Professional Documents
Culture Documents
India Top Picks November 2016
India Top Picks November 2016
Financials Energy Technology Industrials Discretionary Materials Staples Healthcare Telecom Utilities
Contents
Waiting for a trigger, global markets dictate trend 1
India Top Picks: Key sector preferences 3
India Top Picks review 4
Consolidation continues, earnings to be an important catalyst 5
Discretionary 6
Financials 7
Energy 8
Utilities 9
India Top Picks – Performance & Valuations 10
India Top Picks – Investment Rationale 11
India Top Picks – Reserve List Investment Rationale 14
India Top Picks – Results Update 15
Technical Commentary Technical Commentary 18
Definitions 24
Important Information 25
Mitesh Dalal
Chief Investment Strategist
Ashish Mittal
Investment Strategist
Errol Crasto
Sr. Derivative Strategist
Financials OW We remain Overweight on the sector through private banks, given their aggressive investments in branch
expansion and the increasing share of retail in their overall business. Within the segment, we have seen stress
building up on the corporate loan book but believe that these banks are in a good position to absorb the stress.
We maintain our Neutral stance on public sector banks. The systemic high ratio of bad assets, no clear signs of
upgrades or write-backs and tepid growth in advances underpin our concerns about the sector.
We maintain our Neutral stance on non-bank financial companies. Positive trends have emerged among asset-
financing companies; although the NPA burden remains high, loan book growth is impressive. However, expensive
valuations prompt the Neutral rating. We are selectively positive on housing finance companies.
Energy OW We remain Overweight on the sector through oil and gas marketing companies. We believe fuel consumption
growth is likely to sustain, driven by a) growth in the number of vehicles, b) higher disposable income and
propensity to consume and c) growth in manufacturing activity. As India’s economy grows, rising income levels
could boost vehicle ownership. Oil marketing companies, with c.80-85% market share in the domestic fuel market,
continue to benefit from the trend. Moreover, improvement in gross refinery margins could aid performance.
Utilities OW We are Overweight on the sector through power generators and city gas distributors. The success of the UDAY
scheme – financial restructuring of state electricity boards – is critical for power demand growth. Moreover,
improving industrial activity and rising disposable incomes also bode well for power and gas consumption.
Improved transmission links and supply of gas have increased the reach of city gas distributors. A favourable
regulatory environment has also helped in achieving sustainable returns on invested equity for the entire sector.
Fig 1: India Top Picks performance: recovering from February 2016 lows Fig 2: Sensex P/E: re-rating over the past six months
Discretionary
We are Overweight on the sector through automobile, white goods and retail enterprises. Strengthening Sector view
consumption continues to augur well for the sector. Improvement in consumer confidence, higher disposable
incomes for central government employees following the implementation of the 7th Pay Commission’s
recommendations and easy credit facilities in the financial system are the sector drivers. Consistent monthly
growth numbers for consumer durables highlight the growing demand for discretionary products. Low interest rates
are likely to provide a fillip to consumption demand going ahead. Overweight
The roll out of the 7th Pay Commission is expected to Maruti Suzuki – The full impact of the 7th Pay
support consumption demand and may positively Commission payout, new product development and
affect discretionary demand for automobiles, white commencement of the Gujarat plant are the key
goods and lifestyle products. drivers, going ahead. The company posted an 18.5%
Low interest rates, a good monsoon season and a y/y increase in Q2 FY17 domestic volumes, signifying
likely pick-up in rural income could help boost the underlying demand for its models.
consumer sentiment over the next 12 months. Tata Motors – Jaguar Land Rover (JLR) sales growth
is likely to remain strong over the next couple of
quarters, as demand for JLR products has improved.
JLR registered growth of 26% y/y – driven by JLR's
recent launches: Land Rover Discovery Sport, Jaguar
XE and Jaguar F-Pace.
Financials
We remain Overweight on the sector through private banks, given their aggressive investments in branch expansion Sector view
and the increasing share of retail in their overall business. Within the segment, we have seen stress building up on
the corporate loan book but believe that these banks are in a good position to absorb the stress. We maintain our
Neutral stance on public sector banks. The systemic high ratio of bad assets, no clear signs of upgrades or write-
backs and tepid growth in advances underpin our concerns about the sector. We maintain our Neutral stance on
non-bank financial companies. Positive trends have emerged among asset-financing companies; although the NPA Overweight
burden remains high, loan book growth is impressive. However, expensive valuations prompt the Neutral rating. We
are selectively positive on housing finance companies.
Energy
We remain Overweight on the sector through oil and gas marketing companies (OMC). We believe fuel consumption Sector view
growth is likely to sustain, driven by a) growth in the number of vehicles, b) higher disposable income and
propensity to consume and c) growth in manufacturing activity. As India’s economy grows, rising income levels
could boost vehicle ownership. Oil marketing companies, with c.80-85% market share in the domestic fuel market,
continue benefit from the trend. Improvement in gross refinery margins to aid performance.
Overweight
Sector drivers Preferred Stock
Fuel demand is likely to keep growing as economic Indian Oil Corp. – Indian Oil Corp., the largest refiner
activity picks up. The rise in disposable income and and marketer in India, is likely to benefit from growth in
growing urbanisation could act as catalysts for high fuel consumption. The company plans to invest INR
energy consumption. 400bn over the next six years to increase its refinery
Private capex, which has been on a slow burner, may capacity to 104.55mmpta (currently 80.7mmpta) to
see some pick-up moving into 2017 as consumption meet rising demand; this could drive IOCL’s long-term
demand remains strong. This may also lead to higher growth.
demand for transportation fuels.
Utilities
We are Overweight on the sector through power generators and city gas distributors. The success of the UDAY Sector view
scheme – financial restructuring of state electricity boards – is critical for power demand growth. Moreover,
improving industrial activity and rising disposable incomes also bode well for power and gas consumption.
Improved transmission links and supply of gas have increased the reach of city gas distributors. A favourable
regulatory environment has also helped in achieving sustainable returns on invested equity for the entire sector.
Overweight
Sector drivers Preferred Stock
Improvement in domestic coal availability has directly NTPC – The company is likely to see growth in
affected the plant availability factor for power earnings, driven by capacity addition, higher plant load
generators. An imminent improvement in power factors and assured fuel supply. Anecdotally, a fall in
demand is likely, with the implementation of the bond yields has historically aided earnings, owing to
UDAY scheme across states. the leveraged capital structure of power projects,
The lower re-set of gas prices and improved gas which require large investments.
availability bode well for the sector. The government’s
recent efforts to curb pollution in major cities would
lead to increased gas-based vehicular activity.
12m 12m
Stock Consensus Fwd Fwd Div Div TR TR YTD% TR
Ticker Name Sector Price Rating P/E P/B Yield% Payout% 1M% YTD% USD ITD%
MSIL IN Maruti Suzuki Discretionary 5878.1 4.2 24.7 5.0 0.6 22.5 7.3% 28.1% 27.1% 40.6%
TTMT IN Tata Motors Discretionary 530.6 4.5 9.7 1.6 0.0 0.6 -0.8% 35.7% 34.6% 43.5%
ITC IN ITC Staples 240.0 4.3 24.6 7.1 2.4 69.0 -0.6% 12.4% 11.6% 68.6%
RIL IN Reliance Industries Energy 1051.0 4.4 11.0 1.1 1.0 11.2 -3.0% 4.7% 3.9% 49.3%
IOCL IN Indian Oil Corporation Energy 325.2 4.5 10.0 1.7 2.2 30.3 11.6% 56.3% 55.2% 42.2%
HDFCB IN HDFC Bank Financials 1259.8 4.7 19.2 23.5 0.8 18.8 -1.0% 17.4% 16.5% 5.1%
ICICIBC IN ICICI Bank Financials 275.4 4.2 13.4 1.8 1.8 28.6 9.2% 7.6% 6.8% 61.6%
CIPLA IN Cipla Healthcare 571.8 3.6 23.6 3.1 0.4 10.7 -1.4% -11.7% -12.4% 79.4%
LT IN Larsen & Toubro Industrials 1463.2 4.1 22.2 2.6 1.3 33.4 2.1% 16.1% 15.3% -2.2%
HCLT IN HCL Technologies Technology 772.9 4.2 12.6 3.1 3.1 - -2.6% -6.8% -7.5% 23.4%
TECHM IN Tech Mahindra Technology 433.6 4.2 11.4 2.2 2.8 37.2 3.3% -14.8% -15.5% 87.8%
NTPC IN NTPC Utilities 155.0 4.4 12.3 1.3 2.1 27.1 4.7% 8.5% 7.7% 12.6%
Source: Bloomberg, Standard Chartered
As of 1 November 2016
Tata Motors Ltd 26/08/2016 Q1 Miss Tata Motor’s EBITDA declined 30.8% y/y in Q1 FY17, largely affected by an INR 23.0bn impact from
adverse FX movements (post-Brexit), an INR 1.7bn loss from adverse commodity derivatives and
lower local market incentives. The company’s consolidated revenue was up 9.0% y/y, led by 13.2% y/y
growth in the standalone business (19.9% of revenue). Its commercial vehicle segment reported strong
growth, led by LCV (+11.6% y/y) and M&HCV (+7.8% y/y), while its car segment revenue was up by a
healthy 15.1% y/y, led by the newly launched Tiago (April 2016).
ITC Ltd 21/07/2016 Q1 Miss ITC’s Q2 FY17 revenue grew 8.0% y/y, mainly driven by its core FMCG business (+8.5% y/y; includes
cigarettes and other FMCG). Its cigarette sales (58.0% of segmental revenue) rose 7.1% y/y, despite a
10.0% excise duty hike and the 85% graphic health warning requirement (GHW) imposed in mid-2016.
Revenue from other FMCG grew 13.3% y/y. EBIT margins across most segments improved, with
cigarette margins growing 44bps y/y. ITC’s PAT grew 10.5% y/y to INR 25bn.
Reliance Industries Ltd 20/10/2016 Q2 Beat RIL’s robust EBIT growth of 30.1% y/y in Q2 FY17 was driven by 9.6% y/y top-line growth and higher
EBIT margin (+162bps y/y to 10.3%) due to higher volumes in refining, petrochemicals and retail. EBIT
margin in the refining and petrochemicals segments rose 91bps y/y (to 9.9%) and 337bps y/y (to
15.2%), respectively. RIL’s gross refining margin (GRM) of USD 10.1/bbl was higher than the
benchmark Singapore complex margin by USD 5.0/bbl on firm middle distillate cracks and strong fuel
oil cracks. Petrochemicals volumes rose c.10% on healthy demand for polyester and polymer products.
Indian Oil Corporation 27/10/2016 Q2 Miss IOCL’s EBITDA surged y/y (+766.4%) to c.INR 58bn in Q2 FY17, with the Petrochem segment
Ltd contributing c.37% in EBITDA (c.15% in Q1 FY17) on inventory gains, higher gross refining margins
(GRM) and lower other expenses. However, EBITDA declined 57.8% q/q as GRM fell sequentially.
EBITDA margins narrowed 7.0ppt q/q (+5.1ppt y/y) to 5.8% in the quarter. IOCL’s average GRM fell to
USD 7.15/bbl from USD 9.98/bbl in Q1 FY17, on higher crude oil prices and lower inventory gains
(-57.7% q/q) in Q2 FY17. Revenue rose 3.1% y/y on higher sales volume (+3.4% y/y).
Source: Standard Chartered
Larsen & Toubro 29/07/2016 Q1 Miss Revenue growth was muted at 9.1% y/y on sluggish domestic growth (+5.0% y/y; 65% of revenue).
International revenue grew 18.2% y/y amid maturing execution of large projects, including the Riyadh
and Doha Metro projects. EBITDA grew 16.1% y/y on soft commodity prices. PAT growth came in at
45.6% due to the restatement of the base year PAT to INR 4.2bn (from INR 6.0bn), with the transition
to the new accounting standards (IND-AS).
Cipla Ltd 12/08/2016 Q1 Miss Cipla’s revenue declined 6.4% y/y (+10.4% q/q), dragged down by North America (-21.2% y/y; 18.3%
of revenue) because of the lapse of Nexium’s market exclusivity. Domestic sales were up 4.9% y/y
(40.3% of revenue), despite the ban on certain fixed-dose combination (FDC) drugs and price controls
via the National List of Essential Medicines (NLEM). Although its EBITDA margin declined 10.5ppt y/y
to 17.0%, it recovered 11.7ppt q/q (after contracting for two quarters; 5.3% in Q4 FY16 and 14.6% in
Q3 FY16), aided by a favourable product mix and cost-control measures in the base business.
HCL Tech 21/10/2016 Q2 In line HCL reported top-line growth of 2.8% q/q in constant currency terms (cc), mainly driven by
Infrastructure Management Services (IMS; +4.4% q/q in cc; 40.3% of revenue) and Engineering and
R&D Services (+2.3% q/q in cc; 17.8% of revenue). The Financial Services vertical (24.1% of revenue)
recovered, with robust 5.6% q/q growth led by deal wins in the fintech segment. EBIT margin fell 50bps
q/q to 20.1%, weighed by partial wage hikes and higher outsourcing costs.
Source: Standard Chartered
In the following pages, we present the Technical charts for stocks that are the most favourable.
Weekly Chart
Source: Cogencis, Standard Chartered
Weekly Chart
Source: Cogencis, Standard Chartered
Weekly Chart
Weekly Chart
Source: Cogencis, Standard Chartered
Definitions
YTD: Year to date. EV/EBITDA: Enterprise value/Earnings Total return: Capital appreciation + dividend
ITD: Inception to date. Before Interest, Tax and Depreciation income received.
Amortisation. Short term: Time horizon of 1-4 weeks.
PT: Price Targets (SCB uses an investment
Earnings revision ratio: Net earnings Medium term: Time horizon of 3-6 months.
horizon of 12 months for its price targets).
revision (upgrades - downgrades) / Total
RSI: Relative Strength Index. earnings revision (upgrades + downgrades)
Relative Volatility index: A measure of the ROE and ROA: Return on Equity (book
standard deviation of the daily price change. value) and Return on Assets. Investment Strategy Team:
MA: Moving Average. Dividend Yield: Dividend paid/ current price. Mitesh Dalal*
Basket average performance: Basket Distribution per Unit (DPU): DPU is the Director and Chief Investment Strategist
average is the un-weighted performance of distribution/dividend per share for
the shortlisted stocks Ashish Pai*
shareholders. Normally announced and
distributed quarterly or semi-annually. Term is Associate Director & Technical Strategist
Consensus rating: A rating provided by
Bloomberg which reflects the aggregation of commonly used in REITs. Ashish Mittal*
all brokers rating for a particular stock. 1 is a Net Interest Margin (NIM): Is a measure of Sr. Investment Strategist
Sell, while 5 is a Strong Buy. difference between the net interest income
Errol Crasto*
P/E: Price/Earnings ratio. The Trailing P/E generated from lending by financial
Sr. Derivative Strategist
refers to 12m of trailing earnings, while the institutions and the amount of interest paid out
forward refers to 12m forecast earnings, to their lenders (for example deposits) Priyank Chheda*
against current price. Beta: Correlation between a stock and the Investment Strategist
P/B: Price/Book ratio. The book value refers market. Is based on two years of weekly data, Priya Iyer*
to total shareholder’s equity, while the forward but modified by the assumption that a Associate Strategist
refers to 12m forecast book value, against security's beta moves toward the market
average over time. *Research Analyst
current price.
Important Information
Disclosures
1.) SCSI and/or its affiliates have received compensation for the provision of investment banking, financial advisory services or other services within the past one year for the following companies:
Larsen & Toubro Ltd, HDFC Bank, Reliance Industries, NTPC Ltd
2.) SCSI and/or its affiliates was a lead manager, or has managed or co-managed a public offering for the following companies within the past 12 months, for which it received fees: NTPC Ltd
3.) SCSI and/or its affiliates expect to receive or intend to seek compensation for investment banking services from the following companies in the next three months: NTPC Ltd
Global Disclaimer
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.
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.
Please refer to https://www.sc.com/en/banking-services/market-disclaimer.html for more detailed disclosures.
25
3 November 2016 | equity strategy – India Top Picks
Standard Chartered Securities (India) Limited Telephone Number: 1800 - 209 - 2550.
2nd Floor, 23-25 M. G. Road, Fort, Mumbai – 400 001, India. Fax Number: 022 - 6135 5900
Website: http://www.standardcharteredtrade.co.in Email: Tejarshi.Hardas@sc.com
26