Market Strategy - kotaksecurities.com · Market Strategy . July 2020. In May’20, the unemployment rate fell to 13.3% as against market expectation of ~20%, l argely beat economist

Market Strategy July 2020

AUGUST 2, 2017

Kotak Securities – Private Client Group Please see the Disclosure/Disclaimer on the last page For Private Circulation 2


MARKET OUTLOOK FOR JULY 2020 The International Monetary Fund in its “World Economic Outlook forecasts” has indicated that global growth will contract by 4.9 percent due to the coronavirus disruption in CY20 but will rise by 5.4 percent in CY21. The COVID-19 pandemic had a higher negative impact on economic activity in the H1CY20 than anticipated and the recovery is projected to be more gradual than previously forecasted. Due to COVID and resultant lock-down, India’s economy got hit meaningfully. Notably, India’s economy is projected to contract by 4.5 percent following a longer period of lockdown and slower recovery than anticipated in Apr’20.

Stimulus package: Global equity markets recovered meaningfully as various governments and Central Banks have announced stimulus packages to support the economy. Further, to avoid hard economic landing more such measures are expected. Uptill now, governments have adopted a phased rollout of packages. Hence, market expects more government actions.

The various rounds of limited and unlimited QEs (bond purchase programs) pursued by various central banks to finance government deficits indirectly has resulted in a sharp increase in the balance sheet size of the central banks. Just to highlight, Big-4 central banks’ size increased to US$20 tn versus US$15.3 tn at CY19 end and US$11.2 tn at CY15 end.

Interestingly, market mood remained buoyant on expectations of 1) earlier-than-anticipated normalization of activities, as most states committed to remain open despite continuous increase in daily Covid cases, 2) good monsoon prediction, 3) global liquidity and 4) hopes of a potential COVID-19 vaccine. Further, assets like real estate, Bank fixed deposits, bond yields are not offering attractive returns currently which has further acted as a fuel to the fire for equities and Gold. On the flip side, rising geo-political tension and rising virus cases will keep the markets volatile.

FY21 – Excellent start to monsoon. Coming to domestic markets, the monsoon season plays a ginormous role as far as India's agriculture and the overall economy is concerned. In India, cumulative rainfall was 22.6% above long-term average with the weekly rainfall 4.9% above long-term average, till June 24. Out of the 36 sub-divisions across India, till date, three have received deficient rainfall, 15 have received normal rainfall, and 18 have received excess rainfall. Positively, the total kharif acreage was 104% higher than the same period last year, as of June 26.

Covid-19. Recent data suggest a steady increase in the number of Covid-19 cases, with India currently third globally in daily new case additions. The authorities have no option but to follow a balanced approach between lives and livelihoods. The only consolation being the increase in recovery rates to almost 60% as of June 27, 2020 versus 55% of June 20, 2020. Further, fatality rates witnessed steady decline. India continues to have relatively low fatality rates compared to other most-affected countries.

Equity Outlook. Notably, equity market valuations are supported by falling yields in India and globally. We expect market’s focus will shift back to earnings with the start of quarterly earnings season. If earnings for the coming quarter do not come in line with the rally, stocks may see profit booking.

Valuation. Q4FY20 results have been quite disappointing and we have seen 20-30% earnings cut in our FY21 estimates for most stocks under our coverage. Based on latest KIE estimates Nifty-50 Fw PE is trading at 22.8x FY21E and 16.6x FY22E. This implies Free Float earnings growth of -4.4% for FY20E, -4% for FY21E (EPS Rs. 450) and 37.9% for FY22E (EPS Rs. 615). Considering the potential threat to GDP growth, FY21 & FY22 earnings could be at big risk.

Sumit Pokharna [email protected]

+91 22 6218 6438



Hence, valuations which look optically lower today could gradually move higher in light of the potential risk to future earnings. The risk-reward ratio in large caps has turned unfavourable.

Off late the breadth of the market has improved a lot. The Mid caps and small caps continued to outperform the Nifty-50 last month. In the month of Jun’20 the BSE Mid Cap Index was up 11% while the BSE Small Cap Index was up 15% as compared to 8% rise in the Nifty-50. Many of the beaten down mid and small caps are doing catch-up as Nifty sustains above the 10,000 mark. It is difficult to time entry and exit in mid and small caps at this juncture. Hence long term investors can look to buy or accumulate in every decline. One needs to be careful while dealing with beaten down mid & small caps and should know what they are buying. One should not get tempted and clearly avoid penny stocks at this juncture. Q1FY21 results season could offer better buying opportunity as results could be below expectations.

1-year performance of benchmark global indices

Source: Bloomberg, Kotak Institutional Equities

1-month BSE Sectoral Perforamnce


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TOP INVESTMENT IDEAS Price Fair Upside/ Mkt EPS

Rating (Rs) Value Downside cap. EPS (Rs) growth (%) P/E (x) P/B (x) RoE (%)

Company 29 June 20 (Rs) (%) (Rs bn) FY21E FY22E FY21E FY22E FY21E FY22E FY21E FY22E FY21E FY22E

Jindal Steel and Power BUY 153 200 31 156 (9.0) 14.6 (18) 262 NM 10.5 0.5 0.5 NM 4.7

Gujarat Pipavav Port BUY 76 106 40 37 4.5 5.8 (25.1) 28.0 16.8 13.1 1.8 1.8 10.5 13.5

Bharti Airtel BUY 567 690 22 3,094 5.7 14.5 NM NM 100.2 39.2 4.0 3.8 4.0 10.0

Federal Bank BUY 52 80 55 103 6.1 6.9 (21.1) 13.0 8.5 7.5 0.7 0.7 8.1 8.6

Kalpataru Power BUY 213 470 120 33 25 39 0.1 53.3 8.4 5.5 0.9 0.8 11.1 15.2

TCS REDUCE 2,102 1,705 (19) 7,887 82.6 92.0 (4.2) 11.3 25.4 22.9 8.5 7.9 34.7 36.0

Godrej Properties SELL 843 610 (28) 212 10.9 17.7 1.7 62.2 77 48 4.2 3.8 5.6 8.4

Berger Paints SELL 502 410 (18) 488 5.8 9.2 (15.1) 60.2 87 54 16.0 13.6 19.6 27

TVS Motor SELL 378 220 (42) 180 9.1 15.0 (30.1) 65.6 42 25 4.7 4.1 11.6 17.5

Source: Kotak Institutional Equities. For details refer to KIE India Daily report dated 29th June 2020; Note: Earnings season has started and KIE would be changing their earnings estimates, price targets and ratings of above companies as and when their results are out in near future.



INTERNATIONAL MARKETS

The International Monetary Fund in its “World Economic Outlook forecasts” has indicated that global growth will contract by 4.9 percent (i.e. 1.9 percentage points below the Apr’20 outlook) due to the coronavirus disruption in CY20. The COVID-19 pandemic had a higher negative impact on activity in the H1CY20 than anticipated and the recovery is projected to be more gradual than previously forecasted. Further, in CY21 global growth is projected at 5.4 percent. Overall, this would leave CY21 GDP some 6.5 percentage points lower than in the pre-COVID-19 projections of Jan’20. The adverse impact on low-income households is particularly acute, imperiling the significant progress made in reducing extreme poverty in the world since the 1990s.

For the first time, all regions are projected to experience negative growth in CY20. However, in China, where the recovery from the sharp contraction in Q1CY20 is underway, growth is projected at 1.0 percent in CY20, supported in part by policy stimulus. Notably, India’s economy is projected to contract by 4.5% following a longer period of lockdown and slower recovery than anticipated in Apr’20.

Country Fiscal Measures in Response to the COVID-19 Pandemic (Percent of GDP)

Countries are providing sizable fiscal support through budgetary measures, as well as off-budget liquidity.

Sources: National authorities; and IMF staff estimates. Note: Data are as of June 12, 2020. Country groups are weighted by GDP in purchasing power parity-adjusted current US dollars. Revenue and spending measures exclude deferred taxes and advance payments. For details, see the Fiscal Monitor Database of Country Fiscal Measures in Response to the COVID-19 Pandemic. AEs = advanced economies; EMs = emerging markets; G20 = group of twenty economies; LIDCs = low-income developing countries.

Just to highlight, India has unveiled liquidity support (4½ percent of GDP) through loans and guarantees for businesses and farmers and equity injections into financial institutions and the electricity sector.

US unemployment and retail sales Federal Reserve Chairman Jerome Powell has indicated that the US is nearing the end of its shutdown phase and beginning to bounce back.

US job data and retail sales data has surprised on the positive side and gives early indication that bottom has reached in May’20. However, employment and economic activity remain far below pre-pandemic levels and significant uncertainty looms over US trajectory, warned Powell.



In May’20, the unemployment rate fell to 13.3% as against market expectation of ~20%, largely beat economist expectations. Similarly, Retail sales data notched a record 17.7% jump in May’20 far better than expectation.

Powell laid out three phases of the virus downturn and said he believes the nation is entering the second stage.

US unemployment rate since 1929 As per Bureau of labor Statistics, in May’20, the unemployment rate decreased after the US unexpectedly added 2.5 mn jobs.

US unemployment rate

Source: Bureau of labor Statistics and Houstan.com. Note: The unemployment rates for 1929 to 1947 are only available as annual averages. From 1948 onwards, it’s monthly. The 1929 to 1947 data includes the US population ages 14 and up. From 1948 onwards, it’s 16 and up.

US retail sales

Total sales of retail and food services, percent change from previous month

Source: US Census Bureau and BBC

Consolidated G-4 central banks’ balance sheet at US$20 tn; has expanded by US$5 tn in CYTD20 The various rounds of limited and unlimited QEs (bond purchase programs) pursued by various central banks to finance government deficits indirectly has resulted in a sharp increase in the balance sheet size of the central banks over the past few years.

The Labor Department reported lower unemployment rate to 13.3% in May’20 from 14.7% in Apr’20.



Big-4 central banks’ size at increased to US$20 tn versus US$15.3 tn at end-CY2019 and US$11.2 tn at end-CY15.

Size of the balance sheet of G-4 central banks, December calendar year-ends, 2006-20 (US$ bn)


Notably, the monetary actions of central banks (cut in repo rates, limited or unlimited purchases of all sorts of bonds) are simply their ways to tempt economic participants (corporates, households) to take more risks and thus, revive the economy.

China Inc. leaving U.S. market at fastest pace since 2015 As per Bloomberg, the value of buyouts in 2020 by Chinese companies is US$ 8.1 bn (uptill 16th June’20). Chinese companies are exiting their US listings at the fastest pace since 2015 as US weighs tighter scrutiny on Chinese companies after a string of accounting scandals including Luckin Coffee Inc. that have burned some of Wall Street’s biggest names. Nasdaq Inc. is also planning new rules that would make initial public offerings more difficult for some Chinese firms, potentially curtailing their access to the world’s biggest capital market. Other school of thought is that the Covid-19 pandemic has made some US listed Chinese companies look relatively undervalued.

Chinese companies are pulling out of U.S. market

Source: Bloomberg

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Just to highlight, China’s biggest online classified firm 58.com Inc., agreed to a buyout deal led by private equity firms Warburg Pincus and General Atlantic. Secondly, an investor group backed by Chinese tech tycoon Pony Ma’s Tencent Holdings Ltd plan to take Bitauto Holdings Ltd. private (valuing the car-listing website at $1.1 bn).

According to the Bloomberg data, in 2020, US listed Chinese companies have announced four go-private deals with a combined value of US$ 8.1 bn including debt as against NIL in 2019. It’s also the highest value for any full year since 2015, when US$29.8 bn of such buyouts were announced.

European car demand collapse The German automotive sector struggles to recover from the coronavirus lockdowns and low demand for new cars. According to the German Automotive Industry Association, only 1.18 mn cars were produced between Jan-May’20, a drop of 44%, or nearly a mn vehicles from the same five-month period in 2019.

New car registrations across the European Union as a whole plunged by over 52% yoy in May’20. That was a slight improvement from the 73% yoy drop in Apr’20, but no consolation to carmakers desperate to get their production lines running at full capacity again.

In May’20, despite lockdowns easing in many EU member states and showrooms being able to open again, the new car registrations across the European Union plunged by ~52% yoy in May’20.

Gold tempts investors in uncertain times Interestingly, Gold has been the best asset class in term of performance with a spectacular return of 21% in last 1 year. Gold price is rising sharply after Federal Reserve quantitative easing and relaxing monetary policy.

If global central banks keep pumping money and keep interest rates lower, then Gold prices may remain strong, we opine.

Gold prices (US$/Oz)




DOMESTIC MARKETS

Covid-19 India has reached third position globally in the daily new case additions. However, the only consolation being the increase in recovery rates to almost 60%. India is still not able to achieve the second milestone of peaking of active cases. The authorities have no option but to follow a balanced approach between lives and livelihoods.

Steady increase in number of confirmed and active cases A steady increase in the number of Covid-19 cases saw India cross the 0.5 mn mark over the past week. Growth rate of confirmed cases remained stable at 3.7% compared to last week, yielding a doubling rate of 20 days.

10-day CDGR of Covid-19 cases 10-day CDGR of Covid-19 cases at 3.7%, active cases at 2.4%

Total confirmed and new cases of Covid-19 in India as of June 27, 2020 (#)

Source: Covid19India, Kotak Institutional Equities

Our analysis of district-wise data reveals that most of the confirmed cases are still concentrated in urban areas with top-5 districts contributing 49% of cases, top-10 districts contributing 58% cases and top-25 districts contributing 67% cases. As per data of June 27, 78 districts reported fewer than 50 cases and 128 districts reported fewer than 25 cases. We would note that six of the top-20 districts have lower-than-national growth rates and decent-to-high recovery rates. The key metrics of top-20 districts as of June 27. Among major cities, Ahmedabad, Mumbai and Kolkata have seen steady improvement over the past few weeks but cases continue to surge in Chennai, Delhi and Hyderabad.



10-day CDGR of active Covid-19 cases at 2.4%; recovered cases have surpassed active cases

Trend of active cases versus recovered cases and deceased (#)


The growth rate of active cases increased slightly to 2.4% (10-day CDGR) on June 27 compared to 2.1% on June 20, despite a steady increase in recovered cases.

Positive rate among newly tested samples has remained steady

New samples tested versus positive-to-tested on a daily basis


Recovery rate has increased steadily over the past week

Trend of total recovery versus total cases




The overall recovery rate bumped up further with recovered cases/confirmed cases at 59% as of June 27, 2020 versus 55% of June 20, 2020. However, most of the economically important states continue to see steady increase in active cases while the populous but economically less-important states have seen plateauing in the number of active cases. Most states have decent-to-high recovery rates.

Fatality rate has decreased steadily over the past week

Trend of deaths from Covid-19 versus total confirmed cases in India


Fatality rates witnessed steady decline. India continues to have relatively low fatality rates compared to other most-affected countries.



ECONOMIC ACTIVITY

These are the key factors which can effectively gauge the impact of Covid-19 on the economy. Case for optimism. The economic indicators in this week’s KIE Covid-19 tracker make a case for guarded optimism in the sustainability of economic recovery. Most indicators we track are still well below their pre-Covid levels, however, their week-on-week movement is towards recovery. Payments data reveal that UPI and IMPS transactions are back to usual levels, while the number of e-waybills generated continues to rise. Electricity consumption gap between CY2019 and CY2020 narrowed.

Data shows a slowdown in economic activity We track a set of indicators as a proxy for economic activity.

Road traffic. Road traffic remains lower than 2019 levels. This data is available for four Indian cities – Mumbai, New Delhi, Bengaluru and Pune. We also track the average daily number of e-waybills generated. This is available on a weekly basis and is also a proxy for the movement of goods across the country.

Civil aviation data. We track the number of domestic departures and the passengers carried.

Electricity consumption. If Covid-19 leads to a prolonged lockdown and temporary shutting down of factories, we expect electricity consumption to go down. We show the daily electricity consumption of major states in India and compare this with consumption in the same week of CY19.

Real estate and vehicle purchases. We track the number of property sales registered in Maharashtra and the daily number of vehicles registered in Regional Transport Offices under the Vahan4 umbrella.

Railway/Ports data. We show daily average metric tons of freight carried by Indian railways as a proxy of goods movement in India. We track the yoy change in the freight load for major commodities. We also show the volume of traffic at major ports and the change in volume for major commodities.

Number of job postings. Covid-19 has led to hiring freezes as well as involuntary attrition in certain industries. We show the mom and yoy change in the number of new job postings on Naukri.com. We also show estimated nation-wide unemployment level based on CMIE survey.

Covid-19 mindshare. We also track the mindshare of Covid-19 in people’s minds. We are assuming that before economic activity picks full steam, people will need to stop worrying about Covid-19. Thus, the number of people searching for Covid-19 will reduce before we see an uptick in the economy. We track Google trend data for Coronavirus searches.

Import duty collection. We also monitor external trade by comparing the import duty collected in the current period against the import duty collected during the same period in FY20.

Movement of people. Finally, we also track the change in the time spent by people at their residences, their workplaces and at retail and recreational places, compared against the pre-Covid baseline.



All the above indicators show a significantly lower level of economic activity than pre-Covid levels, but most of the indicators are moving back in the right direction.

Economic indicators continue to show an uptick

Source: Kotak Institutional Equities

FY21: Excellent start to monsoon The monsoon season plays a ginormous role as far as India's agriculture and the overall economy is concerned. In India, cumulative rainfall was 22.6% above long-term average with the weekly rainfall 4.9% above long-term average, till June 24. On a cumulative basis, spatial distribution of monsoon was excess though rainfall has been weak in Southern India. Out of the 36 sub-divisions across India, till date, three have received deficient rainfall, 15 have received normal rainfall, and 18 have received excess rainfall.

Retail food price momentum: Average weekly price levels indicate that food price changes have been mixed over last week. Vegetable prices were 0.2% lower while pulses prices were flat over last week. Cereal prices fell 1.3% while the price of oils and fats increased 0.9% in the week ending June 21 as compared to a week prior. We note that this is based on the Department of Consumer Affairs’ daily/weekly data and should not be assumed as the official retail inflation data.

Sowing is much higher than last year’s level: The total kharif acreage was 104% higher than the same period last year, as of June 26. Sowing was late last year due to extremely weak start to monsoon. Rice sowing was 35% higher at 3.8 mn hectares. Oilseed acreage was 526% higher at 8.3 mn hectares and pulses acreage at 1.9 mn hectares was 222% higher than last year. Coarse cereal acreage was 96% higher at 4.8 mn hectares. Sugarcane and cotton acreages were at 5 mn hectares (4.9 mn hectares last year) and 7.2 mn hectares (2.7 mn hectares last year) respectively.

Sowing much higher than last year's levels

Acreage for major crops, December calendar year-ends (mn hectares)

Source: Ministry of Agriculture, Kotak Institutional Equities



Reservoir levels have significant surplus: Basin-wise reservoir levels was at significant surplus compared to long-term average levels. Of the larger river basins, all of them were in surplus: Ganga (north and east), Godavari (west and south), Indus (north India), Kaveri (south), Krishna (west and south), Mahanadi (central and east), and Narmada (central and west). Overall, basins and reservoirs were around 71% above long-term average for week ending June 25.

River basins in surplus

Basin-wise reservoir levels, billion cubic meters (BCM)

Source: Ministry of Water Resources; Kotak Institutional Equities

Liquidity remains adequately in surplus

Systemic liquidity, March fiscal year-ends, Mar-June’20 (Rs. Bn)

Source: RBI, Kotak Institutional Equities

The government announced the Q2FY21 T-bill borrowing calendar. It plans to borrow a gross total of Rs4.55 tn in H2FY21; Rs1.56 tn by issuing 91-day T-bills, Rs1.69 tn by issuing 182-day T-bills and Rs1.3 tn by issuing 364-day T-bills. This amounts to a net borrowing of Rs1.4 tn in Q2FY21 after Rs2.57 tn in Q1FY21 (Rs1.77 tn including CMB maturities).



SECTORAL SNIPPETS

Automobiles Given loss of volumes in April 2020, unlocking of the economy in a phased manner and gradual pick-up in capacity utilization (due to possible headwinds from labor shortage and supply-chain disruptions), we expect automotive industry to witness volume decline in FY21. M&HCV industry is expected to stay under pressure in FY2021 due to the weak economic scenario and a steep price increase post BS-VI implementation and expect domestic CV cycle to revive from FY2022 onwards. We expect tractor demand to recover as rural economy remains strong supported by record rabi output, higher government spending and expectations of a normal monsoon.

Capital Goods The Capital Goods industry is expected to see a slowdown in order inflows in the near term due to the disruption caused by the Covid-19 related lockdown. In our discussions with the corporates, we hear sluggish movement in execution and new deal wins, as customers are reluctant to travel. Working Capital may also get stretched. On the positive side, raw material cost is likely to remain benign. On a net basis, FY21E would be weak and prospects of FY22E would depend on pace of economic recovery in 2HFY21. Defence sector could be in focus in view of the heightened tensions on Indo-China border.

Construction Materials Dealer checks suggest all-India cement prices have declined by 3% to Rs369/bag in Jun’20 with easing supply-side constraints after a sharp 10% m-o-m increase in May’20, both led by South. Rural and pent-up demand has led to higher-than-expected volumes in May-Jun’20 and the industry could just suffer ~40% yoy decline in Q1FY21E volumes. Strong prices should help offset fixed costs under-recovery in Q1FY21E and keep margins intact.

Region-wise price trends. Price cuts in June were pan-India but the highest in South. Prices in South declined 6% mom after a sharp 19% hike in May’20. Prices declined in North, Central and East markets by 2%/3% mom while prices in West remained resilient and declined by just 1% despite very poor demand. Cement prices in Q1FY21E are expected to be higher by Rs18/bag (+5% qoq) versus Q4FY20 levels.

Cement companies are now trading at a discount to historic mean and ~15-20% discount to our fair multiples on EV/EBITDA.

Consumer sector The overall consumption trend continued to be weak. With the Covid-19 outbreak and subsequent lockdown, all segments faced the brunt albeit with varying magnitudes. Discretionary was hit harder with sales coming to a grinding halt for a few names. Even as consumer off-take increased for select staples, disruption in supply chain would have prevented companies from channel up-stocking. However, margin prognosis is positive with benign crude and other RM prices (except dairy). Furthermore, low media intensity, strict control of overhead costs and Ind-AS 116 impact should help reported EBITDA margins, even as operating leverage will be a drag for most names.



Insurance In May’20, General insurers reported 8% yoy decline in premiums (excluding crop) on the back of sharp 23% yoy decline in the motor business reflecting low OEM sales. Excluding motor and crop, premiums were up 5% yoy on the back of strong 22% yoy growth in fire and 25% yoy increase in retail health, indicating higher risk aversion and strong push through digital channels. Standalone health insurers reported 34% yoy growth in retail health.

Fire insurance premiums grew 22% yoy in May 2020. This was likely driven by higher corporate renewals compared to retail businesses as underlying borrowers focus on cash conservation. Additionally, GIC had increased property reinsurance rates in March 2019 (average rise of 2X) for eight occupancies (comprising 35% of industry volumes) and, subsequently, for all 291 occupancies from Jan’20. Large private players like Bajaj General (up 33% yoy), ICICI Lombard (up 51% yoy), and Tata AIG (up 55% yoy) posted strong growth.

IT Services The US President through a proclamation on June 22, 2020 has suspended entry into the US for H-1B, H-2B, L and J visa holders. The suspension is to protect the interest of US workforce amidst high unemployment rate. Technology companies are the largest users of H-1B users. While the intentions are noble, tech unemployment rate in the US is at a negligible 3.7%. IT services companies use H-1B and L visas.

The suspension is not applicable to valid visa holders as of the date of proclamation. This may impact IT companies especially since the process of awarding new H-1B visas starts in October; however the impact will be contained due to (1) aggressive localization in the last few years and (2) potential decline in revenues in the current fiscal year will reduce demand for visa workers. Further increased use of offshore resources is common during recessions. Wipro and HCLT have the highest rate of localization followed by Infosys.

Exemptions are available for those whose entry would be in the national interest as determined by the US agencies.



MSCI World Index: Fw PE chart

Source: Bloomberg & Kotak Securities – Private Client Group

S&P 500 Index: Fw PE chart


Euro Stoxx 600 Index: Fw PE chart


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Based on Bloomberg consensus

estimates the Fw PE of MSCI World Index

has moved up to 20x. Even on CY21E the Fw PE works to

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previous peaks of last 15 years

Based on Bloomberg consensus

estimates the S&P 500 Index is trading at 21.3x on 1 Yr Fw

basis. At 19x CY21E, it is still higher than its previous peak of

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The Euro Stoxx 600 Index, based on

Bloomberg estimates trades at

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trades at 15.6x, which is slightly

below its previous peak 16x. The 10

year average of Fw PE works to 13.1x.



MSCI India Premium Over MSCI EM (on 1 Yr Fw PE basis)


Nifty-50 Index: Fw PE chart


One Yr Fw PE chart: Nifty-50 Vs Mid Cap 100 Index


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15De

c-15

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16De

c-16

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17De

c-17

Jun-

18De

c-18

Jun-

19De

c-19

Jun-

20

Nifty-50 Fw PE 10 Yr Avg

4.0

8.0

12.0

16.0

20.0

24.0

28.0

Oct

-05

Jun-

06

Feb-

07

Oct

-07

Jun-

08

Feb-

09

Oct

-09

Jun-

10

Feb-

11

Oct

-11

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12

Feb-

13

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-13

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14

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15

Oct

-15

Jun-

16

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17

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-17

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18

Feb-

19

Oct

-19

Jun-

20

Nifty Mid Cap 100-Fw PE Nifty 50-Fw PE

MSCI India Fw PE now trades at 46%

premium over MSCI Emerging Market Fw

PE. It has gone above the 10 year

average premium of 38%.

Based on Bloomberg estimates the Nifty-50 trades at 19x on

1 Yr Fw basis. It has now touched the

previous peaks of ~19x.

There is no valuation gap

between the Nifty-50 and the Nifty Mid

Cap 100 Index. On 1 Yr Fw basis the

Nifty-50 trades at 19x whereas the

Nifty Mid Cap 100 Index trades at

18.6x.



JINDAL STEEL AND POWER CMP: Rs.153 Fair Value: Rs.200 Reco: BUY Mkt Cap: Rs.156 bn

JSP’s consolidated EBITDA of Rs22 bn (+25% yoy, +22% qoq) was ahead of estimates led by outperformance across all segments. (1) India steel division reported volumes of 1.4 mn tons (-3% yoy), realizations increased by 7% qoq, whereas costs declined by 23% yoy and 1% qoq primarily due to the usage of SMPL iron ore (zero cost) for about a month. EBITDA/ton increased by 38% qoq to Rs11,159/ton (+16% yoy).

Power division EBITDA increased by 25% yoy with higher generation (+30% yoy) and lower costs due to higher availability of coal. (3) Oman reported +27% yoy volumes and EBITDA at US$112/ton (+44% yoy, +93% qoq) due to higher scrap spreads and lower costs.

JSP has guided 7-7.5 mn tons of domestic steel volumes implying a 20% yoy growth at mid-point. KIE estimate 5.5 mn tons (-8% yoy) of steel volumes in FY2021 factoring the demand destruction led by Covid-19. JSP expects to start supplying 420 MW under fresh PPAs and monetization of international assets in FY2021E, not built in our base case.

KIE see upside risk from various events, which could benefit JSP in the medium term – (1) finalization of PPAs at power division – L1 for 420 MW under PFC Pilot Scheme II, (2) increasing backward integration with allocation of captive coal mines for power and steel divisions, (3) refinancing of international debt as lumpy repayment in FY2021E remains a key investor concern and (4) divestment of international businesses, particularly Botswana and Oman.

JSP has entered into a binding offer with Templar Investments, a promoter group entity to divest its entire stake in Oman steel business for an EV of US$1.1 bn. It has failed to conclude divestment transactions in the past with related parties but appears confident of completing this transaction within a month. (page1, para1 – Report date 1st July, 2020). As the Oman divestment involves a group entity and with limited information on funding arrangements, we await for deal closure to factor it in our estimates. JSP is confident of closing the deal within July 2020 as per the press release.

The Oman steel business consists of a 2.4 mtpa crude steel capacity, 1.8 mtpa DRI plant and 1.4 mtpa bar mill. The transaction after repayment of US$200 mn inter-company advances would fetch US$880 mn (Rs66 bn) or 6.6X EV/EBITDA based on FY2020 EBITDA. KIE estimate lower EBITDA at Oman in FY2022E due to weak demand and value the business at 5.5X EV/EBITDA or Rs38 bn (Rs37/share) in our SOTP. The deal would add Rs28 bn or Rs27/share (+14%) to our fair value.

KIE investment thesis on JSP is based on 1) high growth visibility due to under-utilized assets (70% utilization in steel and 32% in power in FY2020) and 2) deleveraging with strong FCF generation. With limited capex spends, KIE estimate FCF yield of 13%/25% in FY2021/22E and net debt/EBITDA to reduce to 3.3X by FY2022E from 4.6X in FY2020. KIE see room for upside despite the recent rally given attractive valuations at 5.2X EV/EBITDA and 0.5X P/B FY2022E.

Note: The above is brief note on the company, based on the research report and update available (dated: 26th May & 1st July 2020) on our website at:

https://www.kotaksecurities.com/research_report/recommendation/indiadaily.html



GUJARAT PIPAVAV PORT LIMITED (GPPV) CMP: Rs.76 Fair Value: Rs.106 Reco: BUY Mkt Cap: Rs.37 bn

For Q4FY20, GPPV reported an in-line 10% YoY decline in revenues on the back of 12.5% decline in volumes and a 2.5% higher realization. Adjusted for Ind-AS 116 impact, EBITDA margin improved ~300/250 bps YoY/QoQ, driving the outperformance versus KIE estimates.

GPPV attributed Q4FY20 performance to a better revenue mix in favor of the container segment and tight control on (1) operating costs (20% is fuel versus 11% for ADSEZ) and (2) administrative expenses.

The yoy decline in container volumes was largely driven by transshipment volumes. Liquid volumes were resilient and flat QoQ while bulk volumes did see a meaningful decline.

~40%/45% of GPPV’s volumes for 4Q/FY20 came from the parent, the market leader in container transportation. This would offer some protection in a weak FY21 for the market.

GPPV boasts of having a superior double-stacking offering in terms of optimizing instances of double-stacking within weight constraints. It is well-prepared for the partial commissioning of the DFC.

Support of Maersk’s volumes, superior double-stacking offering and changing customer preference towards rail bode well for GPPV’s volumes in a tough FY21 for the sector. We cut our revenue/EBITDA estimates by 13%/14% for FY21/22 and maintain BUY with a revised FV of Rs106 (from Rs117).

Note: The above is brief note on the company, based on the research report and update available (dated: 9th June 2020) on our website at:




BHARTI AIRTEL CMP: Rs.567 Fair Value: Rs.690 Reco: BUY Mkt Cap: Rs.3094 bn

At Rs154/sub/month, up Rs19 or 14% qoq, Bharti’s ARPU was the highlight of the 4QFY20 earnings print. (Page 1, Para 2). Bharti’s 4QFY20 ARPU was also 17% ahead of Reliance Jio despite Bharti having an inferior subs mix on paper. (Page 1, Para 3). Management said that the current tariffs are still atlow levels. They have guided for ARPUs to move to Rs200 in the short term and Rs300 inthe medium term. Besides tariff hikes, ARPU increase will also be driven by increase inshare of 4G subscribers (better mix).

Overall revenues of Rs237.2 bn (+8.1% qoq, +15.1% yoy) came in 5.2% ahead of our estimate. Adjusted for an accounting change in the DTH business, revenue growth was higher at 9% qoq. EBITDA stood at Rs102.0 bn, (+10.1% qoq), again 5% ahead of KIE estimate.

Bharti is indeed looking at developing and monetizing a few digital assets but the approach would be more partnership-driven. Bharti is unlikely, for example, to try and develop an e/m-commerce platform of its own. It could tie up with an e/m-commerce player who sees value in leveraging one of Bharti’s digital assets (Thanks or Wynk) for growing its business.

Management believes that the capex intensity is likely to go down going forward. Since they are seeing a strong increase in data demand, they will continue to invest in networks. Customer experience will remain a key priority for them.

Management said that the last 45-50 days (impact of COVID) have been a mixed bag as they saw (1) surge in demand for home broadband; (2) significant increase in demand from the B2B business; (3) growth in collaboration services; (4) very resilient LTE base; (5) collapse in new device additions; and (6) some impact on the low-end subscriber base.

KIE remain bullish on the stock and revise fair value to Rs690/share from Rs600. KIE continue to believe that Bharti will emerge a winner irrespective of the direction the Indian wireless industry structure takes.

Note: The above is brief note on the company, based on the research report and update available (dated: 19th May 2020) on our website at:




FEDERAL BANK CMP: Rs.52 Fair Value: Rs.80 Reco: BUY Mkt Cap: Rs.103 bn

Federal Bank reported ~20% yoy earnings mainly driven by high provisions, mostly to strengthen the balance sheet. Operating profits grew 28% yoy but led by higher treasury income. NII grew 11% yoy while NIM was flat qoq at 3%. Loan growth has slowed to 11% yoy.

GNPL ratio down ~20 bps to 2.8% led by lower slippages and net NPL ratio declining ~30 bps qoq to 1.3% as the company made higher provisions against NPLs during the quarter. Provision coverage ratio improved ~800 bps to 55%. Moratorium was on the lower side at 35% of loans as on May 25, 2020.

Overall deposits increased ~13% yoy (5% qoq) in 4QFY20 with 11% growth in retail deposits. CASA ratio was down ~100 bps to 30.5%. NIM (reported) was roughly flat qoq at 3.0% in 4QFY20. Yield on loans was down ~10 bps qoq to 9.2% while cost of funds was down ~10 bps to 5.7%.

KIE is building in a ~2% decline in the loan book for FY21 recovering to 5% in FY22 and ~10% in FY23, higher credit costs of ~1.3% in FY21-22E (~0.9% in FY20) with slippages of ~1.2%. NIM to remain at current levels of ~3.0% in the medium-term.

Federal Bank is trading at a significant discount to private peers. KIE maintains BUY rating with a fair value of Rs. 80 valuing the bank at ~1.1X book and 10X March 2022 EPS for RoEs in the range of ~8-10% in the medium term. Earnings are likely to remain volatile given the uncertainty of economic recovery.

Note: The above is brief note on the company, based on the research report and update available (dated: 29th May 2020 & 23rd June 2020) on our website at:




KALPATARU POWER TRANSMISSION LTD (KPTL) CMP: Rs.213 Fair Value: Rs.470 Reco: BUY Mkt Cap: Rs.33 bn

KPTL reported a decline of 8%/5%/22% yoy in 4QFY20 revenues/EBITDA/PAT respectively. Losses at PBT level for Shubham Logistics have come down yoy while JMC Projects' performance was impacted by lockdown, labor unavailability and provisioning pertaining to one road project.

Order inflows were weak during the quarter but KPTL has received orders worth Rs9 bn in FY2021 to date and has L1 position in orders worth Rs20 bn.

The share purchase agreement between CLP India and Alipurdar Transmission was terminated due to delays in commissioning of the project. Factoring in termination of this transaction, debt/EBITDA and D/E are still comfortable at 1.6X/0.6X for FY2021. However, the company is evaluating the sale of this project to other interested players and expects to finalize the sale by June 2020.

The agreement for sale of the third project Kohima Mariani Transmission stands intact. The company has appointed advisors for sale of Shubham Logistics too and initiated restructuring of road projects. With these plans, KIE expect the company to become debt free by FY2022.

KIE has cut its standalone FY2021/22 estimates for KPTL by 20%/10% on lower ordering and execution. It also cut estimates for JMC Projects on slowdown in execution and inflows. Net of roll-forward, KIE has revised fair value to Rs 470 (from Rs 590).

KIE expects KPTL to benefit from a diverse project and geography mix, well-funded order book and its plan to become debt free post asset monetization. Pledged shareholding by promoters, which had moved up during the quarter due to fall in share price, remains a key overhang on the stock.

Note: The above is brief note on the company, based on the research report and update available (dated: 21st May 2020) on our website at:




TCS CMP: Rs.2102 Fair Value: Rs.1705 Reco: REDUCE Mkt Cap: Rs.7887 bn

TCS has highlighted that lockdowns resulted in a switch to extreme form of distributed delivery with 90% of 448K employees working remotely, a shift from the highly centralized campus driven model. TCS has calibrated project management framework and security so that work could be properly allocated, governed and reported, while maintaining security controls, pivoting into a new operating model that TCS calls Secure Borderless Workspaces.

The virtualization, where interactions between TCS and client teams are done virtually, blurs the traditional divide between onsite and offshore, reducing the need to travel to onsite locations, particularly for initial transitions and knowledge transfer. The initial success of SBWS has given confidence to make a bold vision of 25X25. TCS believes that by CY25, only 25% of associates will need to work out of their facilities at any point of time; and every associate will be able to realize their potential without spending more than 25% of their time in a TCS office.

TCS’ theme is ‘Purpose-driven, Resilient, Adaptable’, highlights the strength of the organization, i.e. empowered employees, collaborative culture and resilient processes. It provides important nuggets on future of IT services through an elaborate panel discussion. In addition, KIE also notes (1) products and platforms impress, (2) Diligenta grew at an impressive 21.4% in CY19 and (3) growth in TCS Japan moderates after a strong FY19.

Large addressable market, best-in-class execution, balanced portfolio of service offerings, leadership in multiple digital competencies, healthy products and platforms portfolio and ability to stitch together multiple service offerings to create large transformational deals differentiate TCS from peers. KIE believes that the company is a good business to own but at the right price. TCS trades at peak cycle valuations of 22X FY2022E earnings and is quite pricey. In FY21, KIE expects EPS de-growth of 4.2% (Rs. 82.6) and growth of 11.3% in FY22 (Rs.92). Maintain REDUCE stance on expensive valuations.





GODREJ PROPERTIES LIMITED CMP: Rs.843 Fair Value: Rs.610 Reco: SELL Mkt Cap: Rs.212 bn

Godrej Properties (GPL) closed the year with a strong sales performance of Rs59 bn (+12% yoy) aided by the launch of as many as 17 projects, with sales in 4QFY20 at Rs23.6 bn (+10% yoy).

While pre-sales performance remains strong (historical strength area), margin performance for delivered projects is less enthusing with EBITDA margins of 14% in FY2020 and losses of Rs851 mn from JVs.

Godrej had planned for new project launches of 9.76 mn sq. ft and new phase launches of 8.1 mn sq. ft in FY2020. However, delay in receipt of regulatory approvals led to the company launching only 10.1 mn sq. ft of area in FY2020.

Management highlighted the impact of lockdown on real estate will be multi-fold which is likely to accelerate the pace of consolidation in the industry as well a decline in liquidity in the sector in the short-run. (Page 2, Para 4th, 1st line, 12th May 2020) Short-term cash flows are likely to get impacted as the collections dry up in absence of construction activity.

KIE expects real estate companies to have a difficult year during FY21E, and GPL would have its share of back-ended sales and delayed construction activity reflected in KIE's lowered pre-sales estimate of Rs44 bn for FY21E.

KIE maintains SELL rating with revised FV of Rs610/share as it push back sales as well as lower expectation on the Vikhroli land bank.





BERGER PAINTS LIMITED (BERGER) CMP: Rs.502 Fair Value: Rs.410 Reco: SELL Mkt Cap: Rs.488 bn

For Q4FY20, Berger reported 11%, 8% and 12% decline in revenues, EBITDA and PBT, respectively on like-for-like basis.

The key highlight was 365/280 bps YoY/QoQ expansion in consolidated GM to 43.6% (near-peak levels aided by RM tailwinds; KIE 41.8%).GM expansion didn't translate into commensurate EBITDA margin expansion due to negative operating leverage (Covid impact).

In Concall Management indicated that, robust pickup domestic decorative in June could be partly due to some pent up demand. Urban weakness largely compensated by higher growth in rural.

RM price trend is favorable even as INR has moved adversely. KIE believes that 4Q GM of 43.6% is representative of full year FY21E GM. As of now, the management has no plan to cut prices.

KIE bake in direct and indirect impact of Covid, cut FY21/22E EPS by 33%/9%. Berger has delivered an impressive well-rounded performance over the past few years & emerged as a credible #2 player in decorative paints. The story is good but the stock is trading at 90X FCF and 55X PE (FY22E); about 18-20% premium to APNT. Maintain SELL with a FV to Rs410 (from Rs430 earlier).

Note: The above is brief note on the company, based on the research report and update available (dated: 29th June 2020) on our website at:




TVS MOTOR CMP: Rs.378 Fair Value: Rs.220 Reco: SELL Mkt Cap: Rs.180 bn

KIE expects the two-wheeler industry to decline in FY2021E due to regulation-driven cost pressures and weak economic growth amid the pandemic.

The company highlighted that amid the pandemic, they expect industry volumes to remain under pressure in 1HFY21E. However, they remain cautiously optimistic on the prospects of 2W industry from 2HFY21E onwards. The company expects rural demand to pick up faster than urban demand.

The company highlighted that the situation in the export markets is gradually improving and will take more time to return to normal levels.

TVS’ market share in domestic 2W industry has declined by 100 bps yoy in FY2020 due to steep decline in moped volumes.

KIE expects overall revenues to grow at 7% CAGR over FY2020-23E led by higher ASPs and 3% CAGR in volumes and standalone net profit to grow at 13% CAGR over FY2020-23E

The company has invested Rs2.6 bn in TVS Motors Services, Singapore and Rs350 mn in Sundaram Auto Components in 4QFY20. For FY2020, the company has invested Rs5.8 bn in various subsidiaries.

KIE believes the stock is quite expensive even after building a significant recovery in earnings in FY2022E post a weak FY2021E.

KIE reiterates SELL rating with SoTP-based fair value revised to Rs220 (from Rs240 earlier) based on 14X March 2022E EPS estimates + Rs26/share of TVS Credit Services.





RATING SCALE (KOTAK SECURITIES – PRIVATE CLIENT GROUP) / KOTAK INSTITUTIONAL EQUITIES Definitions of ratings BUY – We expect the stock to deliver more than 15% returns over the next 12 months ADD – We expect the stock to deliver 5% - 15% returns over the next 12 months REDUCE – We expect the stock to deliver -5% - +5% returns over the next 12 months SELL – We expect the stock to deliver < -5% returns over the next 12 months NR – Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for information purposes only. SUBSCRIBE – We advise investor to subscribe to the IPO. RS – Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there is not a Sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. NA – Not Available or Not Applicable. The information is not available for display or is not applicable NM – Not Meaningful. The information is not meaningful and is therefore excluded. NOTE – Our target prices are with a 12-month perspective. Returns stated in the rating scale are our internal benchmark.

FUNDAMENTAL RESEARCH TEAM (PRIVATE CLIENT GROUP) Rusmik Oza Arun Agarwal Amit Agarwal, CFA Priyesh Babariya Head of Research Auto & Auto Ancillary Transportation, Paints, FMCG Research Associate [email protected] [email protected] [email protected] [email protected] +91 22 6218 6441 +91 22 6218 6443 +91 22 6218 6439 +91 22 6218 6433

Sanjeev Zarbade Jatin Damania Purvi Shah K. Kathirvelu Cap. Goods & Cons. Durables Metals & Mining, Midcap Pharmaceuticals Support Executive [email protected] [email protected] [email protected] [email protected] +91 22 6218 6424 +91 22 6218 6440 +91 22 6218 6432 +91 22 6218 6427

Sumit Pokharna Pankaj Kumar Krishna Nain Oil and Gas, Information Tech Midcap M&A, Corporate actions [email protected] [email protected] [email protected] +91 22 6218 6438 +91 22 6218 6434 +91 22 6218 7907

TECHNICAL RESEARCH TEAM (PRIVATE CLIENT GROUP) Shrikant Chouhan Amol Athawale Siddhesh Jain [email protected] [email protected] Research Associate +91 22 6218 5408 +91 20 6620 3350 [email protected] +91 22 62185498

DERIVATIVES RESEARCH TEAM (PRIVATE CLIENT GROUP) Sahaj Agrawal Malay Gandhi Prashanth Lalu Prasenjit Biswas, CMT, CFTe [email protected] [email protected] [email protected] [email protected] +91 79 6607 2231 +91 22 6218 6420 +91 22 6218 5497 +91 33 6625 9810

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Level 2: If you do not receive a satisfactory response at Level 1 within 3 working days, you may write to us at [email protected] or call us on 022-42858445 and if you feel you are still unheard, write to our customer service HOD at [email protected] or call us on 022-42858208.

Level 3: If you still have not received a satisfactory response at Level 2 within 3 working days, you may contact our Compliance Officer (Mr. Manoj Agarwal) at [email protected] or call on 91- (022) 4285 8484.

Level 4: If you have not received a satisfactory response at Level 3 within 7 working days, you may also approach Managing Director / CEO (Mr. Jaideep Hansraj) at [email protected] or call on 91-(022) 4285 8301.

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Documents

Market Strategy - kotaksecurities.com · Market Strategy . July 2020. In May’20, the unemployment rate fell to 13.3% as against market expectation of ~20%, l argely beat economist