Investment Strategy For Indian Markets Post-Covid

STRATEGY
The Big Crisis, and a playbook

India Equity Research | Strategy
This is the Big (crisis) one – Human, Economic, Financial (HEF). It’s Human
and personal–will influence consumer behavior; it’s Economic–deep, will
linger and shift demand/business dynamics; and it’s Financial–will alter
markets, valuation frameworks. And, it’s as local as it is global. The Tech
bust (2000) and GFC (2008) were lesser, but changed the decades that
followed. This one, with the virus still running riot, will be deeper,wider
and more painful. We lend perspectives and a playbook to play through.
We argue: a) The market impact is meaningfully upfront (and will stay

volatile) and economic & business ones will be sharp and linger; b) The
GFC provides a framework for the market–capitulation now,
consolidation ahead and reflation beyond; c) Policy response–India’s
constrained and lagging, and a lot needed; d) Valuations are attractive–
not compelling (2008) with earnings risks ahead; e) Pure value lies in
dividend yield, cash-rich companies; and f) New leaders–healthcare, IT
services and telecom. We’re in the midst of dislocations and a rampaging
virus; time to step back, think hard and build an investing playbook.
Market pain: Growth, earnings and resets ahead

Global and India’s markets have fallen precipitously (>30%), unprecedently and
synchronously over the past month. This reflects the HEF uncertainty; economic
dislocations, earnings rips and more fundamental resets will follow. We expect market
volatility to continue; near-term market and stock calling, particularly levels, are more
matters of faith and investing beliefs, than playbooks. This holds true for growth and
earnings resets and extrapolations–they will come as the viral is reined in.
Policy push: The need, the lag and the likely recovery
The market’s sharp fall has been matched, if not surpassed, by the global policy
response–aggressive rate/liquidity measures, 5-10% GDP fiscal pushes–with ‘whatever
it takes’ commentary. India, however, so far, lags–some market liquidity support, some
state government fiscal promises and a task force for a fiscal push. It needs a lot more;
there’s plenty of monetary room, little option on the fiscal front and while India’s
Aditya Narain
COVID-19 spread has been modest so far, policy has lagged. This could weigh on India’s +91-22-6620 3061
relative economic and business damage, and eventually, the market’s recovery. aditya.narain@edelweissfin.com
Prateek Parekh, CFA

GFC market playbook and how to play the HEF crisis +91-22-6623 3469
prateek.parekh@edelweissfin.com
The HEF is more severe than the GFC. Going beyond our Eco-playbook (Click Here), we
look at the market’s phases–capitulation, consolidation and recovery–and sectors that Padmavati Udecha
+91-22-6620 3103
lead this process. We are likely in the midst of capitulation, a potentially longer
padmavati.udecha@edelweissfin.com
consolidation and a different looking recovery. We plot it out, call a reset of sector and
company leaders; pharma, IT services and telecom could well be leaders, dividend yield
and absolute value are great risk adjusted trades, financials will lag in the consolidation
phase. We will progressively adjust our model portfolio as the market stabilizes. March 24, 2020
Edelweiss Research is also available on www.edelresearch.com, Edelweiss Securities Limited

1
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.
Strategy
Hit hard, but it’s still early days
The COVID-19-driven dislocation is in its early days. It’s still early to call the trajectory of the
virus’ spread, early to estimate the economic damage in terms of its length, the damage to and
Financial markets are collateral the reconfiguring of businesses. It’s also only a start in terms of the policy response that one is
damage of health and economic beginning to see across countries and India,the specifics and the likely changes that one will
challenges… see as the virus settles. While the markets have reacted sharply thanever before and remain
volatile, the uncertainty of the virus and the ultimate economic reconfiguration suggestit’s also
early days to decisively or confidently call the market is in either direction. The same applies to
stocks even as it is time to look at long-term shifts that are likely to follow.
Markets: Dislocated, but logically also upfront

The markets–equity and fixed income–are dislocated, globally as also in India. This is in
value erosion (primarily equity), volumes &liquidity (fixed income) and confidence–with
higher-end risk paper–debt or equity, largely freezing over or offering limited exit
opportunities. This, even as most Central banks have pulled out a range of measures to
provide liquidity, purchases and back-stops.
…markets have cratered and are
dislocated…almost no one to blame The relative swiftness of these measures also reflects little ambiguity on ‘moral dilemma’
and few are being spared that may have existed in previous dislocations;this one is straight health and not market
excess or greed. The markets are dislocated,butfinancial markets are collateral damage of
health and the economic challenges that are hitting the entire world. It may be more for
some countries and markets,but it’s a global pandemic and problem. No one to blame and
few are being spared.
Chart 1: Markets across the world in a free fall

105
(Index rebased to 100)
95
85
75
65
Jan 20 Feb 20 Mar 20
India EMs DMs
Source: Bloomberg, Edelweiss research
So, are markets taking it all upfront and could they be over-reacting? By their very nature,
Markets reflect a lot of economic markets discount the economic loss and further risks upfront; that is why the sharp reaction.
pain ahead–but too much or too But, have they over or under reacted is hard to call; infections are still on the rise, its
little? trajectory and antidote are still conjecture and its economic damage is hard to extrapolate.
That there are aggressive policy offsets underway with more likely (and needed) on the anvil,
makes it near impossible to call the markets with any strong logic or certainty. So the
markets reflect a lot of economic pain ahead, but too much or too little?
2 Edelweiss Securities Limited

Strategy
Economic pain:How, rather than levels, for now

We recently (last week) cut our FY21 GDP forecast to 5% (-50bps). We now believe it will be
Economic pain of lockdowns is likely
more. There’s been, literally over the weekend, a surge in cases in the US/Europe, a sharp
to be very significant,going by
rise and concern in India,but more importantly, there have now been city / state shutdowns
China’s data
announced for a fortnight, factory shutdowns as a consequence and we believe the spill
through impact will be significant. And, the deeper it goes and the longer it takes, the
greater will be the dislocations. Do note that at this juncture confirmed cases in India
arerelatively modest at sub-500; the trajectory of the count and the impact of economic
shutdowns will materially influence economic impacts.
Chart 2: US retail sales suffered a sharp contraction during GFC… …Impact oneconomic activity much higher this time
5 10
5
0
0
(5)
(%, YoY)
(5)
(%, YoY)
(10) -12% (10)
(15) -13%
(15)
-15% (20) -20%
(20) (25)
Mar 08 Jun 08 Sep 08 Dec 08 Mar 09 Feb 19 May 19 Aug 19 Nov 19 Feb 20
US retail sales US IIP
China retail sales China IIP
But, while the levels are relatively difficult to call, we do believe there are characteristics of
the Indian economy that will drive the impact–shorter term–and the possible implications
over the long term. We believe: a) The near 40% rural economy provides a relative hedge–
its dynamics are different and the virus spread is likely to be less impactful; b) A relatively
higher share of services–similar near-term impact vis a vis manufacturing (taking shut-
Relative impact on India’s growth
downs). But could see downward reset in the longer term; c) A net commodity importer
could be a little more modest and
with prices likely to be fundamentally set lower (particularly oil), India should lose a little
spread than most EMs and some
less than a lot of peer EMs; d) A modest capital markets component in India’s savings
DMs
profileis likely to limit the negative wealth effect that is likely to ripple through some
segments; e) Only moderate exports dependence,which we see being significantly
impacted,will also moderate the impact of this challenge. That said, the relatively large
share of informal workers will, however, limit employment protection and effective income
loss, lay-offs could be very front-endedand sharp.
We would argue that the relative impact on India’s growth could be a little more modest
and spread out than most EMs and some DMs, but there will be real pain and how it plays
out and the resets that happen will determine the overall impact on growth.

Strategy
Policy: A start needed with few stops

The developed world has witnessed the most aggressive policy response ever–monetary
and liquidity measures, fiscal commitments never seen before even as the US negotiates the
specifics (rather than the size) and fairly open-ended commitments. This approach almost
cuts across developed markets,irrespective of political ideology. Economic policy is looking
like a medical resuscitation–do what it takes to keep the patient alive. It’s been fast, large
and while its efficacy, so far, has been limited and its long-term impact ignored, there is
huge global consensus and coordination in acting now.
Table 1: Measures announced by governments across the world

Particulars Current
Stimulus measures by various countries
United States Proposal of ~USD 2 trn stimulus package. (This includes direct cash payments to
Americans and loan forbearance)
Germany Proposal to spend an additional €122.5bn this year to counter the slump. It also plans
to set up a €500bn bailout fund that will take stakes in stricken companies
UK Unveiled a £330bn package of emergency loan guarantees to business and £20bn of
fiscal support
France 1. Approved a €45bn rescue package, pledging an array of possible measures, including
nationalising companies
2. Guaranteed €300bn of bank loans to businesses to ensure they do not collapse for
want of liquidity
Japan 1. Offered $15 billion in financing for businesses hit by coronavirus and spend about $4
billion directly to prop up the economy
2. Working on a new spending package of up to 20 trillion yen ($190 billion), including
cash payouts to households and subsidies to tourism companies hit by a slump in
overseas visitors.
Source: News reports, Edelweiss research
India has, however, not moved so far, excluding a few RBI-led liquidity enhancing measures.
It needs to do a lot more, and quickly. We would argue that it has significant headroom on
the monetary front; with a 5.15% repo rate, inflation falling rapidly and deflationary risks
setting in, India probably has monetary room than any other market–easy 100-200bps rate
cuts in the current context.
India’s policy response, so far, has
been timid–monetary & fiscal–and We also believe it needs to be more interventionist across the credit market and
it’s important to act, particularly participants. While the central bank held back in intervening in the NBFC crisis or offering
given India’s fairly extreme any back-stops, the current virus-led environment is significantly more challenging and the
economic shutdown need and downside risks have only risen.
India’s fiscal options are fewer,its need possibly higher. While India is already sitting on a
3.5% plus fiscal deficit, which will almost necessarily slip on account of the economic shut
down,there is a pressing need to provide fiscal support to the challenge ahead. We have
been arguing for a fiscal stimulus to get growth back; it’s now needed to moderate the
inevitable and sharp fall in growth that lies ahead. We believe this is particularly so because
India was at a low even going into the crisis–sub 5% growth, a significantly challenged
banking sector and diminished risk appetite across banks, corporate and individuals.

Strategy
How much and how? We would believe a 2-4% (USD50-100bn) of GDP push is needed over
the next few months. We also believe its execution and allocation will need to be, amongst
others, banking sector loan extensions and moratoriums–small and large businesses–
indirect tax rate relaxations on basics. The economic pain will be most directly and
immediately felt by the contractual informal part of the economy and some direct income
support for a limited period is needed.
In addition, while the government has been reluctant to directly support specific
industries,we would argue it has been sub-optimal and precipitated some of the economy’s
current challenges. Infact, the large fiscal stimulus imparted during GFC–over 3.5% of GDP
helped Indian economy recoverquickly–and suggests it has and does work well.
Table 2: Dealing with the GFC— A variety of fiscal and monetary measures were announced
Particulars Post GFC
Fiscal stimulus (as % of GDP) 3.5
Excise duty cuts 0.9
Food and fertilizer subsidy 0.9
Pay commission 0.6
Rural development 0.4
Farm loan waiver 0.4
Others 0.3
Monetary stimulus
CRR cut 400bps
SLR cut 100bps
Repo rate cut 425bps
Source: Edelweiss research
Towards that end we would believe back-stops, credit supports and tax breaks are needed
for labour-intensive industries and those impacted by the lockdowns–travel, tourism,
transportation and a few others. We also believe there is a need,in the current
environment,to back-stop large corporate / financial failures if they arise. This has been
India’s starting point of growth is damaging to jobs, credit and corporate confidence, and in a higher risk and weaker
significantly lower than in GFC economic environment, could further weigh on an already stressed environment.
India has been hit by the virus when it was already low; a surging pandemicand a slow
&lagging response only raisethe downside risks.

Strategy
Table 3: Most indicators today are even below GFC lows

1Y prior GFC 1Y post GFC 1Y prior Covid 19
Real indicators
IIP 13 0 1
Car sales 13 -2 -13
Truck sales 2 -40 -33
Cement consumption 8 9 3
Diesel consumption 12 8 1
IIP capital goods 39 -7 -11
Nominal indicators
Credit growth 23 15 6
Nominal GDP 17 8 8
Exports 40 -19 0
Non-oil and gold imports 47 -9 -6
Source: Bloomberg, CMIE, Edelweiss research
Even on the earnings front, current momentum remains weak. When GFC struck, earnings
had posted 25% CAGR in the previous five years, significantly higher than the 5% earnings
CAGR in the five years preceding COVID-19. Hence, to that extent, ability of corporate to
absorb the shock is rather limited.
Chart 3: Nifty Earnings growth in the run-up to GFC and now

40
Earnings growth was
Prior to Covid-19,
30 very strong prior to GFC
earnings growth has
been very weak
20
(%, YoY)
10
(10)
(20)
9MFY20
FY04
FY06
FY07
FY09
FY10
FY12
FY13
FY15
FY16
FY18
FY19
FY03
FY05
FY08
FY11
FY14
FY17
Nifty EPS growth


Strategy
The GFC playbook and how it could play this time

Sharper this time,but India completely in sync with EM now, even though it’s still early days.
India fell a lot more from its peak, though it started falling earlier.
Chart 4: India and MSCI EM fell during GFC… …Chart 5: Current Nifty fall
105 105
95
85 95
(rebased to 100)
(rebased to 100)
75
85
65
55
75
45
35
65
Dec 07 Mar 08 Jul 08 Oct 08 Jan 09
Nifty MSCI EM Local Currency Nifty MSCI EM Local Currency
India’s bond yields have largely mirrored US this time too,but without the RBI cutting, so far.
Chart 6: India and US bond yields during GFC Chart 7: India and US bond yields currently
10 4.5 6.7 1.9
6.6 1.7
9 4.0
6.5 1.5
8 3.5
6.4 1.3
(%)
(%)
(%)
(%)
7 3.0 6.3 1.1
6.2 0.9
6 2.5
6.1 0.7
5 2.0
6.0 0.5
Dec 07 Mar 08 Jul 08 Oct 08 Jan 09
India 10Y G-sec US 10Y G-sec - RHS India 10Y G-sec US 10Y G-sec - RHS
The INR had consistently under-performed peers. This time it is outperforming, so far. This
could further weigh on economic activity and India’s export competitiveness.

Strategy
Chart 8: INR performance during GFC Chart 9: Current INR performance

105 100
100 98
95
96
(x)
(x)
90
94
85
80 92
INR underperformed
peers during GFC
75 90
Dec 07 Mar 08 Jun 08 Sep 08 Dec 08 Mar 09 Jan 20 Jan 20 Feb 20 Feb 20 Mar 20 Mar 20
INR Rest of FX vs. Dollar INR Rest of FX vs. Dollar
The equity market had narrowed through the GFC. This time it’s been narrowing into the
crisis; should get narrower still.
Chart 10: Rally was narrow with Nifty stocks gaining the most Chart 11: Rally has been narrow this time around as well
65 65
60 60
55 55
50 50
45 45
Dec 07 Mar 08 Jun 08 Sep 08 Dec 08 Mar 09 Dec 17 Jul 18 Feb 19 Sep 19 Mar 20
Nifty Mcap as % of Total Nifty Mcap as % of Total
The market has got cheaper,but even before the earnings cuts have come, it’s still more
expensive than at the GFC bottom.

Strategy
Chart 12: Valuations have compressed sharply, but still higher than GFC levels
28
24
20
(x)
16
12
8
Mar 00 Mar 02 Mar 04 Mar 06 Mar 08 Mar 10 Mar 12 Mar 14 Mar 16 Mar 18 Mar 20
Nifty trailing PE ratio Long Term avg +1SD -1SD
The markethad taken a year from its top to the bottom, consolidated for under six months
and then retouched its highs in less thantwo years. This time, the fall has been sharperand
Market valuations still haven’t hit at the lows (not necessarily the bottom) and with economic damage ahead, the reflation
GFC lows could be more laboured. We broadly classify market movements into four phases and
discuss the same in the section below–lead in, capitulation, consolidation and reflation.
Chart 13: Characterizing market rally into different phases during GFC
7,000 Capitulation Consolidation Reflation 10

Lead in
Stocks fall, Stocks stabilize, Stocks rise,
Stocks fall,
Yields reverse Yields fall sharply Yields rise
Yields rise
6,000 9
5,000 8
(Index, x)
(%)
4,000 7
3,000 6
2,000 5
Sep 07 Mar 08 Sep 08 Mar 09 Sep 09 Mar 10
NIFTY Index 10Y bond yield (RHS)

Strategy
1) Lead in phase: Rate sensitive’s get sold off as central banks tighten
This is a phase which occurs in a late stage of a bull cycle when central banks tighten
Lead inphase similar to rates aggressively to curb overheating. In this phase, rate sensitives and midand small
2018/H1FY19 market movements caps get sold off. It’s basically a phase where valuation strength gets tested and those
where rate sensitivessold off segments of markets where valuations are high face the maximum brunt. This is a
phase triggered by rising interest rates.It is somewhat similar to the 2018-19 phase in
India, where midcap, NBFC andauto valuations corrected, although the broader market
remained flat. The polarisation was more pronounced this time around.
Table 4: GFC: The early tremors – Rate sensitives and hot stocks get sold This time, it occurred during 2017-19 phase
1Y prior to Nifty Liquidation phase 2017 2017-19
Sector Name
Peak performance Performance Performance
Telecom 75 -43 Nift smallcap 50 -33
Utilities 201 -42 Metals 38 -31
Nift smallcap 89 -41 Telecom 34 -29
Industrials 101 -40 Discretionary 24 -26
Financials 100 -39 Utilities 14 -18
Metals 147 -39 Healthcare -7 -17
Nifty Midcap 87 -38 Nifty Midcap 43 -17
Nifty 60 -26 Industrials 39 -7
Discretionary -1 -24 MSCI India 31 6
Energy 111 -22 Financials 44 13
Consumer Staples 26 -11 Consumer Staples 30 21
IT -23 -2 IT 27 26
Healthcare 5 10 Energy 50 28
2) Capitulation phase: We all fall down (ala current market fall)

This is a phase generally triggered by a financial collapse globally, and all sectors fall.
This happened around the Lehman Brothers collapse in 2008. In this phase,
In capitulation phase, everything policymakers become agile and undertake several measures (QE, fiscal measures, etc.),
sells off. There isn’t much to choose but markets continue to tumble. While EM central banks do cut, the BoP shock does
from and very few hiding places not lead to lower bond yields. Even for India, while RBI cut CRR aggressively during this
phase, it did not percolate to lower bond yields and thus the market continued to
plunge.
This is a phase that we are currently going through, although the pace of fall is much
sharper this time around than GFC (perhaps reflecting more economic near-term pain).

Strategy
Table 5: Capitulation phase– We all fall down… …that’s where we are right now
Capitulation phase
Sector Name Capitulation phase (GFC) Sector Name
(current)
Metals -65 Nift smallcap -46

Nift smallcap -57 Financials -45
Telecom -56 Discretionary -44
Financials -53 Energy -43
Industrials -52 Industrials -43
Energy -52 Metals -42
Nifty Midcap -45 Nifty Midcap -39
MSCI India -45 MSCI India -38
Utilities -42 Utilities -32
IT -38 IT -29
Discretionary -36 Telecom -26
Healthcare -34 Healthcare -24
Consumer Staples -14 Consumer Staples -21
3) Consolidation phase: Cash-rich bounce first, financials last

This phase is generally marked by policymakers getting ahead of the growth downturn.
This, accompanied by cheap valuations,leads to markets forming a bottom. The phase is
In consolidation phase, rates first
triggered by a sharp fall in bond yields as the USD stabilises and markets calm down.
fall sharply, before market forms a
sustainable bottom
In this phase, global cyclical (metals and energy), discretionary (given they are rate
sensitive) and high dividend yielding sectors (utilities) outperform. Within them as well,
those companies with healthy balance sheets bounce faster compared to those with
stretched balance sheets. Financials rally the last.
Global cyclicals, while dividend yield

As things stand today, globally, policy response is certainly coming through. However, it
and cash-rich companies bounce
still remains weak in India (as highlighted in the section above). Hence, to that extent,
first, financials rally last
earnings yield minus bond yields have still not reached attractive levels in India. Hence,
for the entire index to form a sustainable bottom, bond yields will first need to fall
sharply or even more significant equity correction may be warranted. We discuss the
stocks and themes to play in such a scenario in the forthcoming section.

Strategy
Table 6: Consolidation phase – Metals, energy, dividend yield, cash-rich companies bounce first
Sector Name Consolidation phase
Telecom (23)
Financials (13)
Healthcare (13)
Nift smallcap (11)
Nifty Midcap (10)
IT (8)
Consumer Staples (7)
Industrials (4)
MSCI India (2)
Energy 8
Metals 12
Utilities 12
Discretionary 14
Chart 14: Valuations still not attractive relative to bonds

4
Consolidation
phase
2 Current earnings
yield is not yet
Valuations relative to interest rates
attractive
are still not attractive
(%)
Either rates need to fall sharply or

(2)
equities need to correct even more
significantly
(4)
Mar 04 Mar 08 Mar 12 Mar 16 Mar 20
Earnings yield minus bond yield
In all these phases one thing stands out– levered companies were the last to recover and, to
that extent,bore maximum brunt of the crisis.
Table 7: Leverage can be quite painful during crisis

Average stock returns
Net Debt to No. of Capitulation
1Y prior Nifty Peak Liquidation phase Consolidation phase
EBITDA companies phase
<0 103 58 -28 -44 -2

0-5x 205 95 -37 -53 -11
>5 79 124 -48 -60 -17
Total 387 91 -37 -52 -10

Strategy
4) Reflation phase: We all rise

This is the last phase of the market cycle. Herein policy makers finally get ahead of the
curve, growth deterioration stops and equities price-in a full-fledged recovery. Cheap
valuations along with growth bounce lead to more than doubling of equities. The rally is
the sharpest in metals, midcaps, smallcaps, etc. It is in this phase that higher financial
leverage works to one’s advantage and higher debt leads to disproportionate returns.
In reflation phase, markets rally
sharply with most levered stocks Table 8: Reflation – What causes it and what leads the bounce
taking the lead Sector Name Reflation phase
Metals 249
Industrials 163
Nift smallcap 162
Discretionary 162
Financials 159
Nifty Midcap 157
IT 148
MSCI India 122
Healthcare 105
Energy 70
Utilities 60
Consumer Staples 44
Telecom 18

Strategy
How do you position your portfolios?
We do not argue for too much shuffling in the midst of the current market mayhem. We do,
however, believe that we are in the market capitulation phase–with wild unpredictable
We would look to buy dividend swings driven by the virus’ spread, market liquidity and other dynamics and policy responses.
yield/cash-rich companies and It is unwise to try and remodel a portfolio with such significant stock price swings.
become UW on financials once the
dust settles We do believe that as the virus’ trajectory and the market’s dust settles, the market should
enter consolidation phase, which will give the opportunity and the time to emphasize the
portfolio. We also expect it to be a little longer than the GFC consolidation phase in large
measure because the likely economic impact will be greater this time, and such underlying
IT, pharma and telecom likely to be refixes take longer than market ones. To that extent, there will be merit in changing the
sector leaders in the next cycle portfolio stance once the market starts settling at its new, lower levels.
Sectors best suited to this phase are pharmaceuticals, IT services and telecom. These
sectors should structurally see a leg up for their businesses over an extended period of time
and should play through to valuations. We are already OW in these sectors and would look
to add to them once market movements stabilise.
The sectors that we would seek to switch would be financials from a long held OW to
what should become UW. We are holding back in the immediate term because of the very
sharp price erosion and so a rebound is a real possibility. But, beyond that, we see the
sector straining on bearing a large part of the economic pain of this crisis in the form of
asset quality, the likely further moderation of growth that should follow and the risk of
socialization of the economy’s likely pain on account of this. In contrast, consumer staples,
outperforming in the recent past, will likely see the least business damage as businesses and
stocks. We will seek to gradually raise our exposure to these stocks in our portfolio.
Table 9: High dividend yield companies

Stock Name FY21E Dividend Yield
Hindustan Zinc 16
Bharti Infratel 13
HPCL 12
Indian Oil Corporation 11
Coal India 11
NTPC 10
Wipro 7
Hero MotoCorp 6
Infosys Technologies 6
ITC 6
Source: Edelweiss research

Strategy
Table 10: Companies with high cash as a % of market cap

Stock Name Cash as % of Market Cap
Bajaj Auto 35
Hero MotoCorp 27
Maruti Suzuki India 25
Hindustan Zinc 24
Eicher Motors 22
ACC 20
NMDC 20
Tech Mahindra 19
Mahindra & Mahindra 14

Strategy
Table 11: Strategy Portfolio

Stocks Mkt Cap Price Portfolio Nifty wt Rel wt P/E (x) P/E (x) P/B (x) P/B (x) RoE (%) RoE (%) Div Yld (%)
(USD bn) (INR) (%) (%) (bps) FY20E FY21E FY20E FY21E FY20E FY21E FY20E
BFSI 41.9 37.1 480
ICICI Bank 29 284 9.0 5.8 320 16.2 9.9 1.6 1.4 10.3 15.4 1.5
ICICI Lombard 5 835 2.0 0.0 200 29.9 22.0 6.3 5.1 22.3 25.5 0.8
Axis Bank 16 309 4.0 2.2 180 12.9 5.9 1.0 0.9 8.7 15.8 0.5
IndusInd Bank 4 336 1.8 0.6 120 3.9 2.9 0.6 0.5 17.7 19.6 2.6
State Bank of India 24 182 2.2 2.2 0 8.8 4.8 0.8 0.7 9.3 14.9 2.0
Kotak mahindra Bank 31 1,098 3.0 4.6 (160) 24.0 20.4 3.3 2.9 14.7 15.1 0.0
HDFC Bank 65 772 10.9 10.5 40 15.8 12.5 2.5 2.2 16.7 18.2 1.0
HDFC 37 1,521 9.0 8.3 70 19.1 17.9 2.9 2.7 16.2 15.4 2.0
Realty 2.0 0.0 200
Sobha Limited 0 150 1.0 0.0 100 4.2 3.4 0.6 0.5 14.3 15.8 3.9
Brigade 0 125 1.0 0.0 100 40.2 18.2 1.2 1.1 2.9 6.2 0.9
Health Care 4.1 2.8 130
Dr Reddy's Labs 6 2,768 1.6 1.1 50 21.6 15.6 3.0 2.5 14.4 17.5 0.8
Cipla 4 378 1.6 0.6 90 16.0 14.3 1.8 1.6 11.6 11.7 0.8
Dr. Lal Pathlabs Ltd 2 1,252 1.0 0.0 100 39.0 32.1 9.0 7.2 25.3 25.0 0.4
Information Technology 16.0 14.8 120
Mindtree 2 734 2.0 0.0 200 19.2 13.5 3.3 2.9 18.0 22.7 2.0
HCL Tech 15 417 2.0 1.4 60 10.7 9.8 2.2 2.0 23.2 21.4 1.9
Tata Consultancy Services 82 1,670 3.0 5.5 (250) 19.1 17.2 6.7 5.4 35.3 34.7 1.3
Infosys Technologies 31 526 9.0 6.1 290 13.4 11.1 4.0 3.7 27.7 34.9 7.5
Telecommunication Services 4.4 3.3 110
Bharti Airtel 32 407 4.4 2.9 150 NM 23.1 3.0 2.6 0.0 11.0 1.1
Industrials 4.0 3.3 70
Larsen & Toubro 16 724 3.0 2.8 20 10.2 8.6 1.4 1.3 15.5 16.3 2.1
Bharat Forge 2 246 1.0 0.0 100 18.1 12.0 2.0 1.8 11.4 15.8 2.0
Chemicals 1.2 1.0 20
Aarti Industries 2 680 1.2 0.0 120 21.7 16.7 3.9 3.3 19.2 21.3 1.1
Metals & mining 2.1 1.9 20
JSPL 1 89 1.0 0.0 100 NM NM 0.3 0.3 -3.3 -0.1 0.0
Tata Steel 4 271 1.1 0.6 50 10.9 4.3 0.5 0.4 3.7 9.1 4.8
Autos 5.1 5.1 0
Hero MotoCorp 5 1,616 1.3 0.7 60 9.9 9.3 2.3 2.2 24.5 24.3 5.5
Mahindra & Mahindra 5 293 1.0 0.9 10 7.8 9.0 0.9 0.8 12.3 9.7 3.4
Bajaj Auto 8 1,936 1.3 0.8 50 11.0 10.1 2.3 2.0 21.9 21.2 3.0
Tata Motors 3 66 1.5 0.4 110 7.3 3.3 0.4 0.3 5.1 10.7 0.0
Consumers 8.7 14.3 (560)
Asian Paints 20 1,498 2.8 2.1 60 47.7 41.6 13.1 11.3 28.0 28.1 0.8
Hindustan Unilever 53 1,870 5.0 4.2 70 56.7 46.8 49.2 10.9 88.4 38.6 1.4
Dabur 10 396 1.0 0.0 100 42.8 38.5 10.8 9.5 27.0 26.1 0.9
Utilities 0.0 2.8 (280)
Energy 9.5 11.9 (240)
Reliance Industries 78 884 8.0 9.0 (100) 11.1 7.7 1.2 1.1 11.5 14.6 0.9
Gujarat Gas 2 205 1.5 0.0 150 16.2 12.7 4.6 3.6 33.0 31.7 1.5
Cement 1.0 1.8 (80)
JK Cement 1 891 1.0 0.0 100 12.5 10.5 2.2 1.9 18.9 19.0 1.0
Model Portfolio 100.0 100.0 0
Nifty 100.0 0

Strategy
Table 12: Top Picks

Current Current Dividend
market cap Target Price market P/B (x) P/E (x) RoE (%) yield (%)
Company (USD Mn) (INR) price (INR) FY20E FY21E FY20E FY21E FY20E FY21E FY20E
Large caps
Bharti Airtel 29,241 634 407 3.0 2.6 NM 23 -0 11 1.1
Cipla 3,981 560 378 1.8 1.6 16 14 12 12 0.8
Coal India 10,367 250 128 2.2 1.7 4 4 60 46 10.6
HCL Tech 14,895 704 417 2.2 2.0 11 10 23 21 1.9
HDFC Bank 55,666 1,520 772 2.5 2.2 16 13 17 18 1.0
Hero MotoCorp 4,247 2,695 1,616 2.3 2.2 10 9 24 24 5.5
Hindustan Unilever 53,257 2,288 1,870 49.2 10.9 57 47 88 39 1.4
ICICI Bank 24,186 631 284 1.6 1.4 16 10 10 15 1.5
ICICI Lombard 4,941 1,650 825 6.3 5.1 30 22 22 26 0.8
Infosys Technologies 29,501 959 526 4.0 3.7 13 11 28 35 7.5
UltraTech Cement 11,601 5,523 3,055 2.3 2.1 21 15 12 14 0.4
Mid caps/Small caps
Brigade Enterprises 335 344 125 1.2 1.1 40 18 3 6 1.2
CESC 723 880 415 0.6 0.5 4 4 14 13 3.4
Coromandel International 1,923 759 488 3.5 2.8 15 13 25 24 1.4
Dr. Lal Pathlabs Ltd 1,923 1,655 1,252 9.0 7.2 39 32 25 25 0.4
Exide Industries 1,482 260 133 1.71 2 12 12 14 14 2.2
Galaxy Surfactants Ltd 507 1,570 1,088 3.7 3.1 18 15 22 22 1.0
Gujarat State Petronet 1,230 309 166 2.0 1.6 6 6 36 29 1.5
JK Cement 906 2,011 891 2.2 1.9 12 11 19 19 1.0
Just Dial 235 685 275 1.7 1.7 7 8 25 23 2.0
Security and Intelligence 700 652 369 3.5 2.9 17 16 22 20 0.6
Services India Ltd.
Trent Ltd. 1,891 590 404 5.9 5.3 74 49 NA NA 0.0
Chart 15: Strategy portfolio performance since inception Chart 16: Strategy portfolio performance since last change
40 0
30 (5)
20 (10)
10 (15)
(%)
(%)
0 (20)
(10) (25)
(20) (30)
(30) (35)
Sep-17 Mar-18 Sep-18 Mar-19 Sep-19 Mar-20 Mar 20 Mar 20 Mar 20 Mar 20 Mar 20 Mar 20
Strategy Portfolio Nifty Strategy Portfolio Nifty

Strategy
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Digitally signed by ADITYA NARAIN
Aditya Narain DN: c=IN, o=EDELWEISS SECURITIES LIMITED,
ou=SERVICE,
2.5.4.20=3dc92af943d52d778c99d69c48a8e0
c89e548e5001b4f8141cf423fd58c07b02,
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NARAIN
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Date: 2020.03.24 20:21:50 +05'30'
Recent Research
Date Title
11-Mar-20 Small and Midcap Corona: What if it stays and what if

Strategy it goes
04-Mar-20 Strategy This bug has gone viral; stay safe
24-Feb-20 QUARTERLY QUOTES Compendium of conference calls
19-Feb-20 Q3FY20 Result review Soft quarter – Costs the only

cushion
All price charts cannot be included given the large number of companies in our coverage. Specific charts may be available upon request.

Strategy
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STRATEGY

The Big Crisis, and a playbook

We argue: a) The market impact is meaningfully upfront (and will stay

Market pain: Growth, earnings and resets ahead

Prateek Parekh, CFA

Edelweiss Research is also available on www.edelresearch.com, Edelweiss Securities Limited

Hit hard, but it’s still early days

Markets: Dislocated, but logically also upfront

Chart 1: Markets across the world in a free fall

2 Edelweiss Securities Limited

Economic pain:How, rather than levels, for now

3 Edelweiss Securities Limited

Policy: A start needed with few stops

Table 1: Measures announced by governments across the world

4 Edelweiss Securities Limited

5 Edelweiss Securities Limited

Table 3: Most indicators today are even below GFC lows

Chart 3: Nifty Earnings growth in the run-up to GFC and now

Nifty EPS growth

6 Edelweiss Securities Limited

The GFC playbook and how it could play this time

7 Edelweiss Securities Limited

Chart 8: INR performance during GFC Chart 9: Current INR performance

INR Rest of FX vs. Dollar INR Rest of FX vs. Dollar

Source: Bloomberg, Edelweiss research

Nifty Mcap as % of Total Nifty Mcap as % of Total

Source: Bloomberg, Edelweiss research

8 Edelweiss Securities Limited

Source: Bloomberg, Edelweiss research

7,000 Capitulation Consolidation Reflation 10

Source: Bloomberg, Edelweiss research

9 Edelweiss Securities Limited

2) Capitulation phase: We all fall down (ala current market fall)

10 Edelweiss Securities Limited

Metals -65 Nift smallcap -46

3) Consolidation phase: Cash-rich bounce first, financials last

Global cyclicals, while dividend yield

11 Edelweiss Securities Limited

Chart 14: Valuations still not attractive relative to bonds

Either rates need to fall sharply or

Table 7: Leverage can be quite painful during crisis

<0 103 58 -28 -44 -2

12 Edelweiss Securities Limited

4) Reflation phase: We all rise

13 Edelweiss Securities Limited

How do you position your portfolios?

Table 9: High dividend yield companies

14 Edelweiss Securities Limited

Table 10: Companies with high cash as a % of market cap

15 Edelweiss Securities Limited

Table 11: Strategy Portfolio

16 Edelweiss Securities Limited

Table 12: Top Picks

17 Edelweiss Securities Limited

11-Mar-20 Small and Midcap Corona: What if it stays and what if

04-Mar-20 Strategy This bug has gone viral; stay safe

24-Feb-20 QUARTERLY QUOTES Compendium of conference calls

19-Feb-20 Q3FY20 Result review Soft quarter – Costs the only

18 Edelweiss Securities Limited

19 Edelweiss Securities Limited

Disclaimer for U.S. Persons

20 Edelweiss Securities Limited

Disclaimer for U.K. Persons