Analysis of Daily Volatility and Investment Strategies in Finance Conclave 2018

Vikatan Finance Conclave Vikatan Finance Conclave - - 2018 2018

ANALYSIS OF VOLATILITY P R A V E E N R E D D Y

N I F T Y 2 0 1 8 How many of you feel that Index in 2018 does not reflect your experience ? 12,000.0 10,000.0 8,000.0 6,000.0 4,000.0 2,000.0 I N D E X - Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 10,430 01 Jan 2018 10,876 30 Nov 2018

WELCOME GOOD AFTERNOON 1 2 Looking back - Analysis of why most investors are feeling pain and how 2018 has been different from the past Looking forward - Strategies to identify investment opportunities

V O L AT I L I T Y P / E P R O F I T S

V O L A T I L I T Y How often do markets fluctuate more than 1% in a day ? 5% of the time 30% of the time 10% of the time >50% of the time

V O L A T I L I T Y Analysis of data from 01-Jan-2000 to 31-Oct-2018 (4,692 DAYS) DAILY VOLATILITY 54% 46% AVERAGE VERY LOW (0.0% 0.5%) VERY LOW (0.0% 0.5%) 38% 46% 54% 8 days in a month LOW LOW 26% 55% 45% 5 days in a month (0.5% 1.0%) (0.5% 1.0%) MEDIUM (1.0% 2.0%) MEDIUM (1.0% 2.0%) 24% 55% 45% 5 days in a month HIGH HIGH 11% 50% 50% 2 days in a month (2.0% 5.0%) (2.0% 5.0%) 2 days in a year VERY HIGH (More 5%) VERY HIGH (More 5%) 1% 47% 53% Markets have a slight upward bias 1 in 3 days market fluctuation is > 1% ODDS ARE IN THE FAVOR OF INVESTORS

A N A L Y S I S O F D A I L Y V O L A T I L I T Y ( 2 0 0 0 - 2 0 1 8 ) V E R Y L O W L O W M E D I U M H I G H V E R Y H I G H 100% 1% 3% 11% 11% 15% 13% 17% 90% 25% 26% 80% 24% 31% 27% 70% 27% 37% 60% 29% 28% 26% 50% 24% 21% 24% 40% 17% 23% 30% 13% 47% 20% 38% 34% 33% 27% 21% 20% 10% 0% 2000 2001 2007 2008 2009 2018 Average

P R I C E / E A R N I N G R A T I O ( P / E ) Yearly Profit Buy 1 LAKH ME SHOP If I pay 5 lakhs I am paying 5 years of profit upfront, I need to wait for 5 years to recoup my capital P/E = 5 (Price is 5 times earnings) P/E = 10 If I paid 10 lakhs PAYING HIGH P/E IS NOT GOOD FOR THE BUYER

P / E v s I N D E X R E T U R N P / E R E T U R N 29.0 27.0 70.0% If P/E is above average Returns are below average 25.0 50.0% 23.0 30.0% AVERAGE 21.0 P / E = 1 9 . 4 19.0 10.0% R E T U R N = 1 2 % 17.0 -10.0% 15.0 -30.0% 13.0 If P/E is below average Returns are above average 11.0 -50.0% 2010 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2011 2012 2013 2014 2015 2016 2017 2018 HIGH P/E S CORRELATED WITH POOR RETURNS FOR INVESTORS

A N A L Y S I S O F P / E 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 AVG P/E 22.1 16.3 16.1 14.5 16.3 14.8 19.2 21.3 18.7 18.7 22.9 19.8 18.1 17.8 19.9 22.4 21.9 24.7 26.5 30.0 28.0 26.0 24.0 22.0 20.0 18.0 16.0 14.0 12.0 10.0 Jan-99 Sep-99 Jan-00 Sep-00 Jan-01 Sep-01 Jan-02 Sep-02 Jan-03 Sep-03 Jan-04 Sep-04 Jan-05 Sep-05 Jan-06 Sep-06 Jan-07 Sep-07 Jan-08 Sep-08 Jan-09 Sep-09 Jan-10 Sep-10 Jan-11 Sep-11 Jan-12 Sep-12 Jan-13 Sep-13 Jan-14 Sep-14 Jan-15 Sep-15 Jan-16 Sep-16 Jan-17 Sep-17 Jan-18 Sep-18 May-99 May-00 May-01 May-02 May-03 May-04 May-05 May-06 May-07 May-08 May-09 May-10 May-11 May-12 May-13 May-14 May-15 May-16 May-17 May-18 HISTORICAL AVERAGE P/E IS 19.4 2017 AND 2018 P/E S WERE AT HISTORIC HIGHS

P R O F I T S v s N I F T Y P R O F I T I N D E X 700,000 12,000 600,000 10,000 500,000 Corporate profits have been increasing over time 8,000 400,000 6,000 Index and profit growth are correlated 300,000 4,000 200,000 Index growth fluctuates from profits but deviations eventually correct 2,000 100,000 - - 1-Oct 1-Oct 1-Oct 1-Nov 1-Dec 1-Nov 1-Dec 1-Nov 1-Dec 1-Nov 1-May 1-May 1-May 1-Jul 1-Jul 1-Jul 1-Jul 1-Jun 1-Mar 1-Jan 1-Jun 1-Mar 1-Jan 1-Jun 1-Mar 1-Jan 1-Jun 1-Apr 1-Feb 1-Apr 1-Feb 1-Apr 1-Feb 1-Apr 1-Feb 1-Sep 1-Aug 1-Sep 1-Aug 1-Sep 1-Aug 1-Sep PRICES FOLLOW PROFITS

P R O F I T S , G D P & M A R K E T C A P - G R O W T H M A R K E T C A P G D P P R O F I T S 110% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% -60% 2003 2000 2001 2002 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Corporate profit growth contributes to GDP growth

D E E P D I V E I N T O Q o Q P R O F I T G R O W T H 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 QOQ 1.8% 8.0% 8.1% 4.5% 6.4% 6.3% 7.3% 1.8% 3.7% 2.9% 2.1% 2.6% 1.3% 2.1% 0.4% 2.6% 1.2% 2.8% PROFIT 12% 10% 8% 6% 4% 2% 0% -2% -4% 1-Feb-02 1-Feb-03 1-Feb-04 1-Feb-05 1-Feb-06 1-Feb-07 1-Feb-08 1-Feb-09 1-Feb-10 1-Feb-11 1-Feb-12 1-Feb-13 1-Feb-14 1-Feb-15 1-Feb-16 1-Feb-17 1-Feb-18 1-Oct-01 1-Oct-02 1-Oct-03 1-Oct-04 1-Oct-05 1-Oct-06 1-Oct-07 1-Oct-08 1-Oct-09 1-Oct-10 1-Oct-11 1-Oct-12 1-Oct-13 1-Oct-14 1-Oct-15 1-Oct-16 1-Oct-17 1-Jun-01 1-Jun-02 1-Jun-03 1-Jun-04 1-Jun-05 1-Jun-06 1-Jun-07 1-Jun-08 1-Jun-09 1-Jun-10 1-Jun-11 1-Jun-12 1-Jun-13 1-Jun-14 1-Jun-15 1-Jun-16 1-Jun-17 1-Jun-18 POOR CORPORATE PROFIT GROWTH SINCE 2011

R E T U R N A N A L Y S I S Companies are organized into segments by their Market capitalization M A X AV G M I N 77.3% 59.9% 53.3% 54.5% 62.5% 63.2% 9.1% 11.5% 14.7% 14.9% 23.9% 13.3% -15.4% -10.4% -13.1% -25.4% -31.2% -7.7% 20 LARGEST 1% 40 LARGE CAP Average return from smaller companies has been better than larger ones 140 500 MID CAP SMALL CAP 1300 ULTRA SMALL CAP Smaller companies had greater variance in performance ALL

S E G M E N T R E T U R N v s I N D E X 2018 has seen the worst performance vs INDEX in the last 18 years 2006 -4.5% 16.9% 8.0% -10.0% 5.2% 2008 10.8% 0.3% 4.6% -5.1% -17.9% 2009 3.9% 13.1% 33.1% 23.1% 38.5% 2012 -3.2% 3.5% 18.7% 16.5% 28.0% 2013 6.9% -0.6% -10.1% -10.3% -0.9% 2018 5.7% -10.4% -13.1% -25.4% -31.2% Largest 1% Large Cap Mid Cap Small Cap Ultra Small Cap 2018 - All categories other than Largest 1% lost to INDEX 2018 - Most portfolios will be significantly underperforming INDEX All 1.7% 1.5% 16.5% 6.4% -0.4% -7.7%

R E T U R N v s I N D E X F O R V A R I O U S S E C T O R 2 0 1 5 2 0 1 6 2 0 1 7 2 0 1 8 2 0 1 5 2 0 1 6 2 0 1 7 2 0 1 8 10.4% -6.9% -5.8% 25.9% 4.7% -20.8% 31.0% -62.3% IT SOFTWARE TELECOM 4.5% 3.9% 55.2% -42.8% -15.2% 30.2% 69.1% 14.5% REALTY STEEL 14.8% 12.6% 9.3% -33.1% AUTOMOBILE 24.1% -0.1% 15.9% 8.6% FMCG 13.3% 18.1% 13.2% -28.6% CEMENT 32.6% -10.9% 60.3% 8.5% RETAIL 43.6% 10.5% 23.7% -27.0% TEXTILES -4.8% 8.4% -13.9% 5.6% TOBACCO PROD S -27.8% 17.3% -19.1% -23.7% CRUDE OIL & NATUAL GAS 25.2% -11.1% -15.5% 2.6% PHARMACUETICALS 7.2% -8.0% 10.3% -21.2% CAPITAL GOODS 12.6% 12.7% 15.9% -20.6% AUTO ANCILLARIES NON FERROUS -15.5% 56.2% 11.5% -19.6% -20.2% 13.5% 0.9% -19.5% MINING & MINERALS

2 0 1 8 Volatility was not abnormal P/E has been the highest ever Profit growth has been poor All categories other than the Largest 1% have lost to INDEX 2018 has seen the worst performance vs INDEX in the last 18 years Most portfolios can be expected to be underperforming INDEX INDEX is NOT representing the experience of market

LOOKING FORWARD

W H Y I N V E S T I N M A R K E T Sensex in 2025 with various assumptions of growth with 2000 as starting point 140,000 130,758 33x 120,000 23x 100,000 91,665 80,000 17x 67,526 60,000 43,037 11x 40,000 3,972 7x 20,000 27,203 - 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 V. P E S S 8 % P E S S 1 0 % L . P E S S 1 2 % A C T 1 3 . 4 % O P T M 1 5 % Long term growth experienced by US markets in last 60 years Long term GDP growth US market + 2% additional inflation in India Historical growth rate in the Indian market since 1990 Growth experienced by China

W H Y I N V E S T I N M A R K E T Sensex in 2018 with various assumptions of growth with 2000 as starting point 140,000 3.6x 130,758 120,000 100,000 91,665 2.5x 56,530 80,000 1.9x 67,526 36,194 30-Nov 60,000 43,156 43,037 34,211 40,000 3,972 24,293 20,000 27,203 17,142 - 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 V. P E S S 8 % P E S S 1 0 % L . P E S S 1 2 % A C T 1 3 . 4 % O P T M 1 5 % 3 1 2 In 2025 SENSEX can be in the range of 60,000 to 90,000 Market returns since 2000 have been robust They have been slightly lower than historical average

M A R K E T T I M I N G In the last 18 years, there were just 51 days when the daily volatility was more than 5%. 24 of them were days when the market went up TRADER INVESTOR INDER THIRU Tiru the Trader missed 24 very high volatile up days Inder the investor invested in 2000 and stayed invested till 2018 If Tiru started with 10,000 he would have If Inder started with 10,000 he would have 12% 86,000 4.3% 22,250 2/3 OF UPSIDE IS LOST BY MISSING JUST 0.5% OF THE DAYS

P R O F I T G R O W T H A N A L Y S I S 2018 M I N AV G M AX 2 0 1 2 2 0 1 3 2 0 1 4 2 0 1 5 2 0 1 6 2 0 1 7 0.2% 3.9% 9.7% 1.4% 1.9% 3.8% 1.0% 0.2% 3.5% 2.9% LARGEST 1% -3.3% 3.8% 16.9% 7.6% 2.2% 2.4% -3.3% 7.9% -2.2% 2.0% LARGE CAP -2.0% 3.9% 12.9% 2.5% 1.5% 0.1% 1.8% 0.6% 0.7% 5.3% MID CAP -0.1% 3.8% 11.9% 0.3% 0.1% 0.2% 3.2% 3.6% 2.9% 4.2% SMALL CAP -5.8% 3.5% 12.4% -1.2% -2.6% 2.1% 0.4% 4.5% 3.7% -1.5% ULTRA SMALL CAP 3 1 2 Identifying stocks that are having good profit growth is a viable strategy Profit growth in large stocks has been modest Mid and small cap segments are having good growth in profits

P / E A N A L Y S I S 2018 2 0 1 2 2 0 1 3 2 0 1 4 2 0 1 5 2 0 1 6 2 0 1 7 M A X AV G M I N 17.8 18.5 19.9 21.5 20.4 21.5 25.3 26.7 20.4 14.5 LARGEST 1% 15.1 13.5 17.2 23.5 18.9 27.0 28.2 28.2 17.5 9.2 LARGE CAP 7.3 7.0 9.5 10.1 10.5 13.5 12.6 13.5 8.0 4.0 MID CAP 15.1 14.2 19.3 22.4 20.6 25.2 24.0 25.2 15.1 6.1 SMALL CAP 33.7 34.1 49.2 60.9 61.9 69.3 74.8 74.8 38.3 12.9 ULTRA SMALL CAP 16.0 15.4 19.2 22.4 21.0 25.7 26.9 26.9 18.1 11.9 ALL 3 1 2 Companies with attractive valuations could be a better bet Valuations in all the categories are rich (higher than historical averages) HIGH P/E Index funds could be tricky investments

S E C T O R W I S E D A T A 2 0 1 5 2 0 1 6 2 0 1 7 2 0 1 8 2 0 1 5 2 0 1 6 2 0 1 7 2 0 1 8 -18.8% 1.8% 15.2% 22.4% 16.78 13.46 11.12 11.24 STEEL CRUDE OIL & NATURAL GAS 3.2% 1.0% 17.3% 21.6% 15.51 16.46 12.55 11.34 CAPITAL GOODS STEEL 3.6% 5.5% 4.3% 12.4% 10.90 8.60 8.93 11.70 CHEMICALS REFINERIES 3.2% 1.6% -0.1% 9.2% 25.41 32.41 19.71 13.60 FINANCE CAPITAL GOODS 17.4% 54.0% 0.4% 9.0% 12.74 11.80 12.26 14.78 RETAIL POWER GEN & DIST -5.4% -0.6% 1.0% 7.1% 10.85 11.96 11.25 16.47 CRUDE OIL & NATURAL GAS NON FERROUS METALS 3.4% 6.6% -0.3% 6.9% 19.26 19.31 17.84 16.63 AUTO ANCILLARIES IT - SOFTWARE 5.5% 6.2% 1.3% 6.8% 16.73 15.29 14.07 16.66 AUTOMOBILE GAS DISTRIBUTION 7.3% -0.9% 0.7% 6.6% 18.12 10.31 10.23 17.81 PHARMACEUTICALS MINING & MINERALS -10.7% 13.0% 5.4% 6.5% 21.50 23.47 23.39 22.90 GAS DISTRIBUTION CHEMICALS

L O O K I N G F O R W A R D O P P O R T U N I T U E S C H A L L E N G E S Some of the uncertainties are factored in Oil prices, QE, Brexit, etc Liquidity for bank and finance companies End of QE Flux in EU Brexit, end of Merkel era Geo politics - US vs China, Iran, N.Korea Many of the uncertainties will be resolved in the medium term Brexit, Succession in Germany, US vs China, Iran, N. Korea NPA s for Banks and Finance companies India growth story intact Average incomes are above the $2 per day 10 year bull run Uncertainty due to local elections Oil price Value of rupee and Liquidity & NPA s for Banks and Finance companies GDP to be $40 trillion by 2050, will be #2 economy Aspirations of Indians is already making politicians talk the talk, they will also have to walk the talk Low capital addition in last few years 1 in 3 days the market fluctuation is > 1%

S T R A T E G I E S T O I D E N T I F Y I N V E S T M E N T O P P O R T U N I T I E S Markets continue to be great wealth creators Buy right and sit tight Market timing has poor odds Index and category investing may not be suitable in the current circumstances Individual stock picking may be a better strategy Identifying individual stocks Good profit growth Attractive valuations

HAPPY INVESTING