Sensex consolidating in a narrow range No changes to our Top Picks this month. Of the stocks we highlight, we believe those with the most favourable technicals are Cipla (CIPLA IN), Lupin (LPC IN) and Tech Mahindra (TECHM IN) we expect a rally on a favourable outcome in the general elections.
Sensex consolidating in a narrow range No changes to our Top Picks this month. Of the stocks we highlight, we believe those with the most favourable technicals are Cipla (CIPLA IN), Lupin (LPC IN) and Tech Mahindra (TECHM IN) we expect a rally on a favourable outcome in the general elections.
Sensex consolidating in a narrow range No changes to our Top Picks this month. Of the stocks we highlight, we believe those with the most favourable technicals are Cipla (CIPLA IN), Lupin (LPC IN) and Tech Mahindra (TECHM IN) we expect a rally on a favourable outcome in the general elections.
Sensex consolidating in a narrow range No changes to our Top Picks this month. Of the stocks we highlight, we believe those with the most favourable technicals are Cipla (CIPLA IN), Lupin (LPC IN) and Tech Mahindra (TECHM IN) we expect a rally on a favourable outcome in the general elections.
This is not a research report and has not been produced by a research unit.
Important disclosures can be found in the
Disclosures Appendix. 1
Standard Chartered Securities India Top Picks equity strategy equities | 6 March 2014
Sensex consolidating in a narrow range No changes to our Top Picks this month On Watch: Maruti Suzuki (MSIL IN) to Cut (waiting for a rebound) Tata Power (TPWR IN) and HPCL (HPCL IN) or Oil India (OINL IN) under consideration to Add Indian markets were up last month because of better-than- expected inflation data and pre-election opinion polls suggesting that the BJ P-led coalition is the frontrunner for forming the next government at the Centre. Of the stocks we highlight, we believe those with the most favourable technicals are Cipla (CIPLA IN), Lupin (LPC IN) and Tech Mahindra (TECHM IN). We would advocate investors consider adding to these names at current levels. In the Interim Union Budget, the Finance Minister surprised the market by announcing that the FY14 fiscal deficit would be 4.8%, 20bps lower than previously forecast. Other highlights include the lack of populist measures ahead of the budget and excise duty reduction in automobiles, capital goods and non-consumer durables. We expect Indian equities to trade in a narrow range until the general elections and remain Neutral on the markets; we expect a rally on a favourable outcome in the general elections.
Contents Sensex consolidating in a narrow range 1 India Top Picks 2 India Top Picks Review 2 Range-bound till elections 7 Technical Commentary 8 India Top Picks Results Update 18 Sector Performance & Valuations 19 Important Information 21
Soumen Das Senior Quantitative Strategist India Top Picks (Refer to appendix for a summary of the rationale behind each stocks selection) Ticker Name Sector Stock Price Consensus Rating 12m Fwd P/E 12m Fwd P/B Div Yield Div Payout% TR 1M% TR YTD% YTD% USD TR ITD% LPC IN Lupin Ltd Healthcare 982.8 4.6 21.9 5.4 0.3 13.6 13.3% 10.0% 8.0% 7.6% CIPLA IN Cipla Ltd Healthcare 376.6 3.4 18.8 2.6 0.5 10.4 -6.4% -4.1% -6.5% 24.8% LT IN Larsen & Toubro Industrials 1097.6 4.1 17.9 2.4 1.1 21.9 12.6% 3.7% 2.0% 29.1% TECHM IN Tech Mahindra Technology 1906.5 4.4 13.4 3.5 0.3 5.0 4.5% 1.6% 3.2% 92.5% HCLT IN HCL Technologies Technology 1504.7 4.4 15.8 4.6 0.9 20.7 7.8% 25.1% 18.9% 19.9% MSIL IN Maruti Suzuki Discretionary 1582.2 3.9 14.3 2.0 0.5 9.8 -2.9% -9.9% -10.7% 13.8% TTMT IN Tata Motors Ltd Discretionary 410.7 4.7 7.8 1.9 0.5 6.5 19.3% 10.8% 8.6% 14.8% RIL IN Reliance Industries Energy 803.4 4.2 9.8 1.1 1.1 14.7 -3.8% -10.6% -10.7% 9.5% ICICIBC IN ICICI Bank Financials 1029.8 4.6 - - 1.9 24.0 5.7% -5.0% -6.7% 20.1% AXSB IN Axis Bank Financials 1255.5 4.1 - - 1.4 18.9 12.8% -2.5% -3.9% -2.8% BHARTI IN Bharti Airtel Telecom Svs 286.7 4.4 21.4 1.8 0.3 16.7 -8.7% -12.9% -13.6% -14.6% ITC IN ITC Ltd Staples 329.2 4.6 25.4 8.9 1.6 54.5 0.8% 1.8% 1.8% 50.1% Source: Bloomberg, Standard Chartered, data as of 03 March 2014
equity strategy India Top Picks | 06 March 2014
2
India Top Picks Here, we highlight our Top Picks in India on a sector-agnostic basis. For a brief view on each individual stock, refer to page 17. The technicals section on pages 8-15 highlights selected stocks with favourable technical views on a 1-3 months basis. Our key sector calls over the next 12 months Healthcare (OW) Q3 FY14 revenues continued to beat expectations because of greater penetration in key markets, new product launches and a better product mix. Industrials (OW) The sector is expected to be a key beneficiary of any revival in economic growth. Focus on infrastructure development is on the economic agenda of most major political parties, which augurs well for the sector. Furthermore, attractive valuations are supportive in face of market volatility. Technology (OW) The business outlook for the sector remains strong; however, we need to be cautious as profit-booking in the near term cannot be ruled out, because of the recent sharp outperformance. The sector is a good hedge against any volatility arising from an unfavourable election verdict, given its more internationalised earnings profile, which would benefit from a weaker rupee. Utilities (N) The sector is returning to normalcy following the recent regulatory order on a tariff hike, which is positive as it reduces fuel price concerns (the availability of coal remains a worry). Furthermore, the focus on reviving ailing State Electricity Boards (SEB) is expected to improve realisation for power generating companies. A favourable election outcome is likely to raise hopes of further power sector reforms. In addition, valuations in the sector being at historical lows provides added comfort.
India Top Picks Review We are not making any changes to the India Top Picks this month. We have, however, put a number of stocks on our watch list. On Watch: To ADD: Tata Power (TPWR IN), HPCL (HPCL IN), Oil India (OINL IN) To CUT: Maruti Suzuki (MSIL IN) - awaiting a technical rebound
On Watch to Add: Tata Power (TPWR IN) Profile: Tata Power generates and supplies electricity in Mumbai and its suburbs. The company also constructs and operates independent and captive power plants for industrial concerns. In addition, it provides various services related to electricity distribution, erects and commissions transmission lines and is diversifying into the telecommunications market. Key Drivers: TPWRs portfolio comprises low-risk businesses because c.98% of its projects are tied up under long-term power purchase agreements (PPA) and c.94% of operational and under- construction projects have long-term tie-ups for fuel supply. This provides the company medium-term revenue visibility. The recent regulatory order on the pass-through of fuel costs is structurally positive and enhances the viability of its ultra mega power project (UMPP) in Mundra, albeit with a cap on RoE. Stock Ticker View Tata Power TPWR IN Watch (Add) Hind Petroleum Co HPCL IN Watch (Add) Oil India OINL IN Watch (Add) Maruti Suzuki MSIL IN Watch (Cut)
Tata Power trading at c.-1SD below its median EV/EBITDA EV/EBITDA
equity strategy India Top Picks | 06 March 2014
3
Valuations: The stock is attractively valued at 7.3x EV/EBIDTA and trades at 1.7x P/B versus its historical 10-year average of 2.3x. Technicals: The stock is trading within a broad range of INR 70-90. The downside is very limited at the current level. Risks: The recent tariff hike is likely to be challenged by State Electricity Boards (SEBs).
On Watch to Add: Hindustan Petroleum Corp (HPCL IN) We are considering adding HPCL to the Top Picks list. The stock has run up in recent weeks, and we would look to add it on weakness. Profile: Hindustan Petroleum Corporation Ltd refines crude oil and manufactures petroleum and petroleum products. The companys products, sold via outlets throughout India, include lube products, lubricating oil, aviation fuel, hydraulic brake fluid, greases, liquefied petroleum gas and insecticides. The Government of India is the companys majority shareholder. Key drivers: We expect the re-rating of oil marketing companies (OMC) to continue given the improving RoE. The attracti ve risk-reward makes OMCs well positioned for an outperformance in case of a favourable election outcome. We expect fuel subsidies to contract further, led by regular diesel price hikes and declining crude oil prices. However, an INR depreciation could hurt our assumptions. Timely government subsidy payouts are likely to progressively reduce finance charges and improve working capital. This would also help deleverage the balance sheet. We expect RoEs to improve on the back of (1) stable gross refining margins (GRM), (2) falling finance charges, and (3) full compensation in addition to the absence of forex losses in FY14. Valuations: The c.8x 12-month forward P/E is below the Energy sectors historical mean of 13.5x. The stock offers an attractive dividend yield of 3.2%. Technicals: The stock pulled back sharply after hitting a low of INR 160 in September 2013. We expect the stock to touch INR 350 in the medium term. However, a price correction cannot be ruled out in the near term, as momentum indicators are trading in the overbought zone. Risks: Lower compensation by the government in FY14E, rising crude prices on account of geo-political concerns and the INR depreciating against the USD.
On Watch to Add: Oil India Ltd (OINL IN) Profile: Oil India explores, develops and produces crude oil and natural gas in India and internationally. The state-owned company is also involved in the transportation of crude oil, production of liquefied petroleum gas, pipeline services, as well as various exploration and production-related services.
HPCL trading at c.1SD below its median P/Bk 12-month forward P/Bx Source: Bloomberg, data as on 03 March 2014
Oil India trading at c.1SD below its median P/Bk 12-month forward P/Bx Source: Bloomberg, data as on 03 March 2014
equity strategy India Top Picks | 06 March 2014
4
Key drivers: We expect Oil India to benefit from a sharp fall in fuel subsidies in FY15 from FY14 and a doubling of gas prices in FY15, which could drive growth. The companys Q3 FY14 revenue was in line with expectations (adjusting for subsidy) as INR depreciation was offset by lower oil production volume. Valuations: The stock offers an attractive dividend yield of 3.3%. The 6.6x 12-month forward P/E is below the Energy sectors historical mean of 13.5x. Technicals: The stock is trading near multi-year support zone at INR 430-440. It continues to trade within a range of INR 440-490 in the medium term. We expect a technical pullback from lower band of the trading range. Risk: Higher subsidy burden on upstream PSUs in FY14.
On Watch to Cut: Maruti Suzuki Ltd (MSIL IN) The stock is under review for a potential cut. Investors are concerned about the proposed capacity expansion through a contract manufacturing arrangement with 100% Suzuki- owned plant in Gujarat. Investors are apprehensive about the pricing of cars from the plant and the funding of the project, which raises corporate governance concerns. While we await further clarity from management, we expect the issue to cap upside in the near term. The overhang of this pact overlooks Marutis robust operational performance. Technicals: The stock may consolidate within a range of INR 1,500-1,750. The medium-term uptrend would remain intact as long as it holds support at INR 1,400. View: We keep the name in the India Top Picks list for existing investors, and for new investors, we would advocate they await clarity on the Gujarat plant investment by the parent Suzuki.
Current Top Picks: Lupin Ltd (LPC IN) The stock rose 13.6% last month following better-than-expected Q3 FY14 results, driven by strong business growth in the US. During this period, Lupin received final approval for its Rifabutin capsules USP (for advanced HIV infection) from the US Food and Drugs Administration (USFDA) to market a generic version of Pharmacia and Upjohns Mycobutin capsules (annual US sales of USD 18.6m). The companys US subsidiary will commence marketing the product shortly. Valuations: Despite the upmove, the stock is trading at 21.6x 12- month forward P/E, lower than the sectors 10-year average of 22.3x. Risks: Deceleration in the growth of Indian formulations and a prolonged slowdown in sales in J apan.
Uncertainty with regard to the deal with the parent Suzuki spooked investors Maruti Suzukis price chart Source: Bloomberg, data as on 03 March 2014
Lupins exposure to foreign markets could aid its earnings on a global economic recovery Revenue by geography Source: Bloomberg, Standard Chartered
equity strategy India Top Picks | 06 March 2014
5
Cipla (CIPLA IN) Cipla was sold down by 6.4% as its Q3 FY14 earnings disappointed due to lower margins. Management has highlighted that the business model going forward is local manufacturing in countries like Brazil and Turkey. Cipla already has a factory each in Uganda and South Africa and a partnership in China. So it is in the process of evolution, which could lead to having its own manufacturing abroad. The stock did bounce back from a key support level. As highlighted in our Results Flash dated 14 February 2014, we believe that the near-term pressure on margins is due to Ciplas investment in future growth. Furthermore, Ciplas transition to a business model driven by expanding global reach and a greater research focus should lead to higher revenues. Valuations: The stock is trading at 18.9x 12-month forward P/E, below the sectoral mean of 22.3x. Risks: Persistence of margin pressure in the medium term
Larsen & Toubro (LT IN) LT rebounded a sharp 12.6% last month and continues to display strength. LTs strategy of monetising its assets through public listing and stake sales is a sentiment booster in the waning industrial sector. We remain constructive on LTs Infrastructure business (c.76% of the current order book and c.58% of FY14 revenues), which is now the key driver of sales and margins. Furthermore, managements guidance that the infrastructure segment is one of the most profitable segments in its orderbook is reassuring. LT has a robust order book, and new order growth of more than 23% for the first nine months of 2014 exceeded the full-year guidance of more than 20% growth. Valuations: The stock is trading at attractive levels 18.2x 12m forward P/E versus its historical 10-year average of 22.2x. Risks: Lower manufacturing utilisation, especially in power and shipbuilding, will remain a drag on earnings in the near term.
Tata Motors Ltd (TTMT IN) The company saw a sharp up-move of 19.3%, led by: Robust J aguar Land Rover (J LR) retail volume growth (c.12.1% y/y) in J anuary. Volumes grew at a strong double-digit rate in China (up 38.9% y/y) and North America (up 16.9% y/y), led by strong momentum in recently launched models. We expect J LR to continue outperforming, driven by continued momentum in the global luxury vehicle market and aided further by a product launch pipeline and the success of its newly launched models. We continue to observe demand erosion for the domestic passenger and commercial vehicles segments on the back of weak economic activity. Cipla under earnings pressure but bounced back from the support level Ciplas price chart Source: Bloomberg, data as on 03 March 2014
Larsen & Toubro is trading below its median valuation LTs EV/EBITDA Source: Bloomberg, data as on 03 March 2014
TTMT trading at an all-time high Tata Motors price chart Source: Bloomberg, data as on 03 March 2014
equity strategy India Top Picks | 06 March 2014
6
Valuations: The stock is trading at reasonable levels 8.1x 12m forward P/E versus a 10-year average of 12.5x. Risks: Demand moderation in China and developed countries as well as adverse forex movements could pressure J LRs profitability. Further, any impediment in Indias economic recovery could severely impact its domestic business.
Bharti Airtel (BHARTI IN) Bharti Airtel corrected sharply, by 8.7%, in line with industry performance. Investors fear that the recent spectrum auction could lower industry returns, as rising debt will hurt operators' ability to invest and roll out new technologies, which would eventually lead to higher tariffs and reduced services for consumers. We believe the negatives are mostly priced into the stock price and monetization of assets may lead to a de-leveraging of its balance sheet, which can further boost sentiment. In addition, the operating metrics in Bhartis domestic business continue to improve, which is positive. Valuations: The stock is trading at attractive levels at 21.3x 12m forward P/E versus a 10-year average of 29.5x and a P/B of 1.9x versus 3.5x. Risks: Inability to hike prices, as well as rising spectrum and operational costs are margin dampeners.
Data services could dri ve growth Proportion of revenue (%) Source: Bloomberg, Standard Chartered
equity strategy India Top Picks | 06 March 2014
7
Range-bound till elections and possible rally thereafter The impending general election is the key near-term trigger for Indian markets. Interestingly, during the last three elections, the equity markets had rallied strongly, either during the run-up to the election or right after. However, this year, the markets have been marginally positive until now, and we expect a rally on a favourable election outcome. Nevertheless, an unfavourable election outcome, resulting in a hung parliament, should have limited downside for the following reasons: 1. The markets are trading at reasonable valuations. 2. Among the sectors with high index weightage, IT and Consumer Staples are less vulnerable because of their fundamental strength and defensive nature. 3. Energy, another heavyweight, is trading near historically low valuations, and only Financials are likely to witness some volatility. Recent pre-election opinion polls indicate that the Bhartiya J anta Party (BJ P) is likely to emerge as the single largest political party. However, the strength of the largest party in the collation that forms the government will be critical because it is directly related to the stability of the government and its decision-taking capability. The key risk to this outcome is the emergence of the Aam Aadmi Party (AAP) and the expected complexity from 149m young first-time voters that constitute one-fifth of the total electorate. Interestingly, the prima facie economic manifesto of most political parties stress on infrastructure development, revival of economic growth and socio-economic reforms, which is a positive. We suggest adding election beta to the Industrials and Utilities sectors. Markets mostl y have moved up either before or after elections in the last three instances Source: Bloomberg, Standard Chartered
MSCI India sector valuations / weights MSCI India sector P/E 10Y Avg Weight (%) Healthcare 21.3 22.3 7.1 Industrials 15.3 20.0 4.3 Technology 17.4 20.1 25.3 Con Discretionary 10.4 14.5 6.5 Energy 8.7 13.5 11.9 Financials* 2.2 3.0 21.2 Materials 9.8 10.4 6.4 Telco 19.9 19.6 2.5 Utilities 9.6 14.6 3.6 Con Staples 29.6 25.5 11.2 Source: Standard Chartered, Bloomberg P/E 12-month forward P/E and 10-year average forward P/E * For Financials P/Book ratio is considered
equity strategy India Top Picks | 06 March 2014
8
Technical Commentary Below, we present the technical views for our India Top Picks. The stocks are given a rating of 1-5, with 1 being the most favourable and 5 being the least favourable on a 1-3 months basis. This is from a pure technical standpoint and may run contrary to the fundamental views we hold of the stocks within the portfolio, which is on a 12-month basis. India Top Picks Technical rating Name Ticker Sector Rating Cipla CIPLA IN Healthcare 1 Lupin LPC IN Healthcare 1 Tech Mahindra TECHM IN IT 1 Bharti BHARTI IN Telecom 3 ICICI Bank ICICIBC IN Financials 2 ITC ITC IN Staples 2 Larsen & Toubro LT IN Industrials 2 Maruti Suzuki Ltd MSIL IN Discretionary 2 Reliance RIL IN Energy 2 Axis Bank AXSB IN Financials 3 HCL Tech HCLT IN IT 3 Tata Motors TTMT IN Discretionary 3
Source: Standard Chartered, Metastock Views as of 03 March 2014
equity strategy India Top Picks | 06 March 2014
9
Technical Commentary (contd)
BSE SENSEX The Sensex continues to consolidate within a range of 19,000- 21,500. The long-term uptrend should remain intact as long as the Sensex stays above 18,000. Weekly Chart Source: Metastock, Standard Chartered, data as on 03 March 2014
Lupin (LPC IN) The stock should continue to maintain its positive momentum as long as it can hold the support at INR 870. The stock may touch INR 1,030 in the medium term. Weekly Chart _______ 100 EMA _______ 200 EMA Source: Metastock, Standard Chartered, data as on 03 March 2014
equity strategy India Top Picks | 06 March 2014
10
Technical Commentary (contd)
Cipla (CIPLA IN) The stock found support at INR 370 and pulled back slightly. We expect it would consolidate around this level rather than a significant price correction. The medium-term uptrend would remain intact as long as the stock holds above INR 355.
Weekly Chart Source: Metastock, Standard Chartered, data as on 03 March 2014
Larsen & Toubro (LT IN) We remain positive in the longer term. However, the current rally may pause near its resistance at INR 1,150 and the stock may consolidate within a range of INR 1,050- 1,150 in the near term before resuming its uptrend. Daily Chart _______ 50 EMA _______ 100 EMA _______ 200 EMA Source: Metastock, Standard Chartered, data as on 03 March 2014
equity strategy India Top Picks | 06 March 2014
11
Technical Commentary (contd)
Tech Mahindra (TECHM IN) The stock is trading near its all-time high. The near-term positive momentum is likely to continue as long as the stock holds the support at INR 1,700. A strong resistance zone is at INR 1,900- 2,050. Weekly Chart _______ 50 EMA Source: Metastock, Standard Chartered, data as on 03 March 2014
HCL Tech (HCLT IN) The stock is likely to maintain its positive momentum as long as it holds the support at INR 1,250. We expect profit-booking at the current level as momentum indicators are trading in an overbought zone. Weekly Chart _______ 50EMA _______ 100 EMA Source: Metastock, Standard Chartered, data as on 03 March 2014
equity strategy India Top Picks | 06 March 2014
12
Technical Commentary (contd)
Maruti Suzuki (MSIL IN) The stock may consolidate within a range of INR 1,500- 1,750. The medium- term uptrend would remain intact as long as it holds support at INR 1,400. Weekly Chart Source: Metastock, Standard Chartered, data as on 03 March 2014
Tata Motors (TTMT IN) As expected, the stock found support at INR 330 and rallied to a new lifetime-high. Currently, the stock is trading near the upper band of the channel at INR 425. We expect the stock to consolidate within a range of INR 390-425 in the near term. Daily Chart Source: Metastock, Standard Chartered, data as on 03 March 2014 _______ 100 EMA _______ 200 EMA
equity strategy India Top Picks | 06 March 2014
13
Technical Commentary (contd)
Reliance Industries (RIL IN) The stock is likely to continue to trade within a broad range of INR 760-960 in the medium term. We expect pull back from support. Weekly Chart _______ 50 EMA _______ 100 EMA _______ 200 EMA Source: Metastock, Standard Chartered, data as on 03 March 2014 ICICI Bank (ICICIBC IN) The stock should continue to consolidate within a range of INR 900-1,230 in the medium term. The medium-term uptrend would remain intact as long as the stock trades above the key support at INR 900.
Weekly Chart _______ 50 EMA _______ 100 EMA _______ 200 EMA Source: Metastock, Standard Chartered, data as on 03 March 2014
equity strategy India Top Picks | 06 March 2014
14
Technical Commentary (contd)
Axis Bank (AXSB IN) The stock may face resistance at INR 1,330. Key support is at INR 1,100 and below that at INR 950. The stock may consolidate within a range of INR 1,150- 1,330.
Weekly Chart Source: Metastock, Standard Chartered, data as on 03 February 2014
Bharti Airtel (BHARTI IN) The stock is trading near the lower band of the trading range at INR 280. We expect a technical pullback from the support zone at INR 255-280. However, the stock is expected to be range-bound within a band of INR 280-310 in the medium term. Weekly Chart _______ 50 EMA Source: Metastock, Standard Chartered, data as on 03 March 2014
equity strategy India Top Picks | 06 March 2014
15
Technical Commentary (contd)
ITC (ITC IN) The stock should continue to consolidate within a range of INR 309-350 in the near term. The medium-term uptrend would remain intact as long as the stock stays above INR 309. Weekly Chart Source: Metastock, Standard Chartered, data as on 03 March 2014
equity strategy India Top Picks | 06 March 2014
16
India Top Picks Performance & Valuations
India Top Picks performance and valuations (local currency) Ticker Name Sector Stock Price Consensus Rating 12m Fwd P/E 12m Fwd P/B Div Yield Div Payout% TR 1M% TR YTD% YTD% USD TR ITD% LPC IN Lupin Ltd Healthcare 982.8 4.6 21.9 5.4 0.3 13.6 13.3% 10.0% 8.0% 7.6% CIPLA IN Cipla Ltd Healthcare 376.6 3.4 18.8 2.6 0.5 10.4 -6.4% -4.1% -6.5% 24.8% LT IN Larsen & Toubro Industrials 1097.6 4.1 17.9 2.4 1.1 21.9 12.6% 3.7% 2.0% 29.1% TECHM IN Tech Mahindra Technology 1906.5 4.4 13.4 3.5 0.3 5.0 4.5% 1.6% 3.2% 92.5% HCLT IN HCL Technologies Technology 1504.7 4.4 15.8 4.6 0.9 20.7 7.8% 25.1% 18.9% 19.9% MSIL IN Maruti Suzuki Discretionary 1582.2 3.9 14.3 2.0 0.5 9.8 -2.9% -9.9% -10.7% 13.8% TTMT IN Tata Motors Ltd Discretionary 410.7 4.7 7.8 1.9 0.5 6.5 19.3% 10.8% 8.6% 14.8% RIL IN Reliance Industries Energy 803.4 4.2 9.8 1.1 1.1 14.7 -3.8% -10.6% -10.7% 9.5% ICICIBC IN ICICI Bank Financials 1029.8 4.6 - - 1.9 24.0 5.7% -5.0% -6.7% 20.1% AXSB IN Axis Bank Financials 1255.5 4.1 - - 1.4 18.9 12.8% -2.5% -3.9% -2.8% BHARTI IN Bharti Airtel Telecom Svs 286.7 4.4 21.4 1.8 0.3 16.7 -8.7% -12.9% -13.6% -14.6% ITC IN ITC Ltd Staples 329.2 4.6 25.4 8.9 1.6 54.5 0.8% 1.8% 1.8% 50.1% Source: Bloomberg, Standard Chartered As of 03 March 2014
equity strategy India Top Picks | 06 March 2014
17
India Top Picks Stock Rationale
India Top Picks stock rationales Company Ticker Sector Conviction Lupin LPC IN Healthcare Robust earnings growth, led by excellent execution in the US and Indian businesses, expanding geographic reach and strong product pipeline. Margins in domestic business remain a concern. Cipla CIPLA IN Healthcare The stock has corrected post its Q3 FY14 results due to earnings disappointing as a result of lower margins. Revenues, however, grew an impressive 24% y/y. We believe that the near-term pressure on margins is due to Ciplas investment in future growth. Furthermore, Ciplas transition to a business model driven by expanding global reach and a greater focus on research should lead to higher margins in the medium term. Investment in future growth can impact margins in the short term. Larsen & Toubro LT IN Industrials Diversified business model, ability to protect margins in challenging times, stable orderbook and the prospect of monetisation of non-core assets are key drivers. Prolonged economic slowdown is negative. Tech Mahindra TECHM IN Technology Strong focus on organic and inorganic growth, high momentum in deal-wins, stable order book and reasonable valuation. Changes in the US immigration visa rules remain a concern HCL Technologies HCLT IN Technology Still strong earnings traction, large deal wins and reasonable valuation. The recent sharp rally warrants caution in the near term. Changes in the US immigration visa rules remain a concern Maruti Suzuki MSIL IN Discretionary The recently outlined expansion plan with its parent is a near-term overhang on the stock. Market share gains, launch of revolutionary new auto gear shift car and margin expansion are key drivers. Reliance Industries RIL IN Energy The increase in gas prices from Q1 FY15 is positive; however, the low production of gas and high capital investment in its telecom business remain a worry. ICICI Bank ICICIBC IN Financials Strong revenues, margin expansion, healthy CASA, reasonable asset quality, improvement in ROE and attractive valuations. An addition to restructured assets and NPAs is a worry. AXIS Bank AXSB IN Financials Focus on retail business, improved loan growth and valuation close to its historical low are key drivers. Asset quality remains a worry. Bharti Airtel BHARTI IN Telecom Svs Improvement in the domestic business, focus on cost and possible monetisation of assets are positives. The high cost of spectrum leading to stress on the balance sheet is a concern. ITC ITC IN Staples Stable volumes and pricing power in cigarettes, profitability in the non-cigarette FMCG business, traction in the hotels and paper board businesses are potential drivers. The stock is a good hedge in case of an unfavourable election verdict. Increase in excise duty remains a risk. Tata Motors TTMT IN Discretionary The domestic commercial vehicle business is expected to be a beneficiary of economic revival. Strong growth at J LR and a healthy pipeline of new products, key markets witnessing traction, focus on cost rationalisation and an attractive valuation. Increased capex can lead to cash flow stress. Source: Standard Chartered
equity strategy India Top Picks | 06 March 2014
18
India Top Picks Results Update
Name Report Date Quarter Results Comments AXIS BANK 1/16/2014 Q3 Meet Macro slowdown impacted asset quality HCL TECH 1/16/2014 Q3 Beat Growth momentum remains strong RELIANCE INDUSTRIES 01/17/2014 Q3 Meet Flat earnings beat expectations of a decline with stable refining margins while petrochemicals and other income propped up profits ITC LTD 01/17/2014 Q3 Beat Cigarette margins remained strong while other FMCG businesses are expected to maintain momentum LARSEN & TOUBRO 01/22/2014 Q3 Meet Strong business momentum but order growth forecast cut ICICI BANK 01/28/2014 Q3 Meet Slowest quarterly profit growth in four years, as the ability of corporate borrowers to repay loans declined and provisioning increased MARUTI SUZUKI 01/28/2014 Q3 Beat Strong operational performance, higher localisation and favourable forex BHARTI AIRTEL 01/29/2014 Q3 Beat Increase in profit growth after 15 quarters, led by mobile data revenue and realisation from voice services LUPIN LTD 02/03/2014 Q3 Beat Strong US and India sales helped the company put up a stellar show TECH MAHINDRA 02/04/2014 Q3 Beat Sequential growth on account of exceptional gain TATA MOTORS 02/10/2014 Q3 Beat Most geographies showed good traction, along with improved sales performance in J aguar and continued resilience in Land Rover CIPLA LTD 02/14/2014 Q3 Miss Revenues grew an impressive 24% y/y though margins disappointed Source: Standard Chartered
Source: Bloomberg, Standard Chartered As of 03 March 2014
India Sector Preferences Country View Rationale Healthcare OW Earnings momentum continues with greater penetration in key markets, new product launches and better product mix. Industrials OW Expected beneficiary of revival of economic growth. Earnings downturn is likely over and valuations are attractive. Information Technology OW The business outlook for the sector remains strong; however, profit-booking in the near term cannot be ruled out because of the recent sharp outperformance. Consumer Discretionary N Sector outlook remains muted, vehicle sales remain low. The interim budget provided some respite by lowering excise duty. Energy N Creeping reforms and increase in natural gas price are key positives. Financials N Asset quality concern remains a worry, especially for state-owned banks. Valuations are attractive. Materials N Continues to be impacted by low demand and cost pressure. Telecom Svs N The recent aggressive bidding in the spectrum auction is expected to deteriorate balance sheets in the sector. High data usage, uptick in call charges and improvement in operating metrics are positives. Utilities N The sector is returning to normalcy with the recent regulatory order on tariff hikes, which is a positive as it reduces fuel price concerns. Consumer Staples UW Low volume growth, pressure on cost and historically high valuations are key concerns.
Source: Standard Chartered
equity strategy India Top Picks | 06 March 2014
20
Definitions YTD: Year to date. ITD: Inception to date. PT: Price Targets (SCB uses an investment horizon of 12 months for its price targets). RSI: Relative Strength Index. Relati ve Volatility index: A measure of the standard deviation of the daily price change. MA: Moving Average. Basket average performance: Basket average is the un-weighted performance of the shortlisted stocks Consensus rating: A rating provided by Bloomberg which reflects the aggregation of all brokers rating for a particular stock. 1 is a Sell, while 5 is a Strong Buy. P/E: Price/Earnings ratio. The Trailing P/E refers to 12m of trailing earnings, while the forward refers to 12m forecast earnings, against current price. P/B: Price/Book ratio. The book value refers to total shareholders equity, while the forward refers to 12m forecast book value, against current price. EV/EBITDA: Enterprise value/Earnings Before Interest, Tax and Depreciation Amortisation. Earnings revision ratio: Net earnings revision (upgrades - downgrades) / Total earnings revision (upgrades +downgrades) ROE and ROA: Return on Equity (book value) and Return on Assets. Dividend Yield: Dividend paid/ current price. Net Interest Margin (NIM): Is a measure of difference between the net interest income generated from lending by financial institutions and the amount of interest paid out to their lenders (for example deposits). Beta: Correlation between a stock and the market. Is based on two years of weekly data, but modified by the assumption that a securitys beta moves toward the market average over time. Total return: Capital appreciation +dividend income received. Short term: Time horizon of 1-4 weeks. Medium term: Time horizon of 3-6 months. EMA: Exponential moving average Investment Strategy Team: Sirshendu Basu Chief Investment Strategist Nishit Sheregar Investment Strategist Shishir Narsinghani Associate Strategist Soumen Das Senior Quantitative Strategist Ashish Pai Quantitative Strategist
Errol Crasto Quantitative Strategist
Priya Iyer Production Executive
equity strategy India Top Picks | 06 March 2014
21 Important Information
DISCLOSURE SCB and/or its affiliates have received compensation for the provision of investment banking or financial advisory services within the past one year for the following companies: Reliance Industries Ltd and Bharti Airtel Ltd. Global Disclaimer: This document is not research material and it has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. This document does not necessarily represent the views of every function within the Standard Chartered Bank, particularly those of the Global Research function. Standard Chartered Bank is incorporated in England with limited liability by Royal Charter 1853 Reference Number ZC18. The Principal Office of the Company is situated in England at 1 Basinghall Avenue, London, EC2V 5DD Standard Chartered Bank is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority. In Dubai International Financial Centre (DIFC), the attached material is circulated by Standard Chartered Bank DIFC on behalf of the product and/or Issuer. Standard Chartered Bank DIFC is regulated by the Dubai Financial Services Authority (DFSA) and is authorised to provide financial products and services to persons who meet the qualifying criteria of a Professional Client under the DFSA rules. The protection and compensation rights that may generally be available to retail customers in the DIFC or other jurisdictions will not be afforded to Professional Clients in the DIFC. Banking activities may be carried out internationally by different Standard Chartered Bank branches, subsidiaries and affiliates (collectively SCB) according to local regulatory requirements. With respect to any jurisdiction in which there is a SCB entity, this document is distributed in such jurisdiction by, and is attributable to, such local SCB entity. Recipients in any jurisdiction should contact the local SCB entity in relation to any matters arising from, or in connection with, this document. Not all products and services are provided by all SCB entities. This document is being distributed for general information only and it does not constitute an offer, recommendation, solicitation to enter into any transaction or adopt any hedging, trading or investment strategy, in relation to any securities or other financial instruments. This document is for general evaluation only, it does not take into account the specific investment objectives, financial situation, particular needs of any particular person or class of persons and it has not been prepared for any particular person or class of persons. Opinions, projections and estimates are solely those of SCB at the date of this document and subject to change without notice. Past performance is not indicative of future results and no representation or warranty is made regarding future performance. Any forecast contained herein as to likely future movements in rates or prices or likely future events or occurrences constitutes an opinion only and is not indicative of actual future movements in rates or prices or actual future events or occurrences (as the case may be). This document has not and will not be registered as a prospectus in any jurisdiction and it is not authorised by any regulatory authority under any regulations. SCB makes no representation or warranty of any kind, express, implied or statutory regarding, but not limited to, the accuracy of this document or the completeness of any information contained or referred to in this document. This document is distributed on the express understanding that, whilst the information in it is believed to be reliable, it has not been independently verified by us. SCB accepts no liability and will not be liable for any loss or damage arising directly or indirectly (including special, incidental or consequential loss or damage) from your use of this document, howsoever arising, and including any loss, damage or expense arising from, but not limited to, any defect, error, imperfection, fault, mistake or inaccuracy with this document, its contents or associated services, or due to any unavailability of the document or any part thereof or any contents. SCB, and/or a connected company, may at any time, to the extent permitted by applicable law and/or regulation, be long or short any securities, currencies or financial instruments referred to on this document or have a material interest in any such securities or related investment, or may be the only market maker in relation to such investments, or provide, or have provided advice, investment banking or other services, to issuers of such investments. Accordingly, SCB, its affiliates and/or subsidiaries may have a conflict of interest that could affect the objectivity of this document. This document must not be forwarded or otherwise made available to any other person without the express written consent of SCB. Copyright: Standard Chartered Securities (India) Limited 2014. Copyright in all materials, text, articles and information contained herein is the property of, and may only be reproduced with permission of an authorised signatory of, Standard Chartered Securities (India) Limited. Copyright in materials created by third parties and the rights under copyright of such parties are hereby acknowledged. Copyright in all other materials not belonging to third parties and copyright in these materials as a compilation vests and shall remain at all times copyright of Standard Chartered Securities (India) Limited and should not be reproduced or used except for business purposes on behalf of Standard Chartered Securities (India) Limited or save with the express prior
equity strategy India Top Picks | 06 March 2014
22 written consent of an authorised signatory of Standard Chartered Securities (India) Limited. All rights reserved. Standard Chartered Securities (India) Limited 2014. Investment Strategy Disclaimer: This document and/or trading calls are issued by Investment Strategy Team of Standard Chartered Securities (India) Limited, a registered broker regulated by the Securities and Exchange Board of India. This is not research material and it does not represent the views of the Standard Chartered Group, particularly those of the Global Research function. This document is not independent of Standard Chartered Groups own trading strategies or positions. Therefore, it is possible, and you should assume, that Standard Chartered Group has a material interest in one or more of the financial instruments mentioned herein. Opinions, projections and estimates are subject to change without notice. This document and/or the trading calls are for information purposes only. It does not constitute any offer, recommendation or solicitation to any person to enter into any transaction or adopt any hedging, trading or investment strategy, nor does it constitute any prediction of likely future movements in rates or prices or any representation that any such future movements will not exceed those shown in any illustration. The data, opinions and other information that form the basis of this document and/or the trading calls may be provided by third parties for SCSI. While all reasonable care has been taken in preparing this document and/or the trading calls, and the information in it is believed to be reliable, it has not been independently verified by SCSI. Any opinions or views of third parties expressed in this material are those of the third parties identified, and not of SCSI. Trading recommendations based on quantitative analysis are based on index / stocks momentum, price movement, trading volume and other volatility parameters, as opposed to study of macro economic scenario and a companys fundamentals and as such, may not match with India Equity Researchs report / view on a companys fundamentals. The trading calls and/or contents of this document are not made with regard to the specific investment objectives, financial situation or the particular needs of any particular person. Any investments discussed may not be suitable for all investors. Past performance is not necessarily indicative of future performance; the value, price or income from investments may fall as well as rise. You are advised to exercise your own independent judgment (with the advice of your professional advisers as necessary) with respect to the risks and consequences of any matter contained herein. We expressly disclaim any liability and responsibility for any losses arising from any uses to which this communications is put and for any errors or omissions in this communications. This communication is intended for the recipient only and no further distribution of this communication or any part thereof is permitted.
SEBI Regn No BSE Cash - INB011333334 | SEBI Regn No BSE Derivatives INF011333334 | SEBI Regn No BSE Currency Derivative : INE011333338 | SEBI Regn No NSE Cash - INB231333338 | SEBI Regn No NSE Derivatives INF231333338 | SEBI Regn No NSE Currency Derivative : INE231333338 | SEBI Regn No MCX Currency Derivative : INE261333338 | NSDL : DP ID: IN300360 |SEBI Regn No: IN-DP-NSDL-36-97 | CDSL : DP ID: IN12015800 | SEBI Regn No: IN-DP-CDSL-531-2010 | Mutual Fund ARN - 0354 | Merchant Banking Regn No - MB / INM000011542 | PMS Regn No - PM / INP000003542 | Corporate Agency License No: 1545184
Standard Chartered Securities (India) Limited 2nd Floor, 23-25 M. G. Road, Fort, Mumbai 400 001, India. Telephone Number: 1800 - 209 - 2550.
THIS IS NOT A RESEARCH REPORT AND HAS NOT BEEN PRODUCED BY A RESEARCH UNIT.