Market Strategy - Kotak Securities · 2019. 7. 31. · Kotak Securities – Private Client Research...

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Market Strategy August 2019

MARKET OUTLOOK FOR AUGUST 2019 The IMF has cut its 2019 global growth forecast from 3.5% to 3.2%. However, global markets are currently calm due to likely rate cuts by global central banks. We might even see the European Central Bank potentially resuming asset purchases in future. Against global equity markets rising trend India has underperformed both developed and emerging markets by a big margin (post Union Budget). More than Rs.150 bn of selling by FPIs in Jul’19 has wiped out two-third of the gains made from the lows in this calendar year. This is despite DIIs net buying of ~Rs.180 bn seen in the month of Jul’19. There were no big bang reforms or any major stimulus in the Union Budget. On the contrary, increase in surcharge and proposal to raise public shareholding from 25% to 35% has dampened investor sentiment and led to a sharp correction post budget.

The major concern for the market is serious slowdown seen in various sectors that seemed cyclical at the start but are turning out to be structural in nature. To reverse the current slowdown we would need tough economic reforms. Consumption led growth and high government spending could be running out of steam and we are not seeing any revival in private investment. The slowdown in consumption largely reflects moderate growth in household income and higher taxes on households. Private investment will continue to remain subdued without radical reforms to investment and Government capex cannot increase meaningfully without straining the fiscal. Although there is surplus liquidity in the system, the ‘liquidity’ and ‘solvency’ issues faced by NBFCs still persists and can percolate into other parts of the financial system.

Most of the manufacturing industries led by automobiles have been facing slowdown for more than two quarters. There is still no sign of revival in most of the monthly indicators and volume data that we monitor. There is hope that activity could pick up on the ground closer to the festival season but the post result commentary of most managements does not match with this expectation. In spite of global geo-political tension and talks of trade war three factors have remained in favour of Indian markets. These are stable currency, lower crude prices and lower bond yields. However, the single most disappointment factor staring the market is potential cut in earnings forecast that could increase the forward valuations of Indian market.

Thanks to prompt RBI action, the liquidity situation has moved from deficit to surplus. The consistent reduction in repo rates with expectation of further rate cuts in the coming months could help improve demand in the second half of FY20. If government action leads to improvement in industrial activity and things start improving in the next 2-3 months then we could see improvement in monthly data points from Q3-FY20. Base effect will also start playing out from Q3-FY20 onwards.

Earnings & Valuations There has been a big mismatch in earnings expectation at the start of the fiscal year and the actual numbers that come in realty at the end of the year. Nifty-50 earnings have grown at a pitiful CAGR of 3% in the last five years (i.e. FY14 to FY19). At the start of FY20, Bloomberg consensus was showing earnings CAGR of more than 20% for the next two years (i.e. FY19 to FY21). Before the Q1 earnings season, Kotak Institutional Equities was projecting Nifty-50 earnings for FY20 & FY21 to go up by 24% & 16%, respectively. Going by the Q1 results that have come till date we could see meaningful cut in earnings of Non-BFSI companies for the whole of FY20. Second quarter of FY20 is also looking as challenging as the first quarter. This means the asking rate to reach full year estimates could be a tall order in the second half of FY20. Considering these facts, we feel earnings forecast of Nifty-50 for FY20 (post Q1 results) could get cut by 4-6%.

Amit Agarwal [email protected]

+91 22 6218 6439



Before the start of the results season, Nifty-50 was trading at 18.4x Fw PE when it was closer to 11,900 levels. Assuming a 5% cut in future estimates will mean that Nifty-50 will still trade at 17.5-18x Fw PE closer to 11,000 levels. If bond yields sustain in the 6-6.5% range then it will allow equity valuations to sustain at 17-18x Fw PE. Based on current 6.4% bond yield the Bond PE works to 15.6x. Equity PE has historically traded at ~250 bps premium over Bond PE in the last 12 years. Hence, we do not see any major threat of de-rating in the Nifty-50/Indian equites from current levels. Going forward any disappointment in market could be a function of earnings downgrades. For the Nifty-50 to rise materially from here two things need to play out: 1) FPI flows need to resume which will hinge on the surcharge issue & 2) activity on the ground needs to pick-up materially reflecting in monthly numbers.

The current correction and beaten down prices of mid & small caps offers good time window to accumulate stocks from a 2 year perspective. We advise investors to take advantage of the sharp correction in mid and small caps to accumulate them in the next few months.

Portfolio strategy: On broader basis our preference at this juncture is towards mid & small caps as compared to large caps. In absolute terms the Mid Cap Index has given away 70% of the outperformance (over Nifty-50) shown during 2014-2017. Another 10% underperformance could make it very appealing against the Nifty-50. In the last 18 months the Small Cap Index has given up most of the outperformance (over Nifty-50) seen during 2014-17. Going forward, maximum upside potential could be witnessed in the BSE Small Cap Index.

The consistent correction in mid caps has reduced its Fw PE to 13.4x Vs 17.2x of Nifty-50 (based on Bloomberg estimates). We expect Fw PE of both Mid Caps and Nifty-50 to inch up post results season due to lowering of earnings forecasts. The Mid Cap Fw PE now trades at a 22% discount to the Nifty-50 Fw PE. The discount is now closer to the lower end of its historic band (i.e. 10 Yr range). The current correction and beaten down prices of mid & small caps offers good time window to accumulate stocks from a 2-3 year perspective. Given the poor sentiment and high perceived risk towards corporate governance issues it is prudent to buy good quality companies having reasonable earnings growth forecast and reasonable valuations (i.e. at or below their 10 year average valuations).

In terms of sector preference we prefer larger banks, select large NBFCs, life Insurance companies, Capital Goods & Construction companies, Utilities, Select Oil & Gas companies, Healthcare services, and select FMCG companies. Stronger currency and global uncertainty makes us less constructive on IT and pharma sector.

1-year performance of benchmark global indices (%)

Source: Bloomberg

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S&P 500 Index

Dow Jones Index

MSCI World Index

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Market performance – sector wise (July 2019)

Source: Bloomberg

TOP INVESTMENT IDEAS Recommended Stocks

Company CMP* Target Price Potential Upside 52 Week H/L Market Cap (Rs) (Rs) (%) (Rs) (Rs mn)

ENGINEERS INDIA LTD 100 147 47% 140/93 63,254 EQUITAS HOLDINGS LTD/INDIA 113 180 60% 163/78 38,431 ITC LTD 270 335 24% 323/264 3,315,908 OIL & NATURAL GAS CORP LTD 139 210 51% 185/128 1,746,772 STATE BANK OF INDIA 332 410 23% 374/247 2,964,756 WELSPUN CORP LTD 112 171 53% 187/87 29,652

Source: Kotak Institutional Equities; Kotak Securities – Private Client Research; *CMP as on 31July 2019.

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INTERNATIONAL MARKETS IMF lowers its global economic growth forecast again The International Monetary Fund (IMF) has trimmed its forecast for global economic growth again as the U.S.-China trade war continues, Brexit worries linger and inflation remains muted. The global economy is expected to expand by 3.2% in 2019, the revised economic growth figure is 0.1 percentage points lower than the forecast in April and is 0.3 percentage points below the fund’s growth estimate at the start of the year. The silver lining remains the performance of the service sector, where sentiment has been relatively resilient, supporting employment growth.

US GDP growth The US economy grew at an annualized pace of 2.1% in 2CY19 as against 3.1% in 1QCY19. Growth in this quarter was supported mainly by private consumption and government spending, while private investment and exports were a drag. While private consumption expanded at a robust pace of 4.3%, gross private investment witnessed a sharp decline of (-) 5.5%, the worst since the fourth quarter of 2015. Fed expects, the weak inflation to be more persistent than we currently anticipate. The Fed is carefully monitoring these developments, and we will continue to assess their implications for the U.S. economic outlook and inflation. The current federal funds rate is set in a target range of 2.25% to 2.5%, with the Fed signaling a loose monetary policy, with concerns about lack of momentum in global growth and uncertainties around trade tensions weighing on the U.S. economic outlook.

US GDP growth (%)

Source: Bloomberg

Fed Meeting 30-31 July 2019 - What to Expect

The Fed left interest rates unchanged at its last meeting on June 18/19, 2019. Recent Fedspeak points to a rate reduction this time around in recognition of falling economic indicators and damage from the Trade War. The Fed may cut interest rates by a quarter percentage point, eschewing a bigger move in what would be their first reduction in borrowing costs in more than a decade. Faced with slow global economic growth and elevated trade tensions, the policy makers are also likely to leave open the possibility of further cuts down the road as they seek to sustain the record-long U.S. economic expansion.

Expectations for a rate cut had already been signaled by Powell during congressional testimony on July 10 and 11, where he discussed the uncertainties stemming from Trump’s trade policies and slowing global growth.

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Fed Fund rate situation (%)

Source: Bloomberg

US China trade war drags on The US-China trade war has been going on for 16 months and the two sides have put tariffs on nearly $400 bn of goods between them. In their last G20 meeting, the US agreed to lift some export restrictions on Huawei in exchange for Chinese commitments to purchase more U.S. agriculture products. What's not clear is when such activity will take effect. However, China and the United States have agreed to a truce in their trade war and vowing to restart trade negotiations. As a part of truce, the United States has agreed to indefinitely delay placing more tariffs on Chinese imports, including the current threat to put tariffs on about $300 billion worth of goods, as long as the trade negotiations make progress. As per latest report, a U.S. delegation led by U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin are expected to visit China shortly for trade talks. The trip would be the first face-to-face meetings between U.S. and Chinese officials since the G-20 summit in June.

A Long Road Awaits

Despite China and the United States agreeing to another pause in their trade hostilities, the negotiations that lie ahead are fraught with problems and will not be smooth. China has three core demands. First, it must find any U.S. requirement regarding its purchase of American products reasonable. Second, the final trade deal must be a balanced agreement. Finally, any deal must remove all tariffs that the United States has placed on Chinese goods in 2018 and 2019. While, the US is insisting on China changing its domestic laws instead of using administrative action.

To reach a final trade deal, it is likely that China and US will both have to compromise on tariffs, with some being removed quickly and others removed over time. For the time being, the U.S.-China trade war will enter a period of negotiation and renewed hope for a deal.

No deal Brexit European Union leaders earlier agreed to extend the Brexit deadline until October 31, 2019, postponing the UK’s departure about six months from the scheduled April 12 departure date. Boris Johnson, the new prime minister, has vowed to lead UK out of Euro by October end deadline and warned that if the bloc refused to negotiate then there would be a no-deal Brexit.

Some of the consequences of No Deal Brexit:

Trade: The UK would revert to World Trade Organization rules on trade. While Britain would no longer be bound by EU rules, it would have to face the EU’s external tariffs. People: The UK would be free to set its own controls on immigration by EU nationals and the bloc could do the same for Britons. Laws: Britain would no longer have to adhere to the rulings of the European

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Court of Justice. Money: The UK Government would not have to pay the annual £13 billion contribution to the EU budget. However Britain would lose out on some EU subsidies. The Irish border: The issue of the border between Northern Ireland and the Republic would remain unresolved.

China Expansion Slows China’s GDP growth rate weakened to 6.2% YoY in the second quarter of 2019. This was in-line with expectations but the slowest rate of expansion since quarterly records began in 1992. The country’s statistics bureau cited increased external uncertainties that would continue to impact future growth rates.

China GDP growth (%)

Source: Bloomberg, Kotak Institutional Equities

Gulf tensions keep crude prices contained The Strait of Hormuz is proving to be the crude oil price’s crucible for now as the UK, US and Iran are locked in a precarious face-off after Iran went on the offensive in the strait and seized a British oil tanker on 19th July, escalating the already simmering diplomatic crisis. Before the seizure, Brent crude oil had slipped more than 6% to about $55 from $60, but gained steadily to trade at $63.40 a barrel.

Brent crude (US$/barrel)

Source: Bloomberg

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During the first half of the year, the oil price was the best performing commodity price, gaining almost 30%. But it eased since the start of the second half of 2019 with the IEA expecting demand to slow, citing a warm winter in Japan, a slowdown in the petrochemicals industry in Europe, and weak gasoline and diesel demand in the US. Despite OPEC and non-Opec allies (Russia, Kazakhstan, and Mexico) signing a “Charter of Cooperation” for production cuts, IEA has not change its fundamental outlook of an oversupplied market.

While fundamental underlying economic supply/demand dynamics presuppose a weaker oil price, any further escalation in Iranian-triggered geopolitical tensions could well see the oil price rise. In this event, there would be significant economic ramifications too.

Currency market We think the USD is peaking, i.e. that it will not set new highs in the remainder of 2019. The main rationale for our less positive dollar view is the shift in Fed policy. Whereas we previously expected the Fed to raise rates once in 2019, we now think that recent weakness in inflation and growth data will compel the Fed to take out some “insurance” and cut rates by 25 basis points twice. The U.S. dollar is probably in a bear market, meaning emerging-market currencies are in for a good ride for H2CY19, despite a weaker outlook for global growth. KIE estimates USD-INR in the range of 67.5-71.0.

USD vs INR

Source: Bloomberg

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DOMESTIC MARKETS FY20 Monsoon: remains in deficit without much improvement Till July 24, cumulative rainfall was 17% below normal with the weekly rainfall 34.7% below normal. On a regional cumulative basis, spatial distribution has been deficient across India. Out of the 36 sub-divisions across India, till date, 21 have received deficient rainfall and 15 have received normal rainfall. We, view this 17% deviation as unhealthy for the economy. However the IMD expects above average rainfall in the next few days, which will be well distributed across the country. This above-average rainfall is likely to bring down the rainfall deficit to single digit by the end of August from 17% now. IMD has forecast average rainfall in 2019 (rainfall between 96 per cent and 104 per cent of a 50-year average) while, Skymet has predicted below-normal rainfall.

Seasonal Rainfall Scenario in mm (01 June to 25 July, 2019)

Region Actual Normal % Deviation from LPA

All India 325.5 394.3 -17.4 East & Northeast 627.1 699.1 -10.3 Northwest India 200.4 241.2 -16.9 Central India 334.5 424.8 -21.3 South Peninsula 260.9 334.6 -22.0

Source: IMD

Normal monsoon is critical in the following ways: Basin-wise reservoir levels remained in deficit compared to long-term average levels. Of the

larger river basins only Indus (north India) was in surplus while Ganga (north and east), Godavari (west and south), Kaveri (south), Krishna (west and south), Mahanadi (central and east), and Narmada (central and west) were in deficit. Overall, basins and reservoirs were around 28.8% below long-term average for week ending July 25.

Sowing status: improved over last week but still significantly lower than last year. As of July 12, the total Kharif acreage was 6.8% lower than the same period last year.

Poor rains will have a direct effect on crop yields, income for farmers and rural spending. It can equally hurt people in urban cities as deficient rains may drive up food prices and push inflation higher.

Modest hikes in MSP for Kharif crops MSPs for FY2020 Kharif crops have been increased modestly in the range of 1.1-8.7% across all crops. The production weighted increase in MSP is, however, down to 3.8% over FY2019 season—much lower than the 17.3% increase of last year. Meanwhile, the government has continued to defer outlining a concrete plan to provide for any price shortfall for non-procured crops. Even though the government aims to provide a price floor when it announces MSPs, much continues to depend on its procurement ability since a higher MSP does not necessarily guarantee a higher income for the farmer. With muted market price increases, farmers’ profitability has seen substantial negative impact.

The average MSP increase at around 3.8% indicates a return to the usual MSP increase trend. The statistical impact of the hikes will be minimal at 20-25 bps in inflation. The actual impact will also likely be minimal unless there is major disappointment in the monsoon and sowing patterns. We believe that food inflation will remain manageable and expect the MPC to deliver another 25 bps cut in August on the back of benign growth-inflation mix.



MSP increase has reverted to trend seen over FY15 to FY18

MSP Increase % 2017 2018 2019 2020

Paddy 4.2 5.4 12.1 3.7 Jowar 3.5 4.6 42.9 4.9 Bajra 4.3 7.1 36.8 2.6 Maize 3.0 4.4 19.3 3.5 Ragi 4.5 10.1 52.5 8.7 Tur 9.2 7.9 4.1 2.2 Other Pulses 7.9 7.3 14.4 1.4 Groundnut 4.7 5.5 9.9 4.1 Soyabean 6.7 9.9 11.4 9.1 Cotton 1.6 4.1 28.1 2.0 Weighted MSP Increase 3.9 5.6 17.3 3.8

Source: CEIC, Ministry of Agriculture, Kotak Economic Research

State of domestic economic recovery

IIP growth softened

IIP growth softened to 3.1% in May as against an upward revised print of 4.3% in April. Among the sectors, while growth in manufacturing and mining slowed to 2.5% and 3.2%, respectively, growth in electricity registered a sharp increase of 7.4%. As per the use-based classification, tepid growth was observed across the capital goods (0.8%) and the consumer durables ((-) 0.1%) segments. Consumer non-durables, however, posted strong gains of 7.7%.

Sectoral classification of IIP growth

Mining (%) Manufacturing (%) Electricity (%) General (%) 2018 2019 2020 2018 2019 2020 2018 2019 2020 2018 2019 2020

April 3 3.8 5.1 2.9 4.9 4 5.4 2.1 6 3.2 4.5 4.3 May 0.3 5.8 3.2 2.6 3.6 2.5 8.3 4.2 7.4 2.9 3.8 3.1 June 0.1 6.5 -0.7 6.9 2.1 8.5 -0.3 7 July 4.5 3.4 -0.1 7 6.6 6.6 1 6.5 August 9.3 -0.6 3.8 5.2 8.3 7.6 4.8 4.8 September 7.6 0.1 3.8 4.8 3.4 8.2 4.1 4.1 October -0.2 7.3 2 8.2 3.2 10.8 1.8 1.8 November 1.4 2.7 10.4 -0.7 3.9 5.1 8.5 8.5 December 1.2 -1 8.7 2.9 4.4 4.5 7.3 7.3 January 0.3 3.8 8.7 1.3 7.6 0.9 7.5 7.5 February -0.4 2.2 8.4 -0.3 4.5 1.3 6.9 6.9 March 3.1 0.8 5.7 0.1 5.9 2.2 5.3 5.3 Average 2.5 2.9 4.7 3.7 5.3 5.2 4.4 4.4

Source: CEIC, Kotak Institutional Equities

WPI inflation softens to a 23-month low of 2.02% in June – expect 25 bps rate cut in August June WPI inflation further moderated sharply to 2.02% as against 2.45% in May due to decline in manufacturing inflation and fuel & power inflation Sequentially, WPI inflation hardened by 0.2% mom (0.1% in May). WPI food inflation softened marginally to 5% (5.1% in May), even though it continues to provide positive impulses to WPI inflation. Vegetables (24.8%), pulses (23.1%), food grains (10.2%), and eggs, meat and fish (5.6%) contributed the most to food inflation. On a sequential basis, food inflation hardened by 1% mom (0.6% in May). Strong sequential gains were observed across vegetables (7.7%), pulses (2%), eggs, meat and fish (1.2%) and spices (1.2%). Prices of fruits, however, continued to fall. Meanwhile, fuel and power inflation fell by (-) 2.2% (1% in May) and by (-) 1.3% on a sequential basis. Primary non-food inflation softened to 5.1% (6.2% in May). Core WPI inflation (manufactured products excluding food products) softened further to 0.8% in June (1.2% in May); on a sequential basis, it fell by



(-) 0.2% ((-) 0.1% in May). Among the heavyweights, prices of ‘basic metals’ contracted by (-) 0.9% mom and those of ‘chemicals and chemical products’ contracted by (-) 0.3%.

Since growth and inflation are likely to be benign in the near term, MPC’s accommodative stance, acknowledgment of the fading growth impulses and the government’s adherence to fiscal prudence strengthen our belief of another 25 bps cut in August. Further cuts would hinge on how growth and inflation evolve.

WPI remains benign

Source: CEIC, Kotak Economic Research

Trade deficit in June remains unchanged Trade deficit in June came in broadly unchanged at US$15.27 bn from previous month (US$15.35 bn in May) but marginally lower than US$16.6 bn in June 2018. June exports at US$25 bn fell by (- 9.7%) (3.9% in May), compared to US$27.7 bn in the same period last year. The major commodities which contributed towards the decline in June exports are petroleum products (-2.9%), rice (-28.1%), cotton yarn/fabrics/made-ups (-19.7%), gems and jewelry (10.7%), readymade garments (-9.2%), organic & inorganic chemicals (-8.2%), and engineering goods (-2.7%). Meanwhile, merchandize imports also witnessed a decline in June 2019 with contraction of 9.1% to US$40.3 bn as against US$44.3 bn in June 2018. The key sectors registering negative import growth in June were pearls, precious stones & semi-precious stones (-23.6%), petroleum, crude and products (-13.3%), machinery, electrical and non-electrical (-9%), coal, coke and briquettes (-3.4%) and electronic goods (-1.7%).

Monthly foreign trade for India in US $ bn

FYTD (Apr-Jun) chg (%) Date Jun-19 Jun-18 May-19 yoy mom 2020 2019 yoy

Exports 25.0 27.7 30.0 -9.7 -16.6 81.0 83.0 -1.7 Oil exports 2.7 4.1 5.2 -32.8 -47.0 12.0 12.0 -4.5 Non - Oil exports 22.3 23.6 24.8 -5.7 -10.3 70.0 70.0 -1.3 Imports 40.3 44.3 45.4 -9.1 -11.2 127.0 128.0 -0.5 Oil imports 11.0 12.7 12.4 -13.4 -11.4 35.0 35.0 0.5 Non - Oil imports 29.3 31.6 32.9 -7.3 -11.1 92.0 93.0 -0.9 Gold imports 2.7 2.4 4.8 13.0 -44.0 11.0 8.0 36.0 Trade Balance -15.3 -16.6 -15.4 -46.0 -45.0


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BOP situation Capital flow led improvement likely in FY20. From a deficit in FY19 with deterioration in both current and capital accounts, BOP will likely move in to surplus in FY20 given expectations of (1) domestic macro improvements, and (2) easier global monetary policy, sustained capital inflows—at least in near term. We estimate FY20 CAD/GDP at 2.1% and USD-INR in the range of 67.5-71.0. The downside risks to our estimates will be mainly be from any trade-led global slowdown or crude price shocks.

GST – government focuses on improving compliance Based on the monthly PIB release, total GST collection was at Rs999 bn in June (Rs1,003 bn in May). CGST collection amounted to Rs184 bn (May: Rs178 bn), SGST was at Rs253 bn (Rs245 bn), IGST at Rs478 bn (Rs499 bn), and compensation cess was at Rs85 bn (Rs81 bn). After allocations from the IGST, CGST for June was at Rs365 bn (May: Rs359 bn) and SGST was Rs390 bn (May: Rs389 bn). The number of returns filed in June increased to 7.4 mn as against 7.2 mn in May. Accounting for refunds, on a cash accounting basis, June collections would likely be around Rs897 bn implying a 3MFY20 run-rate of around Rs891 bn. However, the average monthly collection for the Q1FY20 stood at Rs 1.04 trillion.

The sluggish collection growth is partly due to the cuts in tax rates and partly due to evasion. The shortfall from the target could increase the central government’s liability to compensate states on the notional revenue loss under the GST regime. The slow pace of GST revenue growth also leaves very little room for the GST Council to cut tax rates in the near future unless revenue collection sees a surge. It also implies that the authorities will now focus on improving compliance by taxpayers using data collected from various sources.

GST collection (prior to refunds) at Rs999 bn in June

(Rs bn) CGST SGST IGST Cess Total Filings (mn)

18-Jun 160 220 495 81 956 6.5 18-Jul 159 223 500 84 965 6.6 18-Aug 153 212 499 76 940 6.7 18-Sep 153 211 501 80 944 6.7 18-Oct 165 228 534 80 1,007 6.7 18-Nov 168 231 497 80 976 7.0 18-Dec 164 225 479 79 947 7.2 19-Jan 178 248 512 87 1,025 7.3 19-Feb 176 242 470 85 972 7.3 19-Mar 204 275 504 83 1,066 7.6 19-Apr 212 288 547 92 1,139 7.2 19-May 178 245 499 81 1,003 7.2 19-Jun 184 253 478 85 999 7.4

Source: Ministry of Finance, Kotak Institutional Equities



Overall, demand remains weak in the economy India’s GDP growth slowed down 6.8% in FY19 from 7.2% in FY18 with fourth quarter GDP growth coming in at 5.8%. Much of the decline was on the back of moderate growth in private consumption, and steady weakening in investment cycle. The second half saw the NBFC crisis unfolding along with a steady decline in household consumption across staples and discretionary products. Auto sales continued on their downward trajectory.

Mixed signs of economic recovery (YoY %)

Industry May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19

Cement production 13.0 14.2 11.2 14.6 11.8 18.4 8.8 11.6 11.0 8.0 15.7 2.3 2.8 NA Commercial vehicle sale 43.1 41.8 29.7 29.6 24.1 24.8 5.7 -7.8 2.2 -0.4 0.3 -6.0 -10.0 -12.3 IIP Manufacturing 3.6 6.9 7.0 5.2 4.8 8.2 -0.7 2.9 1.3 -0.3 0.1 4.0 2.5 NA Steel production 21.6 12.7 -24.7 6.8 4.5 6.2 3.7 6.6 1.6 3.7 3.7 0.4 3.3 NA Airport passenger traffic 16.6 18.4 22.3 17.1 19.0 13.3 11.0 12.9 8.9 5.6 0.1 -4.4 2.8 NA Passenger Vehicle sales 19.7 37.5 -2.7 -2.5 -5.6 1.6 -3.4 -0.4 -1.9 -1.1 -3.0 -17.1 -20.5 -17.5 Two wheeler sales 9.2 22.3 8.2 2.9 4.1 17.2 7.1 -2.2 -5.2 -4.2 -17.3 -16.4 -6.7 -11.7


Modest fiscal stimulus at best but not much help in reviving the economy We expect 20-40 bps of fiscal slippage versus the 3.4% central GFD/GDP target for FY20 in the interim budget given (1) likely lower tax revenues versus interim budget expectations; FY19 tax revenues were lower by Rs1.7 trn versus FY19RE estimates and (2) recognition of carry-forward expenditure pertaining to FY19; FY19 expenditure was about Rs1.5 trn lower versus FY19RE estimates due to postponement of payments by the government. We expect a modest stimulus for housing at best as the government simply does not have the fiscal space for a large stimulus. We stress that nearly 7% of consolidated fiscal deficit year after year after year is tantamount to a massive fiscal stimulus for any economy

Consolidated fiscal deficit has been quiet high over years


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Economic reforms are the only way to get India’s real GDP growth to a higher level In our view, the focus should be on economic reforms relating to investment—(1) increased ‘ease of doing business’ for investment in manufacturing; administrative (approval processes), labor and land reforms are three critical ones in our view and (2) reduced role of government for higher private/foreign investment in infrastructure; this will entail changes to (1) ownership and pricing policies that effectively keep out the private sector from investing in infrastructure and (2) privatization of PSUs.

YoY growth in India's real GDP (%)


Corporate earnings weak so far Weak macros are taking a toll on corporate earnings. The language of the company's comments on the state of the Indian economy and near term outlook is also not encouraging. Lower commodity prices in Q1FY20 partially cushioned the earnings decline. Based on the results declared by 280 companies (both large and small) so far, aggregate PAT for Q1FY20 has decreased by -2.06% YoY.

Corporate earnings growth in Q1FY20 (till 30th July 2019)

(Rs mn) Q1FY19 Q1FY20 Sales PAT Sales PAT

All sectors (excluding banks) 4,851,591 418,551 5,212,821 349,483 Banks 1,176,987 67,805 1,427,095 126,875 Total 6,028,578 486,356 6,639,916 476,358 YoY change (%) 10.14 -2.06

Source: Equitymaster

Key budget reform

India's free float market cap rank has been lower than its market cap and GDP rank because of high promoter holdings and low foreign investment limits. This has constrained active and passive allocation to India from abroad. It has also caused concentration of foreign ownership of Indian stocks. In the budget on July 5, Finance Minister Nirmala Sitharaman made an explicit effort to lift free float of Indian stocks. The Finance Minister has asked SEBI to examine the case to increase minimum public holding from 25% to 35%.We do not know the time frame for this. Controlling stakeholders of the BSE 200 constituents will need to supply about US$30 billion of stocks for all the companies in the index to hit a 65% threshold. At the stock level, TCS, Wipro and Avenue Supermarts are likely to face the most sell-down.

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Other implications are:

For new listings – new companies may not want to dilute a third of their capital on listing;

Listed subsidiaries of multinational companies – some may choose to delist rather thanrelinquish the power to pass special resolutions without the help of minority shareholders;

Competition for companies attempting to raise growth capital from existing companiestrying to meet the new norms.

Budget session extended up to 7th August The government for the first time, made an exception and clubbed the first session of Parliament (which involves oath taking by elected MPs and Presidential address to joint sitting of both Houses) with the Budget session. Now, the budget session of Parliament has been extended by eight working days till 7 August. As per, data collated by PRS Legislative reveals that the government has already passed 12 bills and would consider another 5 bills. This is the most number of Bills passed in the first or Budget session of a new Lok Sabha in 15 years. Of all the bills, we are listing the bills which would have economic and market implications.

List of important bills from economy and stock market perspective

Bill Lok Sabha Rajya Sabha Implication

The Motor Vehicles (Amendment) Bill Passed Passed Positve for trucking industry The Right to Information (Amendment) Bill, 2019 Passed Passed Improve business transparency The Negotiable Instruments Bill Passed Passed Domestic and international arbitration The Banning of Unregulated Deposit Schemes Bill, 2019 Passed Passed Prevent corruption and fraud Fugitive Economic Offenders Bill Passed Passed Prevent economic offences The Airports Economic Regulatory Authority of India Passed Passed Regulates tariffs and other charges (Amendment) Bill, 2019 The Consumer Protection Bill, 2019 Introduced Pending Protect consumer rights The Companies (Amendment) Bill, 2019 Introduced Pending Improve business operations The Insolvency and Bankruptcy Code (Amendment) Bill, 2019 Introduced Pending Provides a time-bound process for

resolving insolvency

Source: PRS Legislative Research



FIIs have turned net sellers for July 2019 Super-rich tax on FPIs, HNIs, muted results from corporates in Q1FY20, trade war, geopolitical concerns and slowdown fears have affected investments. FIIs have reversed their five-month buying trend. It has led to relentless selling by FIIs. As per Bloomberg data, foreign portfolio investors (FPIs) pulled out a net sum of Rs 111.75 bn from equities during July 1-29. On the other hand, DII inflows have been steady at Rs 102.19 bn for the same period. Going ahead, the flows into Indian equities would be largely driven by the growth trajectory of the Indian economy along with policies and reform measures undertaken by the government.

FII vs DII (Rs bn)

Source: Bloomberg

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SECTORAL HAPPENINGS Banking In banks the view is more positive on banks that are getting out of the corporate NPL cycle. FY19 was the first year where the gross and net NPL ratios declined in a decade. Slippages and incremental stress visibility is more company specific as compared to sector-related issues in the past. If the recovery environment is a bit more favorable then it is quite likely that RoEs of corporate led banks could be superior in future. As stressed loans are now fully reflected and reasonably provided the focus in future would shift towards reported book value as compared to adjusted book value. Unlike the manufacturing segment, banking sector is expected to report healthy earnings growth in the next two years. We expect the gross and net NPL ratios of Indian banks to decline over the next few years as the peak of NPL recognition is behind. The larger private sector banks are in a better position to grow their retail book and grab market share from NBFCs.

In Q1-FY20 leading private sector banks have reported healthy 23% growth in net interest income with more than 20% revenue growth coming from retail lending. The aggregate yoy earnings of seven leading private sector banks has gone up by 57% in Q1-FY20 (mainly led by very high growth reported by ICICI Bank and Axis Bank). Net Interest income of old private sector banks has gone up by ~16% in Q1-FY20 (on yoy basis). Earnings growth of old private sector banks has been healthy at ~46% (yoy) in Q1-FY20. PSU banks have also reported healthy earnings growth mainly due to treasury gains and lower slippages and NPLs. Amongst the larger banks, ICICI Bank and IndusInd Bank have reported very good numbers. Amongst the mid & small banks, Bandhan Bank and Federal Bank have reported quite good numbers. Across all banks we have seen provision coverage ratio improving on a yoy basis.

Information Technology In Q1FY20, majority of the mid-cap IT companies reported dismal performance mainly due cuts in client budgets, deferred projects and rising costs of local talent in the US and Europe. We expect slowdown in spends from BFS clients, especially in the capital markets. Mphasis has higher exposure to the BFS vertical, which can be affected by lower client spends. The slowdown in spending on banking, financial services and insurance (BFSI) has emerged as a key concern. Also, NIIT technology’s management has indicated some softness in the BFS space, primarily in the capital markets. The softness is from the client side as the client’s IT spend is being compressed due to geopolitical pressures. Persistent's Q1FY20 consolidated revenue has decreased by 3% QoQ in US$ terms to US$ 120 mn led by 24% yoy decrease in IP revenue.

Key parameters such as Utilization levels, attrition rate, revenue productivity and digital revenue mix have been disappointing. In Q1FY20, generally there are higher expenses because of H-1B filing costs and wage hikes. Additionally, strong rupee against US dollar sequentially also impacted the margin. Mindtree margins dropped to their lowest in eight years. If we look further, part of the BFSI sector (which includes wealth management, capital markets, insurance, consumer banking) in the US is facing a slowdown, impacting even large-cap companies. Few companies are looking for insourcing and lowering tech spend. L&T InfoTech’s sequential revenue growth in constant currency terms was 1%, its weakest in the past nine quarters.



Real Estate NBFCs and HFCs National Housing Bank’s (NHB) recent circular to stop interest subvention schemes poses further risk to slowdown in real estate sales and retail home loan disbursements. We don’t have any published data on the volume of business through subvention schemes although market sources suggest that such schemes are prevalent in the mid-to-higher end of the market. Developers are already facing severe challenges on the liquidity front even as the momentum of retail sales has been stable. Any slowdown/disruption thereof, will add to the challenges. Retain cautious view on wholesale/real estate NBFCs/HFCs.

General Insurance General Insurance premiums were flat yoy in June 2019 following 14-16% growth in the past two months. Slowdown was visible in all large segments. Private General insurance players were up 7% while 1% decline in PSU general insurers and 79% decline in specialized insurers, pulled down industry growth rate. Among key players, ICICI Lombard reported 34% decline due to moderation in motor and decline in crop business, Chola MS was steady at 14% (16% YTD) and Bajaj GI was up 20% (17% YTD). SBI GI reported 40% growth due to over 50% growth in all key segments but 12% decline in motor business.

Telecom March 2019 formed the second consecutive quarter of aggregate consumer spend stability for the sector. Sequential bump in prepaid revenues on the back of minimum recharge construct launched by Bharti and Vodafone Idea was mitigated by a surprising sharp drop in postpaid revenues. Volume growth across both data and voice stayed healthy but is decelerating sharply implying perhaps a sharp slowdown in the pace of bundled plan adoption.

Automobiles The automobile industry is at the cusp of a revolution with adoption of cleaner vehicles (electric and plug-in hybrid) over petrol/diesel vehicles. We believe while China, Europe and the US will be faster to adopt electric vehicles, the Indian market will also embrace these vehicles as battery costs come down. We expect 28% of automobiles (except commercial vehicles) in India to shift to EVs by FY2030 with scooters and three-wheelers adopting electric much faster than other segments.

Profitability in electric vehicles will likely be negative in the initial few years due to (1) lack of economies of scale and (2) potentially aggressive pricing by OEMs to increase adoption levels of EVs. As the electric two-wheeler market will largely be controlled by existing OEMs only, we expect profitability on electric vehicle sales to converge towards current profitability over a period of time with increase in scale and reduction in costs. In terms of the impact on auto ancillaries, the shift towards EVs would be negative for ‘traditional’ automotive component suppliers due to lack of an engine and reduction in transmission content in EVs (60% of vehicle cost in ICE). However, tyre manufacturers, companies with presence in interior and exterior parts such as bumpers, door panel, instrument panel, seats, rear-view mirrors, among others, will not be much impacted.

Consumer Staples Fall in crude price augurs well for consumption; however the industry is experiencing some inflation for agri-commodities. Prices for other commodities remained mixed. We have also noticed increased new product launch activity centered at leveraging the fast-growing e-commerce and modern trade channels. The sector remains expensive despite some recent underperformance.



Metals We expect steel prices to decline in 2HFY20 after staying high in 1HFY20 due to iron ore shortages following Vale’s force majeure on iron ore supplies from its Brazil operations. We expect iron ore supply to revert to normal levels after 3-6 months and in fact, prices may not sustain at higher levels from likely pushback from Chinese buyers (steel mills) given their inability to increase steel prices beyond a certain level on weak demand conditions in downstream sectors. Also, metal prices will largely depend on the strength of the Chinese economy, which in turn will depend on the outcome of China-US trade issues.

Capital Goods Capital Goods manufacturers indicate that big ticket project investment are not showing signs of recovery but investment in capacity expansions in consumer oriented industries have started to gain traction, which is leading to more of smaller-size orders. In the June ending quarter, we believe there is a risk of order intake and revenue growth slowing down due to the general elections related delay in execution and order finalization. Also, working capital could also increase as receivables from government entities may get delayed. On the positive side, commodity prices and INR/USD has been stable so we don’t see any negative surprise on margin front due to cost pressures.

Infrastructure We expect huge thrust on infrastructure sector particularly in roads, water and railways sector, where the government has given more emphasis in the past few years. The finance ministry had allocated the highest-ever budgetary support of Rs 830.2 bn to the highways sector in the recent budget. Based on status of detailed project report and land clearances, higher budgetary allocations and fund raising efforts by NHAI, the government has shortlisted around 25,000 km of highways to be awarded over the next three years under the Bharatmala. FY19 was subdued for the road sector due to delay in financial closure in previously awarded HAM projects, lack of funding from PSU and private banks, delay in land acquisition and clearance issues. The general election also resulted in subdued awarding of new project in Q1FY20. NHAI, Ministry of Road Transport and Highways, several state governments have strong pipeline of projects at various stage of bidding and are largely expected to be awarded in H2FY20. This will be positive for road construction companies.

With the announcement of Jal Jeevan Mission focusing on providing clean and piped drinking water to every household in India by 2024, water and sanitation sector is likely to attract huge investment in the next five years. As per Budget 2019, Railway Infrastructure would need an investment of Rs 50 trillion over 2018-2030 with a capital expenditure outlay of ~Rs 1.5 to 1.6 trillion per annum. The government has proposed Public-Private Partnership for faster tracks laying, rolling stock manufacturing and delivery of passenger freight services.



One Year Rolling Fw PE chart of Nifty-50

Source: Bloomberg

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

Source: Bloomberg

Mid Cap Fw PE -Discount to Nifty-50 FW PE

Source: Bloomberg

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caps has reduced its Fw PE to 13.4x Vs

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both Mid Caps and Nifty-50 to inch up post results season due to lowering of

earnings forecasts.

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forecast to be revised downwards which will push the Fw PE to above 18x

(post Q1 results season)

The Mid Cap Fw PE now trades at a 22%

discount to the Nifty-50 Fw PE. The

discount is now closer to the lower

end of its historic band (i.e. 10 Yr

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Bond PE Vs Fw Equity PE of Nifty

Source: Bloomberg

Relative Performance of Mid Cap Index over NIFTY-50

Source: Bloomberg

Relative Performance of BSE Small Cap Index over NIFTY-50

Source: Bloomberg

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The sharp correction in Bond Yields has

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should allow Equity PE to remain at

higher levels in the near future.

In absolute terms the Mid Cap Index

has given away 70% of the

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shown during 2014-2017. Another 10% underperformance could make it very appealing against

the Nifty-50.

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Cap Index has given up most of the

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during 2014-17. Going forward,

maximum upside potential can be

witnessed in the BSE Small Cap Index.

Engineers India Ltd

CMP (Rs) 52 Week H/L (Rs) Mkt Cap (Rs mn) 100 140 / 93 63065

Financials (Rs mn)* FY18 FY19E FY20ESales 24,443 28,740 34,488 Growth (%) 36.7 17.6 20.0 EBITDA 3,660 4,613 5,729 EBITDA margin (%) 15.0 16.1 16.6 PBT 5,675 6,448 7,525 Net profit 3,701 4,320 5,042 EPS (Rs) 5.9 6.8 8.0 Growth (%) (2.1) 16.7 16.7 P/E (x) 17.0 14.6 12.5

Net debt/equity - - - Source: BloombergROE (%) 16.3 18.9 21.9 RoCE (%) 15.0 19.1 23.8 BVPS 36.0 36.3 36.5 Source: Kotak Securities - Private Client Research; *Consolidated

Financials (Rs mn)* Q4-FY18 Q4-FY19 % ChgRevenues 5,097 6,126 20.2 EBITDA 575 933 62.3 EBITDA Margin (%) 11.3% 15.2%PAT 689 949 37.7 PAT Margin (%) 13.5% 15.5%EPS (Rs) 1.1 1.5 36.4 Source: Kotak Securities - Private Client Research; *Consolidated Source: Bloomberg

This one pager on the company is extracted from last Kotak Securities – Private Client Research update dated 14 Mar 2019 & 23 May 2019 and it does not contain events beyondthat date. Above company recommendation is of Kotak Securities – Private Client Research. Detailed rating scale and disclaimer is provided at the end of this report. It is advisableto read the last report of Kotak Securities – Private Client Research before taking any investment decision on the above company recommendation.

Share Holding Pattern (%)

Analyst: Sanjeev B Zarbade (Email: [email protected]; Contact: +91 22 6218 6424)

Price Performance (3 Years)

Target Price (Rs)147 47.3%

Potential Upside (%)

Promoter52.1%

FII6.5%

DII26.5%

Others15.0%

Key Highlights: Engineers India Ltd (EIL) is a leading global engineering consultancy and EPC, Public Sector company. It provides

services principally focused on the oil & gas and petrochemical sector. Domestic hydrocarbon market is expected to remain buoyant in the long term driven by the ambitious target set by

Ministry of Petroleum and Natural Gas of expanding India’s refining capacity to 440 MMTPA from 247 MMTPAcurrently by the year 2040.

In Q4FY19, revenue grew 20.2% y/y, at Rs 6.1 bn and driven by LSTK (Lumpsum turnkey projects) division. EBITDAmargin expanded to 15.2% vis-à-vis 11.3% in Q4FY18 due to 1/ 210 bps increase in PMC (project management &consultancy) EBIT margin and 2/ reduced un-allocable expense, reported at Rs 299 mn in Q4FY19 against Rs 500mn in Q4FY18.

EIL management reiterated positive outlook on the domestic order inflows driven by 1/ brownfield expansion ofrefineries (including small refineries with capacity of less than 3 mmtpa) 2/ set up & integration of petrochemicalplants with existing refineries and 3/ greenfield refinery expansion- including Maharashtra Refinery.

Current order backlog at record Rs 104.8 bn implying four to five years of revenue visibility. FY19 order inflows remained robust (however, as expected it moderated in Q4FY19), reported at Rs 58.9 bn, which

includes- Rs 15.8 bn in the consulting division and Rs 43 bn in the LSTK division. Management has guided for revenue growth of c.15% for FY20 (conservative in our opinion, given record order

backlog and improved execution expected post Lok Sabha elections) mainly in PMC division. We note that the orderpipeline remains strong, potentially arising from greenfield/brownfield expansion by leading refineries.

We believe that the street has been skeptical about company’s cash reserves (amounting to c. Rs 25 bn), gettingdiverted towards recapitalization of other government owned sick companies. Management, however has dismissedany such threat to its cash reserves and has maintained that the company shall maintain its dividend payout atcurrent 80% level.

We value FY20 core earnings (excluding other income adjusted for tax) at PER 22x and maintain BUY with revisedtarget price of Rs 147 (Rs 153 earlier).

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Engineers India Ltd Nifty

Equitas Holdings Ltd


Financials (Rs mn)* FY19 FY20E FY21ENet Interest Income 11,848 16,809 20,619 Non interest income 2,596 2,580 4,079 Total Income 14,444 19,389 24,698 Growth (%) 29.2% 34.2% 27.4%PBT 3,319 5,407 7,042 Net profit 2,164 3,406 4,437 EPS (Rs.) 6.3 10.0 13.0 Book value (Rs.) 69.6 78.3 90.7 P/B (x) 1.6 1.4 1.2

NIM (%) 8.2 9.3 8.7 Source: BloombergGross NPL (%) 2.5 2.8 2.8 RoE (%) 9.1 12.8 14.5 RoA (%) 1.4 1.8 1.8 Source: Kotak Institutional Equities *Standalone

Financials (Rs mn)* Q4-FY18 Q4-FY19 % ChgNet interest income 2,485 3,331 34.0%PBT 537 1,024 90.7%PAT 350 687 96.3%NIM (%) 8.1 8.9 78 bpsGNPL (%) 2.7% 2.5% -20 bpsCost-income ratio (%) 77.0% 69.0% -832 bpsPCR (%) 47.4% 43.4% -403 bpsSource: Kotak Institutional Equities *Standalone Source: Bloomberg

This one pager on the company is extracted from last KIE update dated May 13, 2019 and it does not contain events beyond that date. We take no obligation to update the KIErecommendations. While source of all other information is taken from Kotak Institutional Equities, the price performance and shareholding pattern chart is inputted by KotakPCG research team (with source as Bloomberg). It is advisable to read the full KIE report before taking any investment decision on the above company recommendation.


Analyst: Nischint Chawathe/M B Mahesh/Dipanjan Ghosh/ Shrey Singh (Email: [email protected]; Contact: +91 22 6218 6427)




FII19.0%

DII42.3%

Others38.7%

Key Highlights: Equitas reported ~100% earnings growth in 4QFY19 led by solid NII growth (34% YoY) and slower cost growth of

23% YoY. Improvement in NII was on the back of strong AUM growth at ~45% YoY, a 10-quarter high primarily driven by non-MFI businesses at ~60% YoY while MFI revived to 35% YoY

NIM was flat QoQ at 9%. Deposits grew ~70% YoY led by a high growth in term deposits at ~90% YoY. CASA andretail TD was flat QoQ at 60%. Non-interest income grew 60% YoY. Asset quality showed improvement with slippages at 2.4% of loans and gross NPLs declining 60 bps QoQ to 2.5% and net NPLs declining 30 bps QoQ to 1.4%of loans

AUM growth increased to ~45% YoY in 4QFY19 from 11% in FY18 while disbursements in the quarter were lower sequentially (down 2% QoQ, up ~32% YoY) in 4QFY19 due to QoQ lower disbursements in the MFI and small business loan segments

RoEs have improved to an 11-quarter high at 11%. The bank is comfortable to grow its balance sheet at closer tocurrent levels, suggesting near-term performance could be better than our current estimates of ~30% CAGR. The bank expects cost growth at ~15% for FY20

We forecast 30% CAGR in AUM over FY19-22E driven by recovery in the microfinance business, stable growth invehicle business, rapid ramp-up in small business loans and newer segments. A diverse business line also opens upthe opportunity for cross-sell of products

1QFY20 Result Preview: We expect AUM growth of ~45% YoY led by SME and auto loans. NIM to be unchangedQoQ at 9%. Operating expenses are likely to be flat YoY resulting in an improvement in cost to income ratio to ~65-68%. We expect impairment ratios to show further improvement with gross NPLs <3%. The progress on deposits,especially on wholesale and retail term deposits, would be a key monitorable

We maintain BUY rating with fair value unchanged at Rs. 180. At our fair value, we value Equitas at 2x book and~15x EPS March’21E book for RoEs moving closer to industry average by FY20-21E.

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Equitas Holdings Ltd Nifty

ITC Ltd


Financials (Rs mn)* FY19 FY20E FY21ESales 444,327 484,204 532,862 Growth (%) 10.4 9.0 10.0 EBITDA 167,426 188,627 210,406 EBITDA margin (%) 37.7% 39.0% 39.5%PBT 183,737 205,198 228,530 Adjusted Net profit 124,178 135,431 150,830 Adjusted EPS (Rs) 10.1 11.0 12.3 Growth (%) 13.5 8.9 11.8 P/E (x) 26.8 24.6 22.0

Source: Bloomberg

ROAE (%) 22.7 22.6 23.6 RoACE (%) 27.1 28.0 29.5 Free cash flow 75,118 102,449 115,501 Source: Kotak Insitutional Equities; *StandaloneFinancials (Rs mn)* Q4FY18 Q4FY19 % ChgRevenues 104,792 118,502 13.1 EBITDA 41,440 45,717 10.3 EBITDA Margin (%) 39.5% 38.6%PAT 29,327 34,819 18.7 PAT Margin (%) 28.0% 29.4%EPS (Rs) 2.4 2.8 16.7 Source: Kotak Insitutional Equities; *Standalone Source: Bloomberg

This one pager on the company is extracted from KIE update dated 13 May 2019 and it does not contain events beyond that date. We take no obligation to update the KIErecommendations. While source of all other information is taken from Kotak Institutional Equities, the price performance and shareholding pattern chart is inputted by Kotak PCGresearch team (with source as Bloomberg). It is advisable to read the full KIE report before taking any investment decision on the above company recommendation.


Analyst: Rohit Chordia/Jaykumar Doshi/Aniket Sethi (Email: [email protected]; Contact: +91 22 6218 6427)




FII17.0%

DII38.1%

Others44.9%

Key Highlights: ITC’s 4QFY19 operating performance was broadly in line with expectations whereas net profit was 9% above expectations

led by lower-than-estimated tax rate and higher-than-estimated other income; Revenues, EBITDA and recurring PAT at Rs.119.9 bn, Rs. 45.7 bn and Rs. 34.4 bn were up 13%, 10% and 17% YoY, respectively

FMCG segment—revenue grew 12% (comparable basis and excluding the Lifestyle Retailing Business) in FY19. The management attributed deceleration in growth in the past 3-4 months to tight liquidity conditions and sluggish rural demand

Cigarette segment—volumes grew about 6.5% (our estimate) and EBIT grew about 9% YoY in FY19. The management indicated that discriminatory pricing and regulatory regime resulted in 4% CAGR decline in organized cigarette industryand 5% CAGR increase in illegal cigarette volumes over FY11-19

Hotels—revenue grew 17% YoY and EBIT grew 27% YoY in FY2019. Robust growth was driven by improvement in ARR and newly commissioned properties at ITC Kohenur and ITC Grand Goa Resort & Spa (erstwhile Park Hyatt Goa Resort & Spa,commissioned in October 2018)

Agri business—the management indicated that Indian crop output in 2018 increased by 6 mn kgs to 218 mn kgs, afterthree successive years of decline. However, it still remains far below the levels of 2014 representing a cumulative drop ofover 30%. Agri business revenues grew 16% YoY and EBIT declined 8% YoY in FY19

Paper boards business. Revenues grew 12% YoY and EBIT grew 19% YoY driven by product mix enrichment, higher realization, strategic investments in imported pulp substitution, process innovation and a cost-competitive fiber chain

We have tweaked our forecasts marginally and revised our fair value to Rs. 335/share. We value the cigarette business at23x post-tax EBIT and the FMCG business at 5x EV/sales

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ITC Ltd Nifty

Oil & Natural Gas Corporation Ltd


Financials (Rs mn)* FY19 FY20E FY21ESales 2,053,357 2,139,856 2,200,119 Growth (%) 31.8 4.2 2.8 EBITDA 767,831 798,799 812,097 EBITDA margin (%) 37.4 37.3 36.9 PBT 481,100 488,719 484,694 Net profit 301,739 312,260 309,368 Adjusted EPS (Rs) 24.0 24.8 24.6 Growth (%) 37.9 3.3 (0.8) P/E (x) 5.8 5.6 5.6

ROAE (%) 11.1 11.3 10.4 Source: BloombergROACE (%) 11.5 11.4 10.6 Free Cash Flow 96,140 240,918 261,024

Source: Kotak Insitutional Equities; *Consolidated

Financials (Rs mn)* Q4FY18 Q4FY19 % ChgRevenues 239,698 267,585 11.6 EBITDA 113,822 123,710 8.7 EBITDA Margin (%) 47.5% 46.2%PAT 59,151 40,446 (31.6) PAT Margin (%) 24.7% 15.1%EPS (Rs) 4.6 3.2 (30.4) Source: Kotak Insitutional Equities; *Standalone Source: Bloomberg

This one pager on the company is extracted from last KIE update dated June 3, 2019 and it does not contain events beyond that date. We take no obligation to update the KIErecommendations. While source of all other information is taken from Kotak Institutional Equities, the price performance and shareholding pattern chart is inputted by Kotak PCGresearch team (with source as Bloomberg). It is advisable to read the full KIE report before taking any investment decision on the above company recommendation.


Analyst: Tarun Lakhotia, Hemang Khanna (Email: [email protected]; Contact: +91 22 6218 6427)




Promoter65.6%

FII5.9%

DII14.8%

Others13.7%

Key Highlights: ONGC’s 2P reserve replacement ratio (RRR) remained healthy at 1.41X in FY2019, while 1P RRR was even higher at

1.7X on account of additions from new projects.

The company has indicated that gas production volumes will continue to increase robustly to ~42 bcm by FY2022from ~25 bcm currently.

The management remained confident about commencing gas production from KG-DWN-98/2 block by December2019; however, the company reduced peak production guidance to ~60 kb/d (~78 kb/d earlier) of crude oil and ~15mcm/d (~16.5 mcm/d earlier) of gas, both expected by FY2022, while indicating that the planned capex will alsoreduce to US$4 bn from US$5 bn earlier.

Standalone capex may rise modestly to Rs. 32.9 bn in FY2020 from Rs. 29.5 bn in FY2019.

OPAL’s loss moderated to Rs7 bn in FY2019 at a utilization rate of ~70% from a loss of Rs10 bn in FY2018, whileOMPL reported its maiden net income of Rs230 mn in FY2019 with the plant operating at 99% utilization rate.

ONGC may consider an equity infusion in OMPL to pare down its debt/equity ratio from unsustainable level of~22X.

ONGC management indicated possibility of a merger of downstream subsidiaries and JVs, including HPCL, MRPL,OPAL and OMPL at an opportune time.

We recommend BUY rating on the stock with a revised fair value of Rs.210, based on 9X FY2021E EPS plus value ofinvestments.

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Oil & Natural Gas Corporation LtdNifty

State Bank of India


Financials (Rs mn)* FY19 FY20E FY21ENet Interest Income 883,489 1,008,001 1,171,905 Non-interest Income 367,749 466,791 529,298 Total Income 1,251,238 1,474,792 1,701,203 Growth (%) 1.4% 17.9% 15.4%PBT 16,075 472,532 666,581 Net profit 8,622 330,772 466,607 EPS (Rs) 1 37 52 BVPS 164 219 284 P/B (x) 2.0 1.5 1.2

Slippages (%) 2.1% 1.5% 1.5% Source: BloombergGross NPL (%) 7.5% 5.5% 4.3%Net NPL (%) 3.0% 1.9% 1.1%ROE (%) 0.4% 13.9% 16.9%RoA (%) 0.0% 0.9% 1.1%Source: Kotak Insitutional Equities; *ConsolidatedFinancials (Rs mn)* Q4-FY18 Q4-FY19 % ChgNet Interest Income 199,743 229,538 14.9%Non-Interest Income 124,948 126,851 1.5%Total Income 324,691 356,390 9.8%PBT (122,132) 4,312 NMPAT (77,185) 8,384 NMSlippages (%) 7.2% 1.6% -563 bpsSource: Kotak Insitutional Equities; *Consolidated Source: Bloomberg

This one pager on the company is extracted from last two KIE updates dated May 10, 2019 and July 5, 2019 and it does not contain events beyond that dates. We take no obligation toupdate the KIE recommendations. While source of all other information is taken from Kotak Institutional Equities, the price performance and shareholding pattern chart is inputted byKotak PCG research team (with source as Bloomberg). It is advisable to read the full KIE report before taking any investment decision on the above company recommendation.


Analyst: MB Mahesh, CFA / Nischint Chawathe / Dipanjan Ghosh / Shrey Singh (Email: [email protected]; Contact: +91 22 6218 6427)




Promoter58.6%

FII9.4%

DII24.5%

Others7.5%

Key Highlights: SBI reported a profit of Rs.8 bn in Q4FY19 on the back of healthy NII growth at 15% YoY and stringent cost control

(operating expenses up 13% YoY).

Calculated slippages dropped in Q4Y19 on the back of decrease in slippages from the corporate book (adjusted forslippages from an aviation account worth Rs.12 bn). We project slippages of 1.5% in FY20E from 2.1% in FY19

Overall loan growth (net) improved to 13% YoY driven by robust growth in retail loans and revival in corporate loangrowth. On gross basis, retail loans saw robust increase at 19% YoY. We are building ~11% loan CAGR over FY19-22Edriven by strong traction in retail loans and gradual increase in corporate lending.

Reported NIM was flat QoQ at 2.8% in Q4FY19 driven by stable yields at 8.5% and cost of deposits at 5.1%. Weforecast NIM (calculated) to improve 20 bps over FY19-22E to 2.9%.

CASA ratio stood at 44% in Q4FY19 (up 50 bps QoQ) led by 9% growth in SA balances while CA growth was modest at8% YoY. We forecast 11% CASA CAGR over FY19-22E and stable CASA ratio of 45% in the medium term.

Overall operating expenses growth was modest at 13% YoY, led by 13% YoY growth in staff cost while other expenseswere up 12% YoY. We expect ~5% CAGR in operating expenses over FY19-22E.

Q1FY20 results preview : We expect loan growth at ~12% YoY and NIM unchanged QoQ at ~2.9%. Non-interest incomegrowth will be higher due to higher treasury income and income from written-off loans. We expect slippages at 1.6% ofloans as recognition of large accounts is complete while gross NPLs could decline led by higher write-offs. Provisionswould be high due to ageing of NPLs.

We maintain BUY rating on SBI with a fair value of Rs.410 (unchanged), valuing the bank at 1.2X book and 7X March21E EPS for RoEs in the range of ~15% in the medium term.

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State Bank of IndiaNifty

Welspun Corp Limited


Financials (Rs mn)* FY19 FY20E FY21ESales 89,535 89,583 90,923 Growth (%) 40.1 0.1 1.5 EBITDA 5,731 8,600 8,890 EBITDA margin (%) 6.4 9.6 9.8 PBT 2,706 5,197 5,556 Net profit (216) 4,098 4,367 EPS (Rs) (0.8) 15.5 16.5 Growth (%) (114.1) 584.8 6.6 P/E (x) (139.8) 7.2 6.8 BV (Rs/share) 106.2 120.3 136.2 ROE (%) 2.1 12.5 11.8 Source: BloombergROCE (%) 7.3 13.4 12.8 Net Debt (Rs Mn) 6,174 468 (5,185)

Source: Kotak Securities - Private Client Research; *Consolidated

Financials (Rs mn)* Q4FY18 Q4FY19 % ChgRevenues 12,766 27,561 115.9 EBITDA 929 322 (65.3) EBITDA Margin (%) 7.3% 1.2%PAT (76) (1,490) PAT Margin (%) -0.6% -5.4%EPS (Rs) (0.3) (5.6) Source: Kotak Securities - Private Client Research; *Consolidated Source: Bloomberg

This one pager on the company is extracted from last Kotak Securities – Private Client Research update dated 25 July 2019 and it does not contain events beyond that date. Abovecompany recommendation is of Kotak Securities – Private Client Research. Detailed rating scale and disclaimer is provided at the end of this report. It is advisable to read the lastreport of Kotak Securities – Private Client Research before taking any investment decision on the above company recommendation.


Analyst: Jatin Damania (Email: [email protected]; Contact: +91 22 6218 6440)




Promoter48.8%

FII6.3%

DII8.7%

Others36.3%

Key Highlights: WCL has the world’s largest welded line pipe manufacturing capacity, with an installed capacity at 2.55MT. In FY19,

the company reported highest ever pipe sales volume of 1.28MT and closed the year with an all-time high orderbook of 1.7MT (US$2.15 bn), which provides enough revenue visibility (to be executed over the next 15-18 months).

The overseas order book not only provides good revenue visibility, but also comes with the stronger margincompared to the domestic market, as number of qualified bidders are less. In addition, increasing demand of spiralpipes in US due to increase in shale gas production and the country’s focus on reducing imports of pipes augurswell of local manufacturers.

Management highlighted that, the U.S continues to be a key growth driver for the future and profitability in Saudi isalso expected to improve in FY20E.

During the year, the company entered into an agreement to divest (non-core assets) PCMD and 43 MW Power plantat a consideration of Rs9.4bn. The PCMD transaction is expected to complete by end of Dec’19. The transaction willstrengthen the company’s balance sheet by providing enough liquidity and deleverage the balance sheet.

At the end of FY19, the gross debt currently stood at Rs13 bn and net debt at ~Rs2.7 bn as against net debt ofRs4.22 bn in FY18. The board has also accepted a proposal to buy back shares worth ~Rs3.9bn (~10.5% of themarket cap). In addition, the company is on track to become a net-cash firm in the next few quarters.

In FY20, the focus will be on free cash flow generation and further strengthening of the balance sheet through debtreduction. The management highlighted that, they are on track to achieve a status of zero net debt by end of FY20.

Key Risks Steel price volatility can impact performance; and Low crude price can defer investments in oil and gas industry.

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Welspun Corp Limited Nifty


RATING SCALE (KOTAK SECURITIES – PRIVATE CLIENT RESEARCH) / 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 RESEARCH) Rusmik Oza Arun Agarwal Amit Agarwal K. Kathirvelu Head of Research Auto & Auto Ancillary Transportation, Paints, FMCG Support Executive [email protected] [email protected] [email protected] [email protected]+91 22 6218 6441 +91 22 6218 6443 +91 22 6218 6439 +91 22 6218 6427

Sanjeev Zarbade Jatin Damania Deval Shah Cap. Goods & Cons. Durables Metals & Mining, Midcap Research Associate [email protected] [email protected] [email protected] +91 22 6218 6424 +91 22 6218 6440 +91 22 6218 6425

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 RESEARCH) Shrikant Chouhan Amol Athawale Faisal Shaikh, FRM, CFTe Siddhesh Jain [email protected] [email protected] Research Associate Research Associate +91 22 6218 5408 +91 20 6620 3350 [email protected] [email protected]

+91 22 62185499 +91 22 62185498

DERIVATIVES RESEARCH TEAM (PRIVATE CLIENT RESEARCH) 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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Disclosure/Disclaimer – Kotak Securities Ltd

Following analysts: MB Mahesh - CFA, Nischint Chawathe, Dipanjan Ghosh, Shrey Singh, Tarun Lakhotia, Hemang Khanna, Rohit Chordia, Jaykumar Doshi and Aniket Sethi of Kotak Institutional Equities and Jatin Damania, Sanjeev Zarbade of Kotak Securities – Private Client Research hereby certify that all of the views expressed in this report accurately reflect their personal views about the subject company or companies and its or their securities. They also certify that no part of their compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. Kotak Securities Limited established in 1994, is a subsidiary of Kotak Mahindra Bank Limited. Kotak Securities is one of India's largest brokerage and distribution house. Kotak Securities Limited is a corporate trading and clearing member of BSE Limited (BSE), National Stock Exchange of India Limited (NSE), Metropolitan Stock Exchange of India Limited (MSE), National Commodity and Derivatives Exchange (NCDEX) and Multi Commodity Exchange (MCX). Our businesses include stock broking, services rendered in connection with distribution of primary market issues and financial products like mutual funds and fixed deposits , depository services and Portfolio Management. Kotak Securities Limited is also a depository participant with National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL). Kotak Securities Limited is also registered with Insurance Regulatory and Development Authority as Corporate Agent for Kotak Mahindra Old Mutual Life Insurance Limited and is also a Mutual Fund Advisor registered with Association of Mutual Funds in India (AMFI). We are registered as a Research Analyst under SEBI (Research Analyst) Regulations, 2014. We hereby declare that our activities were neither suspended nor we have defaulted with any stock exchange authority with whom we are registered in last five years. However SEBI, Exchanges and Depositories have conducted the routine inspection and based on their observations have issued advise/warning/deficiency letters/ or levied minor penalty on KSL for certain operational deviations. We have not been debarred from doing business by any Stock Exchange / SEBI or any other authorities; nor has our certificate of registration been cancelled by SEBI at any point of time. We offer our research services to clients as well as our prospects. This document is not for public distribution and has been furnished to you solely for your information and must not be reproduced or redistributed to any other person. Persons into whose possession this document may come are required to observe these restrictions. This material is for the personal information of the authorized recipient, and we are not soliciting any action based upon it. This report is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It is for the general information of clients of Kotak Securities Ltd. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. We have reviewed the report, and in so far as it includes current or historical information, it is believed to be reliable though its accuracy or completeness cannot be guaranteed. Neither Kotak Securities Limited, nor any person connected with it, accepts any liability arising from the use of this document. The recipients of this material should rely on their own investigations and take their own professional advice. Price and value of the investments referred to in this material may go up or down. Past performance is not a guide for future performance. Certain transactions -including those involving futures, options and other derivatives as well as non-investment grade securities - involve substantial risk and are not suitable for all investors. Reports based on technical analysis centers on studying charts of a stock's price movement and trading volume, as opposed to focusing on a company's fundamentals and as such, may not match with a report on a company's fundamentals. Opinions expressed are our current opinions as of the date appearing on this material only. While we endeavor to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance or other reasons that prevent us from doing so. Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice. 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Research Analyst or his/her relatives has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: No. Kotak Securities Limited has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: No Subject company(ies) may have been client during twelve months preceding the date of distribution of the research report. "A graph of daily closing prices of securities is available at https://www.nseindia.com/ChartApp/install/charts/mainpage.jsp and http://economictimes.indiatimes.com/markets/stocks/stock-quotes. (Choose a company from the list on the browser and select the "three years" icon in the price chart)." Kotak Securities Limited. Registered Office: 27 BKC, C 27, G Block, Bandra Kurla Complex, Bandra (E), Mumbai 400051. CIN: U99999MH1994PLC134051, Telephone No.: +22 43360000, Fax No.: +22 67132430. Website: www.kotak.com/www.kotaksecurities.com. Correspondence Address: Infinity IT Park, Bldg. No 21, Opp. Film City Road, A K Vaidya Marg, Malad (East), Mumbai 400097. Telephone No: 42856825. SEBI Registration No: INZ000200137 (Member ID: NSE-08081; BSE-673; MSE-1024; MCX-56285; NCDEX-1262), AMFI ARN 0164, PMS INP000000258 and Research Analyst INH000000586. NSDL/CDSL: IN-DP-NSDL-23-97. Our research should not be considered as an advertisement or advice, professional or otherwise. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and the like and take professional advice before investing. Investments in securities market are subject to market risks, read all the related documents carefully before investing. Derivatives are a sophisticated investment device. The investor is requested to take into consideration all the risk factors before actually trading in derivative contracts. Compliance Officer Details: Mr. Manoj Agarwal. Call: 022 - 4285 8484, or Email: [email protected]. In case you require any clarification or have any concern, kindly write to us at below email ids: Level 1: For Trading related queries, contact our customer service at '[email protected]' and for demat account related queries contact us at

[email protected] or call us on: Toll free numbers 18002099191 / 1860 266 9191Level 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.

https://www.nseindia.com/ChartApp/install/charts/mainpage.jsp

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Market Strategy - Kotak Securities · 2019. 7. 31. · Kotak Securities – Private Client Research...

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