Wider Choices, Smarter Development

1. Wider Choices, Smarter Development Sensex Drama

2. Rise and fall of stock markets/prices is guaranteed!

3. 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

4. Boom…bang…crash!! Sensex peaks at 21000 levels in Jan 2008 Euphoria Sensex crosses 18000 in Oct 2007 (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) Crash Belief Disbelief Sensex back at 15000 levels in Mar 2008 Sensex under 13000 in Apr 2007

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

6. 2000 - Statistics Feb 2000 – Sensex Peak Jan 2004 – Sensex Bounce back • Dotcom bubble 5933 6026 % of Stock Rise > Sensex 51% % of Stock Fall > Sensex 54% • Flows • FIIs – Rs 43 bn • Domestic –Rs 4 bn • Flows • FIIs – Rs 484 bn • Domestic – Rs (75) bn 3920 May 2000 – Trough 4 yrs Source: Bloomberg

7. 2001 - Statistics Aug 2001 – Sensex Peak Nov 2001 – Sensex Bounce back • September 9 /11 3318 3322 % of Stock Rise > Sensex 56% % of Stock Fall > Sensex 33% • Flows • FIIs – Rs (4.5) bn • Domestic –Rs 1.1 bn • Flows • FIIs – Rs 9.6 bn • Domestic – Rs (10.7) bn 2600 Sep 2001 – Trough 3 months Source: Bloomberg

8. 2004 - Statistics Apr 2004 – Sensex Peak Nov 2004 – Sensex Bounce back • NDA government collapsed 5925 5973 % of Stock Rise > Sensex 69% % of Stock Fall > Sensex 29% • Flows • FIIs – Rs (25) bn • Domestic –Rs 13.3 bn • Flows • FIIs – Rs 124 bn • Domestic – Rs (17) bn 4505 May 2004 – Trough 7 months Source: Bloomberg

9. 2006 - Statistics May 2006 – Sensex Peak Oct 2006 – Sensex Bounce back • Concerns that US will raise rates and draw overseas investors away from emerging markets and surging commodity prices will hurt company earnings. 12612 12736 % of Stock Rise > Sensex 34% % of Stock Fall > Sensex 80% • Flows • FIIs – Rs (103) bn • Domestic –Rs 56 bn • Flows • FIIs – Rs 144 bn • Domestic – Rs 17 bn 8929 Jun 2006 – Trough 5 months Source: Bloomberg

10. 2008 - Statistics Jan 2008 – Sensex Peak Sensex Bounce back - ?? • Sub-prime crisis 20812 % of Stock Fall > Sensex 81% • Flows • FIIs – Rs (149) bn • Domestic –Rs 54 bn 15357 Mar 2008 – Trough ?? months Source: Bloomberg

11. 2008 Crash – Most Vicious Source: Bloomberg

12. 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?

13. 2000 v/s 2008 • 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

14. Corporate Profits Surpass Index Growth 10 year data reveals that …. …profits in the broader market have grown faster than the Sensex Source: Bloomberg; Edelwiess

15. Consistent Earning Growth • 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

16. Economic Fundamentals - Robust 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

17. 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

18. 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

19. Where can the Sensex go? Pls note: the above calculations are based on hypothetical assumptions about the EPS growth rate and the P/E ratio

20. Technical Analysis

21. 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

22. 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

23. 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

24. 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

25. 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

26. Higher September - Way to go? Source: Bloomberg; Edelwiess

27. 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

28. Thank You