>INDIA STRATEGY (MORGAN STANLEY)

Increase Ownership Down the Cap Curve

• After underperforming the narrow market severely in 2008, the broader market bounced back from its March lows relative to the BSE Sensex. More recently, the broader market has given up some of these gains (about 15% underperformance since early June).

• Trading volumes have started going down the cap curve whereas returns are still better up the cap curve. YoY, the Sensex returns have already turned positive (+8%) whereas the median returns across all listed equities is still negative (-16%). No doubt mid- and small-cap indices have bottomed from their lows but remain significantly off the highs.

• Given our view that growth is likely to turn in the coming months, it is quite likely that broad market earnings growth will accelerate faster than large caps (as we saw in the previous cycle). We are already seeing signs of this in the current earnings season. The broad market earnings growth (ex-energy) has gone from -25% in December 2008 to -15% in March 2009 to 16% thus far in the quarter ended June 2009.

• While mid- and small-caps trade at a discount to large caps as they should over a cycle, given the possible acceleration in earnings growth, these stocks could start trading at premium valuations as they did in 2007.

• Hence we think investors should definitely own stocks down the cap curve. We have identified five such names based on our analyst recommendations. The following pages contain some details on these stocks.

To see full report: INDIA STRATEGY