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ENAM Securities Sensex: 15109

India Research

India Strategy
SENSEX RISES 74%!
As balloons go up this 52w high of 15K+ Sensex this Ecstatic Diwali (Oct 2009),
we take you in this report through what led to this 74% rise from the Agony of
last Diwali (Oct 2008).

IC ICI
RIL
158% %
156

RCO ONGC
M
154% 108%

i Tat a
art St ee
Bh % 80% l
82

S BI
60%
HDF
C
40%

ITC s
38% Inf o sy
33%

Nandan Chakraborty Sachchidanand Shukla


Head Research Economist
Email: nandan@enam.com Email: sachins@enam.com
Tel: 9122 6754 7601 Tel: 9122 6754 7648

ENAM Research is available on Bloomberg (ENAM <Go>), Reuters.com and Firstcall.com October 2009
India Strategy

We summarize below how & why this 12 month Sensex journey happened:

Top 10 Contributors to Sensex’s Agony to Ecstasy: Arrangements for global hedge fund
74% move of 6408 points ! liquidation/ redemptions completed in Nov 08, marking
CMP CMP U p sid e C o n trib n the market’s Mariana Trench. Next few months of a
O c t-0 9 O c t-0 8 (% ) to rise benumbed & Apathy-filled market period would also see
R IL 2 ,6 0 0 1 ,0 1 6 156% 1 ,7 5 3
IC IC I 800 310 158% 767
the Real operating world embroiled in corrective actions,
ONGC 1 ,3 7 5 660 108% 430 even as we focus on deteriorating fundamentals.
B h a rti 971 534 82% 408
RCOM 491 193 154% 302
SBI 1 ,8 5 0 1 ,1 5 6 60% 279
Q1 of CY 09 insurance purchases of $5 bn, saw a market-
Info sys 1 ,6 5 5 1 ,2 4 9 33% 278 vertigo as it moved from severe undervaluation to a
IT C 220 159 38% 226 stress-case valuation level (8 to 12K). As we entered mid-
HDFC 2 ,2 0 0 1 ,5 7 3 40% 213
T a ta ste e l 321 178 80% 103
CY 09, an invigorating new Govt & global macro
S e n se x 1 5 ,1 0 9 8 ,7 0 1 74% 4757 realignments brought the “West to East” theme into
Prices as on October 24, 2008 & 2009 sharper focus. Markets entered a scattered-buying
“return to Sanity” period. And by Diwali 09, we have
Appendix I provides for each Sensex entered a whole new World-view. Hence, the Price-
30 stock, their market performance Nadir was Nov 2008!
upto Diwali 09, and why I didn’t
buy them in Oct 08 vs what I
feel about them now in Oct 09.
West to East Power shift: With the worst of asset
bubble breaking and credit crisis, the economic global de-
growth, & hence the West’s efforts to monetarily &
Compare this with our narrow fiscally pump-prime the same played out.
vision in Oct 08, of a paltry Sensex
move of 47% – which was reached As the West tried to grapple with Bretton Woods III &
in Mar 09 itself – & the Top 10 various Protectionisms on its own initially, the BRICA
Contributors to that upside: economies responded through counter-intuitive moves eg
CMP Upside Contribn significant currency appreciation, to prevent the West’s
Tgt pr Oct-08 (%) to rise
RIL 1810 1,016 78% 864
chronic disease from resulting in acute economic growth
ICICI 720 310 132% 631 distress in the East. Even as BRICA pumped its own
Bharti 811 534 52% 254 monetary & fiscal stimuli, investors demanded higher
SBI 1740 1,156 50% 231
interest rates & depreciation of OECD currencies !
HDFC 2200 1,573 40% 209
ONGC 977 660 48% 188
HDFC Bk 1310 973 35% 169
MSCI re-balancing: Despite representing ~24% of
Sterlite 597 209 186% 152 world GDP (PPP), Chindia + S Korea’s MSCI World Index
Tata steel 385 178 116% 146 weight was <5% while US enjoyed 42% muscle with
ITC 195 159 22% 131
19% of GDP! – & decreasing ! Global slowdown
Sensex 12,807 8,701 47% 2,974
notwithstanding, will this not change as economic purging
plays out fully and Chindia emerge as largest global
Appendix II provides stock wise growth contributors?
details as we thought back in Oct 08.
Inflexion of India 2010-20+: India will transform the
next decade – just as the US did last mid-century with its
massive Infra creation, & the middle East with its oil
finds (India’s KG Basin…). India would also reach its
demographic inflexion points just as US/ China reached
theirs in the 80s & 90s respectively. This point usually
Appendix III: Chill ! is as
important to your financial well- marks the take-off of consumption to the next scalar
being as footnotes in balance sheets. level, in turn driving more demand for commodities,
manufacturing, infra & services to meet the same.

OCTOBER 2009 ENAM Securities 2


India Strategy

How the Sensex retraced gains

24,000

21,000

18,000 68%

15,000 15109
64%
12,000
180%
9,000
74%
66% 115% 138%
6,000 82%

3,000

OCt-09 -
Jan-93

Jan-94

Jan-95

Jan-96

Jan-97

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09
Source: Bloomberg, ENAM Research

From a feeling of Razlyubit to one of Torchlusspanik !


At Liquidation stages we proceed to project just the next stage in the market cycle. Like, now it’s a Razlyubit
feeling (Russian: “the one I loved once, but don’t anymore”) – but as Columbus said, the following world-is-
round chart starts again from its left, to its acme of Torchlusspanik (German: “fear of being left on the shelf/
the gate closing/ the last chance at hand ….. !!!”)

The Market Cycle

Diwali Oct 09 Diwali Oct 08


Error of optimism

Boom - PE expansion Leading sectors


spreads, - Credit too easy fail, credit
One sector takes widespread - Long term tightens, gen. Money really
off, later entire prosperity, investing ! environment of tight, fear.
Easy credit, Mkt takes off. Mkts rise - Ends in a sudden profits OK, Demand & Easy credit to
slack Sentiment due to shock but PE falls EPS starts try & kick
earnings improves even EARNINGS falling start profits
as EPS
expectations
rise

Apathy Scattered Greed- Envy- Panic Hope Fear & then Apathy
Buying buying buying revulsion

… And the Valuation Cycle


BEAR MARKET BULL MARKET BUBBLE MARKET BEAR MARKET

GARP/ Trading mkt in


Value Momentum Value
Trading mkt Bear Rallies

Dividend Yield Payback Reflexivity Technical Charts Dividend Yield


Price/ BV P/E PE/G Price/ BV
Replacement Cost EV/ EBITDA Option Value Replacement Cost
Tobin’s Q DCF Tobin’s Q
Source: ENAM Research

OCTOBER 2009 ENAM Securities 3


India Strategy

We describe these events over 3 approx phases, ie the Agony of Oct-Dec 08,
the Apathy of Jan-Jul 09 & the stirrings of Ecstasy post-Aug 09

AGONY OF OCT- DEC 2008


Global liquidity surged even as Markets continued to reel under Global hedge fund
liquidation, and Domestic redemptions & insurance slowdown
While the globe shivered due to global demand slackening (US trade linkages), fears on India related
to its growth being vulnerable to continuing liquidity drought, due to its twin deficits.
Even as global Central banks eased liquidity conditions & RBI cut CRR, SLR & Repo rates, India still bore
the brunt of EM equity liquidation, as global Hedge funds closed & liquidated positions.

Liquidity shrank… Calling for rate cuts

2,500 12
(Rs bn) (%)
10
2,000
8
1,500
6
1,000 4
500 2
0 0
Oct-01

Oct-02

Oct-03

Oct-04

Oct-05

Oct-06

Oct-07

Oct-08

Oct-09
Oct-06

Apr-07

Oct-07

Apr-08

Oct-08

Apr-09

Oct-09

Repo Fed ECB BOJ

Source: Enam Research, Bloomberg

Finance ministry doubled FII investment limit in corporate bonds from USD 3 bn to USD 6 bn. Payment
of farm loan waiver amount of Rs. 250 bn released as the first installment to ease liquidity.
SEBI relaxed rules for indirect investments by FIIs through P Notes.
Govt couldn’t get anything substantial passed due to inter-party AND inter-ALLY machinations.

Indian Markets: Distressed Selling – Yet, when else will you invest?
Confidence was at its lowest, even as dividend yield was at its highest. Market cap/ GDP almost halved
from a high of 1.7x. Earnings yield beat bond yields !

Sensex fwd PBR at 1.4x while RoE at ~17% Earnings yield now > 10yr bond !!!

4.0 22 12
11.6
3.5 21
10
20
3.0
19 8
7.8
2.5
18
2.0 6
17
1.5 16 4
Apr-04

Oct-04

Apr-05

Oct-05

Apr-06

Oct-06

Apr-07

Oct-07

Apr-08

Oct-08
Oct-04

Oct-05

Oct-06

Oct-07

Oct-08
Apr-04

Apr-05

Apr-06

Apr-07

Apr-08

PBR (x) -1 STD


+1 STD Mean Earnings yield 10yr bond
ROE (%) - RHS

Source: Enam Research, Bloomberg

OCTOBER 2009 ENAM Securities 4


India Strategy

Oil marketing and fertilizer cos started moving up from bottom as subsidy pressure eases (oil @ 63,
INR@ 48= no under-recoveries on petrol/ diesel) & Govt put pressure on RBI/ PSBs to lend to them.
Even fundamentally sound Indian stocks sank to ridiculous valuations. Market bottom was made in
Nov 08, by HDFC @ 1480 & SBI @ 970 ! Public banks were the only sector which cracked after this
market bottom with news of their realty exposures, etc – they had stood “like a bank” as they say in
India, all thru the FII carnage – FIIs had minimal exposure to PSBs

Something had to give way: Bretton Woods III in mid-Nov 08?


Conventionally, raising interest rates & letting the currency depreciate is the best defense for a central
bank to attract capital flows and fight a slowdown. However, exactly the opposite had been playing out
in the US. Despite aggressive rate cuts and expansion of dollar-denominated liquidity by the US Fed, the
USD continued to strengthen.

Arguments in favour of a strengthening dollar were difficult to sustain: The global supply of the
greenback was upped considerably (~$1.5trn if $700bn bail out plan + Fannie/ Freddie loss
underwriting + bailouts of Bear Sterns & AIG is included). Also, the US fiscal deficit ballooned as a
result of monetization of these losses. Moreover, tax revenues fell in a recession-hit US. Lastly, the
shrinkage of US CAD due to slowing consumption was jeopardized by a strong USD.

Despite economic head winds & falling intt rates, USD was appreciating – how long could this last?

6 1.2
(%) (%)
5 1.1

4 1.0

3 0.9

2 0.8
1.5%
1 0.7

0 0.6
Oct-01

Oct-02

Oct-03

Oct-04

Oct-05

Oct-06

Oct-07

Oct-08

Oct-09

Oct-01

Oct-02

Oct-03

Oct-04

Oct-05

Oct-06

Oct-07

Oct-08
Source: Bloomberg

USA was trying to print its way out of trouble again

The easy money


policy being pursued
in the US had its own
limits and soon hit
the “Zero hour” – a
point beyond which
lower interest rates
lost their incremental
positive effect on US
GDP growth:

Source: Barry Bannister, Stifel Nicolaus

OCTOBER 2009 ENAM Securities 5


India Strategy

Bretton Woods III?: A G20 meeting in the US in Nov 08 was an unprecedented event, where the
current AND the US presidential nominee attended the meeting. The ingredients of tectonic shifts in
power, to Liquidity Providers vs Controllers, had been in place in 2008 itself. Here, Asian, European &
American leaders shed their differences, to sow the seeds of a new world order.
Thus, like all other bubbles the “fantasy of safety” USD bubble finally burst in 2009 !

Source: BCA Research

OCTOBER 2009 ENAM Securities 6


India Strategy

APATHY OF PRE-ELECTION/JAN-JUL 09:


Liquidity surge started to effectuate parts of India Inc.
Populist dole outs infused ~Rs 1200bn in the economy, which started reflecting in consumption (see
chart). Repo cut by another 50 bps by Jan 2009 pushed up lending to critical sectors and thus could
cushion the economy. But this raised the spectre of unleashing the inflation genie. And RBI announced
unwinding of MSS that has to be completed through FY10.

Consumption perks up Fiscal doleouts prop consumption …


Rs/person Rs bn
30
(%) Rural pockets
25
Agri debt waiver 15,000 600
20 NREGS 10,000 160
15 Urban pockets
10 IT exemption

5 ~30mn tax payers 4,000-45,000 130-260


Senior citizens 30,000
0
Women 35,000
May-03

May-04

May-05

May-06

May-07

May-08
Jan-03

Sep-03
Jan-04

Sep-04
Jan-05

Sep-05
Jan-06

Sep-06
Jan-07

Sep-07
Jan-08

Sep-08

~1.6mn out of the tax net 40,000


6th Pay commission 31,000 150
Consumer Goods Capital Goods Total - ~1100-1200
Source: ENAM Research, CMIE

Financial pages of Indian newspapers were trimmed & mostly related to financial bets on the next ruling
party. Stories mostly related to who will dive next. One of the oldest, largest & most stolid Indian
houses, which became hyper-aggressive in the last 3 yrs, was rumoured to be on the brink of default.

Media piled on the agony Crisil downgrades preceded bankruptcies

1,000 1.4
(Nos)
1.3
INDYA TODAY 100
1.2
1.1
1.0
10 0.9
0.8
0.7
1 0.6
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009

Upgrade Downgrade MCR (RHS)

Source: Media sources

New US President unleashes massive tax-breaks & other fiscal pump-priming measures.
RoW kept easing interest rates (their fiscal programs were yet to be unleashed).
INR/USD: While the INR worsened till end CY08 due to hedge fund liquidation, from January 09
onwards, falling commodity prices started showing up on India’s twin deficit woes, and it ended FY 09
at~ Rs 45. The RBI intervened to stop further appreciation as exports were slumping. But meanwhile,
USD was falling v/s other currencies ie Yen & Yuan etc.
Every $10 fall in crude oil shrank our CAD by ~0.4% and the fiscal deficit by 0.25%. Moreover, a ~25%
depreciation in INR from its peak propped export growth. India’s relative growth rate in a slowing world,
along with its demographics, high savings and relatively safer saner banking system started to attract
required capital inflows.

OCTOBER 2009 ENAM Securities 7


India Strategy

Indian Markets: Strange! Refused to fall even as fundamentals worsened !


Quarterly results, especially of Engineering, Infra/ Realty & Private sector financials hit a 5 yr low in
growth. There was a 3rd round of de-rating & stress valuation reports by brokers. However, while some
of these stocks fell, overall markets acted strangely! Sensex refused to fall further on bad news.
Pulped down Value sectors (Cement, PSU banks, Oil OMCs) actually rose, even as Engg/
Realty etc refused to fall further with bad news flow. After dismal Diwali consumption figures,
Rural consumption data perked up as NREGS & debt waiver schemes loaded money into pockets & pre-
election Govt spending began to show itself in the real economy.
Spate of bankruptcies in smaller Realty & Engg cos gathered momentum even as there were rumours,
but no actual acquisitions, completed yet.
Low floating stock & many sub-5 PE cos seen to be constantly on upper circuit. Creeping acquisitions
seen by some cash-rich cos and buy-backs announced by a few.
February 09 saw massive inflows by domestic insurance players & markets touched a new
high, crossing 12K in March. April however, saw a retrace almost back to 10K levels

The world did not stop lending & consuming, it moved on!
Global ‘trust’ started getting restored, with policy intervention on an unprecedented scale.
Developed world saw aggressive monetary easing, eg US interest rates were brought down to close to
Nil ! Financial losses of 5% of global GDP (~$ 54 trn) were absorbed by Global savings (~ US$ 10 trn),
but it left OECD fiscs dangerously out of sync. This led to a big change in cross-currency rates.
The liquidation of inventories of Nov- Dec 08 as banks refused to lend, was reversed in Q1 CY 09. This
led to sharp corrective moves in product prices that had slumped to 30% below marginal production.
Just like financial markets, product prices also recovered from panic-bottoms, but remained subdued.
Analysts stopped the fallacy of forecasting ever-downwards in a cyclical downtrend

East to West Power shifts: Superior macro fundamentals= EMs revert to their structural trend:
Cyclical Deviation from trend GDP growth but reversion to structural trends inevitable

4.0 10
(%)
2.0 8 (%)
6
0.0
4
(2.0)
2
(4.0) 0
1964

1969

1974

1979

1984

1989

1994

1999

2004

2009

1964

1969

1974

1979

1984

1989

1994

1999

2004

2009

Developing countries High-income countries High-income countries Developing countries


Source: World Bank, DECPG.

Exporters of capital

EMs have both Savings & Consumption, while Other China


Countries 21% Japan
the West has Control on deployment of both 13%
Taiwan 21%
– thru asset managers & brand owners 2% Germany
respectively. In time, geo-pol power kept 11%
Sweden
shifting to the East, to reflect eventual
2% Saudi Arabia
unbundling of the same. Eg Sovereign Wealth
6%
Funds continued to favour EMs, eg >50% of Singapore
UAE Russia
their total trades of $27bn were executed in 2%
5%
3%
BRIC and non-OECD countries for the 2nd
Netherland Switzerland
consecutive quarter as of Sept 2008. 3%
Kuwait Norway
3% 4% 4%

Source: Company, ENAM Research

OCTOBER 2009 ENAM Securities 8


India Strategy

THE ECSTASY OF POST ELECTION JUL- OCT 09:


The New Govt’s main imperative was Employment generation. Hence it announced a slew of Infra
projects and massive E&P programs via NELP IV. In order to attract capital flows to enable the same, it
divested PSUs, relaxed FDI limits for insurance & retail, and passed telecom & mining reforms.
Normal Monsoons buoyed demand conditions & improved inflationary outlook.

Inflation tamed!

14
(%)
12
10
8
6
4 `
2
0
Mar-08

Mar-09
Jun-08

Jun-09
Sep-07

Dec-07

Sep-08

Dec-08

Source: ENAM Research, OEA

Even as the OECD fought stagnation with massive Govt programs, Indian growth forecasts, revised
upwards of 7%, stood out starkly. India & China were seen as the biggest contributors to global
growth. And as the world cut rates, and crude & other commodities rose from their abysses of 2008,
India’s Twin Deficit seemed much more under control now than a year back, as the INR dented
their impact and KG Basin flows came in line.
Cash-rich Indian Cos acquired great businesses across US & Europe at distress valuations, RIL acquired
Dow Chem while Sterlite acquired Asarco at just $1 bn, and Oz minerals of Canada.
Record FDI figs for FY09 were released. INR had its sharpest rise in 9 mons. While the USD
still remains the world currency standard, oil is now denominated in Yuan.
The RBI unwound MSS ($41 bn) to prevent pressure on the BoP (lower capital infllows & exports) as
well as on domestic interest rates (higher borrowing requirement to plug the budget deficit). This
substantially eased the liquidity pressures in India.
RBI also intelligently used the Fx reserves to calibrate the exchange rate. And cut Repo, CRR and SLR to
keep local liquidity conditions benign.
Ex-Guv’nor Dr Reddy is to be awarded Padma Vibhushan on Jan 26, 2010 for his foresight in 2007/ 08.

INR rises as FIIs rush in.. ... but DFIs beat them riding on equity demand

8 38 7 (USD bn) 09E 10E


(USD bn) (INR) (USD bn)
6 6 Gross Dom Savings 418 445
40
4 5
Total Fin.l savings : 221 250
42 4
2 Bank deposits 122 138
44 3
0 Eqty/MF* 07 13
2
(2) 46
1 Insurance* 20 23
(4) 48 0 Prov & PF* 22 25
Q1FY07

Q4FY07

Q3FY08

Q2FY09

Q1FY10

Q4FY10

Q1FY08

Q3FY08

Q1FY09

Q3FY09

Q1FY10

Q3FY10

Source: ENAM estimates


* Note: ~ 50% of incremental
insurance money & ~5% of
FII investment (LHS) provident & PF money has been
INR/USD (RHS) moving into equities

Source: ENAM Research, Bloomberg

OCTOBER 2009 ENAM Securities 9


India Strategy

Indian Markets: Kick yourself thrice!


Indian markets crossed a 52 week high even as prospects of global economic peace seemed to be
limping back and India Inc’s Q1 FY 09 quarterly results were disastrous.
LIC was the champion of market performance with its best ever Annual performance. FIIs started
to pour into scalar sectors such as infra/ realty/ media/ pvt sector BFSI.
Pricing power of banks & cash rich companies showed up in latest qtrly results (weaker players were
financially squeezed out). Defensives started faltering at last, off their 52w highs, while Infra/
engg stocks touched 52w highs (with much more to go), with Govt’s infra announcements &
expectations of rising order books. Expectedly, interest rate sensitives out-performed.

Prognosis of Sector rotation now in Oct 09:


In 2007, we had abandoned the concept of Cyclicality, with every sector from Commodities to Engineering
being defined as Secular. Now that we have been knocked down enough to think more rationally, we expect
the sector-rotation over the market cycle to evolve text-book fashion as:

New projects:
Infra/ Realty/ Retail/ Media
Derived demand:
Commodities &
Engineering
Almost defensive:
WC intensives: Telecom/ IT
Manufacturing

Interest sensitives:
Utilities
Banking/ Auto

Currently pulped out


Pillars:
sectors: Cement, OMCs
FMCG, Pharma

Themes for the next decade: As we perform the Muhurat-trading this Diwali, we ask ourselves what will
be the transformational drivers over the next decade, leading to the next cycle’s multi-baggers ! We discuss
that overleaf.

OCTOBER 2009 ENAM Securities 10


India Strategy

India 2010- 20: Energy sufficiency + Infra backbone creation + Demographic J-curve

India will transform the next decade – just as the US did last mid-century with its massive Infra creation,
& the middle East with its oil finds (India’s KG Basin…). India would also reach its demographic
inflexion points, just as US/ China reached theirs in the 80s & 90s respectively. This point usually marks
the take-off of consumption to the next scalar level, in turn driving more demand for commodities,
manufacturing, infra & services to meet the same.

1. Gas supply to jump to ~260 mmscmd by 2012 Enabling huge savings to the economy

FY12E USD bn
Gas replacement 39
FY11E
- Govt subsidy 9
FY10E
- Household fuel savings 4
FY09E - Rest of economy 26
FY08 Gas value chain players 9
- Upstream (E&P) 6
FY07
(mmscmd) - Midstream (Pipeline & LNG terminals) 2
FY06 - Downstream (CGD Networks) 1
Total 48
0 50 100 150 200 250 300

Existing fields RIL-KG Basin Other New Supplies


LNG Supplies CBM

Source: ENAM Research, OEA

2. India’s Infra backbone creation:

Hyderabad Ph-I Mumbai- Ph I


Airports 35 non-metros
Bangalore Ph-I Delhi- Ph I

Power ~50% jump (66,000 MW) in installed


base in 5 yrs !!

Reliance Adani 2015-2016


SEZs 2012-15
DLF 2010-2015
Unitech 2010-2015

GQ 6 laning
Roads NHDP - Ph III

Rural roads NSEW


Corridor

Overall capacity to almost Further capacity increase


Ports double to 800MTin 6 yrs! at all major ports

Freight Corridors
Delhi-Mumbai, Delhi-
Rail Howrah

KG Basin
Energy phase-I

General Elections Commonwealth Games


Other Events National VAT: Revolutionize Consumer industry

2008 2009 2010 2011 2012 2013 2014 2015

Source: ENAM Research; * All projects - estimated year of completion

OCTOBER 2009 ENAM Securities 11


India Strategy

3. India’s Demographic Change: Dependancy Ratio= (Youth+ Elderly)/ Working age group

(%) 2005 2010 2015


When TDR cuts below 50% while Jr
Youth Dependency Ratio (A) 49 45 41 working age population crosses 40% is
Elderly Dependency Ratio (B) 8 8 9 typically when the demographic J curve
Total Dependency Ratio (A+B) 56 53 50 operates, ie consumption growth takes off
Jr.Working Age Population 38 39 40 exponentially. This happened in the US in
the 80s & China in the 90s. And is
- Youth Dependency Ratio= pop <15 yrs/ pop 15 to 64 yrs. expected for India by 2015
- Elderly Dependency Ratio =pop> 65/ pop 15-64 yrs. With India’s heavy bottom pyramid
- Jr Working age population= pop% of age-group 20 to 45 yrs.
characteristic, the effect would be more
accentuated.

Source: NCAER, ENAM Research

As this transformation occurs, industry-specific investment themes can be used to identify sectors/companies
with above-average market growth in the following classes:

LIFESTYLES “INVESTMENT” INFRASTRUCTURE GLOBALIZING

Luxury Goods Financial Services Capital Goods IT/ ITES


Retail Insurance Products Ports, Airports, Rail, Auto Components
Tourism Asset Management Roads, SEZs, etc Engineering goods
Telecom Housing Construction Pharmaceuticals
Media Education Energy; Power Metals / Resources
Healthcare “Shovel providers”

Source: ENAM Research

With this gentle reminder of the structural pillars of the India story for the next decade, we leave you with
our best Diwali wishes

Don’t miss Appendix III: Chill ! for your financial & otherwise well-being !

OCTOBER 2009 ENAM Securities 12


India Strategy

APPENDIX I: SENSEX 30: Note these are NOT our Target Prices! – for which, see next Appendix
CMP CMP Upside Sensex Contribn Why I didn't buy in Expectations underlying
Co name Oct-09 Oct-08 (%) Wtgs to rise Diwali 08 current prices in Nov 09
RIL 2,600 1,016 156% 12.9 1,753 RIL-RNRL gas dispute could Govt increases gas purchase rate to $7,
delay KGD6 gas production; fear Cash rich RIL acquires global distressed
of delay in RPL refinery assets. Drilling success in other
commissioning; Bleak Petchem, exploratory blocks (D3/D4/D9)
Refining segment outlook due to
global slowdown & overcapacity
Infosys 1,655 1,249 33% 9.8 278 Concerns on CY09 IT spend, yet Earnings lower than mkt expectations,
a safer bet due to high cash makes EU acquisition
flow generating busines model
ITC 220 159 38% 6.8 226 A defensive hideout, but Who wants such low growth these days?
Earnings may underperform
L&T 700 779 -10% 6.6 (59) Credit crunch & fall in comm Passes through a rough patch in CY09,
prices may lead to deferral in but transitioning order book.
key infra/ metals expansion
projects, thereby leading to
lower execution & increasing WC

HDFC 2,200 1,573 40% 6.1 213 Conversion of HDFC bank Mortgage business continues to be on a
warrants could put pressure firm foot
Bharti 971 534 82% 5.7 408 Concerns on rising spectrum Tower Co unlocked at > Rs 180 per
charges & no time frame in share. WC fully vendor financed as no
unlocking of tower entity (Rs other global need ex China. Wireless a
181 per share) near duopoly in India. Pace of telecom
reforms to accelerate
HDFC Bank 1,300 973 34% 5.7 166 CBOP assets might see some Continuing the high quality growth
further deterioration
ICICI 800 310 158% 5.6 767 Concerns on further Insurance lists
deterioration in retail asset
quality & slowdown in insurance
SBI 1,850 1,156 60% 5.3 279 Less prone to global crisis, but Consolidates other PSU banks
stock price not fallen enough
ONGC 1,375 660 108% 4.6 430 Falling crude & fixed subsidy Oil costs passed on by new Govt. to
means lower net realization. consumer. Overseas acquisitions by OVL
Stagnant production. Lower supported by Russia/ Gulf nations
profitability for OVL
HUL 280 225 24% 4.0 84 Best defensive hideout, but best Who wants such low growth these days?
may be priced in!
BHEL 1,000 1,092 -8% 3.0 (22) Clients may ask to delay/ defer LT worries despite strong ST visibility
execution due to credit crunch,
leading to earnings
disappointment & higher WC
requirements
Satyam 401 287 40% 3.0 103 Started undercutting, lower Earnings lower than mkt expectations,
employee additions gets acquired by MNC
NTPC 180 131 38% 2.6 85 New tariff policy may reduce A) Visibility enhances from 75 GW to 100
earnings by 7-8% GW by 2017, given its unlevered b/s. B)
Favourable Tariff policy i.e. 16% RoE
and higher incentives. C) Allocated Coal
blocks to supplement higher capacity &
allowed nuke entry, D) Risk: Merger of
inefficient PSUs
RCOM 491 193 154% 2.3 302 Concerns on higher capex Integrated TMT player, unlocked tower,
GlobalCom. Pace of telecom reforms
TCS 835 490 70% 1.9 119 Concerns on CY09 IT spend, Earnings lower than mkt expectations,
selling by Tata group due to makes EU acquisition
TAMO rights issue

Prices as of Oct 24th 2008 & 2009

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India Strategy

… SENSEX 30
CMP CMP Upside Sensex Contribn Why I didn't buy in Expectations underlying
Co name Oct-09 Oct-08 (%) Wtgs to rise Diwali 08 current prices in Nov 09
Tata Power 1,000 625 60% 1.6 82 5GW projects under Acquires fuel/ coal assets abroad,
development besides 5GW thereby enhances visibility. RoE of 4GW
under construction) may not Mundra UMPP up from 12% to 20%+
come up due to difficulty in
raising equity. Co may buy coal
assets overseas at expensive
valuations
Tata steel 321 178 80% 1.5 103 Crash in steel prices and high Most under owned stock. Benefit from
gearing to adversely impact pricing rebound
profitability
Maruti 907 534 70% 1.2 76 Increased competition, unclear New product successes, financing
Suzuki about new products conditions better
Grasim 2,905 1,053 176% 1.2 179 Negative on VSF outlook and Consolidates UltraTech & Group's
cement oversupply concern to Cement assets. Valuations@USD 100 /
impact the profit growth Ton
Wipro 356 235 51% 1.1 50 Concerns on CY09 IT spend, not Earnings lower than mkt expectations,
a broad based management makes EU acquisition
team
M&M 559 287 94% 1.0 79 Tractor demand to be under Transitioning product mix, IPO of
pressure to tight liquidity, VOI subsidiaries successful
eroded due to mkt conditions

Sterlite 595 209 185% 1.0 154 Falling commodity prices could Commodity boom re-starts, listing of
impact profitability power, buys BALCO/ HZL and acquires
global assets
Reliance 1,000 381 162% 0.9 131 Timing of resolution of gas A) Crack in comm. prices in 08 used i to
Infra supply for Rel Power. Execution lock in prices for power equipment
of large project portfolio in a supplies for Rel Power. B) Acquire Skoda
volatile macro environment Power at FAR less than 1x sales. C) Wins
a couple of large Infra projects at IRRs
of 30%+, in an environment where
every one is cash strapped. D) Raises its
stake in Rel Power beyond 50%, so that
it can consolidate with its earnings and
eliminate hold Co discount while
valuations.
Hindalco 133 43 207% 0.9 155 Poor performance of Novelis, Commodity boom re-starts, was severely
falling aluminium prices & high under owned
gearing to adversely impact
profitability
DLF 550 204 170% 0.8 124 Lack of funding from DAL, high Listing of DLF Assets, Residental demand
debtors & borrowing costs & to pick up again, early exit in under
downturn in realty sector construction office segment to PE
investors
Ranbaxy 330 189 75% 0.8 0 Sharp fall in US sales if FDA Out of sensex
issues not resolved soon
ACC 1,050 423 148% 0.8 99 Lack of Holcim's interest & Merges with Ambuja, plus acquires few
cement oversupply concerns to cement cos @ USD 100/ ton valuation
impact profit growth
Tata 300 163 84% 0.7 52 3bn$ Fund raising for JLR + Passes thru a rough patch in CY09, but
Motors aggressive capex in domestic transitioning product mix
biz. Inadequate cashflows
JPA 60 0.7 0 Execution delays across power, Out of sensex
cement & real estate biz,
financial closure on projects not
received
Total 15109 8701 74% 100 6415
Prices as of Oct 24th 2008 & 2009

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India Strategy

Appendix II: Sensex 30: based on target prices


CMP Upside Sensex Contribn EPS (INR) Tgt PE (x)
Co name Tgt pr Oct-08 (%) Wtgs to rise FY09e FY10e FY10e
RIL 1,810 1,016 78% 12.9 864 108 164 11
Infosys 1,406 1,249 13% 9.8 106 100 110 13
ITC 195 159 22% 6.8 131 9 11 18
L&T 927 779 19% 6.6 107 52 59 16
HDFC 2,200 1,573 40% 6.1 209 88 110 20
Bharti 811 534 52% 5.7 254 45 54 15
HDFC Bk 1,310 973 35% 5.7 169 52 67 19
ICICI 720 310 132% 5.6 631 37 46 16
SBI 1,740 1,156 50% 5.3 231 150 176 10
ONGC 977 660 48% 4.6 188 116 105 9
HUL 260 225 16% 4.0 53 11 11 23
BHEL 1,295 1,092 19% 3.0 48 69 80 16
Satyam 272 287 -5% 3.0 (13) 34 38 7
NTPC 188 131 44% 2.6 98 10 11 17
RCOM 301 193 56% 2.3 107 28 34 9
TCS 613 490 25% 1.9 42 58 66 9
Tata Power 780 625 25% 1.6 33 70 77 10
Tata steel 385 178 116% 1.5 146 80 64 6
Maruti Suzuki 697 534 31% 1.2 33 60 65 11
Grasim 2,041 1,053 94% 1.2 94 233 240 9
Wipro 265 235 13% 1.1 12 24 26 10
M&M 576 287 100% 1.0 83 36 38 15
Sterlite 597 209 186% 1.0 152 52 67 9
Reliance Infra 821 381 115% 0.9 92 40 44 19
Hindalco 107 43 147% 0.9 108 14 16 7
DLF 380 204 86% 0.8 62 46 51 7
Ranbaxy NA 189 NA 0.8 0 12 22 NA
ACC 521 423 23% 0.8 15 59 61 9
Tata Motors 300 163 84% 0.7 51 23 26 11
JPA 61 60 2% 0.7 0 6 8 8
Total 12,807 8,701 47% 100 4,104 923 1,071 12

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India Strategy

APPENDIX III: Chill ! : The Ferrari & the Hatchback both stop at the next red light !

It doesn’t matter what we really did this year – the Ferrari & the hatchback were both stopped out at the
next red light !

If I didn’t buy at 18K, I did so at 15K. And if I didn’t at 15, I did at 12. And in either case, I ANGRILY
averaged down, down, down till 9K, or till at some point I was fully invested. Most went in at some point &
then AGAIN at every ALTERNATE (retrospectively) top in the Sensex sequence this year of 21K/ 18/ 15/ 12/
9 …. And if I felt smug at some point for holding cash for whatever time period, saying “am tempted to tell
u …, but I won’t, as I already did”, well, those who held cash the longest got impatient the earliest. Same
difference !

Stock-selection, sector-selection,…. nothing really mattered. As only the very very dumb would have
converted everything into HUL (price 205) in Jan 08 – at its then PE of 26 !!! – read next in small letters – its
225 today at sub-9K!!! Not dumb, actually ABNORMAL people – Mongoloid from birth or something like that –
they will anyway get lucky once in 42 years & keep suffering for each 41 year period – so there !

And. Those who invested elsewhere instead of India, …. Russia, Brazil, whatever, … lost money elsewhere
… even alternative commodities … oil, gold, … So Chill !

Am not finished! Most of those prigs who sat on CASH in 2008, also sat on cash most of 2007 – so imagine
THEIR BOTH years of stress – missing those wonderful rallies, not knowing what to do – the fretting &
fuming. Far more stress than ALL the others who played & kept busy, mentally active, losing money, you
see! Instead these guys, they became Attaccabottonis (Italian: a bore who corners people with sad,
pointless tales) – everyday they woke up feeling the world would end… slapped their kids, tore wings off
butterflies & cheated on their … dogs … not taking them for walks. So these CASH-types got constipation !
whooping cough !!! And piles !!! So, the first Raaga below is dedicated to them, who deserve our pity-most !

STILL not finished! And, and, and, … those who sold all in Jan 07 & left all this investing stuff & retired to a
beach house … they r not safe either ! One day in 2020, they’ll all drown in their sleep in their beach
mansions, ‘coz they aren’t alert anymore … so smug in their wife’s bosom, they haven’t read up, that Global
warming will flood them as the polar caps heat up in anger at their lack of team spirit & camaraderie in Jan
2007 !!!

So chill ! … Ferrari …. hatchback … beach house …. all the same …

Soothing Raagas & what they do for you


To help you chill, we have tabulated below, some of the therapeutic Raagas (Indian musical scales) which
are supposed to evoke chill-out feelings as you listen to them. Do say thank you !!!

Raga How it affects you Hindi song where used


Jaunpuri Resonates parts below the stomach - no, no, meant it Jaan sake to jaan mere man mein chipkar baithe…
cures constipation
Rathipathipriya Helps you have a happy married life: all ill-feelings Does any such song exist?
vanish
Asavari Reduces hypertension Mujhe gale se lagalo bahut udas hun main
Kaafi Remedy for worry, distress and neurotic disorders Bairan neend na aaye
Kalyan Gives motherly comfort & increases confidence Chandansa badan chanchal chitavan
Alhaiya Bilawal Ensures vigour and good health Sare ke sare ga ma ko lekar gaate chale
Bhairav Neutralizes toxins in the body Jaago mohan pyare jaago
Bhoop Filters out ill-effects of lust and anger Dekha ek khvab to yeh silsile hue
Charukesi Rejuvenates mind and helps you adjust to how old you Teri ummeed tera intezaar karte hai
are getting gradually
Desh Gives a sense of freedom, elevates the senses Vande Mataram

OCTOBER 2009 ENAM Securities 16


India Strategy

NOTES

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India Strategy

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