Equity Markets Review

Underperformance of Largecaps creates an opportunity

600
NSE 100

500 NSE Midcap

400

300

Nifty Midcap Index : 134%

200 Nifty 100 Index : 86%
From Jan-2014 to 30-July-2018
(Absolute Returns)
100

0
05 07 08 09 10 12 13 14 15 17 18

Large caps have underperformed midcaps in last few years due to weak NIFTY EPS growth (Slide 8), however improving
prospects of NIFTY EPS growth (Slide 9) provide an opportunity in Largecaps

Source: Bloomberg
Disclaimer: Midcap refers to NIFTY Midcap 100 . Largecap refers to NIFTY 100. Past performance may or may not be sustained in the future. Historical performance indications and
financial market scenarios are not the reliable indicator for current or future performance
 Why did Largecaps underperform ?

NIFTY EPS
FY13 FY14 FY15 FY16 FY17 FY18
Weak EPS growth of NIFTY (3.5% CAGR between FY13 and FY18) CAGR 13-18
NIFTY EPS 377 410 398 384 439 448
is the key reason why largecaps underperformed 3.5
Growth % 8.8 -2.9 -3.5 14.4 2.0

Reasons for weak NIFTY EPS growth

Metals & Mining

Low prices in China and rest of World

Low demand growth & large imports in India

Corporate Banks & Financials

Significant increase in stress in steel, power & infrasectors

Higher provisioning on NPAs impacting profitability sharply

Utilities

Change in CERC (Central Electricity Regulatory Commission) regulations

Source: Kotak Institutional Equities

Historical performance indications and financial market scenarios are not the reliable indicator for current or future performance. The data/statistics are given to explain general market trends
in the securities market based on information already available in publicly accessible media and the same should not be construed as investment advice or as any research report/research
recommendation.
Why Largecaps now ? NIFTY EPS growth is coming back strongly

NIFTY EPS NIFTY EPS growth of 22%

FY18 FY19E FY20E
CAGR 18-20E CAGR expected between
NIFTY EPS 448 524 668 FY18 and FY20
22.1
Growth % 2.0 16.9 27.5

Profit growth is driven by following sectors

Metals and Mining

• Higher prices led by MIP (Minimum Import Price) in steel and higher global prices across metals.

• Growing Infra / Housing spends / improving volume growth

Corporate Banks & Financials

• Recognition phase of NPAs is largely over

• With falling slippages and increasing resolution of NPAs provisioning costs are expected to fallsharply

Utilities

• Capacity led growth

Interestingly, most of the sectors that witnessed weak profit growth / declining profits are the ones expected to
witness healthy growth going ahead

Source: Kotak Institutional Equities, E - Estimates

The data/statistics are given to explain general market trends in the securities market based on information already available in publicly accessible media and the same should not be construed as
investment advice or as any research report/research recommendation. HDFC Mutual Fund/AMC is not guaranteeing any returns on investments made in this Fund. In view of the individual
circumstances and risk profile, each investor is advised to consult his / her professional advisor before making a decision to invest in the Scheme. Sectors referred above are illustrative and are not
recommended by HDFC Mutual Fund/AMC. The Fund may or may not have any present or future positions in these sectors.
 Indian Economy : Strong fundamentals, improving growth outlook

Improving macros FY13 FY14 FY15 FY16 FY17 FY18 FY19E

GDP at market price (% YoY) 5.5 6.4 7.5 8 7.1 6.7 7.5

Centre's fiscal deficit (% GDP) 4.8 4.4 4.1 3.9 3.7 3.5 3.5

Current Account Deficit (CAD) (% GDP) 4.7 1.7 1.3 1.1 0.7 1.9 2.8

Net FDI (% of GDP) 1.1 1.2 1.5 1.7 1.6 1.2 1.1

Consumer Price Inflation (CPI) (Average) 9.9 9.4 6 4.9 4.5 3.6 4.4
7.8 -
India 10 year Gsec Yield % (at yearend) 7.9 8.8 7.8 7.6 6.8 7.6
Current
Source: CEIC, Kotak Institutional Equities; Economic Survey, E-Estimates

• GST is stabilising, impact of GST and demonetisation on growth in now behind

Capacity utilization is improving Credit growth in double digits continues to outpace deposit growth

Source: RBI

Source: RBI RBI expects GDP growth of 7.4% and 7.7% in FY19 and FY20 respectively vs 6.6% in FY18
India’s External situation – Stable, despite some deterioration

Situation 5 years back Outlier year Current situation

Comment
% GDP FY12 FY13 FY14 FY17 FY18 FY19E

Current account deficit -4.3% -4.8% -1.7% -0.7% -1.9% -2.8% CAD widening but significantly lower than FY13

Net Oil imports / Crude ($/barrel) 5.4% / 114 5.6% / 110 5.5% / 108 2.4% / 49 2.7% / 58 3.6% / 72.5 Oil imports much lower than around 5.5% in FY12-FY14

Gold imports 3.1% 2.9% 1.5% 1.2% 1.3% 1.2% Gold imports continue to moderate

Non-oil-non-gold Trade Deficit -2.1% -2.4% -1.1% -1.6% -2.3% -2.3% Excludes services

Net FDI flows / (US$ bn) 1.2% / 22 1.1% / 20 1.2% / 22 1.6% / 36 1.2% / 30 1.1% / 30 FDI flows continue to remain strong

FII flows / (US$ bn) 0.9% / 17 1.5% / 27 0.3% / 5 0.3% / 8 0.8% / 22 -0.4% / -10 Includes Equity and Debt flows

Balance of payment (BoP) -0.7% 0.2% 0.8% 0.9% 1.7% -0.9% * BoP adjusted for NRI deposits & Banking capital was around -1% in FY14

Forex reserves (US$ bn) 294 292 304 370 424 401 * Forex cover at 9.9 months is higher than 6.7 months in 2013

* As on 10th August, 2018, Forex cover = Forex Reserve / Average Monthly Imports in past 12 months

FY17 was an outlier year

External situation is stable and better than in FY12 / FY13

Oil prices / FII flows (Debt and Equity) are key variables

Source: CMIE, CEIC, Kotak Institutional Equities estimates

Stable macro, improving micro

Last 5 years were characterized by improving macro and weak micro

Next few years should be characterized by stable macro and improving micro

Micro : The worst is behind, strong improvement ahead

NIFTY EPS NIFTY EPS

FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E
CAGR 13-18 CAGR 18-20E

NIFTY EPS 377 410 398 384 439 448 524 668
3.5 22.1
Growth % 8.8 -2.9 -3.5 14.4 2.0 16.9 27.5

Source: Kotak Institutional Equities

Stable Macro
• India’s basket for crude ended July at USD 74 vs FY18 average of USD 56, this is likely to result in some deterioration in current account
deficit, inflation etc.

• However, growth is expected to improve. RBI expects GDP growth of 7.4% and 7.7% in FY19 and FY20 respectively vs 6.6% in FY18
• US interest rates, geo political developments, rising crude oil prices, global capital flows are key variables

Source: Bloomberg
 Equity Markets Outlook – Strong earnings growth in FY19 / FY20

India market cap to GDP ratio, calendar year-ends 2005-20E (%)

• Earnings outlook is improving with improvement in operating margins, peaking NPA’s and higher steel prices

• Successful resolution in NCLT will positively impact banks, private capex and steel etc.

• Markets are trading at CY19(e) p/e of ~17x, which is reasonable, especially given improving earnings outlook

• Global developments, sharp increase in US rates, sharp deterioration in local / FII flows, setback to NCLT etc. can lead to increased volatility

Marketcap to GDP at 66% is attractive, specially at time when NIFTY EPS growth is estimated at 22% CAGR over FY18-20E

Data Source: Kotak Institutional Equities, updated till 31st July, 2018, Market Cap to GDP for 2018E and 2019E are based on current market cap to GDP and GDP estimate by Kotak Institutional Equities. The data/statistics
are given to explain general market trends in the securities market and the same should not be construed as investment advice or as any research report/research recommendation. HDFC Mutual Fund/AMC is not
guaranteeing any returns on investments made in this Fund. In view of the individual circumstances and risk profile, each investor is advised to consult his / her professional advisor before making a decision to invest
in the Scheme.
 Year Ending BSE S&P Sensex** 1 year absolute returns
Worried about elections ? Mar-79 100
Mar-80 129 29
Mar-81 173 35
Mar-82 218 26
Mar-83 212 -3
Elections and equity returns Mar-84
Mar-85
245
354
16
44
Mar-86 574 62
Spot the pattern* ! Mar-87 510 -11
Mar-88 398 -22
Mar-89 714 79
Mar-90 781 9
Mar-91 1168 50
Mar-92 4285 267
Represents year of elections
Mar-93 2281 -47
Mar-94 3779 66
*As can be noticed there is no pattern in Sensex returns during the Mar-95 3261 -14
year in which elections were held or in years before or after the Mar-96 3367 3
elections Mar-97 3361 0
Mar-98 3893 16
**The base year of Sensex is 1978-79 and the base value is 100 Mar-99 3740 -4
Mar-00 5001 34
Mar-01 3604 -28
Source: Sensex : www.bseindia.com, Election Commission of India for election Mar-02 3469 -4
years, Returns computation internal Mar-03 3049 -12
Mar-04 5591 83
Mar-05 6493 16
Mar-06 11280 74
Mar-07 13072 16
Mar-08 15644 20
Mar-09 9709 -38
Mar-10 17528 81
Mar-11 19445 11
Mar-12 17404 -10
Mar-13 18836 8
Mar-14 22386 19
Mar-15 27957 25
Mar-16 25342 -9
Mar-17 29621 17
Mar-18 32969 11