WWRR Vol.2.017

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Exhibit 1: BSE Sensex Outlook: Risk-Reward for Dec. 19 48,000 45,000 42,000 39,000 36,000 33,000 30,000 27,000 24,000 21,000 Jun-14 Sep-14 Dec 19 Fwd probability-weighted outcome @ 42000 Dec-14 Mar-15 Base Case (Dec 2019) Jun-15 Sep-15 Dec-15 Apr-16 Jul-16 Oct-16 Source: RIMES, Morgan Stanley Research (E) estimate Jan-17 Apr-17 Current Price (Dec 10, 2018) Jul-17 Oct-17 Feb-18 May-18 Aug-18 34960 Nov-18 47000(+34%) Feb-19 Historical Performance 42000(20%) 33000 (-6%) May-19 Sep-19 Dec-19 Exhibit 2: Sector Model Portfolio Perform ance relative to M SC I India Sector O W / U W (bps) M T D YT D 12M M SC I India -5% -4% -1% C onsumer D isc. 500 -3% -24% -22% C onsumer Staples -300 8% 19% 17% Energy 0 -8% 4% 1% Financials 500 10% 3% 1% H ealthcare -200 -10% -9% -6% Industrials 400 11% 0% 0% Technology -600 -4% 30% 31% M aterials -100 -4% -14% -11% Telecoms 0 -7% -45% -45% U tilities -200 -5% -15% -17% Source: RIMES, MSCI, Morgan Stanley Research; Past performance is no guarantee of future results. Exhibit 3: Focus List Sector R ating Price as on N ov 14, 2018 M C ap ($ Avg 3M T /O R el to M SC I India YT D Perf 12m Perf Bajaj Auto C ons. D isc. EW 2,725 10.9 19 -15% -14% 8% M &M C ons. D isc. O W 711 11.6 42 -1% 3% 22% Titan C ons. D isc. O W 907 11.1 42 10% 13% 26% ITC Staples O W 270 45.7 49 7% 4% 14% R eliance Industries Energy O W 1,090 95.3 175 23% 20% 22% Bharat Financial Financials ++ 982 1.9 18 2% -1% 110% H D FC Bank Financials O W 2,089 78.3 106 16% 15% 22% IC IC I Bank Financials O W 346 30.8 114 15% 13% 45% Indusind Bank Financials ++ 1,554 12.9 65 -2% -6% 25% Shriram Transport Financials O W 1,091 3.4 24 -23% -20% 29% IC IC I Pru Life Financials O W 307 6.1 7 -16% -18% 7% SBI Financials O W 274 33.7 103 -8% -12% 2Y Fw d EPS Prestige Estates Financials O W 198 1.0 1 -35% -35% 6% Apollo H ospitals H ealthcare O W 1,177 2.3 12 2% 0% 91% Ashok Leyland Industrials O W 100 4.1 38 -12% -14% 21% Adani Ports Industrials O W 359 10.3 21 -8% -8% 9% Eicher M otors Industrials O W 22,405 8.4 37 -23% -22% 22% L & T Industrials O W 1,368 26.4 48 13% 13% 17% Asian Paints M aterials O W 1,274 16.9 27 15% 13% 16% U ltratech C ement M aterials O W 3,777 14.3 19 -9% -8% 23% bn) ($ m n) G row th Source: RIMES, Morgan Stanley Research; ++ Rating and price target for this company have been removed from consideration in this report because, under applicable law and/or Morgan Stanley policy, Morgan Stanley may be precluded from issuing such information with respect to this company at this time. Past performance is no guarantee of future results. Transaction costs and dividends not included. Exhibit 4: Key Themes in Our Portfolio: We Prefer Growth Stocks and Wide Sector Positions Themes Implications Stocks Capex Companies that have done capex over the past 5 years Reliance Industries Unloved and underowned stocks Valuations and momentum Prestige Estates Rising ROCE Delta in ROCE probably more important Asian Paints, Titan Earnings revisions Growth at a reasonable price Source: Morgan Stanley Research. than just the level Earnings momentum is a key share price driver As a style growth is likely to lead performance in the coming months MMFS Bajaj Auto, HDFC Bank, ITC Exhibit 5: Style Performance: GARP in Form 5000% 4000% 3000% 2000% 1000% 0% -1000% -2000% -3000% Value Growth Quality Junk Momemtum Cumulative YoY trailing 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: RIMES, Morgan Stanley Research Exhibit 6: Morgan Stanley forecasts at a glance F2017 F2018E F2019E F2020E G DP G rowth (new) 7.1% 6.7% 7.6% 7.6% IIP G rowth 4.6% 4.4% 4.9% 5.2% Av erage CPI 4.5% 3.6% 3.9% 4.3% Repo Rate (year end) 6.25% 6.00% 6.50.% 7.25% CAD% of G DP -0.7% -1.9% -2.5% -2.3% Sensex EPS 1443 1479 1789 2210 Sensex PE 24.2 23.6 19.5 15.8 EPS growth YoY 2.3% 2.5% 21.0% 23.5% Broad M arket Earnings G rowth 0.0% 3.0% 20.0% 22.0% Broad M arket PE 28.7 27.9 23.2 19.1 Source: RIMES, MSCI, Morgan Stanley Research (E) estimates Note: Prices as of December 10, 2018. Past performance is no guarantee of future results. Results shown do not include transaction costs. 3
Assessing the Cycle - 2019 in Better Shape than 2018 India's relative policy uncertainty appears to be at a cycle peak. When we combine this with the fact that India is heading into elections, a roll over is the most likely outcome. Surprisingly, despite high policy certainty for four years running, India's relative performance against EM has been weak. This tells us that on its own policy certainty is not enough to drive share prices. Exhibit 7: Policy Uncertainty Index 0 50 100 150 200 250 300 350 400 450 India Economic Policy Uncertainity Index relative to World (3MMA) (pushed forward 3M) on reverse scale -LS MSCI India YoY perf. Relative to ACWI 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Economic policy uncertainty index, RIMES, MSCI, Morgan Stanley Research 95% 85% 75% 65% 55% 45% 35% 25% 15% 5% -5% -15% -25% -35% -45% The investment rate has now gone well below trend - reminiscent of the 2002-03. With the counter cyclical government capex already in place, capacity utilization and asset turn above average, and growth likely improving, a private capex cycle is in the offing post elections. This sets the stage for an improvement in corporate profit margins. Exhibit 8: Investment as % of GDP 45% Investment(% of GDP) Linear (Investment(% of GDP)) 40% 35% 30% 25% 20% 15% 10% 5% F1952 F1955 F1958 F1961 F1964 F1967 F1970 F1973 F1976 F1979 F1982 F1985 F1988 F1991 F1994 F1997 F2000 F2003 F2006 F2009 F2012 F2015 F2018 Source: CEIC, Morgan Stanley Research Growth appears to have troughed led by benign inflation, a turn in government capex, recovery in consumption and exports, and the passage of one time shocks like GST and demonetization. As a consequence, credit growth, which put in a bottom last year, seems to be entering a new cycle. Indeed, the peak of previous cycle was way above history and thus the recent trough was well below history. Exhibit 9: Manufacturing PMI 64 62 60 58 56 54 52 50 48 46 44 HSBC India Manufacturing Purchasing Managers’ Index Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Source: Markit Economics, Morgan Stanley Research Exhibit 10: Trailing 3-year Bank credit growth 36% 32% 28% 24% 20% 16% 12% 8% 4% Oct-91 Oct-93 Oct-95 Oct-97 Oct-99 Oct-01 Trailing 3-yr Credit Growth Oct-03 Oct-05 Oct-07 Oct-09 Oct-11 Oct-13 Oct-15 Oct-17 Source: RBI, Morgan Stanley Research 4
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WWRR Vol.2.017

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