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  • 8/17/2019 Religare Invesco Market Outlook

    1/15

    Equity Market

     Outlook

    Vetri Subramaniam, 

    Chief  Investment

     Officer

     

    December 2015

  • 8/17/2019 Religare Invesco Market Outlook

    2/15

      India’s economic indicators are exhibiting mixed outcomes

      The investment cycle trends have weakened

      India’s twin deficit – Fiscal Deficit and Current account deficit are exhibiting stable trends

      Inflation – Supportive of the RBI’s accommodative stance

      India’s earnings cycle continues to be weak with hope of recovery in FY17

      While visibility of earnings recovery is poor, high degree of operating and financial leverageprovide scope for disproportionate uptick in earnings

      Valuations are at 8% premium to the long term average. It is within our comfort zone (+ or –

    10% of the long term average)

    Equity Market Outlook

    2

  • 8/17/2019 Religare Invesco Market Outlook

    3/15

    India Macro  – Mixed Bag

    3

      India's Index of  Industrial Production (IIP) growth was recorded at ‐3.2% in Nov’15, after hitting 

    a 60

    ‐month

     high

     of 

     9.8%

     in

     Oct’15

      India's December manufacturing PMI dipped below 50 for the first time in over two years, 

    coming in at 49.1 versus 50.3 in November, as both output and new order flows contracted.

    Source: Bloomberg.

    49.1

    ‐3.20%

    44

    46

    48

    50

    52

    54

    56

    58

    60

    ‐6%

    ‐4%

    ‐2%

    0%

    2%

    4%

    6%

    8%

    10%

    12%

    06/11 10/11 02/12 05/12 09/12 12/12 04/13 07/13 11/13 02/14 06/14 09/14 01/15 05/15 08/15 12/15

         M    a    n    u     f    a    c    t    u    r     i    n    g     P

         M     I

         I     I     P     G    r    o    w    t     h

    IIP Growth (%) and PMI

    Manufacturing PMI IIP

  • 8/17/2019 Religare Invesco Market Outlook

    4/15

    India Lead Indicators ‐ Mixed Bag

    Source: Kotak

      Commercial Vehicles Sales Growth, Passenger Vehicles growth and petroleum products consumption growth have recovered

    and report healthy trends whereas all other parameters like Railway Freight Growth, Export Growth, Credit and Deposit Growth,

    2 wheeler growth continue to report weakness

    4

    ‐10.37%

    ‐15%

    ‐10%

    ‐5%

    0%

    5%

    10%

    15%

         A    p    r      ‐     1     0

         J    u     l      ‐     1     0

         N    o    v

          ‐     1     0

         M    a    r      ‐     1     1

         J    u     l      ‐     1     1

         N    o    v

          ‐     1     1

         M    a    r      ‐     1     2

         J    u     l      ‐     1     2

         N    o    v

          ‐     1     2

         M    a    r      ‐     1     3

         J    u     l      ‐     1     3

         N    o    v

          ‐     1     3

         M    a    r      ‐     1     4

         J    u     l      ‐     1     4

         N    o    v

          ‐     1     4

         M    a    r      ‐     1     5

         J    u     l      ‐     1     5

         N    o    v

          ‐     1     5

    Railway Freight Growth

    ‐24.43%

    ‐40%

    ‐20%

    0%

    20%

    40%

    60%

    80%

         A    p    r      ‐     1     0

         J    u     l      ‐     1     0

         N    o    v

          ‐     1     0

         M    a    r      ‐     1     1

         J    u     l      ‐     1     1

         N    o    v

          ‐     1     1

         M    a    r      ‐     1     2

         J    u     l      ‐     1     2

         N    o    v

          ‐     1     2

         M    a    r      ‐     1     3

         J    u     l      ‐     1     3

         N    o    v

          ‐     1     3

         M    a    r      ‐     1     4

         J    u     l      ‐     1     4

         N    o    v

          ‐     1     4

         M    a    r      ‐     1     5

         J    u     l      ‐     1     5

         N    o    v

          ‐     1     5

    Export Growth

    7.03%

    ‐40%

    ‐20%

    0%

    20%

    40%

    60%

    80%

         A    p    r      ‐     1     0

         J    u     l      ‐     1     0

         N    o    v

          ‐     1     0

         M    a    r      ‐     1     1

         J    u     l      ‐     1     1

         N    o    v

          ‐     1     1

         M    a    r      ‐     1     2

         J    u     l      ‐     1     2

         N    o    v

          ‐     1     2

         M    a    r      ‐     1     3

         J    u     l      ‐     1     3

         N    o    v

          ‐     1     3

         M    a    r      ‐     1     4

         J    u     l      ‐     1     4

         N    o    v

          ‐     1     4

         M    a    r      ‐     1     5

         J    u     l      ‐     1     5

         N    o    v

          ‐     1     5

    Commercial Vehicles Sales Growth

    9.79%

    0%

    5%

    10%

    15%

    20%

    25%

    30%

         A    p    r      ‐     1     0

         J    u     l      ‐     1     0

         N    o    v

          ‐     1     0

         M    a    r      ‐     1     1

         J    u     l      ‐     1     1

         N    o    v

          ‐     1     1

         M    a    r      ‐     1     2

         J    u     l      ‐     1     2

         N    o    v

          ‐     1     2

         M    a    r      ‐     1     3

         J    u     l      ‐     1     3

         N    o    v

          ‐     1     3

         M    a    r      ‐     1     4

         J    u     l      ‐     1     4

         N    o    v

          ‐     1     4

         M    a    r      ‐     1     5

         J    u     l      ‐     1     5

         N    o    v

          ‐     1     5

    Credit Growth

  • 8/17/2019 Religare Invesco Market Outlook

    5/15

    India Investment Cycle  ‐ Weakness post 

    initial rebound

    Source: CMIE, Citi

      After initial rebound in first 2 quarters of FY16 new projects announcement fell sharply by 74%

    YoY and 65% qoq in 3q16   For 9 months FY16, new project announcement is down 34% YoY

      Projects under implementation but stalled also continue to inch up by 11% YoY and 3% qoq.

    Quarterly New Project announcements (Rs bn)  – fall from earlier rebound   Projects under implementation but stalled as % of  total O/S Projects

    5

  • 8/17/2019 Religare Invesco Market Outlook

    6/15

    India Twin Deficit ‐ Broadly stable

      Fiscal Deficit increased 46.4% in Nov‐15 vs a decline of  11.5% in Oct ‐15.

      On a trailing 12 month basis fiscal deficit increased to 3.5% of  GDP vs 3.3% in Oct 2015  –

    tracking below the target of  3.9%

      While fiscal deficit is currently tracking the target,  there  might be a 4th quarter challenge due 

    to fall in Nominal GDP and failure to meet divestment targets

      Current account deficit at 1.12% of  GDP remains in comfort zone.

    Source: Bloomberg. Controller General of  Accounts (Government of  India), Morgan Stanley Research6

    ‐1.12%

    ‐6%

    ‐5%

    ‐4%

    ‐3%

    ‐2%

    ‐1%

    0%

         M    a    r      ‐     1     2

         J    u    n

          ‐     1     2

         S    e    p

          ‐     1     2

         D    e    c

          ‐     1     2

         M    a    r      ‐     1     3

         J    u    n

          ‐     1     3

         S    e    p

          ‐     1     3

         D    e    c

          ‐     1     3

         M    a    r      ‐     1     4

         J    u    n

          ‐     1     4

         S    e    p

          ‐     1     4

         D    e    c

          ‐     1     4

         M    a    r      ‐     1     5

         J    u    n

          ‐     1     5

         S    e    p

          ‐     1     5

    Current Account Deficit   Fiscal Deficit (12M Trailing Sum % of  GDP)

  • 8/17/2019 Religare Invesco Market Outlook

    7/15

    Inflation trends support accommodative 

    policy

    Source: Bloomberg7

    6.75%

    6.50%

    7.00%

    7.50%

    8.00%

    8.50%

    9.00%

         J    a    n

          ‐     1     2

         M    a    y

          ‐     1     2

         A    u    g

          ‐     1     2

         N    o    v

          ‐     1     2

         F    e     b

          ‐     1     3

         M    a    y

          ‐     1     3

         A    u    g

          ‐     1     3

         N    o    v

          ‐     1     3

         F    e     b

          ‐     1     4

         M    a    y

          ‐     1     4

         A    u    g

          ‐     1     4

         N    o    v

          ‐     1     4

         F    e     b

          ‐     1     5

         M    a    y

          ‐     1     5

         A    u    g

          ‐     1     5

         N    o    v

          ‐     1     5

    Repo Rate

    5.41%

    3%

    4%

    5%

    6%

    7%

    8%

    9%

    10%

    11%

    12%

         J    a    n

          ‐     1     2

         M    a    y

          ‐     1     2

         A    u    g

          ‐     1     2

         N    o    v

          ‐     1     2

         F    e     b

          ‐     1     3

         M    a    y

          ‐     1     3

         A    u    g

          ‐     1     3

         N    o    v

          ‐     1     3

         F    e     b

          ‐     1     4

         M    a    y

          ‐     1     4

         A    u    g

          ‐     1     4

         N    o    v

          ‐     1     4

         F    e     b

          ‐     1     5

         M    a    y

          ‐     1     5

         A    u    g

          ‐     1     5

         N    o    v

          ‐     1     5

    CPI

      Current CPI of  around 5% remains comfortable

      India may

     achieve

     its

     CPI

     target

     of 

     4%

     earlier

     than

     targeted

     due

     to

     commodity

     tailwinds

      Current demand, Inflation  – interest rate dynamics offer some scope for monetary easing

  • 8/17/2019 Religare Invesco Market Outlook

    8/15

    Earnings Season  – Near term weak but 

    hopes of  a Revival

      Consensus growth expectation of  3Q16E earnings is ‐2% implying a weak earnings season for the 

    upcoming quarter

      However consensus is expecting a strong growth revival from 4Q16E onwards implying FY17E EPS 

    growth of  18%

      Growth expectation for FY17 might be at a risk considering the current trends

    Source: Bloomberg.8

    ‐40%

    30%

    ‐20%

    ‐10%

    0%

    10%

    20%30%

    40%

    50%

    60%

         1    q     1     1

         2    q     1     1

         3    q     1     1

         4    q     1     1

         1    q     1     2

         2    q     1     2

         3    q     1     2

         4    q     1     2

         1    q     1     3

         2    q     1     3

         3    q     1     3

         4    q     1     3

         1    q     1     4

         2    q     1     4

         3    q     1     4

         4    q     1     4

         1    q     1     5

         2    q     1     5

         3    q     1     5

         4    q     1     5

         1    q     1     6

         2    q     1     6

         3    q     1     6     E

    Nifty earning growth and expectation

    9%

    18%

    0%

    5%

    10%

    15%

    20%

    FY16E FY17E

    Nifty earning expectation

  • 8/17/2019 Religare Invesco Market Outlook

    9/15

    Earnings  – Levers for Recovery

      While current earning cycle is weak, there are levers to earnings recovery

      India’s Incorporation’s capacity utilisation is a 6 year low

      Resultantly EBITDA margins are 120 bps lower than average during the period FY09 ‐ FY15

      Interest expense in FY15 forms 26% of  EBIT as compared to 13% in 2010 representing significant 

    financial leverage

      Any cyclical uptick in demand should result into more than proportionate uptick in earnings due 

    to operating and financial leverage

    Source: RBI, IIFL, Capitaline, Religare Invesco AMC Research9

    15.43

    16.48

    15.77

    14.0913.19

    13.05  13.24

    73.93

    77.9077.68

    77.00

    74.50

    73.50

    72.15

    69

    70

    71

    72

    73

    74

    75

    76

    77

    78

    79

    8

    9

    10

    11

    12

    13

    14

    15

    16

    17

    FY09 FY10 FY11 FY12 FY13 FY14 FY15

    Capacity Utilisation vs EBITDA Margin trends

    EBITDA Margins (RHS) CU (LHS)

    13%

    13%

    18%

    21%

    23%

    26%

    5%  5%

    6%   6%

    7%

    7%

    3.00%

    3.50%

    4.00%

    4.50%

    5.00%

    5.50%

    6.00%

    6.50%

    7.00%

    7.50%

    10%

    12%

    14%

    16%

    18%

    20%

    22%

    24%

    26%

    28%

    2010 2011 2012 2013 2014 2015

    Financial Leverage

    Interest Exp/EBIT (LHS)

    Cost of  Borrowing (Interest Expense/Avg Borrowings) (RHS)

  • 8/17/2019 Religare Invesco Market Outlook

    10/15

    Earnings  –ROE’s subdued

      Current ROE’s of  Nifty companies are at a 15 year low and 500 bps below long term average

    Source: Religare Invesco AMC Research, Bloomberg, Data as on 31st December 2015.10

    13

    0

    5

    10

    15

    20

    25

    30

         J    a    n

          ‐     0     1

         M    a    r

          ‐     0     2

         A    p    r

          ‐     0     3

         J    u    n

          ‐     0     4

         A    u    g

          ‐     0     5

         O    c    t

          ‐     0     6

         N    o    v

          ‐     0     7

         J    a    n

          ‐     0     9

         M    a    r

          ‐     1     0

         M    a    y

          ‐     1     1

         J    u    n

          ‐     1     2

         A    u    g

          ‐     1     3

         O    c    t

          ‐     1     4

         D    e    c

          ‐     1     5

    Nifty ROE

  • 8/17/2019 Religare Invesco Market Outlook

    11/15

    Valuations ‐ Premium to Long term Average

      Recent price correction has resulted into meaningful valuation correction despite weak 

    earnings

      Sensex now trades at a 8% premium to its long term trailing 12 months average P/E multiple 

    as compared

     to

     22%

     premium

     in

     March

     2015

    Source: MOSL, Religare Invesco AMC Research, Bloomberg, Data as on 8th January 201611

    17.6x

    21.69x

    5

    10

    15

    20

    25

    30

         J    a    n

          ‐

         1     6

         J    u     l

          ‐

         1     5

         J    a    n

          ‐

         1     5

         J    u     l

          ‐

         1     4

         J    a    n

          ‐

         1     4

         J    u     l

          ‐

         1     3

         J    a    n

          ‐

         1     3

         J    u     l

          ‐

         1     2

         J    a    n

          ‐

         1     2

         J    u     l

          ‐

         1     1

         J    a    n

          ‐

         1     1

         J    u     l

          ‐

         1     0

         J    a    n

          ‐

         1     0

         J    u     l

          ‐

         0     9

         J    a    n

          ‐

         0     9

         J    u     l

          ‐

         0     8

         J    a    n

          ‐

         0     8

         J    u     l

          ‐

         0     7

         J    a    n

          ‐

         0     7

         J    u     l

          ‐

         0     6

         J    a    n

          ‐

         0     6

         J    u     l

          ‐

         0     5

         J    a    n

          ‐

         0     5

         J    u     l

          ‐

         0     4

         J    a    n

          ‐

         0     4

         J    u     l

          ‐

         0     3

         J    a    n

          ‐

         0     3

         J    u     l

          ‐

         0     2

         J    a    n

          ‐

         0     2

         J    u     l

          ‐

         0     1

         J    a    n

          ‐

         0     1

         J    u     l

          ‐

         0     0

         J    a    n

          ‐

         0     0

         J    u     l

          ‐

         9     9

         J    a    n

          ‐

         9     9

         J    u     l

          ‐

         9     8

         J    a    n

          ‐

         9     8

         J    u     l

          ‐

         9     7

         J    a    n

          ‐

         9     7

         J    u     l

          ‐

         9     6

         J    a    n

          ‐

         9     6

         J    u     l

          ‐

         9     5

         J    a    n

          ‐

         9     5

    Sensex PE Ratio (trailing twelve months)

    Average since Jan 95 : 16.3x

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    Relative valuation of  Midcaps

      Midcap Index valuation is currently at a 28% premium to its large cap peer (Nifty), as 

    compared to a long period average of  15% discount

    Source: Religare Invesco AMC Research, Bloomberg, Data as on 31st December 2015.12

    28%

    ‐80%

    ‐60%

    ‐40%

    ‐20%

    0%

    20%

    40%

         J    a    n

          ‐

         0     6

         A    p    r

          ‐

         0     6

         J    u     l

          ‐

         0     6

         O    c    t

          ‐

         0     6

         J    a    n

          ‐

         0     7

         M    a    y

          ‐

         0     7

         A    u    g

          ‐

         0     7

         N    o    v

          ‐

         0     7

         F    e     b

          ‐

         0     8

         J    u    n

          ‐

         0     8

         S    e    p

          ‐

         0     8

         D    e    c

          ‐

         0     8

         M    a    r

          ‐

         0     9

         J    u    n

          ‐

         0     9

         O    c    t

          ‐

         0     9

         J    a    n

          ‐

         1     0

         A    p    r

          ‐

         1     0

         J    u     l

          ‐

         1     0

         N    o    v

          ‐

         1     0

         F    e     b

          ‐

         1     1

         M    a    y

          ‐

         1     1

         A    u    g

          ‐

         1     1

         N    o    v

          ‐

         1     1

         M    a    r

          ‐

         1     2

         J    u    n

          ‐

         1     2

         S    e    p

          ‐

         1     2

         D    e    c

          ‐

         1     2

         A    p    r

          ‐

         1     3

         J    u     l

          ‐

         1     3

         O    c    t

          ‐

         1     3

         J    a    n

          ‐

         1     4

         A    p    r

          ‐

         1     4

         A    u    g

          ‐

         1     4

         N    o    v

          ‐

         1     4

         F    e     b

          ‐

         1     5

         M    a    y

          ‐

         1     5

         A    u    g

          ‐

         1     5

         D    e    c

          ‐

         1     5

         (     D     i    s    c    o    u    n    t     )     /     P    r    e    m     i    u    m

     

    Valuation of  Mid cap v/s Large Caps (trailing twelve months)

    9 Years Average: 15%

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    Market Outlook

      In India macro‐economic parameters like current account deficit, fiscal deficit and inflation

    are in the comfort zone

      Local demand indicators are mixed while global growth is a dampener

      The investment cycle is recovering slower than earlier expectations, but the process of de‐leveraging by companies is now clearly underway

      The Sensex is now trading at a P/E of 17.6x trailing twelve months EPS; an 8% premium to

    long term average (as of January 8, 2016). It has corrected significantly from early 2015

    when it was a premium of nearly 30% to the long term average in. It is within our valuation

    comfort zone (+ or ‐

     10% of long period average)   Earnings growth still remains weak but both operating leverage and financial leverage will

    kick in and support faster profit growth when economic trajectory strengthens

      Sectors such as financials, consumer discretionary and industrials will benefit from cyclical

    recovery in growth. Based on valuations we prefer consumer discretionary and Financials

    over Industrials

      We have added exposures to utilities and global cyclicals due to attractive valuations

      We favour a pro cyclical stance to benefit from a recovery in the economic cycle. But our

    portfolio strategy is focused on bottom up stock picking

    13

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    Disclaimer: This presentation is for information purposes only and is not an offer to sell or a solicitation to buy any mutual fund units/securities. The

    information alone is not sufficient and shouldn’t be used for the development or implementation of an investment strategy. It should not be

    construed as investment advice to any party. All opinions, figures, charts/graphs and data included in this presentation are as on date and are subject

    to change without notice. The sectors referred in this presentation are for illustrative purposes only and should not be construed as

    recommendations from Religare Invesco Asset Management Company Private Limited (Religare Invesco AMC) and/or Religare Invesco Mutual Fund.

    Schemes of Religare Invesco Mutual Fund may or may not have any present or future positions in these sectors. The content of this document is

    intended solely for the use of the addressee. If you are not the addressee or the person responsible for delivering it to the addressee, any disclosure,copying, distribution or any action taken or omitted to be taken in reliance on it is prohibited and may be unlawful. The data used in this presentation

    is obtained by Religare Invesco AMC from the sources which it considers reliable. While utmost care has been exercised while preparing this

    document, Religare Invesco AMC does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages

    arising out of the use of this information. Neither Religare Invesco AMC nor any person connected with it accepts any liability arising from the use of 

    this information. The recipient(s) before acting on any information herein should make his/their own investigation and seek appropriate professional

    advice.

    Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

       M   K   T   G    /

       R  o  u  n   d  u  p   E

      q  u   i   t  y   /   1   2   1   5   /   C   0   3   1   7   7

    Disclaimer

    14

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    Get in touch

    Corporate Office:

    Religare Invesco Asset Management Company Private Limited3rd Floor, GYS Infinity, Paranjpe ‘B’ Scheme, Subhash Road,Vile Parle (E), Mumbai – 400057T +91 22 67310000 F +91 22 28371565

    To invest:Call 1800-209-0007 ∆ sms ‘Invest’ to 56677Invest Online www.religareinvesco.com

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