Sectoral Update

Banking & NBFC

03January,2014
Banking & NBFC
Pharmaceuticals
Telecom
FMCG
Metal and Mining
Infrastructure
Automobile
Power
Oil and Gas
IT
Banking&NBFC
Banking index moved to 3 years high after massive decline in August and September 2013.
The strong rebound was backed by heavy FII buying and better than expected asset quality in g y y y g p q y
recently concluded quarter result after RBI allowed them to convert trading bond to HTM to
avoid losses.
H th f d t l f i h i t d b tt th t j t th However, the fundamental of economy is changing towards better growth trajectory than
earlier estimated especially in the second half of FY14. Even at 6% growth, we expect the
credit to grow at 15 to 17 percent. We believe that even if there is correction in banking
space in near term this will be the first sector fly off once the macro environment improves space in near term, this will be the first sector flyoff once the macro environment improves.
The government has taken several steps to reduce slippages and directed the banks to deal
strictly with stressed loan books with different strategy for different class of assets. The steps
towards revival of lumpy sectors like power, roads and ports by clearing projects worth Rs4
Lakh crore especially in power where banks have already lent, is expected to add to the
bottom line and reduce the NPA. The short term rates for banks would come down as MSF
rate has reduced to 8.75% from 10.25%.
In the NBFC space (including HFCs), the companies with niche presence will do better
Positive on: DCB, Yes Bank, Indian Bank, PNB, Repco Home Finance, Gruh Finance, Mahindra
Finance and Shriram City Union etc.
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Pharmaceuticals
Pharma, which outshined other sectors for 4 years, is currently in doldrums. M&A activity has
become subdued as DIPP is scheduled to propose a cap of 49% for FDI in brownfield projects p p p p j
in India. Dealers are reluctant to stock, as margins offered by pharma companies are not
lucrative due to NLEM (expand acronym) impact. USFDA is also hammering pharma
companies across the globe by an increase in the filing fees by average 25%. p g y g y g
Domestic market is slowing down for more than a year now, which makes export business
more viable. We prefer companies with a sizable presence in US markets and strong presence
in drug formulation of lifestyle diseases like diabetic thyroid blood pressure and so on We in drug formulation of lifestyle diseases like diabetic, thyroid, blood pressure and so on. We
expect next leg of growth to come from Japan (2nd largest economy), though regulatory
norms are tough to crack and are more stringent than US. Lupin is one of the company which
has good exposure to Japanese market as compared to other players its around 13% has good exposure to Japanese market as compared to other players, its around 13%
revenues has accrued from Japan in FY13.
The companies with handsome export revenue are also likely to do better.
Positive on: Lupin, Dr. Reddy Labs, IPCA, Alembic pharma and Unichem
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Telecom
Telecom sector is inching towards consolidation phase as the telecom ministry is on the verge
of announcing new M&A policy for telecom operators which could lead to mergers of small g p y p g
players with larger ones. Major companies like Bharti Airtel, Idea and Vodafone have shown
good performance in past two quarters with increasing ARPU and data usage by customers.
The operators are now not willing to cut down prices for gaining market share and which has The operators are now not willing to cut down prices for gaining market share and which has
resulted in improved margins. The department of telecom (DOT) has allowed telcos to have
up to 50% market share after M&A which has opened up opportunities for large operators to
consolidate Spectrum pricing has been the subject of much discussion over the past many consolidate. Spectrum pricing has been the subject of much discussion, over the past many
months. Now, with auctions due next year, TRAI had demanded steep cut of base price for
900 Mhz band in metros as well as for 1800 Mhz band, but DoT has rejected its plea and
wants base price of spectrum in 900 Mhz to be 25% higher and for 1800 Mhz to be 15% p p g
higher than what is recommended by TRAI. Also DoT has asked TRAI to conduct auctions for
800 Mhz band which could generate more revenue for the government.
After ECommerce now its Mcommerce business growing at 20% CAGR mobile operator to After ECommerce now its Mcommerce business growing at 20% CAGR, mobile operator to
play active role to facilitate the business through net connectivity and mobile apps. The
consolidation and JVs in infrastructure is also likely to cut down the O&M cost thereby
boosting the margins boosting the margins.
Positive on: Idea and Bharti Airtel
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FMCG
FMCG companies, a safe haven through most of the slowdown, have felt consumption blues
of late; main reasons being slowdown in overall economy and decrease in discretionary ; g y y
spending. Annual revenues of these companies have increased 1520 per cent, their
advertisement and sales promotions spend have risen 2530 percent a year.
H th il li i h b d th t G d i lik l t Here the silver lining has been a good monsoon across the country. Good monsoon is likely to
spurt the rural demand as agricultural activities are likely to pick up. Bumper crop will
definitely give some relief in terms of softer raw material prices to FMCG companies.
In the current timid economic scenario and all time high market, FMCG still will be a safer bet
but in addition to that, the companies having larger presence in the rural market will be clear
winners
On a cautious note, the recovery in the economy may shift focus towards high beta stocks
which have underperformed in last 23 years.
Positive on: ITC, Dabur India, Bajaj Corp and Godrej Consumer
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MetalandMining
Chinese manufacturing data showing uptick in demand for core products which is gauge
though PMI data clocking to 51.4% for the month of October 2013 the highest in 18 months. g g g
Back in domestic market, the fundamental has still not changed but the prices are rising.
The recent clearance form Supreme Court to resume the operation of closed Category A and
B i i K t k i iti f i t l i ll JSW St l d S B mines in Karnataka is positive for iron ore starve players especially JSW Steel and Sesa
Sterlite. Karnataka being largest state in iron ore mining with over 25% share, is also expected
to fuel the capacity utilization of metal companies.
We expect industry will continue to witness low volume growth though rising cost of
production will continue to keep prices on higher side in short run but volume to pick up as
economy is bottoming out. The recently concluded festive season has witnessed strong
demand for consumer durable segment. We expect manufacturing including metals and
mining to do well going ahead.
The recent uptick in prices of metal stocks (leading indicator) is also suggesting the worse The recent uptick in prices of metal stocks (leading indicator) is also suggesting the worse
may be over and we can expect better prospects going ahead.
Positive on: TATA Steel, Sesa Sterlite, Kalyani Steel and Hindustan Zinc
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Infrastructure
Infrastructure sector has been continuously marred by the high debt levels, tightening
lending norms, deteriorating working capital cycles, inflationary pressures, high interest rates, g , g g p y , y p , g ,
fewer new orders and policy paralysis.
The 12
th
plan to spend over USD 1 trillion on infrastructure is not really looking a realty given
th t fi i l t i t Th PPP d l t b ild l h lf f i f t t h l the current financial constraint. The PPP model to build nearly half of infrastructure, has only
few takers. Recent government move to award projects has witnessed lack of private
participation and ministry is working on converting the projects either on Annuity or Cash
contract basis contract basis.
On the backdrop of above, most of infrastructure players are now looking to deleverage
through assets sales both at domestic and international levels to focus on core area. The
project clearance through CCI route is also to add strength in the sector.
Realty is facing consistent slowdown not only in volume off take but even slowdown in new
project launches Few southern realty companies like Sobha Developers Prestige Estate are project launches. Few southern realty companies like Sobha Developers, Prestige Estate are
able to beat the market due to relatively stable market and boom in IT sector.
Positive on: IRB infrastructure, GMR Infra, Sobha Developers, Prestige Estate, Madras Cement
and Adani Ports etc,
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Automobile
Domestic Automobile sector is showing mixed trend. The volume for commercial vehicle,
Utility Vehicle and selected passenger vehicles are showing continuous declining trend y p g g g
whereas the demand for two wheelers and tractors are witnessing strong demand uptick due
to rural centric approach and good monsoon.
W t i l hi l t d f d t hi h di l i l k f dditi b We expect commercial vehicle to underperform due to high diesel prices, lack of addition by
fleet operators and high interest rate. However, companies dependent upon rural demand
like Maruti, Bajaj Auto and Mahindra & Mahindra are expected to do well. Escort in tractor
segment is also expected to do well TATA motors domestic business is sluggish and would segment is also expected to do well. TATA motor s domestic business is sluggish and would
remain subdued in coming quarter but in JLR and TFL is doing exceptionally well. High growth
in JLR provides cushion to its earnings.
We expect the volume growth to remain highly scattered towards specific areas until broader
economy recovers and that drives the demand.
Positive on: TATA Motors Bajaj Auto Escorts and Maruti Suzuki Positive on: TATA Motors, Bajaj Auto, Escorts and Maruti Suzuki
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Power
Power sector, part of infrastructure space is also struggling to operate at 100% capacity due
to unavailability of fuel, coal scam controversy and lack of project clearances. The imported y , y p j p
coal prices are creating a dent on their margins. Gas based projects are in a more vulnerable
condition due to declining gas output and high import cost.
Th d d f h i t d t i k i t t t d t l ti The demand for power, however is expected to pick up in next two quarter due to election
year and prices are also set to go up which may lead to higher realization per unit. The
merchant power producers like Indiabulls power, JSW Energy to benefit. The NTPC with
expanded capacity to reap in benefits going ahead expanded capacity to reap in benefits going ahead.
Power projects are being paid special attention by putting them on fast track for all projects
worth Rs1000 crore. The recent IIP number where electricity segment has shown continuous
growth is augur well for overall power space.
Apart from utilities, we also expect the T&D segment to do well.
Positive on: NTPC, JSW energy, Power Grid, Jyoti Structure and India Bulls Power etc.
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OilandGas
Growth of downstream companies will be limited due to election year and uncertain
exchange rates. The upstream companies like Cairn India and Oil India are expected to well. g p p p
The prices still remain firm.
Further by approving the natural gas price hike from current $4.2 per unit to $8.4 per would
id ti k l ti ti iti Th t h l d tifi d th i i provide uptick exploration activities. The government has already notified the price incerase
and it will be effective from April 2014 onwards. Freeing the prices of bulk diesel will provide
opportunity to Reliance and Essar Oil to supply oil to Railway and Transport Operators at
market rate and newer business operation market rate and newer business operation.
Positive on: Oil India, ONGC, Reliance Industries and BPCL
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InformationTechnology
It is the flavor of all the seasons. IT has performed when Nifty was at around 5000, it is also
performing when Nifty is at around 6200. Recent result season has shown that IT is still p g y
standing strong with higher dollar revenue YoY, on the back of revival in the US and Euro
zone. Rupee depreciation has also given booster to the overall revenues.
G i f d d i ti ld b fit th IT i H l hik i Going forward, rupee depreciation would benefit the IT companies. However, salary hike, visa
costs and relatively weaker demand environment would negate these benefits. As world
economy is on revival mode we expect IT sector to outpace other sectors.
Indian economic recovery is still uncertain and hence US which account for largest share of IT
export is showing better prospect of growth after the rebound in its GDP number. The US
Feds tapering program will further the dollar index leading to higher rupee revenue growth.
Positive on: HCL technologies, Tech Mahindra, Infosys, NIIT Technologies and Wipro.
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