09/01/10 1

MACRO
The Bigger Picture

09/01/10 3
 We All
Take
About

“Growth”
“India
Shining”

But what
is this
Growth

09/01/10
Cartoon by Ashok Dongre 4
Economic Growth

Lets Define “Economic Growth”

A continuous and persistent increase in the national income or output. It
refers to a ‘real’ increase in the production of goods & services.

In simple words, the increase in the goods & services produced in the
economy …

How do we measure this Output or Growth?

There are many different economic variables that measure the economic
growth. But there is 1 measure that we all should be aware about …GDP

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GDP
GDP stands for Gross Domestic Product:

• Value of all final goods & services produced in a country in a given period
• Eg. biscuits, buildings, cars, CDs, bus rides, your doctor’s & CA’s fees, etc.

• The output of each of these (final) is measured at its market value and all
such values are added together to get the GDP

GDP = consumption + investment + (government spending) + (exports − imports)

Gross: Depreciation of capital excluded.

Consumption = Private consumption of HHs on say clothing, cars, food, etc
Investment = Business investment in capital … Hardware, Software, Services, etc. (It is Non-Financial)
Government Spending = on final goods & services, incl. public servants, weapons, roads, etc
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GDP
• The GDP can further be broken down into different sectors of economy
– Agricultural
– Industry
– Services

A rising GDP means that more and more goods & services are being
produced (output increased) in the economy … this is good news
because
– More factors (people & capital) are being used
– Economic activities are increasing
– Higher production is because of higher demand!

• GDP growth is usually higher for developing economies because a lot of

scope for expansion of the economy exists in practically every aspect of
economy …

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Economic Growth

We all know very well what the key drivers of this growth for India are …

• Huge demographic advantage giving us …

• Supply of quality work force
• Demand for the goods & services

• High rate of investments in the economy

• High Consumption leading to Higher Demand and thus more production

• Strong fundamentals of the economy

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Economic Growth

But how can we keep a track this Growth?

We can look at the various indicators / measures easily available to estimate
the growth potential like …

• Demand & Supply factors

• Gross Domestic Capital Formation
• Inflation (WPIM or Wholesale Price Index)
• IIPM (Index of Industrial Production)
• Sales (of the Private Companies)

You can get a very easy access to such key indicators in news, NJ Fundz Watch, RBI, Finance ministry, etc
For Monthly Data visit: http://finmin.nic.in/stats_data/monthly_economic_report/index.htm
09/01/10 9
Inflation Impact

High Inflation:

Businesses:
• Input costs increase  loss of competitiveness, Demand for higher wages
• Uncertainty  prices, consumption & income levels and hence sales

Individuals:
• Fall in real value of Savings and Returns (especially fixed)
• Wealth destruction. Lesser disposable income. Fall in living standards

Low Inflation:
• Increases chances of economy moving towards deflation, i.e., falling prices
• Consumers postpone purchases  falling levels of output  stagnation of
economic activities

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Indicators

Inflation: The inflation levels, except the current temporary deviation, have
been very steady in India and at around the levels that RBI / govt. wants it to be
(around 5%) …

Index of Industrial Production: This is key figure indicating the of the actual
growth in the industrial output …

Gross Domestic Capital Formation: represents the gross value of the goods
which are added to the fixed domestic capital of the stock during an accounting
year. Expressed as % of GDP

India is currently recording very high GDCF figures or around 30%

indicating the real capital formation taking place in the economy

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Indicators

Fiscal Deficit: Is the difference between the revenue receipts plus certain non-
debt capital receipts and the total expenditure, including loans (net of repayments).
A low Fiscal Deficit indicates
• Less total borrowing requirement of the govt.
• Govt. is prudent / wise in spending the money
• Govt. is finding resources to finance its developmental activities

Gross Domestic Savings: Refers to the sum of public savings and private savings
(physical & financial). Public savings is the difference between total revenue and
current expenditures of the consolidated public sector

The GDS are very strong for India at over 30%. This has seen a steep rise in the
recent years … also indicating rising disposal income with people

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Growth Drivers

Consumerism Infrastructure
Demographics Retail credit, low interest rates, Development of roads, ports, Reforms
Half the population below 25 yrs changing aspirations telecom FDI, Tax reforms

Sustained GDP Growth

Exports
Global
competitiveness Outsourcing

High GDP Growth

Growth Gap Over The World

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GDP Growth

• The GDP rise over years is a fundamental led growth story

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 How Can We Benefit
From the Growth

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Being Part of Growth Meaning

Indirectly, we are already benefiting

from the growth around us …

But we should be the “direct”

participants of this growth …

Rather than being bystanders …

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Growth Participation Why

You as an Owner
Saving & investing money in business

You as a Lender
Saving & giving money to those who need it

This bringing together of those of needs funds & those who have funds is
the most important economic activity
This is where we need to have a market !!!

Participation Is Through Markets

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Financial Markets Why

• Financial Markets and Financial intermediaries

– have the basic purpose / function is the smooth movement of funds

From “people with who have funds” To “who are in need of funds” …

• Well functioning of the financial markets and financial intermediaries are

crucial to economic health …

– Effective movement / circulation of funds …

– Funds move to productive areas where there is need
– Enhances savings / investments in the economy
– Ideas can take shape !!!

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Financial System / Markets

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Financial Markets Structure

• Several categorization of financial markets illustrate essential features of

Financial Markets*

Debt & Primary & Exchange & Money &

Equity Secondary O.T.C. Capital

• Provide channels / platform for allocation of savings to investments and

thereby decouple these two activities.

• Result: the savers and investors are not constrained by their individual
abilities, to invest and save respectively

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Primary Markets How

• Markets have 2 interdependent & inseparable parts …

– Primary Market (new issues)
– Secondary Market (stock)

• Primary
– The issuers of securities issue (create and sell) new securities in the
primary market to raise funds for investment and/or to discharge some
obligation
– a financial market in which new issues of a security such as bond or
stocks are sold to initial buyers by the corporations or Government

• Secondary …
– Secondary markets deals with securities that previously issued. These
securities are resold in these markets.

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Markets Players

The Market enables many entities, including us, to effectively carry out the
activities to fulfill the diverse objectives

Player Objective / Activity

FI/FII’s Investments / Profiting

Mutual Funds Investments – Short term / long term
Corporates Raising Capital
Treasury / Investments
Investors Investments
Traders Business Activity
Jobbers/Scalpers Create Market
Narrow spreads
Speculators Gambling instincts
Arbitrageurs Reduce price difference
Operators Create interest in a scrip
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Environment

• Today the financial markets are among the …

– Best regulated in the world
– Having the best clearing & risk control systems in the world
– Our markets have matured a lot

• SEBI
• RBI

• Regulations cover all aspects of business … labour, ownership, accounting,

capital markets, environment, investor services, etc
• Indian companies, especially bigger ones, follow corporate governance
practices

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Security

This is the product or the commodity which is traded in various

forms in the financial markets between the players that we had seen

• SEBI has been established with the primary objective of protecting the
interests of the investors in ‘securities’ which is defined in the
Securities Contracts (Regulations) Act, 1956 to include:

– Shares, scripts, stocks, bonds, debentures, or other marketable

securities of a like nature in or of any incorporate company or body
corporate
– Derivative,
– Units of any other instrument issued by a collective investment
scheme to the investor in such schemes,
– Security receipts,
– Government securities,
– Rights or interests in securities
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Growth Participation Why

Participating in the Financial Markets

You as a Lender You as a Owners

• Giving business loans to people • Participation directly in own

who you know, directly businesses / assets
• Giving money to intermediaries • Buying exiting businesses

• RBI Bonds • Equities & related

• Infrastructural Bonds Products
• Company deposits
• Govt. Securities
• Debentures

Debt Markets Equity Markets

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 Equity Markets
Equity & Related Concepts

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Equity Meaning

• In financial world, Equity means Capital raised by a company through the

issuance and distribution of shares

• Two meanings …
– Equality Each share represents equal rights
“whole divided into equal parts”

– Ownership Shareholders are the owners of company

“power equivalent to the number of shares”

• A person or organization which holds at least a partial share of stocks is

called a shareholder.

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Equity Options Types

• Common or Ordinary Share

– This is the most common form of shares / holding
– The “Real” Owners of the company (voting rights)
– Have the final or residual interest in the company
– Bearers of the unlimited risk of loss or benefits of profits

• Preference Share
Less common and have a priority over Common Shares for distribution
of profits (fixed dividends / profits). Dividends are cumulative in nature.
No voting rights.

Being a Equity Holder can make you the owner of good businesses like
Reliance, Tata, Infosys, Wipro, Bharti, ICICI

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Equity Price

• Each Share trades at a particular price

The Price represents … (expected)

• Today’s worth of all the future profits
• Value of all the assets of the company

– A price can never be ‘zero’ or ‘negative’ (limited liability)

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Equity

• Earnings Per Share or EPS

= PAT / No. of Equity Shares

PAT is the Profits After Tax of the Company

Reliance Inds. ACC

Number of Shares (crores) 139.37 17.82

PAT (crores) Trailing 4 qrts 5,543.81 200.24
Therefore, EPS = 5,543.81 / 139.37 200.24 / 17.82

EPS in Rs. (unit) 39.78 11.24

Actual Figures. EPS as on 8th Sept’ 04

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Equity

• Price to Earnings Ratio or PE Multiple

= Price / Earnings Per Share (EPS)

Price: current market price &
Earnings: trailing 4 quarter

• Is a relative valuation measure … varying between companies, industries,

countries & times
• Can be used as an indication of how cheap / costly the share are
Reliance Inds. ACC

Current Price (8th Sept) 482.50 271.00

EPS 39.55 13.30
Therefore, P/E = 482.50 / 39.55 271.00 / 13.30
Price to Earnings Ratio 12.20 20.37
09/01/10 Actual Figures. EPS as on 8th Sept’ 04
31
Equity DY

• Dividend Yield

= Dividend / Price
Price: current market price
Dividend = declared Dividend Per Share

– Dividend is declared on the Face Value of the shares

– The Face value and the price of the shares differ …

Reliance Inds. Hero Honda

Current Price (8th Sept) 482.50 450.35

Dividend Declared per Share 5.26 19.81
Therefore, DY = 5.26 / 482.50 19.81 / 450.35
Dividend Yield 1.09% 4.40%
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Equity EY

• Earnings Yield
= Earnings / Price

Earnings: Earnings per share or EPS

Price: current market price

– Similar to Dividend Yield

– Inverse of PE
– Can be used to compare to the yields of other asset classes …

Reliance Inds. ACC

Current Price (8th Sept) 482.50 271.00

Earnings per Share 39.55 13.30
Therefore, EY = 39.55 / 482.50 13.30 / 271.00
Earnings Yield 8.20% 4.91%
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Equity Mkt. Capt.

Reliance Inds. Bata India

Current Price (8th Sept) 482.50 70.50

Number of Shares (crores) 139.37 5.14
Therefore, MKt. Capt. 482.50 * 139.37 70.50 * 5.14
Market Capitalisation (crores) 67,244.94 362.51
Large Cap Stock Small Cap Stock

:Large Cap Small Cap

High market capitalisation •
Greater liquidity •
Relatively smaller potential for returns •
Relatively less risky and steady in nature •
Transaction costs low due to high liquidity •
• Low Market Capitalisation
• Relatively low liquidity
• Potential for higher returns
• Higher risk - more volatility & uncertainty
• High transaction cost

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Equities:

Growth Stocks:

• Potential to for high and/or continued growth in their businesses

• Consistently experience above average increases in sales and earnings
• Generally found in emerging business sectors with potential for high
future growth and expansion
• Command high prices because of the high growth potentials and thus
have relatively higher P/E multiples.

… Growth Investing Style of Funds

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Equities:

Value Stocks:

• Stocks that are available at prices lower than their fundamental worth.
• Good stocks with good earnings history available at lower prices.
• A stock may turn a value stock when the markets fall or when there is
a general downturn in the markets.
• The person investing in value stock hopes that the market will
ultimately discover the stocks and their prices would rise.
• The value stocks generally have lower PE multiple and lower price to
book value ratio.

… Value Investing Style of Funds

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Research in Equity:

• Lies at the heart of any actively managed fund

• Fund Management Team consists of >> Fund managers (schemes) +

Researchers & Analysts who carry out all the research and study work
+ Dealers & Traders who execute the transactions in the markets

• Types:

– Fundamental Analysis
• Top – Down Approach
• Bottom – Up Approach
– Technical Analysis
– Quantitative Analysis

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Equity

Risk in Equities Earnings from Equities

• Returns are unsure! • Dividends

• Equity – owners’ risk Generally at the end of
• Volatility of returns the year or interim

• Market Risk
• Capital gains
• Sentiments in ST, Herd
On sales … converting
Mentality notional gains into real

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 Understanding the Relationship
Economic Growth – Profit Growth – Price

09/01/10 39
Benefiting from Growth

How India’s Growth will drive Profits of Companies?

Households We have already seen India’s

growth potential.

Consumption
The corporate profit growth is
directly to the economic growth
Sales
The corporate profitability growth
can be guessed from the ‘nominal
Profits
economic growth’ …

Production In India we can take it at around

13% … for good companies, we
can assume the growth of around
Factor Payments 15% or above
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Benefiting from Growth

Proof: Strong Earnings of Indian Companies

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Equity Relationship

• Relationship of Price & Earnings

If Earnings Grow, Prices have to Grow

WHY?

EPS of Infosys in 1998 was 18.28 &

Market price 457.00

P/E of Infosys was Price / EPS = 457/18.28 = 25

Earnings Yield of Infosys =18.28*100/457 = 4%

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Equity Relationship

• The EPS of Infosys has grown to 170.30 in 2004.

• If the price don’t grow, then,

P/E of Infosys would be 457/ 170 = 2.68 &

Earnings Yield would be 170*100/457 = 37.19%

Such a high earnings yield is so attractive that the price of Infosys

has to increase. HENCE if earnings grow prices have to GROW

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Equity Relationship

• Infosys Price Movement:

INFOSYS PRICE MOVEMENT
Growth Growth Earnings
Price EPS Period P/E
in EPS in Price Yield

Mar-98 457 18.28 4.00 25

Mar-00 8902 38.70 1998-00 45.51% 341% 0.43 230

Mar-04 4938 170.28 2000-04 44.83% -17.83% 3.45 29

1998-04 45.05% 48.69%

Growth in Earnings & Growth in Prices matches in long run

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Equity Relationship

• Bajaj Auto Price Movement:

Bajaj Auto Ltd. - PRICE MOVEMENT

Growth Growth Earnings
Price EPS Period P/E
in EPS in Price Yield %

Mar-99 616 44 7.21 14

Mar-01 258 25 1999-01 -24.76% -35.31% 9.75 10

Mar-04 912 69 2001-04 40.09% 52.40% 7.58 13

1999-04 9.25% 8.17%

Growth in Earnings & Growth in Prices broadly move together

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Relationship

Proof: Equity in Long Term is function of corporate

profitability

BSE Sensex Vs Earnings

Sensex Sensex
Months
Value Earnings
Mar-91 1,167.97 59.35
Mar-07 13,072.10 658.88
16.29% 16.24%

BSE Sensex
Sensex Earning

Jan-91 Se p-93 M ay-96 Jan-99 Oct-01 Jun-04 Fe b-07

09/01/10 46
PERFORMANCE OF BSE SENSEX - Equities not risky in long run
Years YEAR END SENSEX level 1 year 3 years 5 years 7 years 10 years 12 years 15 y
1 31-Mar-80 128.57 28.57% 31-Ma
2 31-Mar-81 173.44 34.90% 100
3 31-Mar-82 217.71 25.52% 29.61%
4 31-Mar-83 211.51 -2.85% 18.05%
5 31-Mar-84 245.33 15.99% 12.25% 19.66% As Time Increases
6 31-Mar-85 353.86 44.24% 17.58% 22.44%
Volatility & Range
7 31-Mar-86 574.11 62.24% 39.49% 27.05% 28.36%
Decreases
8 31-Mar-87 510.36 -11.10% 27.66% 18.58% 21.77%
9 31-Mar-88 398.37 -21.94% 4.03% 13.50% 12.61%
10 31-Mar-89 713.60 79.13% 7.52% 23.81% 18.48% 21.72%
11 31-Mar-90 781.05 9.45% 15.24% 17.16% 20.52% 19.77%
12 31-Mar-91 1167.97 49.54% 43.12% 15.26% 24.97% 21.01% 22.73%
Harshad
13
Mehta
31-Mar-92 4,285
4285.00 266.88% 81.76% 53.04% 42.80% 34.71% 33.94%
14 31-Mar-93 2280.52 -46.78% 42.93% 41.76% 21.78% 26.84% 23.95%
15 31-Mar-94 3778.99 65.71% 47.90% 39.57% 33.11% 31.45% 26.85% 27.4
16 31-Mar-95 3260.96 -13.71% -8.70% 33.09% 35.03% 24.87% 25.60% 24.0
17 31-Mar-96 3366.61 3.24% 13.86% 23.58% 24.81% 19.35% 24.39% 21.8
18 31-Mar-97 3360.89 -0.17% -3.83% -4.74% 23.18% 20.74% 20.63% 20.0
19 31-Mar-98 3892.75 15.82% 6.08% 11.29% 18.77% 25.60% 17.29% 21.4
Tech Boom
20 31-Mar-99
5,001
3739.96 -3.92% 3.57% -0.21% -1.92% 18.02% 18.05% 19.9
21 31-Mar-00 5001.28 33.73% 14.17% 8.93% 11.87% 20.40% 23.47% 19.3
22 31-Mar-01 3604.38 -27.93% -2.53% 1.37% -0.67% 11.93% 14.45% 13.0
22 31-Mar-02 3469.35 -3.75% -2.47% 0.64% 0.89% -2.09% 13.23% 13.6
22 31-Mar-03 3048.72 -12.12% -15.21% -4.77% -1.41% 2.95% 8.32% 14.5
23 31-Mar-04 5590.60 83.38% 15.76% 8.37% 7.54% 3.99% 2.24% 14.7
24 31-Mar-05 6492.82 16.14% 23.23% 5.36% 7.58% 7.13% 9.11% 15.1
25 31-Mar-06 11279.96 73.73% 54.67% 25.63% 17.08% 12.85% 9.54% 16.3
26 09/01/10
31-Mar-07 13,072.10 15.89% 32.73% 30.38% 14.71% 14.55% 12.27%47 7.7
Probability of Loss 10/28 5/26 3/24 3/22 1/19 0/17 0/
Indicators for Equity Investment

• Corporate profitability has been rising at impressive growth due to better

higher consumption, cost competitiveness, benign interest rates,
increasing presence in world market, etc
• Sound banking system with a network of 70,000 branches, among the
largest in the world
• Favorable Tax structure (LTCG Zero and STCG @10%, Dividend tax
free)
• Corporatisation of Indian stock exchanges
• India has one of the world's lowest transaction costs based on screen-
based transactions and paperless trading
• According to Morgan Stanley Research, trading volumes are expected to
double to $3.2 trillion in 2010 from about $1.6 million currently
• No. of FIIs increased to 1030 in 2006 from 814 in 2005
• Earning growth is among highest in the Asia-Pacific region

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Equity Investing

Direct Investing In-direct Investing - MF

• Relatively high investment • Very low investment amount

amount needed needed (SIP of Rs.100/-)

• Lack of expertise • Professional Expertise

• Inadequate information on – Full time Fund Mngt. team

time – High quality & timely info
• Full time job!! • Lower of Risks due to
• Higher risks diversification

• High Transaction Costs • Low transaction costs

• Dependence on Brokers … • Many other advantages

who have their own agenda!

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Equity Investing Styles of MFs

Active Fund Management • Belief in the ability to out-run

• Growth Investing Style benchmark / markets
• High Research costs
• Value Investing Style
• Higher Expenses
• Blend

• Lower Expenses
Passive Fund Management
• Rebalancing of portfolio for
(Index Funds)
index
• ‘Tracking error’

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