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JPMorgan Indian Investment Trust plc January 2010 Rukhshad Shroff, CFA Rajendra Nair, CFA.

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Presentation on theme: "JPMorgan Indian Investment Trust plc January 2010 Rukhshad Shroff, CFA Rajendra Nair, CFA."— Presentation transcript:

1 JPMorgan Indian Investment Trust plc January 2010 Rukhshad Shroff, CFA Rajendra Nair, CFA

2 RNINDIA1.ppt_ Two consecutive, outlier years Positive Years: 22 (73%) Negative Years: 8 (27%) Year% % % % % -30 to to 0 0 to to 60 >60 Range of returns (%) Source: MOSL, 11/1/10

3 RNINDIA1.ppt_ JPMorgan Indian Investment Trust Cumulative performance to 30 th September 2009 * Includes the return from the bonus of subscription shares in November 2008 Source: Morningstar, JPMAM. Total returns in £. 1 Year 3 Years5 Years 10 Years %% JPM Indian – Diluted NAV JPM Indian – Undiluted NAV JPM Indian – Return to Shareholders45.1* MSCI India Index #

4 RNINDIA1.ppt_ JPMorgan Indian Investment Trust Performance update ^ Inception: 1/7/94 * Undiluted. Excludes the impact of any subscription share dilution Source: Morningstar, JPMAM. Total returns in £. Since Inception^ 6 months1 Year3 Years5 Years10 YearsAnnualised %%% JPM Indian – NAV* MSCI India Index # Relative performance Fund Size £462.3m As at 31 st December 2009

5 RNINDIA1.ppt_ JPMorgan Indian Investment Trust Cumulative performance since launch Source: Bloomberg, JPMAM, Thomson Reuters Datastream As at 31 st December 2009

6 RNINDIA1.ppt_ JPMorgan Indian Investment Trust Top ten holdings Stock NameSector Market Cap £m % of Fund 1Reliance IndustriesEnergy47, Infosys TechnologiesInformation Technology19, HDFC BankFinancials9, Housing Development Finance Corp.Financials10, ICICI BankFinancials12, Bharat Heavy ElectricalsIndustrials15, Tata Consultancy ServicesInformation Technology19, Tata MotorsIndustrials2, Maruti Suzuki IndiaConsumer Discretionary5, Infrastructure Development FinanceFinancials12, Source: JPMAM As at 31 st December 2009

7 RNINDIA1.ppt_ JPMorgan Indian Investment Trust Sector weighting Source: JPMAM As at 31 st December % 12.4% 3.9% 2.6% 4.6% 14.2% 1.0% 30.1% 15.8% 9.8% Financials Energy Information Technology Industrials Materials Consumer Discretionary Utilities Health Care Consumer Staples Cash

8 RNINDIA1.ppt_ Big picture view We think the Indian economy can double in 5-6 years time to ~US$2 trillion. The share of investment, historically neglected, will increase as India finally takes infrastructure seriously. Consumption will continue to grow and remain dominant, driven by favourable demographics. Corporate earnings could double in ~4-5 years Foreign investment + re-allocation of domestic savings pool = positive for equities

9 RNINDIA1.ppt_ India remains a compelling early stage growth opportunity Source: IMF, Morgan Stanley Research, 7/1/10

10 RNINDIA1.ppt_ Reaping the demographic ‘dividend’ Source: NCAER; E= NCAER estimates, 7/1/10 Growing Middle Class (% Share of Households) * Note: Africa includes a group of 56 countries. Source: UN, Morgan Stanley Research, 7/1/10 India the Largest Contributor to Growth in the Working Population Over the Next 10 Years Addition to working age population by 2019 Stock Position 2009E In Millions F2002F2006EF2010E

11 RNINDIA1.ppt_ Positive demographics = growing savings pool = sustainable growth Source: CEIC, IMF, Morgan Stanley Research, 20/1/10 Source: CEIC, CSO, Morgan Stanley Research, 20/1/10 Savings as % of GDP, 2008

12 RNINDIA1.ppt_ Low penetration will drive consumption Source: IIFL,15/1/10 Source: Bloomberg, CEIC, Government Statistics Departments, 7/1/10 Domestic Two Wheeler Volumes % of Population Owning Two Wheelers Auto Penetration (vehicles per thousand) versus GDP per Capita (PPP adjusted) Source: IIFL,15/1/10

13 RNINDIA1.ppt_ while rising infrastructure spending will be another pillar of growth E = Morgan Stanley Research estimates; Source: Morgan Stanley Research, 14/1/10 E = Morgan Stanley Research estimates; Source: Morgan Stanley Research, 14/1/10 India: Infrastructure Investment

14 RNINDIA1.ppt_ Infrastructure: Where is the money going? Assumed USD/INR = 40 for F2008-F2012 Source: Planning Commission, Morgan Stanley Research, 20/1/10 Infrastructure Spending

15 RNINDIA1.ppt_ E = Morgan Stanley Research estimates Source: Morgan Stanley Research, 15/1/10 India & China: Infrastructure Investment (US$ bn)India & China: Infrastructure Investment Chindia: Comparisons are at least indicative

16 RNINDIA1.ppt_ C + I = higher and more resilient growth Source: CSO, CEIC, Morgan Stanley Research, 1/12/09 Quarterly GDP Growth Trend (% YoY)

17 RNINDIA1.ppt_ Source: CSO, Morgan Stanley Research, 7/1/10Source: Ministry of Commerce, Morgan Stanley Research, 7/1/10 Export Decline NarrowsIndustrial Production A near ‘V’ shaped recovery

18 RNINDIA1.ppt_ Ultimately feeding through into corporate earnings Source: MOSL, 11/1/10 Sensex EBITDA GrowthSensex Sales Growth Source: MOSL, 11/1/10 Sensex PAT Growth (YoY)

19 RNINDIA1.ppt_ Earnings could double in less than 5 years Source: MOSL, 11/1/10

20 RNINDIA1.ppt_ Valuations: Not cheap, but…. Source: FactSet, MSCI, Morgan Stanley Research, 14/1/10 MSCI India PE Source: FactSet, MSCI, Morgan Stanley Research, 14/1/10 MSCI India PB

21 RNINDIA1.ppt_ Institutional activity is getting more balanced Source: SEBI, BSE, Morgan Stanley Research, 19/1/10

22 RNINDIA1.ppt_ Risks Inflation and interest rates Global risk appetite Oil price Twin deficits Geopolitics The unexpected

23 RNINDIA1.ppt_ Summary India remains a compelling early stage growth opportunity Infrastructure spending and consumption will drive GDP growth Which in turn will drive earnings growth and profitability The opportunity will be punctuated by risks and volatility… …yet, the market could potentially double in 3-4 years

24 RNINDIA1.ppt_ Appendix

25 RNINDIA1.ppt_ The JF and JPMorgan India team The India team Edward Pulling Managing Director, 15 years of India- related experience Rukhshad Shroff Managing Director, 18 years of India- related experience Rajendra Nair Vice President, 10 years of India- related experience Johnny Wong Dealer, 12 years of India- related experience Nandkumar Surti Vice President, 18 years of India- related experience Harshad Patwardhan Vice President, 16 years of India- related experience Amit Gadgil 6 years of India- related experience Ravi Ratanpal 4 years of India- related experience Rohit Agarwal 4 years of India-related experience Karan Sikka 4 years of India- related experience The Hong Kong team

26 RNINDIA1.ppt_ : An extraordinary turnaround Source: FactSet, MSCI, Bloomberg, 14/1/10 Please note : China A Share : SHCOMP, for H-Share : HSCEI ACWI : All countries world index (Developed world + Emerging markets) World Index : Developed markets

27 RNINDIA1.ppt_ as BRIC economies lived up to the hype Source: IMF, 11/1/10 GDP growth %

28 RNINDIA1.ppt_ Relative performance (on a FY basis) Source: JPMorgan Chase & Co., 31/12/09 Benchmark: MSCI India Net

29 RNINDIA1.ppt_ Performance review: 2009 = the worst of all worlds Bottom up, stock specific Medium/long term time frame, with an average of 3 years holding period Overweight domestic growth plays Quality & blue chips penalised ~9% cash in 1Q Our StrategyThe Market Macro, factor driven Extreme volatility in the last 12 months, with strong rotational tendencies Driven by global commodities, beta and leverage Leverage and beta rewarded ~100% move up in 3 months

30 RNINDIA1.ppt_ Investment Process The basic premise of our process is that there are three sources of investment return: Growth: a bigger and more profitable company adds to investment value and returns. Company contact is key to our process. We conduct hundreds of meetings per annum across countries: we analyse industries in which companies operate, the competitive landscape, management strategy to enhance competitive advantage and returns. As part of our process we not only meet companies but we meet with their competitors, distributors, suppliers and other stake holders. Valuations: how a company is valued impacts our returns. Our valuation analysis encompasses both absolute methodologies as well as relative (to history, to regional and global comparables). We also use DCF/DDM valuation frameworks, where appropriate. Sustainable yield: In addition to capital appreciation, dividend yield is an important source of long term returns. Analysing returns involves an analysis of the growth cycle of the business, its capital intensity and financial management.

31 RNINDIA1.ppt_ XIth Five Year Plan Infrastructure Spending EstimatesInfrastructure Spending Infrastructure Source: Planning Commission, Morgan Stanley Research, 15/1/10 Assumed USD/INR = 40 for F2008-F2012 Source: Planning Commission, Morgan Stanley Research, 15/1/10 Assumed USD/INR = 40 for F2008-F2012

32 RNINDIA1.ppt_ Assumed USD/INR = 40 for F2008-F2012 Source: Planning Commission, Morgan Stanley Research, 15/1/10 Source: Planning Commission, 15/1/10 Source of FundingSources of Funding: Debt & Non-Debt But who will fund it?

33 RNINDIA1.ppt_ Infrastructure: Where is the money going? SectorF1998-F2002F2003-F2007F2008-F2012 IXth planXth planXith plan (E) Electricity Roads33279 Telecom Railways Irrigation Water91436 Ports2322 Airports218 Storage016 Gas024 Total spending (US$ bn) Assumed USD/INR = 40 for F2008-F2012 Source: Planning Commission, Morgan Stanley Research, 20/1/10

34 RNINDIA1.ppt_ Assumed USD/INR = 40 for F2008-F2012 Source: Planning Commission, Morgan Stanley Research, 15/1/10 Assumed USD/INR = 40 for F2008-F2012 Source: Planning Commission, Morgan Stanley Research, 15/1/10 Debt Sources Infrastructure financing

35 RNINDIA1.ppt_ Urbanisation will be a structural growth driver Source: UN population division, World Urbanisation prospects, 7/1/10

36 RNINDIA1.ppt_ Source: CEA, Morgan Stanley Research, 7/1/10Source: Morgan Stanley Utilities Team; E = Morgan Stanley Research estimates, 7/1/10 Growth in Power Generation CapacityIndia’s Power Shortage Investment themes – Power: A crucial ingredient for growth

37 RNINDIA1.ppt_ Investment themes – Roads: Ambitious plans Source: NHAI, Morgan Stanley Research, 7/1/10

38 RNINDIA1.ppt_ Investment themes – Insurance World Insurance Penetration Rate (Premium as % of GDP) in 2008 World Non-Life Insurance Premium Growth – 5 Year (CAGR) World Life Insurance Premium Growth – 5 Year (CAGR) Source: IIFL, 11/1/10Source: Swiss Re, CEIC, IIFL Research, 11/1/10 Source: IIFL, 11/1/10

39 RNINDIA1.ppt_ Source: CEIC, Morgan Stanley Research,15/1/10 China leads India by a wide margin..

40 RNINDIA1.ppt_ …but does she offer a glimpse into India’s future? Source: FactSet, 15/1/10

41 RNINDIA1.ppt_ Relative valuations Source: FactSet, MSCI, Morgan Stanley Research, 14/1/10 MSCI PB: India relative to EM Source: FactSet, MSCI, Morgan Stanley Research, 14/1/10 MSCI PE: India relative to EM

42 RNINDIA1.ppt_ The valuation premium is well deserved Source: Worldscope, FactSet, Morgan Stanley Research, 14/1/10 ROE trends

43 RNINDIA1.ppt_ Risks: Inflation is a concern in the short term.. Source: CEIC, Morgan Stanley Research, 19/1/10

44 RNINDIA1.ppt_ …but monetary tightening is not bad for equities in the long term Source: Bloomberg, RBI & CLSA 15/1/10

45 RNINDIA1.ppt_ Risks: Fiscal deficit is a concern but is improving incrementally Note: *Here the off-budget items include expenditure on food, fertilizer and oil. E = Morgan Stanley Research estimates. Source: RBI, Economic Survey, Ministry of Finance, Morgan Stanley Research, 7/1/10

46 RNINDIA1.ppt_ Risks: Global risk appetite Source: Bloomberg, 14/1/10

47 RNINDIA1.ppt_ Risks – Oil! Source: CEIC, Morgan Stanley Research, 14/1/10Source: FactSet, MSCI, Morgan Stanley Research, 14/1/10

48 RNINDIA1.ppt_ Risks: Geopolitics has been a perennial concern Source: Anand Rathi Securities, 14/1/10

49 RNINDIA1.ppt_ Macro economic forecasts *Total of Central and State Government deficit does not tally due to inter-governmental transactions. E = Morgan Stanley Research Estimates; Source: RBI, CSO, Budget Documents, and Morgan Stanley Research. Source: RBI, CSO, CEIC, Bloomberg, SEBI, Morgan Stanley Research, 14/1/10 Years Ending March 31F2002F2003F2004F2005F2006F2007F2008F2009F2010EF2011EF2012E National Income GDP (US$ bn) ,1731,1571,2321,4901,814 Gross domestic product5.8%3.8%8.5%7.5%9.5%9.7%9.0%6.7% 8.0%7.6% Agriculture and Allied activities (incl. mining)5.9%-5.9%9.3%0.8%5.7%4.4%4.7%1.8%-1.1%5.0%3.0% Manufacturing, Constn, Electricity2.8%6.9%7.8%10.5%10.7%11.2%8.5%3.9%8.3%8.2%8.3% Services7.2%7.5%8.5%9.1%10.6%11.2%10.9%9.7%8.6%8.7% Money and Banking Money Supply (M3) growth (avg)16.2%16.3%13.1%14.2%16.1%19.6%21.8%20.3%18.0%20.0% Bank non-food credit (avg y-y increase)11.9%25.0%17.2%27.5%33.7%31.3%24.3%24.1%15.0%23.0%25.0% Interest rates 91-Day T-Bill Yield (year-end)6.2%5.8%4.3%5.2%6.5%7.4%7.3%4.7%5.3%6.8%7.0% Repo Rate (year-end)8.0%7.0%6.0% 6.5%7.5%7.8%5.0% 6.5%6.8% Prices Wholesale price index (avg y-y increase)3.7%3.4%5.5%6.5%4.4%5.4%4.7%8.4%3.2%5.3%5.5% External sector Current account0.0 Exports (US$ bn) Imports (US$ bn) Exports as % of Imports79%83% 72%67%68%64%62%59%60%59% Invisibles, net (US$ bn) Current account balance (US$ bn) (2.5)(9.9)(9.6)(17.0)(24.1)(27.0)(32.2)(41.8) Debt creating capital inflows (US$ bn)2.3(1.8)(2.1) Total capital -net (US$ bn) Foreign currency reserves (US$ bn)* Average exchange rate (USD/INR) Year end exchange rate (USD/INR) External debt (US$ bn) External debt as a percentage of GDP20.7% 18.6%17.6%17.1%18.8%19.1%19.9%19.5%17.2%15.0% Fiscal deficit (As % of GDP) -----Central government6.2%5.9%4.5%4.0%4.1%3.5%2.7%6.1%6.8%5.8%4.7% -----State government4.1% 4.4%3.4%2.5%1.9%2.3%3.4% 2.7%2.3% -----Consolidated Deficit *9.9%9.6%8.5%7.5%6.7%5.6%4.9%9.4%10.0%8.4%6.9%

50 RNINDIA1.ppt_ Macro indicators Source: RBI, CSO, CEIC, Bloomberg, SEBI, Morgan Stanley Research, 14/1/10 Jan-09Feb-09Mar-09Apr-09May-09Jun-09Jul-09Aug-09Sep-09Oct-09Nov-09Dec-09 Trade Balance (US$ billion) NA Exports (US$ billion) NA Exports (YoY)-16.8%-24%-25%-33%-29%-28% -19%-14%-7%18%NA Imports (US$ billion) NA Imports (YoY)-19.2%-37%-32%-37%-39%-29%-37%-32%-31%-15%-3%NA Foreign Direct Investment (US$ million) NA Foreign Exchange Reserves (US$ billion) Net FII Flows (US$ million) ,4774, , ,1411,7911,1421,520 Rs/US$1 (period average) M3 (YoY)17.9%19.6%18.6%20.8%20.5%20.2%20.0%19.4%19.0%18.3%17.8%17.2% Bank Loans (Non-food credit, YoY)19.4%18.5%17.5%18.1%16.1%15.2%15.9%14.2%13.0%10.1%10.5%12.7% Deposit Growth Rate (YoY)20.8%18.7%21.0%19.8%22.5%22.0%21.6%21.8%20.5%19.8%18.9%18.0% Prime Lending Rate12.3% 11.8% One Year Deposit Rate8.5% 7.8%7.5%7.3%7.0%6.5% 364 day T-Bill Yield4.6%4.7%5.0%4.4%4.1% 4.5%4.6%4.5% 91 day T-Bill Yield4.5%4.7% 4.2%3.5%3.8%3.5%3.9%4.1%3.9% 4.3% 10 yr Government Bond Yield5.9%6.0%6.6%6.5%6.4%6.8%7.0%7.2%7.3% Industrial Production1.0%0.2%0.3%1.1%2.1%8.3%7.2%10.6%9.6%10.3%11.7%NA Manufacturing( in %)1.0%0.2%-0.3%0.4%1.8%8.0%7.4%10.6%10.0%11.1%12.7%NA Consumer Goods3.6%-1.3%1.3%-4.6%-1.1%4.4%9.7%10.9%9.4%11.9%11.1%NA Basic Goods-0.7%-0.1%1.9%4.5%3.8%10.7%4.7%7.7%6.5%4.6%6.0%NA Capital Goods6.6%15.9%11.8%-6.3%-5.9%-3.6%13.4%1.7%9.2%13.3%11.0%NA Intermediate Goods-7.2%-3.0%1.9%7.9%6.6%7.9%9.8%14.4%11.2%15.2%19.4%NA Consumer Price Index (YoY)10.5%9.6%8.0%8.7%8.6%9.3%11.9%11.7%11.6%11.5% NA Wholesale Price Index (YoY) - All Commodities4.9%3.1%0.8%1.3%1.2%-1.4%-0.7%-0.3%0.5%1.2%4.8%NA


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