JM Financial Mutual Fund

Investor Connect Programme April 2008

Rise and fall of stock markets/prices is guaranteed!

A Basic Reminder
Invest for the Long term Price of the company will change daily but not the value of the company. Its 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

Boombangcrash!!
Sensex peaks at 21000 levels in Jan 2008

Euphoria
Sensex crosses 18000 in Oct 2007

(sharp rally of 4000 pts in 1 mths)

Belief

Crash

Sensex crashes to 15332 on Jan 22 2008 thereby retracing to Aug 2007 levels (within 7 trading sessions of achieving a peak)

Disbelief

Last Leg for Up Move was backed by

- Liquidity - Leverage - Rumour mongering - Huge Retail participation But was not backed by FUNDAMENTALS

2000 - Statistics
Feb 2000 Sensex Peak 5933
% of Stock Fall % of Stock Rise > Sensex 51%

Jan 2004 Sensex Bounce back 6026 Flows

FIIs Rs 484 bn Domestic Rs (75) bn

Flows
FIIs Rs 43 bn

> Sensex 54%

Domestic Rs 4 bn

3920 May 2000 Trough 4 yrs

Dotcom bubble
Source: Bloomberg

2001 - Statistics
Aug 2001 Sensex Peak 3318
% of Stock Fall % of Stock Rise > Sensex 56%

Nov 2001 Sensex Bounce back 3322 Flows

FIIs Rs 9.6 bn Domestic Rs (10.7) bn

Flows

> Sensex 33%

FIIs Rs (4.5) bn Domestic Rs 1.1 bn

2600 Sep 2001 Trough 3 months

September 9 /11
Source: Bloomberg

2004 - Statistics
Apr 2004 Sensex Peak 5925
% of Stock Fall % of Stock Rise > Sensex 69%

Nov 2004 Sensex Bounce back 5973 Flows

FIIs Rs 124 bn Domestic Rs (17) bn

Flows
FIIs Rs (25) bn

> Sensex 29%

Domestic Rs 13.3 bn

4505 May 2004 Trough 7 months

NDA government collapsed

Source: Bloomberg

2006 - Statistics
May 2006 Sensex Peak 12612
% of Stock Fall % of Stock Rise > Sensex 34%

Oct 2006 Sensex Bounce back 12736 Flows

FIIs Rs 144 bn Domestic Rs 17 bn

Flows

> Sensex 80%

FIIs Rs (103) bn Domestic Rs 56 bn

8929 Jun 2006 Trough 5 months Concerns that US will raise rates and draw overseas investors away from emerging markets and surging commodity prices will hurt company earnings.

Source: Bloomberg

2008 - Statistics
Jan 2008 Sensex Peak 20812
% of Stock Fall

Sensex Bounce back - ??

Flows

> Sensex 81%

FIIs Rs (149) bn Domestic Rs 54 bn

15357 Mar 2008 Trough ?? months

Sub-prime crisis
Source: Bloomberg

2008 Crash Most Vicious

Date SENSEX INDEX change

From
1 2 3 4 Jan-08 Feb-07 May-06 Apr-04

To
Mar-08 Mar-07 Jun-06 May-04

From
21206 14723 12671 5979

To
14677 12316 8799 4227

%
-30.79% -16.35% -30.56% -29.30%

Date From 1 2 3 4
Source: Bloomberg

BSEMDCAP Index To Mar-08 Mar-07 Jun-06 May-04 From 10113 6187 6033 2337 To 5805 5114 3721 1768

change % -42.60% -17.34% -38.32% -24.35%

Jan-08 Feb-07 May-06 Apr-04

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?

2000 v/s 2008

2000-01 Fwd P/E ratio Savings (as a % of GDP) Investments (as a % of GDP) 35x 23.7% 24.3% *2007-08 16x 34.7% 35.9%

GDP growth
Inflation Earnings growth
Other comparisons: Only driver of markets in 2000 was the TMT sector Rally & the crash now much more broad based

4.35%
7.16% 4.43%

8.73%
4.21% 17-20%

Tata Motors, Tata Steel, M&M making losses in 2000 IT cos much stronger and much bigger
* estimates

Corporate Profits Surpass Index Growth

Date
Apr-98
Apr-99 Apr-00 Apr-01 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07

Sensex
3993
3519 5053 3566 3506 3117 5788 6604 11747 12455

Agg BSE 500 Net Profit (Rs Crs)

33755
31101 37019 45487 45371 70028 90077 119719 136909 195769

Mar-08 10 yr growth
10 year data reveals that .
Source: Bloomberg; Edelwiess

16217 4.1 times

254500 7.5 times

profits in the broader market have grown faster than the Sensex

Consistent Earning Growth

EPS FY98 FY99 247.0 240.5 Growth (%) 6.9 (2.6) Sensex 3,969.6 3,686.3 Sensex growth 15.8% -7.1%

FY00
FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09E

274.4
235.8 251.3 293.7 354.1 435.7 478.4 653.3 865.0 1,012.1

14.1
(14.1) 6.6 16.9 20.6 23.1 9.8 36.6 32.4 17.0

5,001.3
3,604.4 3,500.2 3,081.0 5,740.9 6,605.0 11,280.0 13,072.1 15,800.0 ?

35.7%
-27.9% -2.9% -12.0% 86.3% 15.1% 70.8% 15.9% 20.9% ?

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

Economic Fundamentals - Robust

Real GDP % Y-o-Y 1997-98 1998-99 4.30 6.68 Inflation % Y-o-Y 4.40 5.95

Investments as a % of GDP
% 25.3 23.3

Savings as a % of GDP
% 23.80 22.26

1999-00
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

6.44
4.35 5.81 3.84 8.52 7.45 9.40 9.62 8.73

3.27
7.16 3.60 3.41 5.46 6.48 4.38 5.42 4.21

25.9
24.3 22.8 25.2 28.2 32.2 35.5 35.9 36.3 *

24.81
23.74 23.47 26.40 29.81 31.77 34.28 34.77 35.05*

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

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

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

Where can the Sensex go?

FY2009 EPS growth Sensex EPS P/E 12 13 14 15 16 17 18 19 20 21 22 12120 13130 14140 15150 16160 17170 18180 19190 20200 21210 22220 14544 15756 16968 18180 19392 20604 21816 23028 24240 25452 26664 17453 18907 20362 21816 23270 24725 26179 27634 29088 30542 31997 20420 22121 23823 25525 27226 28928 30630 32331 34033 35735 37436 23891 25882 27873 29864 31855 33846 35837 37828 39819 41809 43800 27953 30282 32611 34941 37270 39600 41929 44258 46588 48917 51246 32146 34824 37503 40182 42861 45539 48218 50897 53576 56255 58933 36967 40048 43129 46209 49290 52370 55451 58532 61612 64693 67773 42512 46055 49598 53141 56683 60226 63769 67311 70854 74397 77940 47614 51582 55550 59517 63485 67453 71421 75389 79357 83324 87292 20 1010 FY2010 20 1212 FY2011 20 1454 FY2012 17 1702 FY2013 17 1991 FY2014 17 2329 FY2015 15 2679 FY2016 15 3081 FY2017 15 3543 FY2018 12 3968

Pls note: the above calculations are based on hypothetical assumptions about the EPS growth rate and the P/E ratio

JM Financial Mutual Fund

Technical Analysis

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

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

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

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

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

Higher September - Way to go?

Sensex Values Year 2003 2004 2005 2006 2007
Source: Bloomberg; Edelwiess

31-Mar 3,049 5,591 6,493 11,280 13,072

30-Sep 4,453 5,584 8,634 12,454 17,291

growth 46.1% -0.1% 33.0% 10.4% 32.3%

Key Statistics - JM Schemes

JM ELF P/E ratio (FY09) Profit growth (FY09)
Source: JM Financial MF research

JM Basic 12.4x 51.7%

JM HIFI 10.4 40%

JM Equity 13.6x 38.5%

BSE Sensex 15.3 17.0%

10.8x 65.0%

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 RBIs 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

JM Financial Mutual Fund

Thank You !!