Jm Financial Mutual Fund

JM Financial Mutual Fund Investor Connect Programme April 2008

Rise and fall of stock markets/prices is guaranteed!

A Basic Reminder • Invest for the Long term • Price of the company will change daily but not the value of the company. It’s the value that finally drives the price. • Do not follow the herd – draw your own path • Be disciplined • Markets in the long run will depend upon a) Macro Factors – Economy b) Corporate India performance

Boom…bang…crash!! Sensex peaks at 21000 levels in Jan 2008

Euphoria Sensex crosses 18000 in Oct 2007

Crash

Belief

(sharp rally of 4000 pts in 1 ½ mths)

Sensex crashes to 15332 on Jan 22 2008 thereby retracing to Aug 2007 levels (within 7 trading sessions of achieving a peak)

Disbelief Se n sex

und er 13 0

00 in

Apr

2007

t ac k a b x e Sens

1500

0

0 Mar 2 n i s l l eve

08

Last Leg for Up Move was backed by - Liquidity - Leverage - Rumour mongering - Huge Retail participation But was not backed by FUNDAMENTALS

2000 - Statistics Feb 2000 – Sensex Peak 5933

Jan 2004 – Sensex Bounce back 6026

% of Stock Fall

% of Stock Rise

> Sensex

> Sensex

Flows

51%

54%

•FIIs – Rs 43 bn

•FIIs – Rs 484 bn

•Domestic –Rs 4 bn

•Domestic – Rs (75) bn

3920 May 2000 – Trough 4 yrs

• Dotcom bubble Source: Bloomberg

Flows

2001 - Statistics Aug 2001 – Sensex Peak 3318

Nov 2001 – Sensex Bounce back 3322

% of Stock Fall

% of Stock Rise

> Sensex

> Sensex

Flows

56%

33%

•FIIs – Rs (4.5) bn

•FIIs – Rs 9.6 bn

•Domestic –Rs 1.1 bn

•Domestic – Rs (10.7) bn

2600 Sep 2001 – Trough 3 months

• September 9 /11 Source: Bloomberg

Flows

2004 - Statistics Apr 2004 – Sensex Peak 5925

Nov 2004 – Sensex Bounce back 5973

% of Stock Fall

% of Stock Rise

> Sensex

> Sensex

Flows

69%

29%

•FIIs – Rs (25) bn

•FIIs – Rs 124 bn

•Domestic –Rs 13.3 bn

•Domestic – Rs (17) bn

4505 May 2004 – Trough 7 months

• NDA government collapsed Source: Bloomberg

Flows

2006 - Statistics May 2006 – Sensex Peak 1261 2 % of Stock Fall > Sensex

Flows

80%

Oct 2006 – Sensex Bounce back 1273

% of Stock Rise > Sensex 34%

6 Flows

•FIIs – Rs (103) bn

•FIIs – Rs 144 bn

•Domestic –Rs 56 bn

•Domestic – Rs 17 bn

8929 Jun 2006 – Trough

•

5 months Concerns that US will raise rates and draw overseas investors away from emerging markets and surging commodity prices will hurt company earnings.

Source: Bloomberg

2008 - Statistics Jan 2008 – Sensex Peak 2081 2 % of Stock Fall > Sensex

Flows

81%

•FIIs – Rs (149) bn •Domestic –Rs 54 bn

1535 7 – Trough Mar 2008 ?? months

• Sub-prime crisis Source: Bloomberg

Sensex Bounce back - ??

2008 Crash – Most Vicious Date

SENSEX INDEX

change

From

To

From

To

%

1

Jan-08

Mar-08

21206

14677

-30.79%

2

Feb-07

Mar-07

14723

12316

-16.35%

3

May-06

Jun-06

12671

8799

-30.56%

4

Apr-04

May-04

5979

4227

-29.30%

Date

BSEMDCAP Index

change

From

To

From

To

%

1

Jan-08

Mar-08

10113

5805

-42.60%

2

Feb-07

Mar-07

6187

5114

-17.34%

3

May-06

Jun-06

6033

3721

-38.32%

4

Apr-04

May-04

2337

1768

-24.35%

Source: Bloomberg

Key Question in Investors Mind

• Is the 2008 stock market crash similar to 2000 crash and would this mark the beginning of the bear market?

2000 v/s 2008 2000-01

*2007-08

35x

16x

Savings (as a % of GDP)

23.7%

34.7%

Investments (as a % of GDP)

24.3%

35.9%

GDP growth

4.35%

8.73%

Inflation

7.16%

4.21%

Earnings growth

4.43%

17-20%

Fwd P/E ratio

Other comparisons: • Only driver of markets in 2000 was the TMT sector • Rally & the crash now much more broad based • Tata Motors, Tata Steel, M&M making losses in 2000 • IT cos much stronger and much bigger * estimates

Corporate Profits Surpass Index Growth Date

Sensex

Agg BSE 500 Net Profit (Rs Crs)

Apr-98

3993

33755

Apr-99

3519

31101

Apr-00

5053

37019

Apr-01

3566

45487

Apr-02

3506

45371

Apr-03

3117

70028

Apr-04

5788

90077

Apr-05

6604

119719

Apr-06

11747

136909

Apr-07

12455

195769

Mar-08

16217

254500

10 yr growth

4.1 times

7.5 times

10 year data reveals that …. Source: Bloomberg; Edelwiess

…profits in the broader market have grown faster than the Sensex

Consistent Earning Growth EPS

Growth (%)

Sensex

Sensex growth

FY98

247.0

6.9

3,969.6

15.8%

FY99

240.5

(2.6)

3,686.3

-7.1%

FY00

274.4

14.1

5,001.3

35.7%

FY01

235.8

(14.1)

3,604.4

-27.9%

FY02

251.3

6.6

3,500.2

-2.9%

FY03

293.7

16.9

3,081.0

-12.0%

FY04

354.1

20.6

5,740.9

86.3%

FY05

435.7

23.1

6,605.0

15.1%

FY06

478.4

9.8

11,280.0

70.8%

FY07

653.3

36.6

13,072.1

15.9%

FY08

865.0

32.4

15,800.0

20.9%

FY09E

1,012.1

17.0

?

?

• Indian corporates have been delivering consistent growth for last 5-6 years • Markets have been rising from levels to 1200 in Fy01 to 4900 in Fy08 at a CAGR of 20% p.a. • In FY07 and FY08; Sensex has grown slower than the Sensex EPS growth; thereby anticipating a slowdown in future earnings • As the growth outlook improved; Sensex likely to give disproportionate returns Source: Bloomberg; Edelwiess

Economic Fundamentals - Robust Real GDP

Inflation

Investments as a % of GDP

Savings as a % of GDP

% Y-o-Y

% Y-o-Y

%

%

1997-98

4.30

4.40

25.3

23.80

1998-99

6.68

5.95

23.3

22.26

1999-00

6.44

3.27

25.9

24.81

2000-01

4.35

7.16

24.3

23.74

2001-02

5.81

3.60

22.8

23.47

2002-03

3.84

3.41

25.2

26.40

2003-04

8.52

5.46

28.2

29.81

2004-05

7.45

6.48

32.2

31.77

2005-06

9.40

4.38

35.5

34.28

2006-07

9.62

5.42

35.9

34.77

2007-08

8.73

4.21

36.3 *

35.05*

Source: CSO, CMIE, RBI, Edelweiss, * estimates

• Economic fundamentals have been robust and key metrics have consistently improved • Current level of Saving and investments can sustain 8% growth

Is There Enough Liquidity? • • • • •

Record US$100bn of outflows from global equity funds, 80% of which pertains to developed markets, 20% to emerging markets Taiwan, Russia, Middle East, Africa are the only market-funds that saw inflows Money is moving to money market funds that saw inflows of US$140bn. MM funds have ballooned to US$3.5trn in the US. A lot of money is thus now on the sidelines; these will flow into riskier assets once climate improves Commodity funds saw inflows of US$3bn, 3x YoY. There is over-heating here, commodities look very vulnerable More than 50% of the 25-top US mutual funds have seen outflows in their equity funds

• The above statistics show that the risk aversion is at a peak in equities • Liquidity is ample but there seems to crisis of confidence • Commodities cooling will release liquidity into oversold equity markets

The Crash and Carnage was backed by - Low Liquidity - Heavy Shorting/hedging activity - Rumour mongering - Problems with US financial system But again driven more by fear than only fundamentals

Fundamentals are still strong

Where can the Sensex go? FY2009

FY2010

FY2011

FY2012

FY2013

FY2014

FY2015

FY2016

FY2017

FY2018

EPS growth

20

20

20

17

17

17

15

15

15

12

Sensex EPS

1010

1212

1454

1702

1991

2329

2679

3081

3543

3968

12

12120

14544

17453

20420

23891

27953

32146

36967

42512

47614

13

13130

15756

18907

22121

25882

30282

34824

40048

46055

51582

14

14140

16968

20362

23823

27873

32611

37503

43129

49598

55550

15

15150

18180

21816

25525

29864

34941

40182

46209

53141

59517

16

16160

19392

23270

27226

31855

37270

42861

49290

56683

63485

17

17170

20604

24725

28928

33846

39600

45539

52370

60226

67453

18

18180

21816

26179

30630

35837

41929

48218

55451

63769

71421

19

19190

23028

27634

32331

37828

44258

50897

58532

67311

75389

20

20200

24240

29088

34033

39819

46588

53576

61612

70854

79357

21

21210

25452

30542

35735

41809

48917

56255

64693

74397

83324

22

22220

26664

31997

37436

43800

51246

58933

67773

77940

87292

P/E

Pls note: the above calculations are based on hypothetical assumptions about the EPS growth rate and the P/E ratio

JM Financial Mutual Fund

Technical Analysis

Technical View - Crude oil

•The crude oil prices are looking heavily overbought on the charts •The most likely scenario is a correction to USD 90 levels •A breach of this level is likely to take crude oil to USD 80 levels •Crude oil would lead the fall in other industrial metals and gold Source: Reuters

Technical View - BSE 500

•The BSE 500 index has climbed back after breaching the long term support line in early March •A move above the trend line will indicate that the long term trend remains intact Source: Reuters

Technical View - BSE Midcap

•The BSE Midcap index has breached the long term trend line thrice over the last three years •Typically this happens during times of panic •The index is looking oversold in term of stochastics •The index should bounce back over the long term trend line over the next three weeks Source: Reuters

Technical View - MSCI Emerging Markets Index

•The Morgan Stanley emerging markets index is showing the formation of a double bottom on the charts •This reflects that the index might have bottomed out in the near term Source: Reuters

Technical View - BSE Sensex Index

•The long term chart of the sensex reflects that the index has been able to come back into the long term channel •As long as this index remains in the channel the positive trend will remain intact and the index should rally to the upper end of the channel over the next few weeks

Source: Reuters

Higher September - Way to go? Sensex Values Year

31-Mar

30-Sep

growth

2003

3,049

4,453

46.1%

2004

5,591

5,584

-0.1%

2005

6,493

8,634

33.0%

2006

11,280

12,454

10.4%

2007

13,072

17,291

32.3%

Source: Bloomberg; Edelwiess

Key Statistics - JM Schemes JM ELF

JM Basic

JM HIFI

JM Equity

BSE Sensex

P/E ratio (FY09)

10.8x

12.4x

10.4

13.6x

15.3

Profit growth (FY09)

65.0%

51.7%

40%

38.5%

17.0%

Source: JM Financial MF research

Synopsis • Indian markets are cheap and trading below fair value • Indian markets can move up by 20% in the next 3-4 months • Subsequently, markets will be driven by movements in commodity prices and RBI’s credit and monetary measures • Q1 results in developed economies should bring out the most of the losses in the balance sheets of the global financial majors. • Thus we believe that the worst of the sub-prime crisis will be behind us post the Q1 results • There is no change in the long term trend of the market

JM Financial Mutual Fund

Thank You !!