Market Strategy: Trending Towards New Highs

August 2016

Anand Laddha
Research Analyst
anand.laddha@edelweissfin.com
+91 (22) 4272 2636

Sahil Kapoor
Chief Market Strategist
sahil.kapoor@edelweissfin.com
+91 (22) 4088 6044
1

Market Strategy
Favourable growth dynamics, a quasi stimulus from the 7th Pay Commission doles, positive policy developments,
under control inflation and a reviving Emerging Markets outlook are coming together to give Indian markets a
reason to trend towards life highs. We continue to remain "Bullish on Indian equities over medium to long term. We
expect Nifty (current level - 8538) to scale to a life time high in FY17 and there appears to be upside risks to our
targets.
Monsoon for the current year is progressive at above normal pace and sowing is accelerating all over India this
should help inflation numbers to cool off and rural economy to recover

Stronger focus on rural India and front loading of government expenditure in the first quarter will support revival of
the economy and especially the hard hit rural India
7th Pay Commission increments and arrears are expected to get credited in the next one month. This would result
in a large demand push, especially on urban consumption
Crude oil prices have corrected by more than 15% after hitting $54 Brent in early June16. This would keep the
room open for the government to remain committed to its fiscal targets and to continue its investment spending.
Probability of GST getting passed in this monsoon session has increased significantly due to change in the mix of
Rajya Sabha. This would be a big positive step over the long term
We expect marginal growth in earnings due to base effect and nominal increase in demand from core industries
in Q1FY17 results. An earnings revival may take place in the next two quarters
Risk: No short term visibility on Brexit, FCNR redemption in September and elections in major economies

Equity Strategy
Key recommended sectors and rationale
Autos and Auto ancillary Twin benefit of fall in input cost due to low commodity prices and increase in
consumption demand
Private Sector Banks and NBFCs Fall in interest rates and pent up consumer credit will lead to improvement in
asset quality

Infrastructure Government focus and spending on infrastructure will aid execution. Roads sector remain key
beneficiary of a strong minister at the helm with an excellent execution track record
Textile Branded apparel will do well owing to pent up demand and fall in cotton prices
Cement We expect recovery in cement demand led by infrastructure uptick and higher government spending.
We believe that South-based cement companies will continue to outperform the sector led by a strong pricing
environment
Consumer Sector With the implementation of the 7th Pay Commission pay hike for (central and state)
government employees, combined with a good monsoon, consumption will get a boost

Emerging Markets Back From The Brink

175

160

145

130

115

100

-1
Jan-02

85
Jan-05

Jan-08

Jan-11

EM-US Growth Differential

(Index, 100 = December 2002)

(%)

EMs Growth Differential Over US Is Positive & Rising

Jan-14
EMFX

Source: Edel Invest Research

Ems Manufacturing PMI Staging A Comeback

60

60

Expansion

55

55

50

50

45

45

Contraction

40

40

35

35
05

06

07

08

09

10

11

12

13

14

15

16

Source: Capital Economics

The sharp rise in the aggregate EM PMI in July suggests that after a brief pause in Q2, the recovery in EM industry
resumed at the start of the third quarter

Markits EM manufacturing PMI index rose to 50.3 in July, from 49.3 in June. This was the strongest reading since
February of last year

The large EMs Brazil, Russia, India and China are now seeing growth differential over US expanding. This means
that the rebound rally in EMs is significant and would continue

India is witnessing the strongest growth rate among large EMs and is getting premium valuations

Indications Of Growth Uptick In India

20.00

Electricity Production Increasing Steadily

15.00

Infra Demand Proxies Are Robust

20.00

10.00

15.00

5.00

10.00

0.00

5.00

Electricity growth has been robust and indicates

strengthening growth dynamics

0.00
Cement and Steel demand has been growing steadily as
Govt. infra push bears fruit

-5.00

Coal 3MMA, YoY % Growth

16%

10.00

6%

5.00

1%

0.00

-4%Apr-14

-5.00

LCV Monthly Volumes Are Trending Higher

Oct-14

Apr-15

Oct-15

Apr-16

-9%

-10.00

-14%

Fertilizers 3MMA, YoY % Growth

Source: Edel Invest Research

Apr-16

Jan-16

Oct-15

Jul-15

Apr-15

Jan-15

Oct-14

Jul-14

Apr-14

Jan-14

Oct-13

Jul-13

Apr-13

Jan-13

Oct-12

Jul-12

Apr-12

Jan-12

Oct-11

Jul-11

-15.00

Apr-16

Cement 3MMA, YoY % Growth

11%

15.00

Jan-16

Oct-15

Jul-15

Apr-15

Jan-15

Oct-14

Jul-14

Apr-14

Jan-14

Oct-13

Jul-13

Apr-13

Jan-13

Oct-12

Jul-12

Steel 3MMA, YoY % Growth

Electricity 3MMA, YoY % Growth

Production of Agri Base Commodity

Increasing

20.00

-10.00
Apr-12

Apr-16

Jan-16

Oct-15

Jul-15

Apr-15

Jan-15

Oct-14

Jul-14

Apr-14

Jan-14

Oct-13

Jul-13

Apr-13

Jan-13

Oct-12

Jul-12

Apr-12

Jan-12

Oct-11

Jul-11

-20.00

Jul-11

-15.00

Jan-12

-10.00

Oct-11

-5.00

-19%
Monthly LCV Units Sale(Right)

33,000
23,000
13,000
3,000
-7,000
-17,000
-27,000
-37,000
-47,000

3MMA,YoY - LCV
5

Non-Plan CapEx As % of Budget Set To Rise, And Push Growth Up

Capital Expenditure As Percentage to Central Budgeted Estimates
At lowest level in last five
years, higher capex is
expected in coming quarters
for FY2016-17

35
30.19

30

28.91
25.96

25.9

24.44

% To BE

25

22.96

20

15

18.45

13.77

18.54

22.63

17.91

14.59

10

0
31-06-2011

31-06-2012

31-06-2013
Plan Capital Exp

Source: Edel Invest Research

31-06-2014

31-06-2015

31-06-2016

Non-Plan Capital Exp

Global QE Is Reaching Unprecedented Levels

Monthly Fed, ECB and BoJ Asset Purchases

80

150

Approx $180bn

100

(% To GDP)

60
40
20

50

BoE

Fed

BoJ

ECB

Euro Area

Japan

UK

16

15

14

2017

13

2016

12

2015

11

2014

10

2013

09

2012

08

2011

07

2010

06

0
2009

05

(US$ bn)

200

0
2008

Central Banks Have Increased Their Balance

Sheet By More Than $13trn In 10 Years

100

05

250

US
Source: Edel Invest Research

The stepping up of quantitative easing in Eurozone and unprecedented interest rate cuts in other developed
economies have kept liquidity levels at record levels

The US Fed has abstained from raising interest rates citing either local economic slack or slower growth globally.
This has led to correction of divergence in monetary policy in the US and elsewhere

This has also led to resumption of flows into risky assets which includes Emerging Markets

Foreign Portfolio Investors Flock Emerging Markets As Volatility Declines

Emerging Markets ETF Volatility Index

EMs Bond Yields Have Softened

19

3.1
3.0
3.0
2.9
2.9
2.8
2.8
2.7
2.7
2.6

17
49

15

39

11

13
9

29

5
4
3

(US$ bn)

(US$bn)

1
0
-1
-2
-3
-4
-5

Jan-16
1 Aug-15
3 5 7 9 11 13 15 17 19 21
23 25 27 29 31 33 35 37 39 41 Jun-16
43 45 47 Jul-16
49 51
Source: Edel Invest Research

Brazil 10 Year Yield(LHS)

Indonesia 10 Year Yield (LHS)

China 10 Year Yield (RHS)

7-29-2016

7-15-2016

7-1-2016

6-17-2016

6-3-2016

5-20-2016

5-6-2016

4-22-2016

4-8-2016

3-25-2016

3-11-2016

2-26-2016

2-12-2016

India 10 Yr Yield (LHS)

Biggest Weekly Flows in ETF in Almost Last Two

Years

Weekly Emerging-Market Bond Flows At

Highest Level in Year

1-29-2016

28-Jul-15
11-Aug-15
25-Aug-15
8-Sep-15
22-Sep-15
6-Oct-15
20-Oct-15
3-Nov-15
17-Nov-15
1-Dec-15
15-Dec-15
29-Dec-15
12-Jan-16
26-Jan-16
9-Feb-16
23-Feb-16
8-Mar-16
22-Mar-16
5-Apr-16
19-Apr-16
3-May-16
17-May-16
31-May-16
14-Jun-16
28-Jun-16
12-Jul-16
26-Jul-16
CBOE Emerging Markets ETF Volatility Index

1-15-2016

1-1-2016

5
19

4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
-2.5
Jan -16

Feb -16

Mar -16

Apr -16

May -16

Jun -16

Jul -16

India 10 Year Yield Softens To 3 year Low

1600
7.8

1400
1200

INR Bn

800
7.4

% Change

7.6

1000

600
400

7.2

200

Daily sovereign bond turnover (LHS)

28-Jul

21-Jul

14-Jul

7-Jul

30-Jun

23-Jun

16-Jun

9-Jun

2-Jun

26-May

19-May

12-May

5-May

28-Apr

21-Apr

14-Apr

7-Apr

31-Mar

24-Mar

17-Mar

10-Mar

3-Mar

25-Feb

18-Feb

11-Feb

4-Feb

28-Jan

21-Jan

14-Jan

7-Jan

7
31-Dec

Benchmark 10-year bond yield (RHS)

Indian sovereign bonds are in great demand among foreign funds and investors at home. The daily turnover
climbed to an unprecedented 1.43 trillion rupees ($21 billion) last week
Improving cash supply in Indias banking system and mounting speculation of a dovish new central banker have
spurred appetite for the securities locally, helping contribute to the biggest monthly rally in 10-year notes since
May 2013
Source: Edel Invest Research

Consumption Recovery To Gather Steam

Consumer Durable
we expect demand of white goods will increase after
outflow of 7th pay commission

Incremental Outflow of

INR ~85,000 cr till

the end of this year
including arrears and
incremental salary, plus
it would increase if
states implement 7th
Pay commission in this
financial Year itself

FMCG
Slightly positive for FMCG sector demand, major
demand uptick would happen post good monsoon

Automobile
Employees are going to receive onetime arrear of 6
months and incremental pay of 23% that can push
luxurious goods demand like auto, Jewellery, etc

Real Estate
Arrear and rise in salaries of 1cr employees can push
affordable housing demand

10

GST - Positive Impact on Different Sectors & Stocks

Sectors

Stocks Expected To Benefit from GST

Automobiles

Maruti Suzuki, Hero MotoCorp, Bajaj Auto, Eicher Motors, Ashok Leyland

Consumer Durables

CGCE, Havells, Voltas, Blue Star, Bajaj Electricals, Symphony, Hitachi

FMCG

HUL, GCPL, P&G, Asian Paints, Berger Paints

Paints

Asian Paints, Berger Paints, Kansai Nerolac, Akzo Nobel, BASF India

Sanitary

HSIL , Cera Sanitaryware

Ceramic

H&R Johnson (Prism Cements), Kajaria Ceramics

Ply

Greenply, Greenlam Industries

Logistics

VRL Logistics, GATI, Blue Dart, Transport Corporation of India, Snowman Logistics

Cement

ACC, Ultratech, JK Cement, Shree Cement

Entertainment

PVR, Inox Leisure, Dish Tv

Textiles/ Garments

Arvind, Raymond, Page Industries

11

Nifty Hits 52 Week High, History Says Trend To Continue

Nifty 52 Week High
Nifty 52 Week Low

Fresh 52 week high

after March15

Number of Nifty Stocks at 52 week high

Percentage of Nifty stocks above 200 DMA

Number of Nifty Stocks at 52 week low

Data Sets

13

EM Market Valuation India Still Near Long Term Averages

P/E Ratio

Current

5 Yrs Avrg

10 Yrs Avrg

2016E

2017E

MSCI EM

15.4

12.0

13.1

13.2

11.6

HANG SENG INDEX

11.0

10.3

12.5

12.3

11.1

SHANGHAI SE COMPOSITE

16.3

13.8

19.6

13.6

12.1

RUSSIAN RTS INDEX $

7.5

5.4

6.6

7.2

6.2

KOSPI INDEX

17.1

15.3

14.7

11.1

10.1

TAIWAN TAIEX INDEX

16.4

16.9

18.2

14.5

13.2

Nifty 50

21.8

17.4

18.3

18.0

15.0

S&P BSE SENSEX INDEX

20.7

17.5

18.6

17.6

14.8

P/B Ratio

Current

5 Yrs Avrg

10 Yrs Avrg

2016E

2017E

MSCI EM

1.5

1.5

1.8

1.4

1.4

HANG SENG INDEX

1.1

1.3

1.7

1.1

1.1

SHANGHAI SE COMPOSITE

1.6

1.7

2.5

1.4

1.4

RUSSIAN RTS INDEX $

0.9

0.7

0.9

0.7

0.7

KOSPI INDEX

1.0

1.0

1.1

1.0

1.0

TAIWAN TAIEX INDEX

1.5

1.6

1.7

1.6

1.6

Nifty 50

3.0

2.6

3.2

2.8

2.8

S&P BSE SENSEX INDEX

3.0

2.7

3.4

2.8

2.8

Source: Bloomberg
All data on basis of Calendar Year; * TTM(Trailing Twelve Months)

14

Nifty & Sensex Consensus EPS

Nifty EPS

1000

30%

800
20%

600
369

400

429
10%

200
0

0%

-200
-10%

-400

-600

-20%

-800
-1000

-30%
FY2007

FY2008

FY2009

FY2010

FY2011

FY2012

YoY Growth (Right)

Source: Bloomberg; Edel Invest Research

FY2013

FY2014

FY2015

FY2016

FY2017(e)

Nifty EPS (Left)

15

Banking Stress Peaking, Further Adverse Impact Limited

PSU Bank Stress Assets

14000

21%

12000

18%

10000

15%

8000

12%

6000

9%

4000

6%

2000

3%

0%
FY07

FY08

FY09

FY10

FY11

FY12

Total Stress in PSU banks (INR bn) (LHS)

1800

FY13

FY14

FY15

FY16

FY17E

Gross NPA+ Rest assets (%) - PSU banks (RHS)

7%

Private Bank Stress Assets

1600

6%

1400

5%

1200
1000

4%

800

3%

600

2%

400

1%

200
0

0%
FY07

FY08

FY09

FY10

FY11

Total Stress in Private banks (INR bn) (LHS)

Source: Edel Invest Research

FY12

FY13

FY14

FY15

FY16

FY17E

Gross NPA+ Rest assets (%) - Private (RHS)

16

Source: Edel Invest Research

IIP-3MMA
Basic goods -3MMA
Capital goods -3MMA
Intermediate goods -3MMA

Feb-16

Feb-16

May-16

Apr-16

May-16

Apr-16

Mar-16

Jan-16

Jan-16

Mar-16

Dec-15

Dec-15

Sep-15

Aug-15

Jul-15

Jun-15

May-15

Apr-15

Mar-15

Feb-15

Jan-15

Dec-14

Nov-14

Oct-14

Sep-14

Aug-14

Jul-14

Nov-15

10.0
5.0
-5.0
-10.0
-15.0
-20.0
-25.0
Nov-15

3MMA-By Usage

Oct-15

Manufacturing Total -3MMA

Oct-15

Sep-15

Aug-15

Jul-15

Jun-15

May-15

Apr-15

Electricity Index-3MMA

Mar-15

Feb-15

Jan-15

Dec-14

Nov-14

Oct-14

Sep-14

Mining Total-3MMA

Aug-14

Jul-14

Jun-14

May-14

Apr-14

Mar-14

Feb-14

Jan-14

Dec-13

Nov-13

Oct-13

Sep-13

Aug-13

Jul-13

Jun-13

May-13

Apr-13

Mar-13

Feb-13

Jan-13

16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
-2.0
-4.0
-6.0

Jun-14

20.0
15.0

May-14

Apr-14

Mar-14

Feb-14

IIP-3MMA

Jan-14

Dec-13

Nov-13

Oct-13

Sep-13

Aug-13

Jul-13

Jun-13

May-13

Apr-13

Mar-13

Feb-13

Jan-13

Industrial Production Subdued, Pace Set To Increase

3MMA-By Production

Consumer goods -3MMA

17

Source: Edel Invest Research

No. of projects Under Implementation(Left)

-5,000
-14%

YoY Growth (Right)

May-16

-7%

363
360
361

400
350
300
250
200
150
100
50
0
Mar-16

-3,000

Jan-16

0%

Nov-15

-1,000

Sep-15

7%

Jul-15

1,000

May-15

14%

Mar-15

3,000

Jan-15

5,000
21%

Nov-14

28%

Sep-14

Capacity utilisation %

Jul-14

9,000
May-16

Mar-16

Jan-16

Nov-15

Sep-15

Jul-15

May-15

Mar-15

Jan-15

Nov-14

Sep-14

Jul-14

May-14

Mar-14

Capacity utilisation %

May-14

35%

Mar-14

11,000

Jan-14

7,000
42%

Nov-13

48

Sep-13

65

Jan-14

50

Jul-13

70

Nov-13

52

Sep-13

60
Jul-13

75

May-13

No. of projects Under Impl. Vs Growth

Oct-15

Jun-15

Feb-15

Oct-14

Jun-14

Feb-14

Oct-13

Jun-13

Feb-13

Oct-12

Jun-12

Feb-12

Oct-11

Jun-11

Feb-11

Oct-10

Jun-10

Feb-10

Oct-09

Jun-09

Feb-09

80

USD Bn

13,000
Oct-08

85

Mar-13

Jun-02
Jan-03
Aug-03
Mar-04
Oct-04
May-05
Dec-05
Jul-06
Feb-07
Sep-07
Apr-08
Nov-08
Jun-09
Jan-10
Aug-10
Mar-11
Oct-11
May-12
Dec-12
Jul-13
Feb-14
Sep-14
Apr-15
Nov-15

Jun-08

Forex Reserves At Record High, Capacity Utilization Subdued

India's PMI

54

46

India's PMI

Total India's Foreign Exchange Reserves at

Highest level

Total India's Foreign Exchange Reserves

18

Auto Sales remain robust

PC Sales

3,25,000
2,55,000

10%

1,85,000

5%

1,15,000

0%
-5%

60,000

14%
7%

45,000
-25,000

-7%

-95,000

-14%

-1,65,000

-21%

20,000
-20,000
-60,000

Total Monthly CV Units Sale (Right)

3MMA, YoY% Growth - Passenager Vehicle

Jun-16

Apr-16

Feb-16

Dec-15

Oct-15

Aug-15

Jun-15

Apr-15

Feb-15

Dec-14

Oct-14

Apr-14

-1,00,000
Aug-14

-28%

Total Monthly PC Units Sale (Right)

3MMA, YoY - Total CV (Left)

LCV Monthly Volume Sale

MHCV Monthly Volume Sale

50%

1,00,000

21%

0%

Apr-16

Feb-16

Dec-15

Oct-15

Aug-15

Jun-15

Apr-15

Feb-15

Dec-14

Oct-14

Aug-14

Jun-14

Apr-14

-10%

CV Volume Monthly Sale

28%

Jun-14

15%

70,000

40%

16%

33,000

11%
50,000

1%

3,000

10,000

-4%

-7,000

Monthly MHCV Units Sale(Right)

Source: Edel Invest Research

3MMA, YoY - MHCV (Left)

Monthly LCV Units Sale(Right)

Jun-16

Apr-16

Feb-16

Dec-15

Oct-15

Aug-15

-47,000
Jun-15

-19%
Apr-15

-37,000
Feb-15

Jun-16

Apr-16

Feb-16

Dec-15

Oct-15

Aug-15

Jun-15

Apr-15

Feb-15

Dec-14

Oct-14

Aug-14

Jun-14

-30,000
Apr-14

-20%

-27,000

-14%
Dec-14

-10,000

-10%

-17,000

-9%

Oct-14

0%

Aug-14

10%

13,000

30,000

Jun-14

20%

23,000

6%

Apr-14

30%

3MMA,YoY - LCV

19

EM and Developed Market Performance

Source: Edel Invest Research, Bloomberg; Data as of 30-Jun-16

20

Edelweiss Mid-Cap Marvels

S.No Stock Name

CMP
(INR)

Mkt Cap
(INR Crs)

(INR)

(INR Cr)

FY17E

FY18E

FY17E

FY18E

FY17E

FY18E

1,153

17,995

23.1

19.0

NA

NA

18.5

18.6

P/E (X)

EV/EBITDA (X)

ROE (%)

1.

Cholamandalam Finance

NIIT Ltd.

79

1,355

14.7

10.8

14.3

10.8

8.6

12.9

3.

Indo Count Industries Ltd.

880

3,466

10.1

8.4

1.1

0.6

43.2

37.5

4.

Indian Terrain Fashions Ltd.

163

625

18.4

15.5

10.7

8.9

18.7

18.0

5.

Jamna Auto Industries Ltd.

195

1,563

15.1

13.1

8.3

7.1

36.6

32.5

6.

Natco Pharma Ltd.

603

10,647

20.2

23.7

13.7

15.1

33.2

21.8

7.

Siyaram Silk Mills Ltd.

1,030

938

8.8

7.3

6.0

5.1

19.5

20.0

Note: Market CAP (Mkt CAP) and Current Market Price (CMP) were last recorded on 2nd August, 2016

21

Edelweiss Focus-12

S.No

Stock Name

CMP
(INR)

Mkt Cap
(INR Crs)

(INR)

(INR Cr)

FY17E

FY18E

FY17E

FY18E

FY17E

FY18E

145

11,314

65.7

36.2

21.8

17.0

14.0

19.0

P/E (X)

EV/EBITDA (X)

ROE (%)

1.

Aditya Birla Fashion and Retail Ltd

2.

Dalmia Bharat Ltd.

1,438

12,831

26.3

19.3

10.0

8.5

10.8

13.1

3.

Infosys Ltd.

1,084

2,49,276

16.0

14.1

10.7

9.2

24.2

26.2

4.

Larsen & Toubro Ltd.

1,503

1,39,236

34.2

25.1

8.9

7.8

8.7

11.0

5.

Maruti Suzuki India Ltd.

4,986

1,47,000

22.0

18.9

12.2

10.3

22.1

21.7

6.

Tata Motors Ltd.

493

1,63,550

9.9

9.3

4.2

3.7

18.5

16.5

7.

Repco Home Finance Ltd.

861

5,330

27.5

22.5

NA

NA

18.4

19.0

8.

Strides Arcolabs Ltd.

1,145

10,152

22.5

18.5

13.5

11.5

9.9

10.9

9.

Sun Pharma Industries Ltd.

829

2,01,120

23.6

20.0

16.6

13.2

24.1

23.4

10.

United Spirits Ltd.

2,390

34,655

66.4

41.2

34.1

25.4

26.0

31.3

11.

Zee Entertainment Enterprises Ltd.

500

48,481

39.8

32.7

25.0

20.8

28.4

28.2

CMP as on 2nd August 2016

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