Market Outlook

Market Outlook

There is not only a crisis of credit but there is a crisis of confidence as well. The kind of economic situation we are in is unprecedented since we saw in early part of the last century. In times like this, historical records are broken and new ones are created. So, it might be ridiculous to make opinion on the basis of past events. But we may attempt to gauge up the underlying situation. As they say extraordinary problems require extraordinary solutions. And that we see in the depth and scale at which governments and regulatory bodies are taking steps. To what extent they will be effective only time will tell. Economic conditions at this juncture are very uncertain and unpredictable and the direction of the future will depend much on the future events. In this backdrop we try to figure out how the stock markets are going to behave in the next few quarters. After three years of over 9% GDP growth, India’s growth rate is expected to moderate to a level between 6.5-7.5% in the current fiscal. The World Bank has already revised China’s GDP growth to 7.5% from earlier 8.5% against previous years’ double digit growth. Though we are domestic economy and we can grow on our own unlike China which contributes over 8.9% of world exports against ours 1%. Still, our export will be affected badly as developed economies like the US, Europe and Japan to whom we mainly export, are in recession. Sectors that are likely to take big hit are IT, jewellery and gems, textiles among others. Even emerging markets in Asia region are experiencing slowdown. We are likely to see decent growth in top lines of India Inc but growth in their bottom lines will be muted. Already there is expectation that the many frontliners will report single digit growth in net profit. Even in FY10, picture is not rosy. The severity of the current economic crisis is not known and everybody is groping and indulging in wild guesses. How the markets will move will much depend on future triggers like corporate earnings, FIIs flows, global cues and political situation. Though RBI has taken steps to ease the liquidity crunch by cutting rates and more are in the offing, and opening other windows such as ECBs. But considering the faltering risk appetite and credit situations, it will be very difficult for corporate India to raise money. FIIs’ return to the Indian equities is necessary for them to bounce back. When the markets will bottom out? We believe markets will bottom out by the end of this fiscal. However, we are likely to see a long consolidation period which may last for 18 months. Some experts argue that we are about half-way between a smaller bottom and a mega-bottom. They expect a further correction of 21-25% correction for S&P500 and Dow and predicting them to test levels as low as of 700 and 6,500 respectively. From that yardstick, Sensex may test 6,800-7,200 levels. The good news is that after both mega-bottoms in the 1974 and 1982, the stock market promptly returned at least 60% in the next 9 months. But will that happen this time in 9 months or 18 months is anybody’s guess. What level the Sensex will be at by the end of FY09 and FY10? Despite the fact that we are second fastest growing economy our economy is not insulated. Indian stock markets move in tandem with its global peers. On estimated Sensex EPS of 900 and a PE of 8x (the most pessimistic approach; Sensex has never traded below a PE of 8x) we see Sensex at 7,200. A more optimistic level of 10,800 can be seen at PE of 12x). Our sense is that the Sensex will trade range bound till March 2008 in between 7,000-9,500 while Nifty will gyrate between 2000-2900 in the above said period. By the end of FY2010, we see Sensex touching 15120 at PE of 15x.

Deepak Tiwari Research Analyst [email protected] T: + 91 22 4063 3032

Dec 1, 2008

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Since January’s peak, Sensex has lost over 57%. In the last one month itself it has lost over 15%. Stocks across the sector have been the victims of global turmoil. The kind of volatility is seen these days are unparalleled as captured by India VIX data which has been continuously rising; it has surged to 65.6 from 24.2 since May 2008. FIIs are incessantly cash out from the Indian equities in order to make up for the losses incurred back home. The recent trend is that both the FIIs and Domestic Institutions are net sellers while retail investors are holding the fall to some extent. In last one month, FIIs stood net sellers with Rs. 6,462 crore followed by DIIs with Rs. 135 crore. Retail investors on the other hand, were net buyers with Rs. 2,520 crore. Volumes in both cash as well derivatives segments are declining rapidly. The average cash turnover of Rs 5,049 on BSE and Rs 12166 crore on NSE respectively since May 2008 has continuously been declining. During last one month it was Rs. 3701 crore and Rs 9751 crore on BSE and NSE respectively. A similar trend is witnessed in derivatives segment on NSE as well save spikes during expiry days. What good is happening? 

Inflation and prices of commodities including crude have drastically declined in the couple of months leaving enough room for the RBI to take steps to stimulate the economic growth.



Interest rates are likely to come down soon which will generate liquidity and boost demand.

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Government’s stimulus plans like increased spending, tax cuts and priority on infrastructure funding will shore up the growth.

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Domestic institutions that are sitting on the huge cash, will aggressively invest soon.

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Due to cooling off crude prices and start of gas flows from new blocks such as Jharia block in Jharkhand and D6 gas block in the eastern offshore KG Basin will improve fiscal position.

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Real estate prices are likely to correct sharply as demand weakens. We expect at least 2025% correction in property prices which have gone up almost thrice in most markets in the past five years.

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At rock bottom prices there are huge opportunities for investors with long term horizon.

What is bad for the markets?

Dec 1, 2008

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Capital requirements for expansion particularly imported capital (such as ECBs), will take a hit due to global credit crunch, increased risk aversion and increased cost funds.

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Tepid corporate earnings are expected in coming quarters as slowdown fears loom large. The bottom line growth is likely to hit single digit.

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FIIs flow is unlikely to resume in near term thanks to increased risk aversion and high volatility in rupee. A weak rupee and expectation of poor corporate earnings are other main reasons of capital flight. We expect FIIs exodus will continue at least till December end. Post the year end when new allocations happen in January, some of them may return to the Indian bourses but it is too early to say that by that time risk appetite will resume.



Economic data will decide the future direction of the markets such as IIP, corporate earnings, quarterly GDP growth, export growth etc.

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Depreciating rupee will increase the cost of import which will further hit the expansion plans of India inc. As per recent reports, in the last H1 FY09, 92 projects amounting to Rs. 76,529 crore have been shelved hitherto.



Exports to take a big hit. The IMF expects the world trade growth to decline to 4.1% in the current fiscal against 4.9% a year ago. The growth rate was 7.2% in 2007 which shows imminent slowdown. Developed economies are in recession. India’s biggest trade partner, China’s growth has been scaled down significantly from double digit to 7.5% this fiscal. It will force India to focus on Asian markets but these markets cannot make up for developed markets. Needless to mention that this will hit India’s exports which is evident by October’s figures. Exports grew at 15% in October and this is the lowest growth rate in five years. During April-September export grew at the rate of 30.8%, and 21. 9% during April-October. Sectors that will be badly affected by the current economic crisis will be IT and ITES, gems and jewellery, automobile parts, textile and capital goods. Seven key export segments— textiles, apparel, gems and jewellery, diamonds, brassware, handicraft and leather—all are

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reeling under recessionary trends. 

Tax collections have already taken a big hit thanks to slowdown in the production and demand. Excise collections in October dipped by 8.7%, after a 3.8% dip in September. However, net direct tax collections during April-October this fiscal stood at Rs.1.67 trillion, up from Rs.1.29 trillion, registering a growth of 29.5%. Growth in corporate taxes was 33.5%, while personal income tax grew at 23.1%. Any tax cut will further widen fiscal deficit which is a major concerns for the overseas investors.

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Terrorist attacks like we recently saw in Mumbai, the financial capital of the country, will dent the India’s image of a safe investment destination and expose its vulnerability to such attacks. In short term it will affect sectors like hospitality and tourism.

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In the first half of the next year, India will go for election and thus we cannot expect any major policy reform and announcement. Further, a hung parliament will increase the political uncertainty and markets will respond to that in the similar fashion.

When the markets will bottom out? Stock market is a discounting mechanism. When the stock market recovers, normally the economy will follow in six to nine months. All the bad news has already been discounted into the current stock prices and unless markets encounter some unexpected shocking news, we believe markets will bottom out by the end of this fiscal. However, we are likely to see a long consolidation period. Some experts argue that we are about half-way between a smaller bottom and a mega-bottom. They expect a further correction of 21-25% correction for S&P500 and Dow and predicting them to test levels as low as of 700 and 6,500. From that yardstick, Sensex may test 6,800-7,200 levels. The good news is that after both mega-bottoms in the 1974 and 1982, the stock market promptly returned at least 60% in the next 9 months. This also happened after the 1932 bottom within the Great Depression. So, can we expect such sparkles in the next year end? It’s anybody’s guess. But it must be worth to mention that the time period between bottoms can be irregular, sometimes, with over a decade passing between them. The deepest correction took place in 1974 and 1982. Our expectation is that we are likely to see a long consolidation period which may last for 18 months. What level the Sensex will be at by the end of FY09 and FY10? "We know what we are, but we know not what we may become" William Shakespeare said. Meaning thereby future is very uncertain and unpredictable. Despite the fact that we are second fastest growing economy our economy is not insulated. Indian stock markets move in tandem with its global peers. On estimated Sensex EPS of 900 and a PE of 8x (the most pessimistic approach; Sensex has never traded below a PE of 8x) we see Sensex at 7,200. A more optimistic level of 10,800 can be seen at PE of 12x). Our sense is that the Sensex will trade range bound till March 2008 in between 7,000-9,500 while Nifty will gyrate between 2000-2900 in the above said period. By the end of FY2010, we see Sensex touching 15120 at PE of 15x.

FY

2008

PE

20.11

9.9

8

12

15

15

778

878

900

900

900

1008

15644

8696

7200

10800

13500

15120

EPS Sensex

Dec 1, 2008

Today

2009E

For Private Circulation only

2010E

3

Sensex Cash Turnover in Rs. crore since May 2008

NSE Cash Turnover in Rs. crore since May 2008 25000

8000 Sensex Cash

5d avg

NSE Cash

5d avg

7000 20000 6000

5000 15000 4000

3000

10000

2000 5000

1000

0

2-May 12-May 21-May 29-May 6-Jun 16-Jun 24-Jun 2-Jul 10-Jul 18-Jul 28-Jul 5-Aug 13-Aug 22-Aug 1-Sep 10-Sep 18-Sep 26-Sep 7-Oct 16-Oct 24-Oct 5-Nov 13-Nov

19-Nov 11-Nov 3-Nov 22-Oct 14-Oct 3-Oct 24-Sep 16-Sep 8-Sep 28-Aug 20-Aug 11-Aug 1-Aug 24-Jul 16-Jul 8-Jul 30-Jun 20-Jun 12-Jun 4-Jun 27-May 16-May 8-May

Total Cash Turnover in Rs. crore since May 2008

0

Derivatives Turnover in Rs. crore since May 2008

30000

90000 Total Cash Turnover

NSE Derivatives

5d avg

5d avg

80000 25000 70000 20000

60000

50000 15000 40000 10000

30000

20000 5000 10000

Dec 1, 2008

0 2-May 12-May 21-May 29-May 6-Jun 16-Jun 24-Jun 2-Jul 10-Jul 18-Jul 28-Jul 5-Aug 13-Aug 22-Aug 1-Sep 10-Sep 18-Sep 26-Sep 7-Oct 16-Oct 24-Oct 5-Nov 13-Nov

2-May 12-May 21-May 29-May 6-Jun 16-Jun 24-Jun 2-Jul 10-Jul 18-Jul 28-Jul 5-Aug 13-Aug 22-Aug 1-Sep 10-Sep 18-Sep 26-Sep 7-Oct 16-Oct 24-Oct 5-Nov 13-Nov

0

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4

14000 6000

12000 5000

0 0

20000 6000

0

0

5d avg NSE Derivatives

5d avg NSE Cash

20-Nov 19-Nov 18-Nov 17-Nov 14-Nov 13-Nov 12-Nov 11-Nov 10-Nov 7-Nov 6-Nov 5-Nov 4-Nov 3-Nov 31-Oct 29-Oct 27-Oct 24-Oct 23-Oct 22-Oct 21-Oct

20-Nov 19-Nov 18-Nov 17-Nov 14-Nov 13-Nov 12-Nov 11-Nov 10-Nov 7-Nov 6-Nov 5-Nov 4-Nov 3-Nov 31-Oct 29-Oct 27-Oct 24-Oct 23-Oct 22-Oct 21-Oct

5

For Private Circulation only

Dec 1, 2008

20-Nov 19-Nov 18-Nov 17-Nov 14-Nov 13-Nov 12-Nov 11-Nov 10-Nov 7-Nov 6-Nov 5-Nov 4-Nov 3-Nov 31-Oct 29-Oct 27-Oct 24-Oct 23-Oct 22-Oct 21-Oct

20-Nov 19-Nov 18-Nov 17-Nov 14-Nov 13-Nov 12-Nov 11-Nov 10-Nov 7-Nov 6-Nov 5-Nov 4-Nov 3-Nov 31-Oct 29-Oct 27-Oct 24-Oct 23-Oct 22-Oct 21-Oct

40000 12000

Derivatives Turnover in Rs. crore in last one month Total Cash Turnover in Rs. crore in last one month

60000 5d avg Total Cash 18000

5d avg Sensex Cash

NSE Cash Turnover in Rs. crore in last one month Sensex Cash Turnover in Rs. crore in last one month

4000

10000

3000

8000

6000 2000

4000 1000

2000

16000

14000

50000

10000

8000

30000

4000

2000

10000

Total Cash

150%

100%

0%

Volatility as reflected in VIX data

90 80

80 % Change

70

50 20

40 0

20

10

0

Dec 1, 2008 2-May 12-May 21-May 29-May 6-Jun 16-Jun 24-Jun 2-Jul 10-Jul 18-Jul 28-Jul 5-Aug 13-Aug 22-Aug 1-Sep 10-Sep 18-Sep 26-Sep 7-Oct 16-Oct 24-Oct 5-Nov 13-Nov

2-May 12-May 21-May 29-May 6-Jun 16-Jun 24-Jun 2-Jul 10-Jul 18-Jul 28-Jul 5-Aug 13-Aug 22-Aug 1-Sep 10-Sep 18-Sep 26-Sep 7-Oct 16-Oct 24-Oct 5-Nov 13-Nov

250%

21-Oct 22-Oct 23-Oct 24-Oct 27-Oct 28-Oct 29-Oct 31-Oct 3-Nov 4-Nov 5-Nov 6-Nov 7-Nov 10-Nov 11-Nov 12-Nov 14-Nov 17-Nov 18-Nov 19-Nov 20-Nov 21-Nov

2-May-08 12-May-08 21-May-08 29-May-08 6-Jun-08 16-Jun-08 24-Jun-08 2-Jul-08 10-Jul-08 18-Jul-08 28-Jul-08 5-Aug-08 13-Aug-08 22-Aug-08 1-Sep-08 10-Sep-08 18-Sep-08 26-Sep-08 7-Oct-08 16-Oct-08 24-Oct-08 4-Nov-08 12-Nov-08

Relative change in Total Cash and derivatives Turnover since May 2008 Relative change in Cash Turnover and Sensex market cap since May 2008

Derivatives 140% Cash

For Private Circulation only

Market Cap

200% 120%

100%

80%

60%

40%

50% 20%

0%

FIIs activities in last one month

India VIX 1500

60 1000

60 40 500

0

30 -20

-500

-40

-60

-1000

-1500

6

DIIs activities in last one month

Retail investors’ activities in last one month

800

1000.0 800.0

600 600.0 400

400.0 200.0

200

0.0 0

-200.0 -400.0

-200

-600.0 -400 -800.0

21-Oct 22-Oct 23-Oct 24-Oct 27-Oct 28-Oct 29-Oct 31-Oct 3-Nov 4-Nov 5-Nov 6-Nov 7-Nov 10-Nov 11-Nov 12-Nov 14-Nov 17-Nov 18-Nov 19-Nov 20-Nov 21-Nov

-1000.0 21-Oct 22-Oct 23-Oct 24-Oct 27-Oct 28-Oct 29-Oct 31-Oct 3-Nov 4-Nov 5-Nov 6-Nov 7-Nov 10-Nov 11-Nov 12-Nov 14-Nov 17-Nov 18-Nov 19-Nov 20-Nov 21-Nov

-600

Sensex EPS since FY2001-2010

1200 1008 1000 900 778

800 643 600

539 416

400

193

204

2001

2002

301 230

200

2010E

2009E

2008

2007

2006

2005

2004

2003

0

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Dec 1, 2008

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