IndianEquitiesAnOpportunityinthemaking!

.continued

Bottomline:InourlastcommunicationdatedAugust8,2011(ReferEquityUpdateAug2011.pdf),we highlighted how 2011 was much different than 2008. To reiterate, our conclusion was that across fundamental and technical parameters, the Indian equity markets are looking much better now than theywerein2008andallfearsofa2008likemeltdownseemstotallyoutofcontext. We also realize, as all others, that equity markets are forward looking and price movements are a reflectionofwhatweexpectinfutureratherthanwhathashappened.Withthisinperspective,wehave attempted to gaze in the future and tried to see what the key variables impacting the economy and equity markets would look like, one year from now. We look at variables in key categories namely, 7thSept2011

 global macro, domestic macro, corporate earnings, valuations, flows and policy environment. We elaborate individual variables later, but highlight that most variables would be showing marked improvementifwefastforwardoneyear. Thefinalconclusionisnotdifferentfromourearliernote;neartermchallengesnotwithstanding,the currentuncertaintypossiblyprovidesagoodopportunityforlongtermIndianinvestors. Heresouranalysis: GlobalMacro:Withtheslewofrecentpooreconomicdata,manyinthemarkethavestartedtoworry about the renewed fears of recession (double dip) in DM (developed markets). This coupled with sovereign debt crisis has instilled fears in investors mind. While slow global growth is likely, the evidence is far from being conclusive to assume a new recession is inevitable. In fact, we expect repeatedeffortsbytheDMpolicymakerstostimulatetheireconomyandmarkets.Also,EM(emerging markets) economies are in far better shape and therefore would be less impacted in case of western slowdown.Inthiscontextmostemergingmarketshavealreadycorrectedover20%inlast23quarters. Further, we highlight that growth rate in most of the emerging markets are likely to remain robust in 2012andthefearsofexcessiveinterestratetighteninginkeyEMshavereduced.Indeed,inamajorsign ofinterestratecycleinEMisnowturningontheeasingpath,oneofmostconservativelargeEMcentral bank in Brazil has positively surprised last week by cutting their official interest rates. Consensus has alreadyreducedtheirglobalforecastsandstillglobalgrowthinCY12islikelytobebetterthanCY11. Indianeconomy:ThekeyvariableswhichhavekeptIndianmacroenvironmentunderpressureforthe last 34 quarters i.e., inflation and policy tightening are near peak. We expect incrementally positive news on the both fronts. By 2QFY13, inflation should be as low as 5% and similarly the RBI in all likelihood would have already started easing the interest rates. On the growth front, while the consensus has acknowledged the downside risk to growth in FY12, they expect better growth in FY13 overFY12.Moreover,capexcycle,whichhasbeenabigdragonfundamentals,wouldbottominnextsix monthsandby2QFY13,weexpectrecoveryincapexcyclealongwiththeRBIeasing. In terms of expectations, analyst expectations which are currently on the conservative side due to ongoingnegativenewsflowmayalsoturnoptimisticasandwhensignsofmacroimprovementaremore visibleoverthecourseoftheyear. Earningsandvaluations:Indianearningsgrowthexpectationshavebeensignificantlyreviseddownin consonance with bad news flow and sentiments. Even after that Indian markets are trading at a 10% discounttolongterm1yearforwardPE.Notonlythisdiscountisexpectedtoreverttomeanlevelsin the coming year but also the expectations of earnings growth for FY13 are higher than that of FY12. ConsensusearningsgrowthexpectationsforFY13are14%comparedto13%inFY12.Webelievethat earnings downgrade cycle for Indian market is in the latter stage. Though FY13 EPS growth is already higherthanFY12,itmayrisefurtherastheearningsdowngradecyclechangesitscourse.

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 Flows and policy environment: Post the US rating downgrade, India has seen 3 bln US$ outflows in August 11 taking the ytd FII flows into equities to almost flat level. Other than global headwinds, domestic macro concerns have led to low risk appetite and in turn dismal portfolio inflows in Indian equities. Asexplained,mostoftheseheadwindswouldsubsideifwefastforwardoneyear.Otherthaninflation and rates, another key reason for the investors despondency is the Govt policy inactivity and related uncertainties. Govt policy disappointment resulted in lack of confidence among corporates who postponed their expansion plans and that has disappointed investors. However, in recent weeks we have seen definite steps towards improving the policy environment. Few recent announcements: cabinet reshuffle, a much overdue fuel price hikes, revamped GST taskforce, softer stance on pesky environmental clearance issue and clearance of land acquisition bill, roadmap to cut down state electricityboardslosses,etc.Inourbasecase,weexpectfurtherpickupinmomentuminpolicyaction over the next one year. Few likely actions: introduction of GST and DTC, new banking licenses, FDI in retailandinsurance,reformsoninfrastructurefinancing,etc.Thisshallhelpassuageinvestorsconcerns. Conclusion: We acknowledge that Indian markets have remained under pressure for the last few quarters due to significant macro headwinds both on the domestic and international front. While the markethasbeenpricingalotofthoseconcerns,wethinktheseheadwindsarepeakingnow.Investors shouldputinperspectivethatcurrentconcernsmaybeshortlivedandtheenvironmentmaynotbeas gloomyorratherbeprettydecentoverayear.Therefore,insuchtimesofadversity,longterminvestors shouldobjectivelyassessthemediumtermpictureandhowequitieslookfromriskrewardperspective. Wereiteratethatnotwithstandingtheevents/risksinthenextfewmonths,ifoneinvestinequitiesnow, intheensuingperiodonecanexpectrelativelybetterreturnsoverthefollowing1218months. Inthefollowingpageweprovideanexhaustivesnapshotofkeyvariablestohighlighthowdifferentand superiortheywouldbelookingafterayear(Aug12).Pleasehavealook.

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 Snapshotofkeyvariablesnowversuswhattheycouldbeinacoupleofscenariosinayear
DomesticMacro Inflation Aug11 1QFY129.5%(yoy) RBIhashikedpolicyratesby150bps sinceJan11(Lastlegofmassive tightening) ExtremelytightsinceJune2010 FY12growth(Est.)7.5% BaseCase 2QFY136%(yoy)Inflationshould nomorebeamajorconcern Aug12 Bestcase 2QFY135%(yoy)

Interestrate Liquidity GDPGrowth(%yoy) GovtPolicyactions (reforms)

Fewactions/reformsfromgovtside

IndianRupee/US$ RealCapexgrowth(%yoy) Fiscaldeficit(central) Creditgrowth Corporatecapitalraising Investmentsentiment GlobalandEM Globalgrowth USgrowth EMgrowth EMas%ofGlobalGDP Globalbankingsystem Marketsandvaluation FIIflowsoutlook ImpliedPE PEdiscount/premium Earningsgrowth ROE MarketcaptoGDP(%) BrentCrudeoil($/bbl) Globalearningsgrowth (MSCIACWI)

Almostflatonyoybasis FY12E7%(yoy)Subdued FY12E5.2% FY12E17% Tightresourcesraisedremains subdued Uncertain/negative CY11E4% CY11E1.7% CY11E6.6% 35% GlobalbanksConcernswhetherwell capitalizedornot FlatsinceCY11ytdExtremelysubdued 1yrFwdPE13.2 10%discounttolongtermaverage FY12EstEPSgrowth13%(SensexEPS of1200) FY12E16% 66%(declinedfrom95%innFY10) FY12ytdavg115$/bbl CY2011E14.3

Interestrateeasingbegun Mayseesharperratecutsof150 [100bpscut] 200bpsbyFY13end Improvedliquidityscenarioduetohigherdepositgrowth,lowerinflation andrelativelylessborrowingfromthegovt FY13E 7.8%(BetterthanFY12Eand robust) FY13E8.5% Recenteventspointtowardsrenewedactiononpolicyfront Positive stepslikelyovernextyearGST,DTC,bankinglicense,FDIreforms, infrastructuredevelopment&financing,etc Appreciate4%to44onstronger portfolioflows,surgeinFDI,and INRmayappreciateby9%to42 betterthanexpectedCAD level FY13E 8.3%(yoy) Capextopick upfromFY13 FY13E10.4%(yoy) FY13E 4.6% (Fiscaltighteningto improvedeficitstatus) FY13E4.4% FY13 19% FY13E 22% Morerobustwitheasingmacroheadwinds Incrementallypositiveasmacroenvironmentimproves CY12E 4.2%(BetterthanCY11) CY12E 4.4% CY12E 2.2% CY12E 2.4% CY12E 6.2%(Growth rate 3xthat ofDM) CY12E6.7% Estimates 37%(3xDMgrowth rate) MoreclarityneededonthestateofGlobalbanks Mayattractinflowsasthemacroconcernssubside FwdPE 11.7 (AtcurrentlevelwithEPSgrowthof15%CAGR inFY1113 andFY13expectedEPSof1400) Mayreverttomeanlevelsof16.5,ifthathappensimpliedSensexis 23100(PE16.5,FY13EPS1400) FY13E 14%(EPS 1370) Higher thanFY12 FY13E17%(EPS1400) FY13E 16.5%(Havingfallenforlast23yrsROEexpectedtoimprove marginallyfromFY13) Atcurrentestimatesthismayfallto58%by2QFY12againstanaverage of100%inthemediumterm 5yravgof86$/bbl 10yravgof60$/bbl CY2012E 14.7(EPSgrowthestimatesforCY12ishigherthanthatof CY11)

Source:RMFestimates,Bloomberg,CMIE,Nomuraestimates,Citiresearch,BofaML

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 WherewillthemarketbeinApril2012? FollowingtablegivesascenarioanalysisofwheretheSensexcouldbetradingona1yearforwardbasis (PEratio)onApril2012undervariousearningsgrowthandPEmultiplesscenario.Withyourown assumptionsyoucanseetheimpliedlevelofSensex.

ImpliedSensexlevelsatdifferentearningsgrowthassumptionsandPEmultiples Sensitivity PE*** analysis 12 14 16 18 20 12% 15,977 18,640 21,303 23,966 26,628 14% 16,553 19,312 22,070 24,829 27,588 16% 17,139 19,995 22,852 25,708 28,564 18% 17,735 20,691 23,646 26,602 29,558 20% 18,341 21,398 24,455 27,511 30,568

ImpliedSensexforApril2012=FY11EPS*CAGREPSfortwoyearsuptoendFY13*PEmultiple. *BaseforearningsgrowthisactualSensexFY11EPSof1061 **EarningsgrowthCAGRfortwoyearsFY12andFY13. ***1yrfwdPEratio,Tocite,5yraverageof1yrFwdPEis16.5x

Source:Bloomberg

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EPSgrowth**

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None of the Sponsor, the Investment Manager, the Trustee, their respective directors, employees, affiliates or representatives shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages,includinglostprofitsarisinginanywayfromtheinformationcontainedinthismaterial. TheSponsor,theInvestmentManager,theTrustee,anyoftheirrespectivedirectors,employeesincludingthefund managers,affiliates,representativesincludingpersonsinvolvedinthepreparationorissuanceofthismaterialmay fromtimetotime,havelongorshortpositionsin,andbuyorsellthesecuritiesthereof,ofcompany(ies)/specific economicsectorsmentionedherein. StatutoryDetails:RelianceMutualFundhasbeenconstitutedasatrustinaccordancewiththeprovisionsofthe Indian Trusts Act, 1882. Sponsor: Reliance Capital Limited. Trustee: Reliance Capital Trustee Co. Limited. Investment Manager: Reliance Capital Asset Management Limited (Registered Office of Trustee & Investment Manager: 'H' Block, 1st Floor, Dhirubhai Ambani Knowledge City, Koparkhairne, Navi Mumbai 400 710, Maharashtra).TheSponsor,theTrusteeandtheInvestmentManagerareincorporatedundertheCompaniesAct 1956.TheSponsorisnotresponsibleorliableforanylossresultingfromtheoperationoftheSchemebeyondtheir initialcontributionofRs.1lakhtowardsthesettingupoftheMutualFundandsuchotheraccretionsandadditions tothecorpus. RiskFactors:MutualFundsandsecuritiesinvestmentsaresubjecttomarketrisksandthereisnoassuranceor guaranteethattheobjectivesoftheSchemewillbeachieved.Aswithanyinvestmentinsecurities,theNAVof theUnitsissuedundertheSchemecangoupordowndependingonthefactorsandforcesaffectingthecapital markets.ThenameoftheSchemeanddoesnotinanymannerindicateseitherthequalityoftheScheme;its future prospects or returns. Past performance of the Sponsor/AMC/Mutual Fund is not indicative of the future performance of the Scheme. The NAV of the Scheme may be affected, interalia, by changes in the market conditions, interest rates, trading volumes, settlement periods and transfer procedures. For details of scheme featuresandforSchemespecificriskfactors,pleaserefertotheSchemeInformationDocumentwhichisavailable at all the DISC / Distributors / www.reliancemutual.com. Please read the Scheme Information Document and StatementofAdditionalInformationcarefullybeforeinvesting.

7thSept2011