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8/13/2019 2QFY2014ResultReview_November2013
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8/13/2019 2QFY2014ResultReview_November2013
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November 2013November 2013November 2013November 2013November 2013
Please refer to important disclosures at the end of this report. 1
INR aids earnings performance
For 2QFY2014, Sensex as well as our coverage companies* reported a
lower-than-expected earnings growth, weighed, in particular, by earnings in cyclical
sectors such as cement, capital goods and infrastructure. The earnings de-growth
for these sectors emerged as a drag on overall profitability despite overall healthy
revenue growth for Sensex and our coverage companies and in-line margin
performance. Sensex companies posted a 5.9% yoy growth in earnings as compared
to our estimate of 8.2% yoy and our coverage companies reported a marginal
growth of 0.7% yoy in earnings in contrast to our estimate of 4.1% yoy growth. The
overall earnings performance continued to be largely supported by companies in
the export-oriented space namely IT and pharmaceuticals. The metals sector also
supported earnings performance led by the impact of INR depreciation on import
substitution and increase in steel exports.
Both Sensex and our coverage companies reported higher-than-expecteddouble-digit revenue growth at 13.9% yoy and 13.1% yoy during the quarter despite
sluggish pace of economic growth. The performance can be mainly attributed to
robust top-line growth in the IT, pharmaceuticals, automobile and oil and gas sectors.
On the margins front, the performance came broadly in line with our expectations.
Our coverage companies reported margin contraction of 25bp yoy and 89bp qoq
mainly due to the stress in cyclical sectors reflecting weak pricing power.
External sector in better shape, macros poised for a recovery
Coupled with persistence of easy money, the signs of strengthening GDP growth in
advanced economies have driven risk-on mode back in the global markets.
Domestically, the improvement in export performance has come as a much-needed
silver lining for the economy. We believe that the strong rebound in exports is likely
to have a cascading positive impact on narrowing the CAD substantially and boosting
investment and GDP growth. Addressing our external vulnerability by tackling the
elevated CAD and attracting foreign inflows for its financing has boosted confidence
in our markets. This is amply reflected by the return of strong FII inflows in equities
as well as appreciation and consequent stability in the INR. Going ahead we believe
that the expected easing of food prices, as the new harvest enters markets, is likely
to lead to a moderation in inflationary pressures in the economy. The expectations
on the outcome of elections are also likely to drive market sentiments.
Outlook and Valuation
We expect Sensex EPS to post a growth of 9.4% for FY2014. Attributing a 15x
multiple to our Sensex EPS, we arrive at a target of 23,000 for the Sensex over the
next one year implying an upside of about 14.0% from the present levels.
We continue to have a positive outlook on export-oriented sectors like IT and
pharmaceuticals owing to signs of recovery in advanced economies and the rupee
depreciation on a yoy basis. We are positive on select metal stocks as well,
considering recent capacity additions and under-utilized capacity getting employed
for exports aided by improvement in global fundamentals as well as competitiveness
due to rupee depreciation. We also selectively prefer large private banks as they
remain structurally strong and are also likely to benefit from an imminent
cyclical revival.
2QFY2014 Result Review2QFY2014 Result Review2QFY2014 Result Review2QFY2014 Result Review2QFY2014 Result Review
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2QFY2014 Result Review
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SectorSectorSectorSectorSector
2QFY14A2QFY14A2QFY14A2QFY14A2QFY14A 2QFY14E2QFY14E2QFY14E2QFY14E2QFY14E 2QFY14A2QFY14A2QFY14A2QFY14A2QFY14A 2QFY14E2QFY14E2QFY14E2QFY14E2QFY14E 2QFY14A 2QFY14A 2QFY14A 2QFY14A 2QFY14A 2QFY14E 2QFY14E 2QFY14E 2QFY14E 2QFY14E
(%, yoy)(%, yoy)(%, yoy)(%, yoy)(%, yoy) (%, yoy)(%, yoy)(%, yoy)(%, yoy)(%, yoy) (%, yoy)(%, yoy)(%, yoy)(%, yoy)(%, yoy) (%, yoy)(%, yoy)(%, yoy)(%, yoy)(%, yoy) (bps, yoy)(bps, yoy)(bps, yoy)(bps, yoy)(bps, yoy) (bps, qoq)(bps, qoq)(bps, qoq)(bps, qoq)(bps, qoq) (bps, yoy)(bps, yoy)(bps, yoy)(bps, yoy)(bps, yoy) (bps, qoq)(bps, qoq)(bps, qoq)(bps, qoq)(bps, qoq)
Agriculture (2) 25.5 16.8 38.9 35.0 73 26 12 (39)
Auto (7) 20.0 19.8 23.4 18.3 266 163 124 21
Auto Anc. (10) 9.8 9.7 23.6 16.0 219 13 120 (52)
Banks - New private (4) 18.5 19.3 22.7 23.5 347 65 93 (152)
Banks - PSUs and Old private (23) 10.7 6.5 (40.6) (22.3) (606) (586) (399) (380)
Banks - Housing finance (2) 13.9 9.4 13.1 6.4 (4) (34) (58) (89)
Capital Goods (7) (5.6) (3.9) (48.2) (28.1) (626) 39 (238) 427
Cement (7) (3.8) (0.4) (54.1) (24.2) (883) (653) (459) (218)
FMCG (12) 9.5 11.2 13.9 13.8 108 45 55 (6)
Infrastructure (12) 6.5 5.2 (14.6) (9.5) (104) 14 (90) 10
IT (12) 29.5 29.8 30.8 24.5 141 202 54 112
Media (5) 19.1 16.5 14.2 12.2 (113) (60) 154 211
Metals (14) 8.4 5.6 19.8 24.3 163 (97) 116 (170)
Mining (2) 4.2 3.5 (4.6) 3.6 (376) (928) 181 (419)
Oil & Gas (8) 15.4 5.4 (0.7) (2.8) (122) 88 (144) 62
Pharmaceuticals (12) 20.9 11.6 22.3 18.7 68 143 34 64
Power (2) 0.7 1.5 (18.9) (0.6) (108) (211) (42) (146)
Telecom (3) 7.3 5.1 12.3 25.1 178 33 65 (80)
Coverage Universe (144)Coverage Universe (144)Coverage Universe (144)Coverage Universe (144)Coverage Universe (144) 13.1 13.1 13.1 13.1 13.1 9.9 9.9 9.9 9.9 9.9 0.7 0.7 0.7 0.7 0.7 4.1 4.1 4.1 4.1 4.1 (25) (25) (25) (25) (25) (89) (89) (89) (89) (89) (32) (32) (32) (32) (32) (107) (107) (107) (107) (107)
Exhibit 1: 2QFY2014 Angel coverage performance vis-a-vis estimates
Source: Company, Angel Research
Operating MarginsOperating MarginsOperating MarginsOperating MarginsOperating MarginsNet SalesNet SalesNet SalesNet SalesNet Sales Net PNet PNet PNet PNet Profitrofitrofitrofitrofit
Exhibit 2: 2QFY2014 Sensex performance vis-a-vis estimates
Source: Company, Angel Research; Note: *Sesa Goa and Cipla estimates have been excluded as comparable 2QFY2013 numbers are not available
SectorSectorSectorSectorSector
WWWWWeighteighteighteighteight 2QFY14A2QFY14A2QFY14A2QFY14A2QFY14A 2QFY14E2QFY14E2QFY14E2QFY14E2QFY14E 2QFY14A2QFY14A2QFY14A2QFY14A2QFY14A 2QFY14E2QFY14E2QFY14E2QFY14E2QFY14E 2QFY14A 2QFY14A 2QFY14A 2QFY14A 2QFY14A 2QFY14E 2QFY14E 2QFY14E 2QFY14E 2QFY14E
(%)(%)(%)(%)(%) (%, yoy)(%, yoy)(%, yoy)(%, yoy)(%, yoy) (%, yoy)(%, yoy)(%, yoy)(%, yoy)(%, yoy) (%, yoy)(%, yoy)(%, yoy)(%, yoy)(%, yoy) (%, yoy)(%, yoy)(%, yoy)(%, yoy)(%, yoy) (bps, yoy)(bps, yoy)(bps, yoy)(bps, yoy)(bps, yoy) (bps, qoq)(bps, qoq)(bps, qoq)(bps, qoq)(bps, qoq) (bps, yoy)(bps, yoy)(bps, yoy)(bps, yoy)(bps, yoy) (bps, qoq)(bps, qoq)(bps, qoq)(bps, qoq)(bps, qoq)
Auto (5) 10.4 22.0 21.7 28.9 23.0 300 167 144 10
Capital Goods (1) 0.7 (14.8) (11.6) (54.1) (31.8) (1,186) 70 (367) 889
Finance (4) 24.5 11.7 11.9 (4.2) 0.4 (406) (246) (264) (83)
FMCG (2) 12.9 9.2 10.7 10.5 12.2 196 148 48 0
Infrastructure (1) 4.5 10.0 6.1 12.2 0.7 (100) 113 (116) 97
IT (3) 17.8 29.3 29.6 25.8 21.4 108 184 52 128
Metals (3) 2.7 6.2 4.8 83.4 107.9 190 (71) 149 (108)
Mining (1) 1.0 5.8 3.5 (0.8) 3.6 (314) (914) 181 (419)
Oil & Gas (3) 13.5 15.3 5.6 1.5 (2.0) (82) 103 (132) 53
Pharma (2) 4.5 36.3 21.4 41.6 53.0 155 29 64 (63)
Power (2) 2.5 (0.9) 2.6 (19.9) (3.8) 1 (198) 42 (157)
Telecom (1) 2.4 5.2 1.1 (29.0) 9.8 70 (23) 22 (71)
Sensex* (28)Sensex* (28)Sensex* (28)Sensex* (28)Sensex* (28) 97.3 97.3 97.3 97.3 97.3 13.913.913.913.913.9 10.410.410.410.410.4 5.95.95.95.95.9 8.28.28.28.28.2 66666 (26)(26)(26)(26)(26) (1)(1)(1)(1)(1) (34)(34)(34)(34)(34)
Operating MarginsOperating MarginsOperating MarginsOperating MarginsOperating MarginsNet SalesNet SalesNet SalesNet SalesNet Sales Net PNet PNet PNet PNet Profitrofitrofitrofitrofit
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WWWWWeighteighteighteighteight
SectorSectorSectorSectorSector (%)(%)(%)(%)(%) 2QFY20142QFY20142QFY20142QFY20142QFY2014 2QFY20132QFY20132QFY20132QFY20132QFY2013 % chg% chg% chg% chg% chg 2QFY20142QFY20142QFY20142QFY20142QFY2014 2QFY20132QFY20132QFY20132QFY20132QFY2013 % chg% chg% chg% chg% chg
Bajaj Auto 1.7 5,061 4,817 5.1 837 741 13.0
Bharti Airtel 2.4 21,343 20,283 5.2 512 721 (29.0)
BHEL 0.7 8,984 10,546 (14.8) 648 1,412 (54.1)
Coal India 1.0 15,411 14,573 5.8 3,043 3,069 (0.8)
Dr. Reddy 1.7 3,357 2,881 16.5 690 444 55.4
HDFC 7.4 1,908 1,736 9.9 1,266 1,151 10.0
HDFC Bank 7.2 6,321 5,354 18.1 1,982 1,560 27.1
Hero Moto Corp 1.2 5,696 5,151 10.6 481 441 9.3
Hindalco 0.9 6,246 6,115 2.1 196 359 (45.3)
HUL 2.6 6,747 6,155 9.6 880 805 9.3
ICICI Bank 7.2 6,210 5,414 14.7 2,352 1,956 20.2
Infosys 9.0 12,965 9,858 31.5 2,626 2,369 10.9
ITC 10.3 7,776 7,146 8.8 2,038 1,836 11.0
Jindal Steel 0.6 3,633 3,541 2.6 257 582 (55.8)
Gail India 1.0 13,945 11,361 22.7 916 985 (7.1)
L&T 4.5 14,510 13,195 10.0 978 871 12.2
M&M 2.3 8,814 9,659 (8.7) 989 902 9.7
Maruti Suzuki 1.2 10,212 8,070 26.5 670 227 194.7
NTPC 1.7 16,272 16,120 0.9 2,493 3,142 (20.7)
ONGC 3.5 22,312 19,788 12.8 6,064 5,897 2.8
RIL 9.0 103,758 90,336 14.9 5,490 5,409 1.5
SBI 2.7 15,529 14,320 8.4 2,375 3,658 (35.1)
Sun Pharma 2.8 4,192 2,657 57.8 1,362 1,005 35.5
Tata Motors 4.0 56,216 42,819 31.3 2,687 2,085 28.9
Tata Power 0.8 2,200 2,520 (12.7) 262 296 (11.5)
Tata Steel 1.3 36,645 34,133 7.4 527 (407) (229.6)
TCS 6.9 20,977 15,621 34.3 4,702 3,512 33.9
Wipro 2.0 10,992 9,271 18.6 1,942 1,486 30.7
Sensex*Sensex*Sensex*Sensex*Sensex* 97.3 97.3 97.3 97.3 97.3 448,232448,232448,232448,232448,232 393,441393,441393,441393,441393,441 13.913.913.913.913.9 49,266 49,266 49,266 49,266 49,266 46,515 46,515 46,515 46,515 46,515 5.95.95.95.95.9
Exhibit 3: Sensex companies' 2QFY2014 performance
Source: Company, Angel Research; Note: Sesa Goa and Cipla estimates have been excluded as comparable 2QFY2013 numbers are not available
Net Sales (Net Sales (Net Sales (Net Sales (Net Sales (`````cr)cr)cr)cr)cr) Net PNet PNet PNet PNet Profit (rofit (rofit (rofit (rofit (`````cr)cr)cr)cr)cr)
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Automobi le - Strong JLR performance and
favorable forex boost earnings
During 2QFY2014, our coverage automobile companies
reported 23.4% yoy growth in earnings as compared to our
estimate of 18.3% yoy led by favorable forex movement which
aided EBITDA margins. The overall performance was largely
supported by Tata Motors (TTMT) driven by strong earnings
growth at JLR as well as Maruti Suzuki (due to the low base of
last year on account of the strike at its plants).
On a sequential basis too, our coverage automobile companies
posted an impressive 20.9% qoq growth in earnings with a
double-digit expansion in revenue. This can be attributed largely
to the 21.6% qoq revenue growth as JLR's performance was aided
by robust volume growth and translation gains on account of
INR depreciation against the GBP. Excluding TTMT, earnings
growth came in at 7.1% qoq as revenue declined by about
2.0% qoq on decline in volumes.
Banking - Earnings divergence continued as
expected
During 2QFY2014, New Private Banks continued to outshine
their peers and delivered a strong earnings growth of
22.7% yoy, aided by healthy NII growth of 21.2% yoy. Old private
banks faced higher asset quality pressures than new private ones
and reported moderate earnings performance during the quarter,
with earnings growth of 12.9% yoy.
On the other hand, PSU Banks reported a weak performance,
marred by elevated asset quality pressures (35.9% yoy higher
Gross NPAs), higher opex growth (25.6% yoy), moderate growth
in non-interest income (6.9% yoy) and MTM losses on higher
yields (though RBI relaxations provided a breather this time).
During the quarter, PSU banks posted a sharp bottom-line decline of
42.2% yoy (within which mid-PSUs reported much sharper earnings
de-growth of 77.9% yoy as against 29.0% yoy for larger ones).
Capital goods - BHEL weighs on earnings
performance
The capital goods companies in our coverage universe reported
a sharp de-growth in earnings, weighed down mainly by BHEL's
quarterly performance. BHEL, the only Sensex capital goods
company, reported a disappointing performance due to
slow-moving orders, delay in payments and project clearances
at customers' ends as well as margin pressure owing to increase
in provisioning. Excluding BHEL, revenues reported a modest
5.4% yoy growth and the operating margin expanded by
42bp yoy. But at the same time, higher interest cost due to
enhanced working capital requirements, led to earnings
contraction of 10.0% yoy for the remaining capital goods
companies.
Cement - Decline in realisation impacts earnings
Our cement coverage universe posted a poor performance during
2QFY2014 due to steep fall in yoy realization. The demand
scenario was weak across the country leading to price collapse
and the fall in realization. Most of the companies reported a
decline even on the top-line front, with the overall cement universe
posting a top-line de-growth of 3.8% yoy. Weak realization
resulted in a steep decline in OPM for the coverage companies
in the range of 650-1,870bp yoy. Profitability was also impacted
due to increase in freight costs. Poor operational performance
resulted in a 54.1% yoy fall in bottom-line for our coverage
cement companies.
FMCG - Healthy earnings continue for the sector
Most of the FMCG companies in our coverage universe have
posted strong earnings performance in 2QFY2014, despite the
slowdown, aided by higher volumes, better realization and
superior product mix. The top-line growth of our FMCG universe
stood at 9.5% yoy. However, the performance on the operating
margins front has been mixed as the increase in gross margin
was offset to an extent by higher advertisement and sales
promotion expenditure for most of the companies on account of
the slowdown in demand and intense competition. Our coverage
FMCG universe posted a 108bp yoy expansion in OPM and
13.9% yoy growth on the bottom-line front.
Infrastructure - L&T supports overall performance
but earnings pressure continues
Our coverage infrastructure companies disappointed on the
earnings front with a 14.6% yoy contraction owing to higher
interest cost and lower-than-anticipated operational
performance. L&T, the only infrastructure company in the Sensex,
surprised positively on both, the revenue and the earnings front.
This was mainly on the back of strong execution performance
and higher-than-expected other income. Excluding the
performance of L&T, mainly subdued revenue growth of
3.0% yoy resulted in a steep ~80.0% yoy contraction in earnings
for the sector. This decline in earnings can be attributed to the
persistence of high interest and commodity cost and slowdown
in order inflow for the sector.
IT - Strong earnings performance continues
Our coverage IT companies posted a robust earnings growth of
30.8% yoy and 17.4% qoq as 2Q is traditionally a strong quarter
because of the strong budget flush that happens before close of
Sectoral Analysis
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the annual capex cycle by clients. On the earnings front,
performance came in better-than-expected owing to most of the
companies delivering better USD revenue growth. Also, favorable
INR depreciation and operational efficiencies helped the
companies to post robust operating margins.
With Europe showing signs of opening up to the outsourcing
model, the Managements of most of the IT companies indicated
that deal pipeline is looking strong. While signs of revival in
discretionary spending in the US are still at a nascent level,
non-discretionary domains continued to lead growth momentum.
2QFY2014 turned out to be the second consecutive quarter of
broad-based growth, with contribution from all geographies,
verticals and service lines.
Metals and mining - Tata Steel supports strong
earnings performance
Most of the companies in the metals sector reported
better-than-expected top-line growth. Amidst low steel demand
in India, domestic steel majors have managed to report strong
sales growth during 2QFY2014 on the back of 1) import
substitution arising out of higher cost of imported steel and
2) increase in steel exports - both of which are a result of sharp
INR depreciation against the USD. Our coverage metal
companies reported a strong 19.8% yoy growth in earnings. But
excluding Tata Steel, our coverage metal universe posted a largely
flat earnings performance. Tata Steel's operating performance
was boosted due to cost efficiencies and better performance from
the European operations.
Oil and Gas - Mixed earnings performance
Our overall coverage oil and gas companies reported a marginal
0.7% yoy decline in earnings mainly owing to pressure on margins
(on expected lines). Sensex oil and gas companies reported a
better earnings performance (1.5% yoy growth). This is because
heavyweights like RIL and ONGC supported the overall earnings
of the coverage oil and gas companies excluding which our
coverage oil and gas universe reported earnings de-growth of
7.6% yoy. For ONGC, higher rupee realization boosted the
earnings performance.
Pharmaceuticals - Strong earnings performance
Our overall coverage pharmaceutical companies posted a strong
22.3% yoy growth in earnings during the quarter supported by
robust revenue performance as well as margin expansion.
Excluding the disappointing performance of Ranbaxy (on account
of forex losses and extraordinary expenditure), earnings growth
for the remaining pharmaceutical companies in our coverage
came in much higher at 38.6% yoy.
Telecom - Disappointment on earnings growth
Overall our coverage telecom companies reported a mixed set
of numbers. While Idea reported a largely in-line performance,
Bharti's bottom-line was below our expectation due to higher
finance charges as well as a one-time exceptional charge and
RCom's results came in ahead of our as well as street expectations
as margin increased by a whopping 354bp qoq. As the
competitive intensity is receding and pricing power is coming
back to operators, we expect incumbent players such as Bharti,
Vodafone and Idea to perform well going ahead. We are currently
neutral on the telecom sector as issues like one-time spectrum
charge and renewal fees still persist.
Continued benign global liquidity conditions boost
sentiments
Central banks in advanced economies have continued to supporta revival in economic growth through benign liquidity conditions.
The Federal Reserve (Fed), for instance, has surprised markets
positively and maintained a dovish stance, delaying the tapering
of QE3. The Fed has decided to continue purchasing securities
to the tune of USD85bn per month (USD45bn in treasury
securities and USD40bn in mortgage-backed securities) to
maintain downward pressure on longer-term interest rates and
support economic recovery. It has also maintained that the Fed
funds rate at 0.25% is likely to remain at this exceptionally low
level at least as long as the unemployment rate remains above
6.5% and long-term inflation expectations are well anchored.
Hence coupled with persistence of easy money, the signs of
strengthening GDP growth in advanced economies have driven
risk-on mode back in the global markets.
At the same time, domestically too positives are shaping up easing
concerns on the external front. We do believe that with concerted
policy action our external sector vulnerabilities have receded
substantially. Strong export growth along with slowing import
demand and curbs on gold imports are expected to narrow our
trade deficit and CAD substantially. In addition, as a result of the
RBI's measures to attract debt and NRI inflows, the financing ofthe CAD is unlikely to be as challenging as expected earlier. So
far, it is believed that the RBI has garnered about USD20bn under
its schemes to attract FCNR (B) deposits and foreign currency
borrowings. At the same time, the RBI governor has indicated
that majority of the oil marketing companies' dollar demand is
back in the forex markets. Buoyed by these developments, FIIs
have poured in USD5.8bn in the Indian equity markets since
September 2013 in contrast with outflows of USD3.7bn witnessed
during June - August 2013. Therefore, we believe that the
economy is now better poised to tackle risks on account of the
imminent tapering of QE3 in the coming months.
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Exhibit 5: ... lead to substantial narrowing of the trade deficit
Source: Ministry of Commerce, Angel Research
(25)
(20)
(15)
(10)
(5)
-
Jan-1
2
Fe
b-1
2
Mar-
12
Apr-
12
May-1
2
Jun-1
2
Jul-12
Aug-1
2
Sep-1
2
Oc
t-12
Nov-1
2
Dec-1
2
Jan-1
3
Fe
b-1
3
Mar-
13
Apr-
13
May-1
3
Jun-1
3
Jul-13
Aug-1
3
Sep-1
3
Oc
t-13
(USD bn)
WPI Inflat ion CPI i nflation
7.0
10.1
4.0
5.0
6.0
7.0
8.0
9.0
10.0
11.0
12.0
Apr-12
May
-12
Jun
-12
Jul-12
Aug
-12
Sep
-12
Oct-12
Nov
-12
Dec
-12
Jan
-13
Feb
-13
Mar-13
Apr-13
May
-13
Jun
-13
Jul-13
Aug
-13
Sep
-13
Oct-13
(%)
Exhibit 6: Pick-up in headline WPI as well as CPI inflation
Source: Office of Economic Adviser, Mospi, Angel Research
Export growth to have a cascading positive impact
Exports have reported robust growth since July 2013 for four
straight months on the back of pick-up in external demand,
weaker rupee and a low base. The improvement in export
performance has come as a much-needed silver lining for the
economy. In the April - October period, the trade deficit has
narrowed sharply to USD90.7bn as compared to USD112.0bn
in the corresponding period of the previous year. We maintain
that the strong export growth along with compression of gold
imports in particular is expected to narrow the CAD considerably
at about 3.0-3.5% of GDP during FY2014 as compared to 4.8%
of GDP in FY2013. The RBI governor has pegged the CAD for
FY2014 at USD56bn ie lower by a whopping USD32bn as
against the previous year's deficit.
We continue to maintain that significant export growth is likely
to be the starting point of overall sustainable improvement in
our macro fundamentals. The growth in non-oil exports is
expected to trigger a virtuous investment cycle in the economy.
We believe that given the weightage of value-added exports in
our economy of at least about 16%, a sustained exports growth
at a double-digit run rate could potentially add 100-150bp to
the overall GDP growth.
18.2% (18.4% in September 2013) mainly due to the persistence
of high vegetable and fruit prices for the fourth consecutive month.
Amongst its components, vegetable inflation continued to be
driven mainly by prices of onions (278%), sweet potato (206%),
tomato (122%) and ginger (109%) and contributed substantially
(about 150bp) to the headline print. At the same time, coreinflation also picked up to a six-month high at 2.6% as compared
to 2.1% in the previous month and 5.2% in October 2012
reflecting the pass through of higher input costs in the
manufacturing sector despite weak pricing power.
CPI inflation during October 2013 touched a seven month high
as it further inched upwards to 10.1% as compared to 9.8% in
September 2013. Inflation in food articles (accounting for almost
50% weightage in the index) edged higher to 12.3% as against
11.3% in the previous month. CPI inflation has persisted to remain
elevated and close to double-digit levels and core CPI inflationhas also remained sticky at 8%-levels. High retail inflation has to
a large extent entrenched inflationary expectations.
Going ahead, we believe that food inflation is likely to moderate
with cooling off of vegetable prices in particular. This can be
attributed to good monsoon, the 5% rise in area under kharif
sowing and modest improvement in kharif production as per
the first advance estimates. At the same time, rabi production is
likely to improve meaningfully on account of soil moisture and
water reservoir levels. Put together, these factors are expected to
result in easing food inflation pressures in the economy.
14.7
10.3
2.5
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13
(%) Pr im ar y Art ic les Fue l a nd Po we r Ma nu fa ct ure d Pr od uc ts
Exhibit 7:Amongst WPI components, primary articles inflation is high...
Source: Office of Economic Adviser, Angel Research
13.5
(14.5)
(20.0)
(15.0)
(10.0)
(5.0)
-
5.0
10.0
15.0
20.0
Apr-12 Jun-12 Aug-12 Oct-12 Dec -12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13
(%) Export growth Import growth
Exhibit 4: Positive trends in export and import growth...
Source: Ministry of Commerce, Angel Research
Food inflation likely to ease going forwardThe headline WPI inflation paced up towards an 8-month high
during October 2013 at 7.0% as compared to 6.5% in the
previous month. Food inflation continued to remain elevated at
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Revival in investment key to economic outlook
Growth in industrial output as measured by the IIP continues to
remain sluggish led down primarily by the performance of the
manufacturing sector. The IIP reported a modest growth of 2.0%during September 2013 as compared to 0.4% during the previous
month and 0.7% de-growth in September 2012. The weakness
in investment as well as consumption space is reflected by the
contraction of 6.8% and 10.8% in capital goods and consumer
durables segment respectively.
(6.0)
(3.0)
-
3.0
6.0
9.0
12.0
15.0
Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec -11 Apr-12 Aug-12 Dec -12 Apr-13 Aug-13
(%) IIP 3MMA IIP
Exhibit 9: Sluggish pace of growth in industrial activity
Source: Mospi, Angel Research
18.2
6.8
-
5.0
10.0
15.0
20.0
25.0
Apr-12 Jun-12 Aug-12 Oct-12 Dec -12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13
(%) Food Articles Non-food Primary Articles
Exhibit 8: ...Driven by elevated food inflation at above 18.0%
Source: Office of Economic Adviser, Angel Research
We maintain that a turnaround in the investment cycle is key to
meaningfully stimulate growth in the economy. In this context,
we believe that positive outcome in the state elections over the
coming 2 months would build up expectations of a strong
government at the helm in the upcoming general elections. Taking
cues thereon we believe that market sentiments are likely to beboosted further. Going forward, if and when such a government
comes to power with a strong mandate we expect further structural
reforms in the economy aimed at clearing supply-side bottlenecks
and reviving the investment cycle that would in turn support
economic growth.
Outlook and Valuation
We expect Sensex EPS to post a growth of 9.4% for FY2014.
Attributing a 15x multiple to our Sensex EPS, we arrive at a target
of 23,000 for the Sensex over the next one year implying anupside of about 14.0% from the present levels.
We continue to have a positive outlook on export-oriented sectors
like IT and pharmaceuticals owing to signs of recovery in
advanced economies and the rupee depreciation on a yoy basis.
We are positive on select metal stocks as well, considering recent
capacity additions and under-utilized capacity getting employed
for exports aided by improvement in global fundamentals as
well as competitiveness due to rupee depreciation. We also
selectively prefer large private banks as they remain structurally
strong and are also likely to benefit from an imminent cyclical
revival.
1,192
1,304
1,538
500
700
900
1,100
1,300
1,500
1,700
FY2013 FY2014E FY2015E
(`)
9.4%grow
th17.9%
growth
Exhibit 10: Sensex EPS growth over FY2013-15
Source: Angel Research
5.0
10.0
15.0
20.0
25.0
30.0
Nov-01 Nov-03 Nov-05 Nov-07 Nov-09 Nov-11 Nov-13
S en se x 1 ye ar forw ard P /E 15 ye ar A vg 5 ye ar A vg
Exhibit 11: Sensex one-year forward P/E
Source: Angel Research
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Stock Watch
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Note: Please refer to the importantNote: Please refer to the importantNote: Please refer to the importantNote: Please refer to the importantNote: Please refer to the important Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latestStock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latestStock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latestStock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latestStock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest
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investment positions in the stocks recommended in this report.investment positions in the stocks recommended in this report.investment positions in the stocks recommended in this report.investment positions in the stocks recommended in this report.investment positions in the stocks recommended in this report.
Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)Reduce (-5% to -15%) Sell (< -15%)
Ratings (Returns) :
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Research Team
Fundamental:
Sarabjit Kour Nangra VP-Research, Pharmaceutical [email protected]
Vaibhav Agrawal VP-Research, Banking [email protected]
Bhavesh Chauhan Sr. Analyst (Metals & Mining) [email protected]
Viral Shah Sr. Analyst (Infrastructure) [email protected]
V Srinivasan Analyst (Cement, FMCG) [email protected]
Yaresh Kothari Analyst (Automobile) [email protected]
Ankita Somani Analyst (IT, Telecom) [email protected]
Sourabh Taparia Analyst (Banking) [email protected]
Bhupali Gursale Economist [email protected]
Vinay Rachh Research Associate [email protected]
Amit Patil Research Associate [email protected]
Twinkle Gosar Research Associate [email protected]
Tejashwini Kumari Research Associate [email protected]
Akshay Narang Research Associate [email protected]
Harshal Patkar Research Associate [email protected]
Nishant Sharma Research Associate [email protected]
Technicals:
Shardul Kulkarni Sr. Technical Analyst [email protected]
Sameet Chavan Technical Analyst [email protected]
Derivatives:
Siddarth Bhamre Head - Derivatives [email protected]
Institutional Sales Team:
Mayuresh Joshi VP - Institutional Sales [email protected]
Meenakshi Chavan Dealer [email protected]
Gaurang Tisani Dealer [email protected]
Production Team:
Tejas Vahalia Research Editor [email protected]
Dilip Patel Production Incharge [email protected]