Equity Strategy

India

India Equity Insights

The inflection point in Indian ROE

Corporate Indias ROE bottoming after

the past few years decline
Valuations potentially beginning to
reflect ROE revival
Industrials, materials and telecoms set to
see largest ROE uptick (we have an
overweight stance on these sectors)
Historical valuation premium fuelled by better ROE. The
Indian market has traditionally traded at a PE valuation
premium versus the rest of Asia ex-Japan. Higher economic
growth, coupled with better return on equity (ROE), has
arguably been the driver of the premium.
Corporate Indias ROE has declined since 2008 but is now
poised for a revival. ROE has fallen in most sectors since
2008, particularly among domestic cyclicals, due to:
The rising cost of resources (spectrum in telecoms, land
in infrastructure/real estate etc)
Higher levels of interest rates to temper inflation
Rising component of overseas revenues reflective of
lower ROE/COE in DMs are a few that top the list.

6 January 2015
Jitendra Sriram*
Equity Strategist and Head of Research, India
HSBC Securities & Capital Markets (India) Private Limited
+91 22 2268 1271
jitendrasriram@hsbc.co.in

View HSBC Global Research at: http://www.research.hsbc.com

*Employed by a non-US affiliate of HSBC Securities (USA) Inc,
and is not registered/qualified pursuant to FINRA regulations
Issuer of report: HSBC Securities and Capital Markets (India)
Private Limited

Disclaimer & Disclosures

This report must be read with the
disclosures and the analyst certifications
in the Disclosure appendix, and with the
Disclaimer, which forms part of it

Although we do not expect ROE to return to the highs of

2005-08 (when Indias ROE averaged 23.5%) anytime soon,
we believe it has bottomed and expect profitability to
improve. We forecast ROE to rise by 150bp (to 16.5%) by
FY16 and 200bp (to 17%) by FY17 from the current level of
15%. Cyclicals could lead the uptick, supporting our
overweight stance on domestic cyclicals (see India Equity
Insights: Tug-of-war between defensives and domestic
cyclicals, 17 October, for more details). We retain our
underweight stance on defensive sectors.
Margin uptick, faster asset turn and fall in borrowing
costs are key catalysts for an expected ROE uptick. Our
five-step DuPont analysis shows that the uptick in ROE will
be driven by a fall in interest rates, increase in operating
margins and uptick in asset turn. Tax burden and equity
multiplier effects remain broadly stable in explicit forecasts.
With valuations already partly reflecting an improvement in
ROE in 2015, earnings will likely take over as the key driver
of returns.

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Equity Strategy
India
6 January 2015

ROE analysis in charts

1. ROE gap Convergence till 2010; slow expansion thereafter (%)

25
20
15
10
5
0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

MSCI India

MSCI EM

Source: Thomson Reuters Datastream, MSCI, HSBC

Note: Data on calendar year basis

2. Valuation gap Convergence a year ahead of ROE convergence in 2010; expansion thereafter (12 months forward PE)
25
20
15
10
5
0
1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

MSCI India

2006

2007

2008

2009

2010

2011

2012

2013

2014

MSCI EM

Source: Thomson Reuters Datastream, MSCI, HSBC

3. 12 month forward PB vs. ROE/COE Market potentially factoring COE compression on rate cuts as PB expands (MSCI India)

4.5

2.2

4.0
1.9

3.5
3.0

1.6

2.5
2.0

1.3

1.5

ROE/COE (LHS)
Source: Thomson Reuters Datastream, MSCI, HSBC

Fwd PB (x)

Jul-14

Oct-12

Jan-11

Apr-09

Jul-07

Oct-05

1.0

Jan-04

1.0

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Equity Strategy
India
6 January 2015

ROE breakdown for India using DuPont analysis

4. Five-step DuPont analysis of Nifty index (ex-financials)

Tax Burden
Interest Burden
Operating Margins
Asset Turnover
Equity Multiplier
ROE
ROA
Including financials
ROE
ROA

Mar-05

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Mar-13

Mar-14

0.72
0.94
20.6%
0.80
2.2
24.1%
11.1%

0.74
0.95
19.8%
0.80
2.1
23.9%
11.2%

0.74
0.94
20.5%
0.77
2.1
22.8%
11.0%

0.74
0.92
19.2%
0.81
2.2
23.4%
10.6%

0.73
0.89
14.5%
0.79
2.4
17.9%
7.4%

0.74
0.91
17.8%
0.75
2.3
20.2%
8.9%

0.75
0.90
17.6%
0.74
2.3
19.8%
8.8%

0.73
0.88
15.9%
0.79
2.3
18.4%
8.1%

0.71
0.86
15.4%
0.77
2.3
16.7%
7.2%

0.74
0.85
15.9%
0.71
2.3
16.4%
7.1%

22.3%
4.3%

21.6%
4.1%

21.3%
4.2%

21.3%
4.4%

16.9%
3.3%

18.4%
3.7%

18.0%
3.8%

17.2%
3.6%

15.7%
3.3%

15.1%
3.2%

Source: Prowess, Thomson Reuters Datastream, HSBC

5. High interest rates have not helped ROE expansion

6. Operating margins starting to move up

1.00

Mar-12

Mar-13

Mar-14

Mar-13

Mar-14

Mar-11

Mar-12

Interest Burden

Mar-10

Mar-14

Mar-13

Mar-12

Mar-11

Mar-10

Mar-09

Mar-08

Mar-07

Mar-06

Mar-05

0.75

Mar-09

0.80

Mar-08

0.85

Mar-07

0.90

Mar-06

0.95

Mar-05

21%
20%
19%
18%
17%
16%
15%
14%

Operating Margins

Source: Prowess, Thomson Reuters Datastream, HSBC

Source: Prowess, Thomson Reuters Datastream, HSBC

7. Mixed trends in asset turn

8. ROE close to decade low

25%

0.90

23%

0.80

21%
19%

0.70

17%

Source: Prowess, Thomson Reuters Datastream, HSBC

Mar-11

Mar-10

Mar-09

Mar-08

Mar-07

Mar-06

Mar-14

Mar-13

Mar-12

Mar-11

Mar-10

Mar-09

Mar-08

Mar-07

Mar-06

Asset Turnover

Mar-05

15%

0.60

ROE
Source: Prowess, Thomson Reuters Datastream, HSBC

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Equity Strategy
India
6 January 2015

Indian ROE a decade of compression

9. Sector ROE analysis for Nifty companies: core sectors drag down ROE

Materials
Industrials
Utilities
Financials
Health Care
Consumer Disc
Energy
Telecom
Consumer Staples
IT

Mar-05

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Mar-13

Mar-14

29%
34%
15%
16%
15%
23%
25%
27%
34%
34%

29%
26%
15%
14%
21%
25%
24%
27%
32%
36%

30%
30%
15%
16%
25%
23%
19%
35%
35%
36%

33%
19%
15%
16%
21%
21%
20%
31%
37%
33%

23%
24%
15%
14%
14%
3%
14%
28%
36%
32%

19%
26%
16%
13%
17%
23%
18%
26%
37%
30%

20%
23%
16%
13%
20%
28%
17%
18%
38%
29%

16%
21%
13%
14%
21%
25%
17%
12%
39%
27%

10%
18%
15%
13%
21%
19%
17%
9%
44%
33%

12%
11%
13%
12%
20%
19%
16%
10%
42%
37%

Source: Prowess, Thomson Reuters Datastream, HSBC

11. Asset turnover of domestic cyclical sectors

Mar-14

Mar-14

Mar-12

Mar-13

Materia ls

Mar-11

Mar-10

Mar-09

Mar-08

Mar-07

Mar-06

Mar-14

Mar-13

Mar-12

Industria ls

Industrials

Source: Prowess, Thomson Reuters Datastream, HSBC

Source: Prowess, Thomson Reuters Datastream, HSBC

12. Defensives sector ROE saw uptick

13. led by strong operating margins

50%

30%

45%

27%

40%

24%

30%

21%

25%

18%

IT

Consumer Staples

Source: Prowess, Thomson Reuters Datastream, HSBC

IT

Mar-12

Mar-11

Mar-10

Mar-09

Mar-08

Mar-07

15%
Mar-05

Mar-14

Mar-13

Mar-12

Mar-11

Mar-10

Mar-09

Mar-08

Mar-07

Mar-06

Mar-05

20%

Mar-06

35%

1.00
0.95
0.90
0.85
0.80
0.75
0.70
0.65
0.60

Mar-13

Materia ls

Mar-11

Mar-10

Mar-09

Mar-08

Mar-07

Mar-06

Mar-05

40%
35%
30%
25%
20%
15%
10%
5%
0%

Mar-05

10. ROE of domestic cyclical sectors

Consumer Staples

Source: Prowess, Thomson Reuters Datastream, HSBC

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Equity Strategy
India
6 January 2015

ROE recovery from

FY15e
ROE appears to have bottomed out and we expect it to rise by

1.5ppt by FY16
Improved macro environment and better policies from the new

government should underpin this revival in profitability

We expect cyclical sectors to lead the uptick in ROE, whereas

defensives are already maintaining above-average ROEs

Decade long outperformance but capital efficiency fell

India has been one of the best performing markets globally over the past 10 years, with the MSCI India
rising by a factor of three times (or at a 14% CAGR) since 2004, driven largely by strong corporate
earnings and the expansion of valuation multiples. During this period, India has boasted a consistently
higher ROE than other emerging markets and we believe this has justified the 20-30% valuation premium
that the Indian market enjoyed over its peers.
However, corporate Indias ROE fell sharply to 15% in 2014 its lowest level in a decade from a peak
of 22% in 2005. Although ROE has fallen in all major markets over the past few years on weaker global
growth, Indias ROE contraction has been among the most severe. Table 4 on page 3 shows the steep fall

14. India: the best performing major market in the past 10 years (2004-14)

300%

200%

100%

0%
INDIA

CHINA

KOREA

EM

BRAZIL

USA

RUSSIA

WORLD

UK

EUROPE

TAIWAN

JAPAN

Source: MSCI, Thomson Reuters Datastream, HSBC

Note: MSCI countries returns in dollar terms

abc

Equity Strategy
India
6 January 2015

in ROE has been mainly led by rising interest rates (the interest burden multiplier fell from 0.94 to 0.85
between 2005 and 2014), operating margins down from 20.6% to 15.9% and asset turn deteriorated from
0.80 to 0.71.
ROE compression triggered by multiple factors

In our view, the decline in corporate profitability has been due to three main factors: 1) the rising cost of
resources (spectrum in the telecoms sector, and land in the infrastructure and real estate sectors); 2)
increases in interest rates to temper inflation; and 3) a rising component of overseas revenues.
1. Rising cost of resources: The cost of doing business in India has gone up sharply due to factors such
as an increase in the cost of inputs, difficulty in acquiring land and tougher environmental regulation.
This has been compounded by an increased awareness of the value of resources; the telecoms sector saw a
jump in spectrum charges at auctions; power companies were hurt by Coal India reducing its discount
versus international prices; increases in petroleum prices (prior to the recent fall in crude oil prices) and
subsequently freight rates corrected anomalies in fuel pricing; and ore mining and crude production have
seen an increase in cess and royalty rates.
2. Higher interest rates to temper inflation: RBI hiked rates 13 times between March 2010 and October
2011 as it attempted to curb inflationary pressures. This contributed significantly to the contraction in
ROE, especially among indebted Indian companies. However, lately inflation has fallen sharply, helped
by a decline in the prices of major commodities. Our India economist is expecting RBI to cut its policy
rate by 50bp over the course of 2015, which should help improve corporate profitability (RBI decision:
Promises to cut if inflation stays low, 2 December 2014).
3. An expanding proportion of overseas revenues: Although it is debatable whether overseas
acquisitions reflect poor capital allocation during an era of abundant capital availability (2004-08), the
fact is that returns in developed markets are lower than in India, in line with the lower cost of capital
prevalent in such markets. A number of Indian companies have acquired meaningful overseas assets
(Corus by Tata Steel, Jaguar-Land Rover by Tata Motors, Whyte & Mackay by United Spirits, Taro by
Sun Pharma, Novelis by Hindalco, various African assets by Bharti Airtel, and Repower by Suzlon
Energy to name a few). Most of these overseas investments have struggled to achieve double-digit
returns, whereas domestic Indian operations have generated an average ROE of 15%.

15. Repo rate (%)

16. Overseas exposure of Nifty companies

40%

9.0
8.0

30%

7.0

20%

6.0

10%

5.0
0%

Source: RBI, HSBC

Aug-14

Feb-14

Aug-13

Feb-13

Aug-12

Feb-12

Aug-11

Feb-11

Aug-10

Feb-10

4.0

2005
Foreig n Asset as % Total Asset
Foreig n Sales as % Total Revenue
Source: Thomson Reuters Datastream, HSBC

2014

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Equity Strategy
India
6 January 2015

Sector drivers

Table 9 shows that the main drag on Indias overall ROE has clearly come from domestic cyclical sectors.
The industrial sectors ROE plunged from 34% in March 2005 to an all-time low of 11% in the last fiscal
year ending March 2014, the materials sectors ROE fell from 29% to 12% between FY05 and FY14;
while the telecoms sector saw ROE drop from 27% to 10%. Other sectors which saw a notable decrease
were financials, utilities and energy. Interestingly, Indian defensive sectors, such as consumer staples, IT
and healthcare, saw an increase in ROE mostly driven by INR depreciation (for healthcare and IT) and
improved rural consumption (for staples).

ROE appears to have bottomed: Consensus expects it to rise

by 1.5ppt by 2016e
Consensus is forecasting corporate Indias ROE to increase by 1.5ppt from 15.0% currently to 16.5% by
2016. Chart 17 shows most cyclical sectors are expecting a pick-up in profitability. Industrials ROE is
expected to increase the most by 2016 by 5ppt followed by consumer staples, financials and materials.
As a result, we expect materials and industrials to contribute significantly to the expected increase in
Indias overall ROE, but ROE to remain below long-term averages of 22% for materials and 23% for
industrials. Meanwhile, we expect telecoms to continue to see single-digit ROE. Interestingly, looking at
the breakdown of corporate Indias forecast ROE (Chart 18), we note that although the IT sector saw the
most ROE deterioration, it should remain one of the highest contributors to overall ROE. Defensive
sectors are expected continue to contribute the most to Indias ROE in the next 12 months. Consensus is
forecasting an ROE of 38% for consumer staples, 24% for IT, and almost 18% for healthcare in 2016.
17. Forecast increases in ROE by FY16e
6%

5%
4%
3%
2%
1%
0%
-1%
-2%
-3%
MSCI INDIA

Industrials

Cons Staples

Financials

Materials S

T/Cm Svs S

Utilities S

Energy S

Health Care

Cons Discr

IT

Source: MSCI, Thomson Reuters Datastream

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Equity Strategy
India
6 January 2015

18. Sectoral ROE current versus in FY16e

40.0%

35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
Cons Staples

IT

Cons Discr

Health Care

Financials

MSCI INDIA

Current

Industrials

Energy

Materials

UtilitieS

T/Cm Svs

CY2016e

Source: MSCI, Thomson Reuters Datastream, HSBC

19. Stocks rated Overweight by HSBC analysts with estimated ROE gains of more than 1ppt between FY14 and FY17e
Company

Ticker

Sector

Rating

Asian Paints
BALLARPUR INDUSTRIES
Bharat Forge
Bharti Airtel
Cadila Healthcare Ltd
Cipla
Coal India Limited
Colgate-Palmolive
Fortis Healthcare
Godrej Consumer Products
Hathway Cable & Datacom
Hindalco
Hindustan Petroleum
ITC
Jubilant Foodworks
Just Dial
Larsen & Toubro
Maruti Suzuki India Ltd
Motherson Sumi
PTC India
Sesa Sterlite
Tata Power
UPL Limited
Voltas Ltd

APNT IN
BILT IN
BHFC IN
BHARTI IN
CDH IN
CIPLA IN
COAL IN
CLGT IN
FORH IN
GCPL IN
HATH IN
HNDL IN
HPCL IN
ITC IN
JUBI IN
JUST IN
LT IN
MSIL IN
MSS IN
PTCIN IN
SSLT IN
TPWR IN
UPLL IN
VOLT IN

Materials
Materials
Consumer Discretionary
Telecommunication Services
Health Care
Health Care
Energy
Consumer Staples
Health Care
Consumer Staples
Consumer Discretionary
Materials
Energy
Consumer Staples
Consumer Discretionary
Information Technology
Industrials
Consumer Discretionary
Consumer Discretionary
Utilities
Materials
Utilities
Materials
Industrials

Overweight
Overweight
Overweight
Overweight
Overweight
Overweight
Overweight
Overweight
Overweight
Overweight
Overweight
Overweight (V)
Overweight
Overweight
Overweight
Overweight (V)
Overweight
Overweight
Overweight
Overweight (V)
Overweight (V)
Overweight
Overweight
Overweight

Price

ROE (% FY14)

ROE (% FY17e)

Change (ppt)

760
24
970
481
1645
730
390
2000
152
1125
432
200
696
415
1371
1900
1938
3750
425
120
354
125
352
307

33.1
2.0
16.9
5.0
25.5
13.5
33.3
90.1
3.1
22.0
(12.5)
6.1
7.8
35.3
24.1
25.1
12.8
14.1
34.1
10.4
7.4
2.2
19.2
12.6

35.1
11.0
29.5
11.6
27.3
17.3
35.7
113.2
6.7
24.3
0.5
9.8
11.2
41.7
26.9
34.2
17.5
19.7
39.1
10.9
9.7
9.7
20.5
18.3

2.0
9.0
12.6
6.5
1.9
3.8
2.4
23.1
3.6
2.3
13.0
3.7
3.4
6.4
2.7
9.1
4.8
5.6
5.1
0.6
2.2
7.4
1.3
5.7

Source: HSBC estimates. Prices as of 2 January

Improved macro and potential lower interest rates remains the key catalysts

With a stable new government in place following the general elections, expectations have increased over
a pick-up in growth. In addition, the recent fall in commodity prices and expectations of lower interest
rates are likely to improve profitability among Indian companies. In table 19, we list companies covered
by HSBC fundamental analysts that are rated Overweight (or OW(V)) that have estimated ROE gains of
more than 1ppt between FY14 and FY17e. Interestingly, 16 of the 24 stocks are from cyclical sectors
such as materials, consumer discretionary, energy, industrials and utilities. The ROE expansion will be
led by a fall in interest rates, margin recovery and improved asset turnover ratio (see next page for details
of the DuPont methodology and table 24 for the breakdown of our DuPont analysis by sector).

Equity Strategy
India
6 January 2015

abc

Expensive valuations reflects the uptick in ROE

The Indian market is currently trading at 1SD above its long-term average 12-month forward PE and
continues to command a significant premium over its peers in MSCI Asia ex-Japan and MSCI EM. In
2015, we expect the Indian market to move higher, in line with earnings growth albeit with a mild derating in PE. Our end-2015 target for the Sensex is 30,000.
The PE improvement that we saw in 2014, in our view, is partly a reflection of two factors the acceleration
in growth expectations following the formation of a new government with a stable majority and an
improvement in capital efficiency (softer interest rates, better operating leverage, etc). However, with
growth forecasts buoyant over the next two years on the back of an ongoing economic recovery, we see
share prices likely tracking earnings growth, with a small element of PE de-rating (i.e. mean reversion).
The methodology
ROE drivers: DuPont analysis

We use a five-step DuPont model to break down ROE.

ROE = (Tax Burden) x (Interest burden) x (Operating income margin) x (Asset turnover) x (Equity
multiplier)
Where:
ROE = Net Income / Shareholders Equity
Tax Burden = Net Income / EBT
Interest Burden = EBT / EBIT
Operating income margin = EBIT / Sales
Asset turnover = Sales / Total Assets
Equity multiplier = Total Assets / Shareholders Equity
In the past decade Indian companies have enjoyed higher ROE than other emerging markets. However,
recently we have seen this ROE edge come down to only 3ppt in 2014 compared to 6ppt in 2002.
Our five-step DuPont analysis shows that the decline in ROE for Indian companies was mainly driven by
a continued increase in interest burden, fall in operating margins and worsening asset turnover; while tax
burden and equity multiplier effect remained stable.
Operating margins followed by interest burden were the main driver for the fall in Indian companies
ROE. This reflects the macroeconomic backdrop of sticky inflation, high interest rates, buoyant
commodity prices and rupee depreciation.
However, there is renewed hope that reform will be a high priority for the new government. Breaking up
monopolies, opening markets and creating a more investment friendly environment all appear to be high
on the policy agenda. Our DuPont analysis shows that the expected uptick in ROE will be driven by a fall
in interest burden, increase in operating margins and uptick in asset turnover, while the tax burden and
equity multiplier effect remain stable.

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Equity Strategy
India
6 January 2015

What could upset the forecasts?

1

USD strength: In our view, USD strength which is being witnessed could constrain the degree of
easing the markets expect out of the Indian monetary authority. In case the fall in rates is milder than
expected by consensus, some of the tailwinds arising from the interest burden could be muted.

India recovery: Markets are pricing in a recovery in the Indian economy. Any weakness or delay in
the recovery could mean a slower margin recovery than forecast.

Global recovery: Weaker crude oil prices represent stresses for oil exporting nations in their ability
to balance their budget. This could mean a slower global recovery than forecast impacting export
growth for Indian companies. India, however, is a large oil importer; thus weakness in crude oil is
usually positive for the Indian economy.

Taxation: We believe the market is anticipating stable taxation levels. However, there are two
uncertainties. First is the issue of sops extended to few sectors such as autos where rates have been
tempered temporarily. Reversal to prior higher rates could mean higher doses of indirect taxation.
Second is the migration to a goods and services tax (GST) regime in FY16. If rates on GST are
higher than current levels of state imposed sales tax (post set offs for intermediate taxes), this could
again trigger higher indirect taxes, which could mean a higher pricing level for finished goods. Price
elasticity of demand could then come into play, impacting margins.

20. ROE gap lowest since 1996 (%)

25
20
15
10
5
0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

MSCI India
Source: MSCI, Thomson Reuters Datastream, HSBC
Note: Data on calendar year basis

10

MSCI EM

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Equity Strategy
India
6 January 2015

Valuations pricing in ROE

inflection
Expectations of an uptick in Indian ROE already visible in the

Indian valuation premia

We expect a mild de-rating in India PE multiples, which are at a

50% premium to MSCI EM index

We are overweight India within Asia, with an end-2015 Sensex

target of 30,000

The India market significantly outperformed most emerging markets in 2014. MSCI India outperformed
MSCI EM by 30% and MSCI Asia ex-Japan by 22% in 2014. The strong performance was mostly driven
by a PE rerating and strong 2Q14 earnings performance. With PE valuations now 1SD above the longterm average 12-month forward PE, the India market is now trading at a significant premium to its peers.
An uptick in profitability will lead the market higher from here, in our view.
Relative valuations expensive for financials, industrials and staples

Table 21 shows most India sectors trade at a significant premium to peers. India trades at a 41% premium
to Asia ex-Japan and 52% premium to the global EM index on a 12-month forward PE basis. Comparing
Indian sector valuations with global EM sectors, the financial sector remains the most expensive, trading
at an 87% premium to the global EM financial sector followed by energy, consumer staples and
industrials which are trading at a higher premium to overall country premium. Interestingly, Indian metals

21. 12-month forward premium

Aggregate Index
Consumer Discretionary
Consumer Staples
Energy
Financials
Health Care
Industrials
Information Technology
Materials
Telecommunication Services
Utilities

Asia
ex-Japan

EM

China

India

Premium to
Asia ex-Japan

Premium to EM

11.2
10.0
20.0
9.3
9.5
22.1
12.7
12.6
11.9
15.1
10.3

10.4
11.4
19.6
5.7
8.6
21.2
13.7
12.7
11.2
13.7
9.3

8.9
9.5
19.8
9.0
6.2
18.7
10.8
21.5
10.1
12.7
11.2

15.9
13.7
32.2
9.6
16.2
23.8
21.9
16.9
11.1
18.0
10.5

41%
36%
61%
4%
71%
8%
72%
33%
-6%
19%
2%

52%
20%
64%
69%
87%
12%
59%
33%
-1%
32%
14%

Source: Thomson Reuters Datastream, MSCI, HSBC

11

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Equity Strategy
India
6 January 2015

is the only sector that is trading at a discount to both Asia ex-Japan and global EM, while all other sectors
are trading a premium.
India remains the preferred market for global investors
Global investors continued to raise exposure to the Indian market through 2014, triggering the rerating.
Indias weight in most regional indices such as EM, Asia ex-Japan and global rose consistently in 2014 to
near a record high.
Looking at absolute foreign institutional investors (FII) equity fund flows into Asia ex-Japan countries,
India continues to receive a disproportionately high share for the second consecutive year. Chart 22
shows that of the six major Asia ex-Japan markets for which FII flows data is available, India has
received more than half since January 2013.
22. Absolute net FIIs fund flows

50
2013

2014

40
30
20
10
0
-10
Taiwan

Korea

Thailand

Indonesia

Philippines

India

Asia ex Japan

Source: Bloomberg, HSBC

23. India allocation to regional and global equity funds inching up

25%

1.5%

20%
1.0%

15%
10%

0.5%

5%
0%
Dec-07

Source: EPFR, HSBC

12

0.0%
Dec-08

Dec-09

GEM Funds

BRIC Funds

Dec-10

Dec-11

Asia Ex Japan Funds

Dec-12
Pacific Funds

Dec-13
Global Funds (RHS)

abc

Equity Strategy
India
6 January 2015

DuPont analysis
24. Breakdown by sector
Materials

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Mar-13

Mar-14

Tax Burden

0.75

0.73

0.74

0.79

0.67

0.74

0.70

0.61

0.74

Interest Burden

0.94

0.94

0.85

0.82

0.85

0.85

0.83

0.77

0.76

Operating Margins

25%

27%

19%

12%

16%

18%

16%

14%

17%

Asset Turnover

0.82

0.71

0.91

1.00

0.81

0.76

0.77

0.67

0.57

Equity Multiplier

2.1

2.3

3.1

3.0

2.5

2.3

2.3

2.3

2.3

29.3%

29.8%

32.7%

23.0%

18.8%

20.3%

16.5%

10.1%

12.2%

Industrials

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Mar-13

Mar-13

Tax Burden

0.75

0.76

0.66

0.68

0.70

0.66

0.66

0.69

0.67

Interest Burden

0.86

0.91

0.86

0.89

0.91

0.90

0.82

0.76

0.64

Operating Margins

12%

16%

14%

17%

20%

19%

20%

19%

17%

Asset Turnover

0.98

0.81

0.71

0.62

0.60

0.58

0.56

0.53

0.47

Equity Multiplier

3.3

3.3

3.5

3.8

3.4

3.4

3.4

3.3

3.4

26.0%

30.2%

19.4%

24.4%

25.8%

22.7%

20.9%

17.8%

11.3%

ROE

ROE

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Mar-13

Mar-14

Tax Burden

Utilities

0.78

0.79

0.72

0.70

0.74

0.74

0.68

0.70

0.70

Interest Burden

0.88

0.85

0.87

0.84

0.82

0.78

0.72

0.71

0.67

Operating Margins

27%

27%

25%

23%

25%

28%

24%

26%

24%

Asset Turnover

0.42

0.44

0.49

0.51

0.49

0.41

0.42

0.40

0.40

Equity Multiplier

1.9

1.9

2.0

2.1

2.2

2.5

2.7

2.8

2.9

14.5%

15.1%

15.4%

14.6%

16.4%

16.2%

13.4%

15.0%

13.1%

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Mar-13

Mar-14

Tax Burden

0.86

0.85

0.88

0.80

0.83

0.88

0.82

0.75

0.77

Interest Burden

0.94

0.95

0.96

0.94

0.98

0.97

0.98

0.98

0.98

Operating Margins

19%

24%

24%

15%

20%

22%

25%

26%

24%

Asset Turnover

0.46

0.76

0.67

0.75

0.72

0.69

0.69

0.73

0.71

Equity Multiplier

2.9

1.7

1.6

1.6

1.5

1.5

1.5

1.5

1.6

20.7%

25.3%

21.1%

13.5%

17.1%

19.5%

21.2%

21.2%

20.2%

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Mar-13

Mar-14

Tax Burden

0.73

0.71

0.72

0.36

0.72

0.81

0.90

0.71

0.74

Interest Burden

0.93

0.91

0.85

0.45

0.78

0.85

0.80

0.78

0.79

Operating Margins

14%

14%

13%

4%

10%

11%

10%

10%

11%

Asset Turnover

1.11

1.07

0.97

0.97

1.08

1.10

1.07

1.04

1.01

Equity Multiplier

2.4

2.5

2.7

4.3

4.0

3.2

3.3

3.3

3.0

24.5%

23.5%

21.1%

2.9%

23.1%

27.8%

25.4%

19.4%

19.5%

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Mar-13

Mar-14

Tax Burden

0.71

0.70

0.71

0.67

0.73

0.72

0.72

0.73

0.73

Interest Burden

0.97

0.96

0.97

0.93

0.95

0.95

0.95

0.95

0.95

Operating Margins

18%

18%

18%

14%

17%

15%

13%

12%

12%

Asset Turnover

0.86

0.79

0.82

0.72

0.73

0.81

0.94

0.96

0.90

Equity Multiplier

2.3

2.1

2.0

2.2

2.1

2.1

2.0

2.0

2.2

24.1%

19.5%

20.4%

14.4%

18.2%

17.2%

17.5%

17.0%

16.4%

ROE
Health Care

ROE
Consumer Disc

ROE
Energy

ROE

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Mar-13

Mar-14

Tax Burden

Telecom

0.88

0.88

0.91

0.95

0.89

0.88

0.82

0.79

0.78

Interest Burden

0.92

0.96

0.97

0.97

0.99

0.93

0.84

0.80

0.88

Operating Margins

22%

27%

28%

25%

30%

25%

20%

18%

19%

Asset Turnover

0.56

0.63

0.61

0.64

0.58

0.48

0.46

0.46

0.45

Equity Multiplier
ROE

2.7
27.4%

2.5
35.3%

2.1
30.9%

1.9
28.0%

1.7
25.7%

1.8
17.5%

1.8
11.6%

1.8
9.4%

1.7
9.9%

Source: Prowess, HSBC

13

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Equity Strategy
India
6 January 2015

24 (Contd) Breakdown by sector

Consumer Staples

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Mar-13

Mar-14

Tax Burden

0.73

0.74

0.72

0.73

0.70

0.71

0.71

0.71

0.70

Interest Burden

0.99

1.00

0.99

0.99

0.99

0.99

0.99

0.99

1.00

Operating Margins

23%

25%

25%

22%

25%

25%

26%

28%

29%

Asset Turnover

1.07

1.08

1.14

1.25

1.10

1.12

1.17

1.19

1.16

Equity Multiplier

1.8

1.8

1.8

1.8

2.0

1.9

1.8

1.8

1.8

32.3%

35.2%

36.8%

36.2%

37.1%

38.3%

39.3%

44.2%

42.0%

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Mar-13

Mar-14

Tax Burden

0.86

0.87

0.84

0.85

0.84

0.83

0.77

0.78

0.78

Interest Burden

1.00

1.00

0.98

0.97

0.97

0.98

0.99

0.99

0.99

Operating Margins

24%

23%

22%

20%

23%

23%

22%

26%

28%

Asset Turnover

1.24

1.22

1.10

1.02

0.92

0.98

0.99

1.09

1.11

Equity Multiplier

1.5

1.5

1.7

1.8

1.7

1.6

1.6

1.5

1.5

36.5%

36.4%

32.8%

31.6%

29.5%

28.8%

26.9%

32.6%

36.7%

ROE
IT

ROE
Source: Prowess, HSBC

14

Equity Strategy
India
6 January 2015

abc

Disclosure appendix
Analyst Certification
The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the
opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their
personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific
recommendation(s) or views contained in this research report: Jitendra Sriram

Important disclosures
Equities: Stock ratings and basis for financial analysis

HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which
depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations.
Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities
based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon;
and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative,
technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating.
HSBC has assigned ratings for its long-term investment opportunities as described below.
This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when
HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at
www.hsbcnet.com/research. Details of these short-term investment opportunities can be found under the Reports section of this
website.
HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's
existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating
systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research
report. In addition, because research reports contain more complete information concerning the analysts' views, investors
should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not
be used or relied on in isolation as investment advice.

Rating definitions for long-term investment opportunities

Stock ratings

HSBC assigns ratings to its stocks in this sector on the following basis:
For each stock we set a required rate of return calculated from the cost of equity for that stocks domestic or, as appropriate,
regional market established by our strategy team. The price target for a stock represents the value the analyst expects the stock
to reach over our performance horizon. The performance horizon is 12 months. For a stock to be classified as Overweight, the
potential return, which equals the percentage difference between the current share price and the target price, including the
forecast dividend yield when indicated, must exceed the required return by at least 5 percentage points over the next 12 months
(or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock must be
expected to underperform its required return by at least 5 percentage points over the next 12 months (or 10 percentage points
for a stock classified as Volatile*). Stocks between these bands are classified as Neutral.
Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage, change of volatility
status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management review,
expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily
triggering a rating change.
*A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12
months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However,
stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the past
15

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Equity Strategy
India
6 January 2015

month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating,
however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.

Rating distribution for long-term investment opportunities

As of 05 January 2015, the distribution of all ratings published is as follows:
Overweight (Buy)
46%
(29% of these provided with Investment Banking Services)
Neutral (Hold)

37%

(28% of these provided with Investment Banking Services)

Underweight (Sell)

17%

(21% of these provided with Investment Banking Services)

HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments (including derivatives)
of companies covered in HSBC Research on a principal or agency basis.
Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment
banking revenues.
Whether, or in what time frame, an update of this analysis will be published is not determined in advance.
For disclosures in respect of any company mentioned in this report, please see the most recently published report on that
company available at www.hsbcnet.com/research.

Additional disclosures
1
2
3

This report is dated as at 06 January 2015.

All market data included in this report are dated as at close 02 January 2015, unless otherwise indicated in the report.
HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its
Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research
operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier
procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or
price sensitive information is handled in an appropriate manner.

MSCI disclaimer
The MSCI sourced information is the exclusive property of MSCI Inc. (MSCI). Without prior written permission of MSCI, this
information and any other MSCI intellectual property may not be reproduced, redisseminated or used to create any financial
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of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any
damages of any kind. MSCI and the MSCI indexes are services marks of MSCI and its affiliates.

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Equity Strategy
India
6 January 2015

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Disclaimer
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17

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Global Equity Strategy Research Team

South East Asia

Global
Daniel Grosvenor
+44 20 7991 4246

daniel.grosvenor@hsbcib.com

EU and US
Peter Sullivan
Head of Equity Strategy, EU and US
+44 20 7991 6702
peter.sullivan@hsbcib.com

Europe
Robert Parkes
+44 20 7991 6716

robert.parkes@hsbcib.com

John Lomax
Head of Global Emerging Market Equity Strategy
+44 20 7992 3712
john.lomax@hsbcib.com
wietse.nijenhuis@za.hsbc.com

Kishore Muktinutalapati
+91 80 3001 2983
kishoremuktinutalapati@hsbc.co.in

Asia
Herald van der Linde
Deputy Head of Research and Head of Equity Strategy, Asia-Pacific
+852 2996 6575
heraldvanderlinde@hsbc.com.hk
Devendra Joshi
+852 2996 6592

devendrajoshi@hsbc.com.hk

Steven Sun
+852 2822 4298

stevensun@hsbc.com.hk

Roger Xie
+852 2822 4297

rogerpxie@hsbc.com.hk

Taiwan
Jenny Lai
Head of Taiwan Research
+8862 6631 2860
jennylai@hsbc.com.tw
Bruce Warden
+8862 6631 2868

India
Jitendra Sriram
Head of Research, India
+91 22 2268 1271
jitendrasriram@hsbc.co.in

Korea

CEEMEA

Wietse Nijenhuis
+27 11 676 4218

Neel Sinha
Head of Equity Research, South East Asia
+65 6658 0606
neelsinha@hsbc.com.sg

brucebwarden@hsbc.com.tw

Brian Cho
Head of Research, Korea
+822 3706 8750
briancho@kr.hsbc.com
James Jong-pil Lee
+822 3706 8776
jplee@kr.hsbc.com

Latin America
Ben Laidler
LatAm Equity Strategist and Head of Research, Americas
+1 212 5253460
ben.m.laidler@us.hsbc.com
Francisco Schumacher, CFA
Southern Cone & Andean Equity Strategist
+1 212 525 4430
francisco.j.schumacher@us.hsbc.com
Kevin R Gonzalez
Associate
+1 212 525 4394

kevin.r.gonzalez@us.hsbc.com

Andre C Carvalho
Head of Brazil Equity Strategy
+55 11 3371 8190
andre.c.carvalho@hsbc.com.br
Marina F Valle
Equity Strategist
+55 11 3371 8191

marina.f.valle@hsbc.com.br

Gonzalo Fernandez
Mexico Equity Strategist and Head of Equity Research, Mexico
+52 55 5721 3607
go.fernandez@hsbc.com.mx
Jaime Aguilera
Equity Strategist
+52 55 5721 2379

jaime.aguilera@hsbc.com.mx