Second level Third level Market Outlook Third level Fourth level Fifth level 17-Jun-14 1 Click to edit Master title style Click to edit Master text styles Second level Third level Third level Fourth level Fifth level 17-Jun-14 2 Click to edit Master title style Click to edit Master text styles Second level Third level Low exposure to equity could be injuriousto your Third level Fourth level Fifth level 17-Jun-14 3 could be injuriousto your wealth Click to edit Master title style Click to edit Master text styles Second level Third level Why invest in equity? Why now? Third level Fourth level Fifth level 17-Jun-14 4 Why now? Click to edit Master title style Click to edit Master text styles Second level Third level Sensex moved from 100 to 21500 level in 30 years Year Sensex 1978 (base year) 100 From 1978 to 1988 100 600 Sensex multiplies by 6x per decade Third level Fourth level Fifth level 17-Jun-14 5 Average annual return of 19.6% between 1978 and 2008; only asset class to give such superior returns over a period of 30 years From 1988 to 1998 600 3600 From 1998 to 2008 3600 21400 Click to edit Master title style Click to edit Master text styles Second level Third level Close to 20% average return in spite of concerns/issues Decade Issues/concerns 1978 - 1988 Indira Gandhis assassination; USSR-US cold war; Punjab terrorism at peak; Kashmir unrest; Sri Lanka troubles, Bofors scam etc 1988 - 1998 India debt crisis (gold mortgaged in 1991); US sanctions post-nuclear test; three PMs in two years (1996-98); LTCM default, US-Iraq war; defaults in Latin America, Harshad Superior returns against all odds Third level Fourth level Fifth level 17-Jun-14 6 default, US-Iraq war; defaults in Latin America, Harshad Mehta scam etc 1998 - 2008 Dotcom bubble bust; US slowdown; Indias GDP growth below 4% in 2002; 9/11 attacks; Al-Qaeda as the new face of global terror; Ketan Parekh scam etc Nothing could be worse; heard it a number of times in 30 years! Click to edit Master title style Click to edit Master text styles Second level Third level Sensex returns mirror growth in corporate earnings 800,000 1,200,000 1,600,000 2,000,000 Corporate profitssole driver of equities Third level Fourth level Fifth level 17-Jun-14 7 Indias nominal GDP (inflation + real GDP) has been close to 14.5% since 1978; no wonder the leading corporates (companies in Sensex) grew by close to 18% on an average between 1978 and 2008! 0 400,000 F Y 9 3 F Y 9 4 F Y 9 5 F Y 9 6 F Y 9 7 F Y 9 8 F Y 9 9 F Y 0 0 F Y 0 1 F Y 0 2 F Y 0 3 F Y 0 4 F Y 0 5 F Y 0 6 F Y 0 7 F Y 0 8 F Y 0 9 F Y 1 0 F Y 1 1 F Y 1 2 F Y 1 3 Click to edit Master title style Click to edit Master text styles Second level Third level Year Sensex 1978 100 1988 600 The Big question Third level Fourth level Fifth level 17-Jun-14 8 1988 600 1998 3600 2008 21400 2018 ??? Click to edit Master title style Click to edit Master text styles Second level Third level Sub-par performance is followed by strong returns Periods Sensex Returns Months Downturn Nov 94 -- Nov 98 4270 2810 48 Upturn Dec 98 -- Jan00 2812 5447 18 Downturn Feb 00 -- Sep 03 5447 5584 55 Equitylook ahead; not behind Third level Fourth level Fifth level 17-Jun-14 9 Non-linear nature of equity = Opportunity for superlative returns Upturn Oct 03 -- Dec 07 5584 20286 38 Downturn Jan08 -- Feb14 20286 21120 74 Upturn Mar14 21120 ??? Click to edit Master title style Click to edit Master text styles Second level Third level Sensex set to double; do not be surprised with 50,000 plus levels (even without expecting any re-rating of valuation multiples) It is not about IF but about WHEN it will double and the answer is In 2 to 3 years SENSEX PE 24025 15 16 17 18 19 20 21 E P S
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1 8 % FY15* 1,550 23,250 24,800 26,350 27,900 29,450 31,000 32,550 FY16* 1,790 26,850 28,640 30,430 32,220 34,010 35,800 37,590 Doublea done deal Third level Fourth level Fifth level 17-Jun-14 10 *Bloomberg estimates Growth in corporate profits + Easing of interest rates = Bull run ahead E P S
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1 8 % FY16* 1,790 26,850 28,640 30,430 32,220 34,010 35,800 37,590 FY17 2,184 32,757 34,941 37,125 39,308 41,492 43,676 45,860 FY18 2,664 39,964 42,628 45,292 47,956 50,620 53,285 55,949 FY19 3,250 48,756 52,006 55,256 58,507 61,757 65,007 68,258 FY20 3,965 59,482 63,447 67,413 71,378 75,344 79,309 83,274 Click to edit Master title style Click to edit Master text styles Second level Third level 600 706 864 820 835 1,067 1,165 1,248 1,350 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000 Sensex@75,000 or even 1,00,000 The Big picture: Index set to jump 3-4x Third level Fourth level Fifth level 17-Jun-14 11 90 103 182 249 255 274 212 190 209 233 287 328 471 600 - 5,000 10,000 A p r - 9 2 A p r - 9 3 A p r - 9 4 A p r - 9 5 A p r - 9 6 A p r - 9 7 A p r - 9 8 A p r - 9 9 A p r - 0 0 A p r - 0 1 A p r - 0 2 A p r - 0 3 A p r - 0 4 A p r - 0 5 A p r - 0 6 A p r - 0 7 A p r - 0 8 A p r - 0 9 A p r - 1 0 A p r - 1 1 A p r - 1 2 A p r - 1 3 A p r - 1 4 A p r - 1 5 A p r - 1 6 A p r - 1 7 Even an average growth of 16-17% in corporate profits for next five years would mean Sensex/Nifty tripling (or more) from the current levels comfortably. Click to edit Master title style Click to edit Master text styles Second level Third level Why now? Third level Fourth level Fifth level 17-Jun-14 12 Why now? Click to edit Master title style Click to edit Master text styles Second level Third level When Indian markets are trading at life-time highs Third level Fourth level Fifth level 17-Jun-14 13 Click to edit Master title style Click to edit Master text styles Second level Third level Is the market providing an opportunity @ 25,000 Sensex? Third level Fourth level Fifth level 17-Jun-14 14 Click to edit Master title style Click to edit Master text styles Second level Third level India in a sweet spot Changing political equation + Stabilising economy Third level Fourth level Fifth level 17-Jun-14 15 Click to edit Master title style Click to edit Master text styles Second level Third level How this is a RARE event? Deadly combination Modi @ Indias helmpro-growth, pro-investor focus Raguram Rajan-- Dynamic RBI Governor India Inc. hungry for growth after the most challenging phase of past 4 years Third level Fourth level Fifth level 17-Jun-14 16 Click to edit Master title style Click to edit Master text styles Second level Third level 10.1% 7.7% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% Gujarat India 5.1% 5.8% 6.1% 5.9% 5.8% 7.1% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 1960-61 1970-71 1980-81 1990-91 2000-01 2012-13 GDP growth consistently outpaced national growth (FY02 FY12) Gujarats contribution to Indias GDP surged during FY02 -FY12 Modinomics: Proven track record in Gujarat Third level Fourth level Fifth level 17-Jun-14 17 Gujarats debt as a % of GDP declined under Modis regime Significant leap in per capita income during Modi regime 38.8% 25.2% 0.0% 10.0% 20.0% 30.0% 40.0% 2001 2012 Click to edit Master title style Click to edit Master text styles Second level Third level -2,702 4,041 -3,000 -2,000 -1,000 0 1,000 2,000 3,000 4,000 5,000 FY02 FY13 10.7% 3.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% Gujarat India Revival of sick PSU in Gujarat Losses to high profits (Rs cr) Industry flourished; also Agri growth stood 3.5x India average Modinomics: Proven track record in Gujarat Third level Fourth level Fifth level 17-Jun-14 18 FY02 FY13 Gujarat India Modis magic mantra: - Make policy framework investor friendly, fair and transparent. - Re-energise bureaucracy and administrative machinery - Use technology to enhance productivity and minimise wastage of resources Click to edit Master title style Click to edit Master text styles Second level Third level Expectation of getting investment cycle on track Third level Fourth level Fifth level 17-Jun-14 19 While the slowdown in the investment activity has been prolonged and well- flagged, the current corporate results have also shown that construction activity, steel and cement demand, and even order books picked up during the last quarter. The new government (based on infrastructure and industrial development activities in Gujarat) is expected to kick-start the weak investment cycle. Click to edit Master title style Click to edit Master text styles Second level Third level GDP growth bottoms out 9.5 9.6 9.4 6.9 8.6 9.3 6.3 5 4.4 4.8 4.7 4.6 3 4 5 6 7 8 9 10 GDP Growth Rate Third level Fourth level Fifth level 17-Jun-14 20 The GDP growth of 4.4% in Q1FY2014 has marked the bottom and started showing signs of stabilisation with the Q4FY2014 GDP improving marginally by 20BPS YoY to 4.6%. However, outlook for FY2015 GDP growth is better (consensus estimate of ~5.5%) in expectation of a revival in manufacturing sector and reform push by the government. Click to edit Master title style Click to edit Master text styles Second level Third level Trade deficit for April 2014 came in at $10 billion; the April 2014 exports CAD much lower than feared -25.0 -20.0 -15.0 -10.0 -5.0 0.0 5.0 10.0 15.0 20.0 -25 -20 -15 -10 -5 0 5 J u l - 1 2 A u g - 1 2 S e p - 1 2 O c t - 1 2 N o v - 1 2 D e c - 1 2 J a n - 1 3 F e b - 1 3 M a r - 1 3 A p r - 1 3 M a y - 1 3 J u n - 1 3 J u l - 1 3 A u g - 1 3 S e p - 1 3 O c t - 1 3 N o v - 1 3 D e c - 1 3 J a n - 1 4 F e b - 1 4 M a r - 1 4 A p r - 1 4 Trade balance ($bn) LHS Imports % yoy Exports % yoy Third level Fourth level Fifth level 17-Jun-14 21 Trade deficit for April 2014 came in at $10 billion; the April 2014 exports were up by 5% YoY while the imports were down by 15 % YoY which contributed to the narrowing of the trade deficit. With increasing exports and falling imports, Indias current account deficit (CAD) has dropped significantly from about $88 billion in FY2013 to $33 billion this year. These numbers suggest that in FY2014 CAD percentage of GDP which was a major concern earlier, is narrow to a six years low of 1.7% of GDP compared with 4.7% in FY2013. Click to edit Master title style Click to edit Master text styles Second level Third level Stable rupee 52 54 56 58 60 62 64 66 68 70 Indian Rs / $ Third level Fourth level Fifth level 17-Jun-14 22 Despite the tapering by US Federal Reserve (Fed) and after the RBI and the Government of India jointly made efforts to contain the rupees fall, it has stabilised near 59-60 levels. The rupee may appreciate to 57 levels against the dollar if the risk appetite continues in 2014. Click to edit Master title style Click to edit Master text styles Second level Third level Stable rupee leads to good FII flows Equity inflows have strengthened in the past few months Investment by FIIs into equities remains steady ($8 billion YTD) Also, India's relative attractiveness compared with the other equity markets may drive more FII flows into equities 30000 40000 Equity Debt Third level Fourth level Fifth level 17-Jun-14 23 -40000 -30000 -20000 -10000 0 10000 20000 0 1 / J a n 0 1 / F e b 0 1 / M a r 0 1 / A p r 0 1 / M a y 0 1 / J u n 0 1 / J u l 0 1 / A u g 0 1 / S e p 0 1 / O c t 0 1 / N o v 0 1 / D e c 0 1 / J a n 0 1 / F e b 0 1 / M a r 0 1 / A p r 0 1 / M a y Click to edit Master title style Click to edit Master text styles Second level Third level FII holdings up Ante to new high 50.40% 49.50% 50.70% 50.30% 49.30% 23.60% 23.90% 23.60% 24.60% 25.00% 14.20% 14.70% 14.20% 13.70% 14.10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Ownership Trend (top 75 Companies) Promoters 49.3% FII 25.0% Financial Inst 8.4% Public 14.1% Ownership Pattern for Mar 14 Third level Fourth level Fifth level 17-Jun-14 24 In Q4FY2014, FII stake in top 75 companies further rose 33BPS to 25% Retailers have moved away from equities over the past 4 years and retail investments have fallen to 13.7% from 14.2% 0% Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Promoters FII Domestic MF Financial Inst Public & Others MF 3.2% Inst 8.4% Click to edit Master title style Click to edit Master text styles Second level Third level Retail investors under ownership Third level Fourth level Fifth level 17-Jun-14 25 Retailers have moved away from equities over the past 4 years and are under invested in equity market Click to edit Master title style Click to edit Master text styles Second level Third level Corporate earnings growth to improve 1480 1530 1580 1630 1680 A p r - 1 3 M a y - 1 3 J u n - 1 3 J u l - 1 3 A u g - 1 3 S e p - 1 3 O c t - 1 3 N o v - 1 3 D e c - 1 3 FY15 1,300 1,350 1,400 1,450 A p r - 1 3 M a y - 1 3 J u n - 1 3 J u l - 1 3 A u g - 1 3 S e p - 1 3 O c t - 1 3 N o v - 1 3 D e c - 1 3 FY14 Third level Fourth level Fifth level 17-Jun-14 26 Since analysts earnings expectations have been revised sharply in the past 12 months, we believe the bulk of the downgrades is done for FY2014 Also margins may stabilise, given the improving macro and a stable rupee; it is fair to expect a double-digit earnings growth in FY2015 FY14 Click to edit Master title style Click to edit Master text styles Second level Third level Despite the recent surge, the valuations are still at long-term average Sensex valuation is at 16x its 12-month forward earnings estimate (long- term average multiple of around 16x) Available @ long-term average valuation 18.0 23.0 Third level Fourth level Fifth level 17-Jun-14 27 8.0 13.0 18.0 D e c - 0 1 D e c - 0 3 D e c - 0 5 D e c - 0 7 D e c - 0 9 D e c - 1 1 D e c - 1 3 PER +1 sd Avg PER -1 sd Click to edit Master title style Click to edit Master text styles Second level Third level Global factors Third level Fourth level Fifth level 17-Jun-14 28 Click to edit Master title style Click to edit Master text styles Second level Third level The Fed has decided to taper QE by $30 billion a month and reduced the monthly stimulus package to $55 billion from $85 billion earlier, but has maintained the guidance for the near zero interest rates, thereby removing the uncertainty for the global markets Easing global fears Third level Fourth level Fifth level 17-Jun-14 29 Indications from Eurozone about lower interest rates and liquidity support. Implied Volatility is at a lower range. Click to edit Master title style Click to edit Master text styles Second level Third level Conclusion Third level Fourth level Fifth level 17-Jun-14 30 Click to edit Master title style Click to edit Master text styles Second level Third level This is just the beginning of a big bull run for the Indian equity market (3-5 years) There is an opportunity to grow net worth by participating in it Review your existing exposure to equityideally it should be anywhere from 40% to 70% of the net worth Conclusion Third level Fourth level Fifth level 17-Jun-14 31 Get your portfolio cleaned upSharekhan could help you with Portfolio Doctor, a free tool that will help you achieve proper balance across sectors and obtain right stock ideas for better performance over a period of time Click to edit Master title style Click to edit Master text styles Second level Third level Risks to our prognosis Third level Fourth level Fifth level 17-Jun-14 32 Click to edit Master title style Click to edit Master text styles Second level Third level Inflation: If inflation (food inflation is coming down currently) remains high it may force the RBI to hold or hike the interest rates, dampening sentiments in the short term. Risk of El Nino this year: The US weather forecasters indicate that the El Nino phenomenon can wreak havoc on Third level Fourth level Fifth level 17-Jun-14 33 Risk of El Nino this year: The US weather forecasters indicate that the El Nino phenomenon can wreak havoc on global crops. El Nino, a warming of the sea-surface temperatures in the Pacific, can trigger both floods and drought in different parts of the globe. Click to edit Master title style Click to edit Master text styles Second level Third level Sector Ideas/ Themes Third level Fourth level Fifth level 17-Jun-14 34 Themes Click to edit Master title style Click to edit Master text styles Second level Third level Three Investment themes for superior returns: Policy push (roads/power) Companies: L&T, Crompton Greaves, UltraTech, Va-Tech Wabag PSU re-rating MODIfied Portfolio Third level Fourth level Fifth level 17-Jun-14 35 Companies: Container Corporation, Engineers India, Coal India , BPCL Economy revival leading sectors (auto/financials) Companies: ICICI Bank, SBI, LIC Housing, Maruti, Mahindra & Mahindra Click to edit Master title style Click to edit Master text styles Second level Third level MODIfied Portfolio Policy Push - Road / Power EPS PE Company Name CMP (Rs) FY15E FY16E FY15E FY16E L&T 1,645 60.9 72.8 27.0 22.6 Crompton Greaves 196 8.6 11.3 22.8 17.3 Ultra Tech 2,784 102.9 118.3 27.1 23.5 Va - Tech Wabag 1,333 56.5 60 23.6 22.2 PSU Rerating EPS PE Company Name CMP (Rs) FY15E FY16E FY15E FY16E Container Corporation 1,159 62.4 73.6 18.6 15.7 Engineers India 307 16.4 19.6 18.7 15.7 Coal India 395 26.4 33.5 15.0 11.8 Third level Fourth level Fifth level 17-Jun-14 36 Coal India 395 26.4 33.5 15.0 11.8 BPCL 594 37.9 43.5 15.7 13.7 Oil India 602 55.4 67.3 10.9 8.9 Economy Revival Leading Sectors ( Auto / Financial ) EPS/BV PE /PBV Company Name CMP (Rs) FY15E FY16E FY15E FY16E ICICI Bank 1,411 694.3 767.4 2.0 1.8 SBI 2,560 1651.9 1887.9 1.5 1.4 LIC Housing Finance 312 175.3 256.2 1.8 1.2 Maruti 2,403 116.4 127.3 20.6 18.9 M&M 1,107 84 104 13.2 10.6 Click to edit Master title style Click to edit Master text styles Second level Third level MODIfied Portfolio Policy Push - Road / Power Company Name CMP (Rs) EPS/BV PE /PBV FY15E FY16E FY15E FY16E Larsen & Toubro 1,645 60.9 72.8 27 22.6 Larsen & Toubro Even in a challenging macro-economic environment L&T has delivered an impressive performance in terms of winning orders which depicts its credentials and ability. A strong and decisive PM will support infrastructure projects which will help L&T to achieve its targeted revenue guidance, though it may face some challenges on the OPM front. Third level Fourth level Fifth level 17-Jun-14 37 targeted revenue guidance, though it may face some challenges on the OPM front. We remain positive on L&T in view of its ability to withstand economic downturns and expect it to stand out within the sector. Its efforts to improve return ratios should also work in its favour. The recent order wins will lead to a growth of over 15% in order inflows in FY2014. The demand outlook for FY2015 and FY2016 is expected to improve on account of a possible revival in the domestic economy and growing investments in infrastructure in the Middle-East (two mega events- -Expo 2020 in Dubai and FIFA World Cup in Qatar, are around the corner) where L&T has a strong foothold. Click to edit Master title style Click to edit Master text styles Second level Third level MODIfied Portfolio Policy Push - Road / Power Company Name CMP (Rs) EPS/BV PE /PBV FY15E FY16E FY15E FY16E Crompton Greaves 196 8.6 11.3 22.8 17.3 Crompton Greaves Companies like Crompton Greaves would benefit from the much needed push from the new government to revive the industrial and investment cycles. The performance of its industrial systems and power system segments is mediocre currently and so the improving outlook for these segments can be a catalyst for the stock price. Third level Fourth level Fifth level 17-Jun-14 38 the improving outlook for these segments can be a catalyst for the stock price. Moreover, post-restructuring of its European operations, the overseas business is likely to improve the bottom line performance significantly which would add to the momentum. We believe the stock has the potential to deliver 40% returns in the next 15-18 months. Key risk: A slower than expected policy action to review the industrial growth and investment cycle. Click to edit Master title style Click to edit Master text styles Second level Third level MODIfied Portfolio Policy Push - Road / Power Company Name CMP (Rs) EPS/BV PE /PBV FY15E FY16E FY15E FY16E UltraTech Cement 2,784 102.9 118.3 27.1 23.5 UltraTech Cement Indias largest integrated cement company with an approximately 54mtpa cement capacity. It has benefited from an improvement in market mix. The ramp-up of the new capacity and savings accruing from the new captive power plants will improve its cost efficiency. In Q4FY2014 it commissioned a cement grinding capacity of 1.45mt at Malkhed, Karnataka. It also commissioned a 30MW thermal power plant and a 6.5MW waste heat recovery system at Rawan, Chattisgarh and Awarpur, Third level Fourth level Fifth level 17-Jun-14 39 30MW thermal power plant and a 6.5MW waste heat recovery system at Rawan, Chattisgarh and Awarpur, Maharashtra respectively. Its current cement capacity stands at 53.95mtpa. It is likely to add an additional capacity of 5mtpa in FY2015. It is in the process of ramping up the capacity to 64.45mtpa by 2015. The potential to increase throughput without incurring a major capex by increasing the utilisation and blending along with a location advantage gives it the flexibility to either export or sell in the domestic market. After a weak macro environment in the past couple of years, cement demand likely to pick up across India after the monsoon as infrastructure development activities pick up under the new government. From the long-term perspective, the cement demand is expected to grow at 8%. UltraTech is our most preferred stock in the sector due to its strong balance sheet and pan-India presence. Click to edit Master title style Click to edit Master text styles Second level Third level MODIfied Portfolio Policy Push - Road / Power Company Name CMP (Rs) EPS/BV PE /PBV FY15E FY16E FY15E FY16E VA Tech Wabag 1,333 56.5 60.0 23.6 22.2 VA Tech Wabag The company is a technology driven specialised player in the water segment which demands a huge investment in India. The size of the opportunity in the water segment is unparalleled and it will be a key beneficiary of the same. Third level Fourth level Fifth level 17-Jun-14 40 the same. The NDA-led government at the center has an ambitious plan to connect rivers across India which along with its emphasis on water infrastructure is a boon for the company. With a strong growth outlook ahead, its stocks valuation could expand and the stock could see a 40- 50% upside in the next 12-18 months. Key risk: A slower than expected investment in the water segment could affect the growth. Click to edit Master title style Click to edit Master text styles Second level Third level MODIfied Portfolio PSU Rerating Company Name CMP (Rs) EPS/BV PE /PBV FY15E FY16E FY15E FY16E Container Corporation of India 1,159 62.4 73.6 18.6 15.7 Container Corporation of India It has started witnessing an improvement in the domestic and exim volumes over the last two quarters. The realisation for the domestic trade has also improved. Under the new government implementation of dedicated freight corridor projects will be on fast track and it will be a key beneficiary of the dedicated freight corridor projects. Third level Fourth level Fifth level 17-Jun-14 41 and it will be a key beneficiary of the dedicated freight corridor projects. It is likely to get a fillip in terms of improving exim trade and better realisation. The governments focus on expansion of port capacities also augurs wells. We are upbeat about its growth prospects over the next two to three years which could improve the cash flows leading to a better valuation. Key risk: Lower exim trade and increased competitive intensity could lead to lower revenues and earnings. Click to edit Master title style Click to edit Master text styles Second level Third level MODIfied Portfolio PSU Rerating Company Name CMP (Rs) EPS/BV PE /PBV FY15E FY16E FY15E FY16E Engineers India 307 16.4 19.6 18.7 15.8 Engineers India It has a unique business model as it is a specialised consultant for infrastructure projects, especially in the oil & gas sector, which is one of the most focused areas of the new government and is likely to see significant reforms. Thus, opportunities are huge. A strong balance sheet and niche expertise would be a key advantage. In the last two years with a Third level Fourth level Fifth level 17-Jun-14 42 A strong balance sheet and niche expertise would be a key advantage. In the last two years with a stagnating order inflow scenario, it had been de-rated sharply despite being a superior cash and return ratio generator. The valuation is likely to expand along with the rising opportunities and the stock could rally again and potentially deliver returns of over 35-40% in the next 12-18 months despite the recent run-up. Key risk: A delay in the reform in the oil & gas and infrastructure sectors. Click to edit Master title style Click to edit Master text styles Second level Third level MODIfied Portfolio PSU Rerating Company Name CMP (Rs) EPS PE FY15E FY16E FY15E FY16E Coal India 395 26.4 33.52 15 11.8 Coal India Coal India Ltd (CIL) is an apex body with seven wholly owned coal producing subsidiaries and one mine planning and consultancy company spread over eight provincial states of India. CIL is a 'Maharatna' public sector undertaking under the Ministry of Coal. The company is the largest coal producing company in the world based on their raw coal production. Also, they are the largest coal reserve Third level Fourth level Fifth level 17-Jun-14 43 company in the world based on their raw coal production. Also, they are the largest coal reserve holder in the world based on their reserve base. Recently released production data for April 2014 was up 4.9% YoY, in line with CILs own target. Though the offtake growth was disappointing, but we believe CIL has ample time to make up for the deficit. With the possibility of a stronger government at the center that would expedite project clearances and also the building of key rail projects, it would boost the volume for CIL in the near term and bolster its long-term prospects. At the CMP, CIL trades at just 12.1x its FY2016 earnings estimate.. Click to edit Master title style Click to edit Master text styles Second level Third level MODIfied Portfolio PSU Rerating Company Name CMP (Rs) EPS PE FY15E FY16E FY15E FY16E BPCL 594 37.9 43.46 15.7 13.7 BPCL BPCL is one of the largest public sector refining and marketing company in India. It has refineries at Mumbai, Kochi, Bina and Numaligarh. BPCL also has upstream assets which it is looking to develop so as to further integrate its operations and hence reduce volatility of its operations in the long term. BPCLs FY14 financials improved markedly over a muted FY13, led primarily by strong refining Third level Fourth level Fifth level 17-Jun-14 44 BPCLs FY14 financials improved markedly over a muted FY13, led primarily by strong refining performance and higher inventory gains of Rs 15.8bn ( Rs 6.8bn in FY13) despite a higher net subsidy burden at Rs 5.1bn (INR 2.5bn in FY13). Timely government support also lowered finance charges to Rs 13.6bn ( Rs 18.2bn in FY13). Refining and finance charges to support FY15 earnings. In FY15, we expect BPCL to report healthy performance on continued refining strength and assume a zero net subsidy burden. Subsidy scenario continues to improve. Total subsidy loss continues to improve led by diesel price hikes. With diesel losses now at INR 2.8/litre, losses have come down from the September 2013 levels of INR 14.5/litre. Lower dependency on government support in FY15/16E should reduce working capital needs further, thus leading to a further reduction in finance charges. Click to edit Master title style Click to edit Master text styles Second level Third level MODIfied Portfolio PSU Rerating Company Name CMP (Rs) EPS PE FY15E FY16E FY15E FY16E Oil India 602 55.4 67.3 10.9 8.9 Oil India Oil India (OIL) is a 'Navratna' stateowned company, engaged in exploration, development, production and transportation of crude oil and natural gas in India. Compnay has 2P reserves of 944mmboe, ~94% of these located in the north-east. Third level Fourth level Fifth level 17-Jun-14 45 Diesel reforms to lead to significant cut in underrecoveries: Recently announced diesel reforms (a) increasing diesel prices by INR 0.5/ltr every month end (b) Market pricing for bulk buyers; would lead to a significant cut in under recoveries (35%reduction by FY16 over FY14). (c) freeing of diesel prices, possibly by the end of FY15 . Valuations attractive; steady production growth; gas price hike a key trigger: Oil India trades at ~40% discount to global peers on EV/BOE (1P basis). We expect the overall oil subsidy burden to be lower and a revision in gas price in FY2015. Given the new government at the center, we expect several reforms and positive policy actions which could benefit companies like OIL substantially Click to edit Master title style Click to edit Master text styles Second level Third level MODIfied Portfolio Economy Revival Leading Sectors ( Auto / Financial ) Company Name CMP (Rs) EPS/BV PE /PBV FY15E FY16E FY15E FY16E ICICI Bank 1,411 694.3 767.4 2.0 1.8 ICICI Bank It is the second largest private bank in terms of market cap (of over Rs1 lakh crore). As on September 2013, it had 3,507 branches and 11,098 ATMs, spread across the country as well as overseas. Its CASA ratio at 43% is also the highest among private banks. The CAR as per Basel-II norms is the highest at 18.35%. Its Q4FY2014 numbers suggest buoyancy in the operating performance, which has Third level Fourth level Fifth level 17-Jun-14 46 highest at 18.35%. Its Q4FY2014 numbers suggest buoyancy in the operating performance, which has been driving the earnings growth. The improvement in deposit profile is structurally positive for the NIM outlook. The asset quality challenges for the bank will be within manageable limits and the recovery in the operating performance will help in dealing with the provisioning requirements. With an improved liability base, increased visibility on the advances growth and relatively stable trend in the asset quality, it is likely to trade at a premium to its five-year mean valuation. Earnings growth is likely to remain steady (a CAGR of 15% over FY2014-16) and drive an improvement in the return ratios. Click to edit Master title style Click to edit Master text styles Second level Third level MODIfied Portfolio Economy Revival Leading Sectors ( Auto / Financial ) Company Name CMP (Rs) EPS/BV PE /PBV FY15E FY16E FY15E FY16E State Bank of India 2,560 1651.9 1887.9 1.5 1.4 State Bank of India It is the largest bank in India with loan assets of over Rs11 lakh crore. The loan growth for FY2014 was above the industry average while the core operating performance was largely stable. The successful merger of the associate banks and value unlocking from the insurance business could provide a further upside. It has started focusing on the existing bad loans and the assets that are Third level Fourth level Fifth level 17-Jun-14 47 provide a further upside. It has started focusing on the existing bad loans and the assets that are beginning to show stress and are likely to slip into NPA category. It has introduced a technological platform giving early warnings of stressed assets. For Q4FY2014 it reported PAT of Rs3,041 crore (up 36% QoQ), led by a strong growth in the non- interest income (up 19% YoY). But the core profitability improved led by a strong growth in the NII (up 16.5% YoY) and the fee income. The asset quality surprised as slippages were lower (Rs7,947 crore vs Rs11,438 crore in Q3FY2014) leading to a decline in the NPAs. The recoveries were also better partly led by a sale of the loans to ARCs. Click to edit Master title style Click to edit Master text styles Second level Third level MODIfied Portfolio State Bank of India Being the largest bank with a strong liability franchise and healthy capital (tier-1 CAR of 9.72%) it is better placed to benefit from an economic revival. While the NPAs have been a cause for concern, the pick-up in the economy may improve the asset quality position. It is better placed compared with other PSBs with regards to the migration to Basel-3 norms and creates a need for a huge capital infusion into the PSBs. The government could also look at ways for pension funds and insurance companies to invest in the long-term perpetual debt of banks (considered as tier-1 capital). This, if it happens, could address the need for capital infusion without significantly expanding the equity capital of the PSBs. The outlook for the bank has also improved due to its capital position after the recent QIP issue. Third level Fourth level Fifth level 17-Jun-14 48 Click to edit Master title style Click to edit Master text styles Second level Third level MODIfied Portfolio Economy Revival Leading Sectors ( Auto / Financial ) Company Name CMP (Rs) EPS/BV PE /PBV FY15E FY16E FY15E FY16E LIC Housing Finance Company 312 175.3 256.2 1.8 1.2 LIC Housing Finance Company A recovery in the economy will boost the housing sector which anyways has remained resilient in the slowdown. Being the second largest housing finance company it will benefit from the recovery in the housing market. The re-pricing of the fixed rate loans to floating rate loans over FY2015 and FY2016 coupled with a Third level Fourth level Fifth level 17-Jun-14 49 The re-pricing of the fixed rate loans to floating rate loans over FY2015 and FY2016 coupled with a moderation in the interest rates will boost its margins. The stock is currently trading at 1.5x FY2016 book value. We foresee an upside of about 40% in the next 12-18 months. Key risk: A weak monsoon rainfall or sticky core inflation could lead to monetary tightening by the RBI which, in turn, could raise the wholesale borrowings cost and hit the margins. Click to edit Master title style Click to edit Master text styles Second level Third level MODIfied Portfolio Economy Revival Leading Sectors ( Auto / Financial ) Company Name CMP (Rs) EPS/BV PE /PBV FY15E FY16E FY15E FY16E Maruti Suzuki India 2,403 116.4 127.3 20.5 18.8 Maruti Suzuki India It is Indias largest small carmaker. Though the demand for diesel cars is witnessing pressure due to a hike in diesel prices, but the petrol segment is witnessing a recovery due to the narrowing differential between petrol and diesel prices. It is planning to launch 14 new models over the next five years (including in the high value UV space) Third level Fourth level Fifth level 17-Jun-14 50 It is planning to launch 14 new models over the next five years (including in the high value UV space) which would boost its volumes and realisation both. The recently launched Celerio has been well received by the market and garnered bookings of over 30,000 units. Its new automatic manual transmission feature has especially enthused the market. It has ceded the proposed Gujarat plant, which was being set up by a subsidiary of Suzuki Motor Corp, Japan. It will now seek a nod from the minority shareholders on the issue. Click to edit Master title style Click to edit Master text styles Second level Third level MODIfied Portfolio Economy Revival Leading Sectors ( Auto / Financial ) Company Name CMP (Rs) EPS/BV PE /PBV FY15E FY16E FY15E FY16E M&M 1107 84 104 13.2 10.6 Mahindra & Mahindra Mahindra & Mahindra (M&M) is a leading maker of tractors and utility vehicles (UVs) in India. Though the automotive demand is under pressure owing to a declining demand for UVs and light commercial vehicles (LCVs), but the demand for tractors is growing in strong double digits, thanks to a normal monsoon rainfall and higher minimum support prices. The collaboration with world majors in the passenger cars and commercial vehicles (CVs) has helped it diversify into various automobile segments. Third level Fourth level Fifth level 17-Jun-14 51 segments. M&M posted a double-digit growth in the earnings in Q3FY2014 on the back of a robust operating performance (owing to an improved product mix and cost-control initiatives) even as the revenues remained flat. The margin improved for both the automotive and tractor segments. The tractor segment is expected to maintain a double-digit growth in FY2015 on the back of strong demand rivers (owing to an increase in the rural income and a labour shortage which encourages mechanisation). In the automotive business the volume growth could turn positive aided by the low base effect, demand revival and the launch of the compact UV models. Also, the management expects to sustain the margin due to the continued improved mix and benign commodity prices.. Click to edit Master title style Click to edit Master text styles Second level Third level Sector view/picks Third level Fourth level Fifth level 17-Jun-14 52 Click to edit Master title style Click to edit Master text styles Second level Third level Sharekhan Sector Preferred Picks Sectors CNX 100 Sharekh an View/Stan ce Prefered picks Banks & Financials 27.2 28.5 Positive ICICI Bank, SBI, Federal Bk, Yes Bank, LIC Housing, PTC Fin Srvcs, Max India IT 14.4 10.5 Neutral TCS, HCL Tech, Persistent Sys, Firstsource, CMC Energy 13.1 15.0 Positive RIL, Oil India, Coal India, Selan Exploration Auto & auto anci 8.2 10.0 Positive Maruti, M&M, TVS Motors, Apollo Tyres Consumer/Disc spending 13.6 10.0 Cautious ITC, Arvind, Relaxo, Titan, Jyothy Labs, Zee Ent Pharma 5.8 4.0 Cautious Sun, Cadila, Lupin, Aurobindo Third level Fourth level Fifth level 17-Jun-14 53 Pharma 5.8 4.0 Cautious Sun, Cadila, Lupin, Aurobindo Industrials/Engineering /Cement 8.5 14.0 Positive L&T, Crompton, Finolex Cables, PTC India, IRB Infra, V-Guard, Ultratech, Ramco Cement Metals & Mining 4.8 4.0 Neutral NMDC, Sesa Sterlite Telecom 2.5 2.0 Neutral Bharti Airtel, Bharti Infratel, Tata Comm Others 1.9 2.0 UPL, Bharat Electronics Total 100 100 Click to edit Master title style Click to edit Master text styles Second level Third level This document has been prepared by Sharekhan Ltd.(SHAREKHAN) This Document is subject to changes without prior notice and is intended only for the person or entity to which it is addressed to and may contain confidential and/or privileged material and is not for any type of circulation. 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Click to edit Master title style Click to edit Master text styles Second level Third level Thank you Third level Fourth level Fifth level 17-Jun-14 55 Thank you Click to edit Master title style Click to edit Master text styles Second level Third level Third level Fourth level Fifth level 17-Jun-14 56