WWRR Vol.2.017

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India's terms of trade went through a Yo-Yo ride last year. For now, with crude oil suffering a supply-led price fall, the terms of trade have once again shifted in India's favor. India's responds to supply shortage led spikes in oil - we have tried to identify these by measuring oil performance to copper (both commodities assumed to respond similar to improvement in global demand). We find that India's USD equity performance plots directionally against the oil/copper relative performance (as one would expect). Exhibit 11: Brent relative performance Brent crude Rel to Copper YoY Returns MSCI India Rel to EM YoY Returns 80% 60% 40% 20% 0% -20% -40% -60% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: RIMES, MSCI, Bloomberg, Morgan Stanley Research Exhibit 12: India 10 year yield -30% -20% -10% 0% 10% 20% 30% 40% Whether the 10-year yield's recent peak is the peak of this cycle will demand primarily on how India's growth pans out next year. Since we are constructive on growth, to us it seems that bond yields may have further to rise in this cycle. Consistent with the economic cycle, short rates are likely to move higher albeit with a pause in the coming months given the benign headline inflation and reasonable real rates. Source: Bloomberg, Morgan Stanley Research Exhibit 13: Policy Rates 12% 11% Repo Rate Rev repo 91D Yield 10% 9% 8% 7% 6% Revenue growth for Corporate India is already accelerating for the past several quarters and is now at a five-year high. Revenue growth could be heading higher in 2019. 5% 4% 3% Apr-02 Sep-02 Feb-03 Jul-03 Dec-03 May-04 Oct-04 Mar-05 Aug-05 Jan-06 Jun-06 Nov-06 Apr-07 Sep-07 Feb-08 Jul-08 Dec-08 May-09 Oct-09 Mar-10 Aug-10 Jan-11 Jun-11 Nov-11 Apr-12 Sep-12 Feb-13 Jul-13 Dec-13 May-14 Oct-14 Mar-15 Aug-15 Jan-16 Jun-16 Nov-16 Apr-17 Sep-17 Feb-18 Jul-18 Dec-18 May-19 Oct-19 Source: RBI, Bloomberg, Morgan Stanley Research Exhibit 14: Broad Market Revenue Growth 30% Revenue growth (Broad Market - 1178 cos) RS 10% -10% Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 Source: Capitaline, Company data, Morgan Stanley Research 5
The share of profits in GDP or profit margin seem to be putting in a trough and could be entering a new mediumterm cycle, which could last for five years and result in strong profit growth. Exhibit 15: India Corporate Profit to GDP 8% 7% 6% 5% 4% 3% 2% 1% 0% Corporate Profits to GDP F1992 F1993 F1994 F1995 F1996 F1997 F1998 F1999 F2000 F2001 F2002 F2003 F2004 F2005 F2006 F2007 F2008 F2009 F2010 F2011 F2012 F2013 F2014 F2015 F2016 F2017E Source: CMIE, Morgan Stanley Research (E) estimates Like with profit margins, ROEs also seem to be putting in a bottom and preparing for a new up cycle. Asset turn has already risen. Exhibit 16: ROE Trend 24% ROE Trend 22% 20% 18% 16% 14% 12% 10% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Valuations appear to be mid-cycle compared to fundamentals, which seem to be coming out of a cycle trough. We prefer to use PB as a valuation metric versus PE given how depressed earnings are relative to trend. Valuations could head either way in the short run depending on factors other than fundamentals such as India's election outcome and global events. Source: Worldscope, RIMES, Morgan Stanley Research Exhibit 17: India PB ratio 7 MSCI India PB LTA 6 +1 Stdev -1 Stdev 5 4 3 2 1 1995 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, MSCI, Morgan Stanley Research EV/sales is also at long-term averages and pricing in some of the recovery in margins that could be in the pipeline. Exhibit 18: Sensex EV/Sales 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 Sensex EV/Sales LTA Avg. Nov-95 Nov-96 Nov-97 Nov-98 Nov-99 Nov-00 Nov-01 Nov-02 Nov-03 Nov-04 Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14 Nov-15 Nov-16 Nov-17 Nov-18 Source: Company data, Morgan Stanley Research 6
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Page 5 and 6: Strategy India Exhibit 5: Almost 40
Page 7 and 8: Strategy India Exhibit 10: BJP won
Page 9 and 10: Strategy India Exhibit 13: We recom
Page 11 and 12: Portfolio Strategy We continue to b
Page 13: Assessing the Cycle - 2019 in Bette
Page 17 and 18: FPI flows have also made a cycle lo
Page 19 and 20: 1/4/2019 The impact on India's econ
Page 25 and 26: THE INVESTMENT OUTLOOK FOR 2019: LA
Page 36: Agenda 01 02 03 04 05 Retail Credit
Page 40: Retail Credit Growth- 2-year CAGR o
Page 44: Retail-NBFC Credit Break-up- Share
Page 48: Liquidity Impact on Growth 8
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Asset Quality Trends
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Asset Quality- Challenges set to re
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Christopher Wood christopher.wood@c
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1/4/2019 The struggle for India’s
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1/4/2019 The struggle for India’s
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Navigating 2019 Surprises for 2019?
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Navigating 2019 Svalbard, Norway. C
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Equities Oslo, Norway. Ole Jørgen
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Equities Emerging market equities C
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Metal index P/ B ratio Jan-12 May-1
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Jan-12 Apr-12 Jul-12 Oct-12 Jan-13
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economists expanded Solow’s model
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WWRR Vol.2.017

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