 July- Denmark becomes the 1st European nation to confirm its recession
13,000

12,000 5 Sept- Failure of Fannie Mae & Freddie Mac

11,000 25 Sept- Ireland slides into recession

10,000
9,887.81
10 Oct- Singapore becomes the 1st Asian economy to side into recession
9,000
.12
01Fri 18/01/2008
16 01 18 03 17 01 16 02 16 02 16 01 16 01 18 01 16 01 16 03 17 01 16

Q1 2008 Q2 2008 Q3 2008 Q4 2008

Source: Reuters, ICICIdirect.com Research

8-year time cycle

The Sensex is following a classic eight year cycle ever since its birth. As
shown on the chart below, 1984 was the beginning of the eight-year long bull- Sensex following 8 year
run till '1992. The next important turning points occurred exactly eight years cycle
thereafter, in 1992 and 2000. Both these turning points coincided with the two
biggest stock market scams we had and consequently, the leaders of the rally
during these turning points had an extremely difficult time later. For example,
ACC, the leading stock of the 1992 bull market, remained below its highs till
end of 2004. Similarly, the IT stocks, which were leaders of the 2000 rally, lost
as much as 90% of their top valuations by 2003, and most are below their top
levels even today. In the current year 2008 we were sitting again on this very
important cycle, which therefore has thrown up similar possibilities.

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Exhibit 37: Sell offs as per 8 year cycle

Source: ASA, ICICIdirect.com Research

An important striking fact about this eight year cycle is similarity of both time
and price wise correction, which has happened. In the previous eight-year
cycle top during 1992-93, Sensex lost 56% from 4546 to 1980. In the next
cycle top, the cut was almost 58% from 6150 in 2000 to 2594 in 2001. Time-
Markets likely to form
wise, the 1992 cycle completed the bear phase in 12-16 months, while the
bottom by Feb-Mar 09 as
2000 cycle took 19 months to hit the low, which was then followed by 19
per 8 year cycle
months of base formation before the bull phase resumed again.
Remember, in technical analysis, both time and price forecasts must be
achieved. Accordingly, in 2008, we have already achieved price wise
correction to the tune of 64%. However, time wise correction should get over
by February- March 2009. By then it would have consumed 13-14 months.

Price & Time Wise correction

Exhibit 38: Price-time wise correction

Period Peak levels Bottom levels Correction

Price wise Time wise
1992-93 4546 1980 56% 12-16 Mth
2000-01 6150 2594 58% 19 Mth
2008-09 21266 7697 64% Feb-Mar 09 (13-14 Mth)

Source: ICICIdirect.com Research

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Another peculiar pattern observed in the previous two bear market as per
eight-year cycle), was that during 1992-93 and later during 2000-03, four to
five sell-offs had been seen. This year we have already seen four sell-offs: (1)
January 2008 (2) March 2008 (3) July 2008 (4) October 2008 and so the
possibility of one more cannot be ruled out.

Major sell offs in 2008

Exhibit 39: Four major falls for CY08

Source: Reuters, ICICIdirect.com Research

Technical Outlook for 2009

Major Supports
History suggests that major market bottoms are made in panic and followed
by a major event like terror attack, war, scam etc. In 1993, there were serial
blasts in Mumbai whereas 2001 saw terrorist attack on New York. Technical
analysis suggests previous important tops and bottoms act as support or
resistance in future. The October 2008 lows of 7697 are near October 2005
lows of 7656. Further, October 2008 lows also rest on the trend line drawn
joining February 2000 and March 2005. The confluence of supports at this
level suggests 7700 is a good technical support level. However, it remains to
be seen if this level holds in the event of another sell-off. If it holds, that is
good, else Sensex may break the October 2008 lows and will head southward
for another major support area around 6100 – 6500 levels. While February
2000 and January ‘04 highs are at 6100-6250 levels. Also, 80% retracement of
the entire bull rally from April ‘03 to Jan ‘08 comes around 6500 levels.

Exhibit 40: Sensex support levels

Source: ASA, ICICIdirect.com Research

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Also on the yearly charts the value of 2-4 lines for 2009 is at about 6200-6500
as shown in the graph below

Exhibit 41: Long term support for Sensex

Source: ASA, ICICIdirect.com Research

Major resistance
On the weekly charts we have drawn the trend line joining the highs of
January 2008 and May 2008, which clearly indicates that in the last 12 months
the Sensex has been unable to trade above this trend line on the closing
basis. If it trades above it, it may fail to sustain beyond one or two weeks,
which clearly shows that market has been clearly facing the resistance near
this trend line. Currently in the short-term, the value of the trend line is at
10997 levels, so unless the Sensex closes above this trend line and sustains
above these levels for some more time, the pain in the market is still not over.
However, if it achieves this feat then this will be the first sign of trend reversal.

Exhibit 42: Sensex resistance levels

Source: ASA, ICICIdirect.com Research

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On the higher side, 14412-15300 may act as a major resistance for the
We expect Sensex to
markets for the coming year. As per change of polarity principle, the lows of
find strong support in
January 2008 fall at around 15300, which could act as a stiff resistance for the
the range of 7600-6500
Sensex because during the current corrective phase beginning with the
on the lower side.
January top of 21207 to January 22, the low was 15332 (from where it
bounced over 3500 points). The March 10 low was 15362 (bounced 1300
On the higher side
points) while the April 1 low was 15297 (bounced 900+ points). All these
14450-15300 could be
bounces came from lows around 15300. Further, considering the October
the maximum upside
2008 lows of 7697 are held, the 50% retrenchment of the recent fall from
we see in the year
21207 to 7697 will be at 14459 levels. Moving above those levels could further
2009.
move the Sensex to touch 15300. Considering all the abovementioned
technical aspects, we expect the market to remain in a consolidation phase
after finding the bottom near the support area. We, therefore, conclude that
the Sensex would find strong support in the range of 7600-6500 on the lower
side. On the higher side, 14450-15300 could be the maximum upside we see
in the year 2009.

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ICICIdirect Sectoral Outlook
Sector Comments Outlook
Automobile The automobile industry is on a rocky road and no express highway is in sight. Poor sentiments and a
severe finance crunch on account of restrictive lending from financial institutions have severely hit
auto sales volumes.

Seeing the demand setback, almost all companies have announced/initiated a production cut either
by shutting the plant temporarily or by reducing shifts. In the aftermath of this, there would be
further de-growth in production and sales volumes. We expect, volumes to decline further in
December this year making Q3 (otherwise the best quarter) the worst quarter of the year, leading to
a bleak outlook for the segment, at least for the few forthcoming quarters.

Raw material prices have corrected sharply. This can add to EBITDA margins. However, the cut in
production and likely reduction in sales price (to push up sales volume) would restrict margin
expansion.
Banking In spite of the slowing economy, the banking sector would witness stable credit and deposit growth
of around 20-22% and 18-20%, respectively, in 2009, despite falling interest rates.

Growing risk to non performing assets (NPAs) remains a major concern for banks as asset quality
would deteriorate with a lag effect.

Falling yields benefit banks in terms of mark to markets gains on G-Sec bonds

In view of safety, valuation of PSU banks remains attractive over private sector banks.
Cement We expect the demand-supply situation to get worse for the cement industry due to massive
capacity additions of 95 MT in the next three years. On the demand side, domestic cement
consumption, after reporting growth of 10% in the last three years, has slowed down to 7% in FY09.

On the cost front, decline in coal prices and the recent excise duty cut are likely to ease cost
pressures. However, worsening of the demand-supply scenario would force cement companies to
pass on the saving by reducing prices in the medium-term.
Edible Oil The sector is likely to get support after the government imposed custom duty of 20% on import of soy
degum (crude soy oil).

Rising demand of oil meal by China and South East Asian countries will continue to spur exports, as
witnessed in the last two years.

Higher domestic soybean crop has led to good availability of oilseeds for crushing and to cater the
export demand.
FMCG The FMCG sector faced challenges in 2008 as commodity prices surged to their highest level.
However, most of the commodity prices started easing from August onwards, which will result in a
drastic improvement in margins from January onwards. We believe some of this cost advantage will
be invested into promotions, advertising and offers to consumers, which would accelerate volume
growth. Improved margins would also boost the bottomline for major companies. Therefore, we have
a positive outlook on the FMCG sector for 2009.
Hotels Average room rates (ARRs) and occupancy levels of all major hotel players would continue to remain
under pressure due to the decline in foreign tourist arrivals (FTAs) led by global slowdown and rising
terror activities in India.

Operating and net profit margins to continue to remain under pressure on account of sluggish demand
outlook despite decline in operating costs.

Government measures such as reduction of luxury tax and service tax aimed at reviving hotel room
demand would help over a longer term.

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Hospitals Demand for hospitals to remain unaffected by global economic slowdown and continue to remain
positive on account of shortage of hospital beds.

With cheaper medical treatment cost and world class facilities compared to other developed
countries, large players to get more benefit on account of growing medical tourism.
Infrastructure Elections are approaching due to which there can be slowdown in awarding of projects as election
commission code of conduct prohibits government from making new promises.

In the current Five Year Plan, around 30% of the financing has to be done from private sector. Due to
the adverse conditions in the market, this seems difficult to achieve.

A tight credit environment has made it difficult for companies to achieve financial closure of projects
and high interest rates also make these projects unviable. However, the government is taking steps
to increase funding from public sources. Also, there have been signs of easing in interest rates.
Commodity prices are falling. This would prove to be a positive for the sector in the future.
IT The outlook for the sector continues to remain bleak. With the global and, in particular, the US
economy going through a phase of slowdown, the next one to two years would remain fairly
challenging.

With the effects of the slowdown spreading beyond the BFSI space to manufacturing and retail the
companies could face pressure both in terms of volume as well as price.
In such a situation it is advisable to stick to select larger players in the sector.
Logistic Logistic players are deferring their expansion plans due to the tightening of volumes in H2FY09E. We
believe containerised traffic will get less affected by the global slowdown. So it is positive for the rail
logistic players like Concor and Gateway Distriparks Ltd.

Increasing rail haulage is a concern as this would reduce the pricing gap that railways enjoy. But
entry of private players would increase price competitiveness of this sector.

With recent fall in diesel price we expect road transport players like TCI to see improvement in
margins in Q4FY09E.

We believe volumes will improve from FY10E.

Media With falling crude prices & reduced demand we expect the newsprint prices to decline further.
Newsprint costs form ~40% of the total cost of print media companies and the recent fall will help
companies to improve their margins.

Multiplex companies began this year in a rather dismal fashion. However, with good content pipeline
Q209 was relatively better and we expect these companies to post still better results for the rest of
FY09 on the back of higher occupancy.

Increasing competition and lower ad revenue has resulted in pressure on earnings and lower visibility.
Given the already cluttered national broadcasting space, companies with regional presence are
expected to fare better than their national counterparts.
Pharma The pharma sector has been defensive in nature in a volatile market conditions due to non cyclicality
of the business.

Selectively the sector would outperform the market.

We prefer a balanced business model towards domestic and export markets with strong
management.
Retail High rental prices and interest cost have been affecting the profitability of the retail sector.

With economic instability, the footfalls, conversion rate and average transaction price have reduced.

Given the economic uncertainty, we have a neutral outlook on the sector despite improving factors
like lower rentals, lower interest rate, thrust on cost reduction by retailers and availability of better
retail space.

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Steel Major steel players would face margin compression due to weakening demand, lower realisation,
comparatively higher raw material costs and inventory loss in H2FY09E.

Steel companies may not see higher realisations but margin pressure is expected to ease after
H2FY09E as raw material contract price is set to be negotiated lower in H2FY09E.

Announcement of increased spending by China and India towards infrastructure through bailout
packages is expected to revive the demand for steel from at least H1FY10E.
Sugar The fall in cane procurement prices coupled with the noteworthy rise in farm-gate prices has resulted
in a shift in acreage from cane to more profitable crops such as wheat, rice and oil seeds.

With India witnessing an unprecedented rise in sugar exports from1.5 MT in SY07 to 4.8 MT in SY08,
it has resulted in a shrinkage of the sugar surplus to 6.1 MT at the end of SY09.

We believe sugar prices will continue to remain firm above Rs 17.5 per kg in SY09 in anticipation of a
lower surplus of sugar in the industry, which would drastically boost the earnings for sugar mills and
presents a positive outlook for the industry.
Shipping The shipping sector has been severely impacted by the slowdown in global trade due to fall in
commodity demand and lower crude prices. The dry bulk segment has been the worst affected due to
virtual drying up of commodity trade because of lack of demand from the Chinese economy with day
rates for dry bulk vessels well below their operating cost.

Day rates in the dry bulk segment are expected to recover (but remain far below the peak it touched
in Q2FY09) in FY10 on account of revival of steel demand on the back of increased spending by China
and India on infrastructure through bailout packages. Day rates for crude oil tankers and rigs are likely
to remain soft owing to lower crude prices, though winter demand for crude can provide support to
the tanker day rates.

We maintain a neutral outlook on the sector as Indian shipping companies to an extent are cushioned
from the current fall in rates due significantly lower spot exposure compared to global peers
Telecom The Indian mobile industry continues to grow at an unabated pace. The mobile subscriber base grew
at an unprecedented rate, adding ~10 million subscribers each month in the last three months (Sep –
Nov’ 2008). We expect the subscriber base to touch 369 million by the end of FY09.

As the operators expand into rural parts of the country and increase penetration in the low income
group, ARPUs are bound to fall. However, with increasing MOUs and relatively slower decline in
ARPM we expect the wireless revenue to maintain its growth trajectory.

The main concern would be the declining margins in the wireless business, which would be further
impacted negatively by 3G rollout and geographical expansion by existing operators. However, this
would be compensated by increasing margins in other businesses (Broadband, NLD & ISD, Data) for
integrated players like Bharti and Reliance Communications.
Textile Volatile rupee, higher raw material prices, higher interest cost and higher fuel cost have impacted the
profitability (both operating and net profit margin) of the sector negatively.

The government is providing increased thrust on supporting the export-oriented labour intensive
sectors like textile wherein one package has already been announced and the second is expected to
be announced in the near term. This is expected to provide a cushion to margins.

Given the economic uncertainty resulting in weak demand, we have a neutral outlook on the sector
despite improving factors like lower raw material cost, lower interest rate and the textile package
announced by the government.

26 | Page
What an investor should do?

Exhibit 43: Recommended entry levels

Company CMP* Sector I-direct code Rec. buying range
BHEL 1,301 Capital goods BHEL 950-1020
Bharti 686 Telecom BHATE 485-560
HDFC Bank Ltd. 973 Financials HDFBAN 795-900
HUL 252 FMCG HINIEV 218-225
Infosys 1,109 Technology INFTEC 925-1020
ITC Ltd. 171 FMCG ITC 145-150
L&T 745 Capital goods LARTOU 620-660
Maruti 510 Auto MARUTI 420-480
NTPC 177 Power NTPC 140-155
ONGC 643 Oil & Gas ONGC 540-630
Reliance Industries 1,210 Oil & Gas RELIND 810-950
Reliance Infrastructure 543 Power BSES 360-390
SBI 1,243 Financials STABAN 950-1020
TCS 472 Technology TCS 445-470
Tata Power 730 Power TATPOW 630-650
Glenmark Pharma 298 Pharma GLEPHA 225-260
PNB 499 Financials PUNBAN 420-440
GAIL 200 Oil & Gas GAIL 180-200
Power Grid 81 Power POWGRI 65-70
Bank of Baroda 263 Financials BANBAR 215-245
Bank of India 279 Financials BANIND 190-220
SAIL 71 Metals SAIL 62-68
Sun Pharma 1,057 Pharma SUNPHA 890-950
*CMP as on 26th Dec, 08

Source: ICICIdirect.com Research

27 | Page
Pankaj Pandey Head – Research pankaj.pandey@icicidirect.com

ICICIdirect Research Desk,

ICICI Securities Limited,
Ground Floor, Mafatlal House,
163, HT Parekh Marg,
Churchgate, Mumbai – 400 020

research@icicidirect.com

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