AUGUST 2, 2017 - Kotak Securities
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AUGUST 2, 2017
2019 Market Strategy January 2019
Teena Virmani
teena.virmani@kotak.com
OUTLOOK FOR 2019
+91 22 6218 6432
Summary of our 2019 Outlook:
Being an election year, in a Bear case (i.e. a fractured mandate in Central elections) we
expect Nifty to range between 10,000-10,500 by end of Dec’19, while in Bull case (i.e. either
a clear mandate or BJP/Congress led coalition Government) we expect Nifty to range
between 12,500-13,000 by end of Dec’19. Earnings revival could be the most important
driver of Indian equity market in CY19. We feel there is very high probability of mid & small
cap outperforming the large caps in CY19. Scope of valuation re-rating remains very high
in host of mid & small caps provided earnings come in line with estimates.
To weather the on-going volatility which may remain till middle of CY19 (i.e. till Central
elections), it is ideal to have higher allocation into high earnings growth large caps and
mid-caps (with strong management pedigree and reasonable valuations). Post elections,
one can increase exposure to beaten down mid & small caps if we have a clear mandate or
single party led coalition government at the centre. Among the large caps one can focus
on select stocks from sectors like corporate banks, select NBFCs, IT services, metals &
mining and oil & gas. In the mid caps, one can focus on select stocks from sectors like
capital goods, construction and auto ancillaries.
2019 is also going to be an action packed year with H1CY19 likely to keep markets volatile.
Events like US Fed meet and its action on interest rates amid fears of expected slowdown in
US economy, Future course of action by OPEC members after the recent sharp correction in
crude prices, outcome/escalation of US-China trade war and Brexit approaching in March and
domestic events like Union Budget/Vote on Account, RBI monetary policy and then Lok Sabha
elections are likely to keep markets looking for direction. Out of the international events it is
difficult to predict the outcome of Brexit and Trade War. A pause in rate hike by Fed, sometime
in H1CY19 could bring back life into emerging markets (including India). Going by global
demand & supply situation for Oil, India’s twin deficit and macros could improve in CY19.
Domestically, we see many positives in terms of improving macros (i.e. lower crude prices,
fairly valued currency, lower inflation as well as possibility of a 50 bps rate cut by RBI going
forward) which would get reflected in earnings of coming quarters. We see earnings revival,
which has started in FY19E and should accelerate in FY20E to be the most important driver of
Indian equity markets in CY19. We believe domestic markets are better placed in comparison
to its global counterparts. The gap between earnings yield and bond yield has also narrowed
post the recent decline in bond yields.
Based on 14%/27% estimated growth in earnings of FY19E/20E, the Nifty is currently trading
at 19.8x/15.8x FY19E/20E, respectively. Valuation of Nifty looks reasonable when viewed
against recent historical valuations of ~18-20x on forward PE basis (mainly due to high
earnings growth expectation). Based on Bloomberg consensus estimates, the one year
forward PE of Mid Cap Index has now converged near Nifty PE of ~16x.
Kotak Securities – Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 22019 Market Strategy January 2019
1-month performance of benchmark global indices (%)
NASDAQ Index -9.77%
NIKKEI Index -9.47%
S&P 500 Index -9.29%
Dow Jones Index -8.78%
MSCI World Index -8.25%
DAX Index -8.12%
FTSE Index -5.99%
MSCI Asia Pacific -4.77%
Hang Seng Index -4.51%
MSCI India 0.43%
-12.00% -10.00% -8.00% -6.00% -4.00% -2.00% 0.00% 2.00%
Source: Bloomberg
Market performance – sector wise (December 2018)
9.0%
5.7%
6.0%
3.8%
2.7%
3.0% 1.8% 1.5% 1.3% 1.4%
0.2% 0.4%
0.0%
-0.3% 0.0%
-3.0% -1.5%
-2.9%
-6.0%
Source: Bloomberg
Kotak Securities – Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 32019 Market Strategy January 2019
KEY EVENTS TO LOOK OUT FOR IN 2019
Indian markets remained volatile in 2018 led by introduction of LTCG, MF reclassification of
schemes, ASM list introduction, US Fed rate hikes, Trade War between US-China, oil prices and
rupee touching the roof and coming back, IL&FS crisis, resignation of RBI governor and BJP
losing in 3 state elections.
2019 is also going to be an action packed year with H1CY19 likely to keep markets volatile.
Events like US Fed meet and its action on interest rates amid fears of expected slowdown in
US economy, Future course of action by OPEC members after the recent sharp correction in
crude prices, outcome/escalation of US-China trade war and Brexit approaching in March and
domestic events like Union Budget/Vote on Account, RBI monetary policy and then Lok Sabha
elections are likely to keep markets looking for direction. Out of the international events it is
difficult to predict the outcome of Brexit and Trade War. A pause in rate hike by Fed, sometime
in H1CY19 could bring back life into emerging markets (including India). Going by global
demand & supply situation for Oil, India’s twin deficit and macros could improve in CY19. We
highlight below these events and likely impact on markets.
Calendar for important events
Date Events
Jan-19 US-FOMC meet
Vote on Brexit deal
Production cut by OPEC
GST council meet –India
Feb-19 India - Union Budget or Interim budget
RBI monetary policy
Mar-19 US-FOMC meet
US-China trade agreement timeline
Brexit
April-May,19 Lok Sabha elections and outcome
Jun-Dec,19 State elections in Arunachal Pradesh, Odisha, AP, Haryana, Maharashtra
Source: FOMC, Election commission, RBI
Kotak Securities – Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 42019 Market Strategy January 2019
GLOBAL EVENTS LINED UP FOR 2019
Global markets witnessed sharp correction during the month after Fed continued to hike the
interest rates which added to the fears of global slowdown. Continuous differences between
US President and Fed over interest rates also added to the volatility amidst US government
shutdown and trade spat between US and China. We believe that under circumstances of no
resolution on trade war between the two nations, the global economy would start feeling the
pain in 2019 which would get reflected in decline in global growth, thereby implying a weak
tailwind for already volatile and weaker global indices.
US – FOMC meet eyed throughout the year for rate decisions starting Jan, 2019
US markets fell sharply during Dec, 2018 as investors got worried about the bond-market
phenomenon signaling a possible economic slowdown and lingering fears of continuation of
US-China trade war. Post Fed’s decision to raise the benchmark overnight lending rate by one
quarter point to a target range of 2.25-2.5 percent, concerns started emerging on Fed’s
comments on reducing the balance sheet going forward and with the forecast for 2 rate hikes
in next year.
US GDP is now seen as rising by 3 percent in CY18, down one-tenth of a percentage point from
September, and 2.3 percent for CY19, a 0.2 percent point reduction.
Indicators pointing towards a US slowdown include the gap between US 10 year rate and US 2
year rate which is continuously reducing indicating a flattening yield curve, inflation moving
up since the beginning of the year prompting Fed to hike rates, decline in homes sales reflected
in key housing market. Though unemployment rate is still lower at 3.83 percent but it is difficult
to predict how much more decline is possible from the current levels. These indicators will be
very important to watch out for in the next one year to access if the US economy is heading
towards a slowdown or not. Any kind of slowdown in the developed markets is likely to have
an impact on global growth. Crude & currency could be the deciding factor for many emerging
markets.
US 10 year government bond yield vs 2 year government bond yield
US 10 year government bond yield US 2year government bond yield
3.5
3.0
2.5
2.0
1.5
1.0
May-17
Sep-17
May-18
Sep-18
Oct-17
Oct-18
Apr-17
Aug-17
Nov-17
Feb-18
Apr-18
Aug-18
Nov-18
Mar-17
Mar-18
Jan-18
Jul-17
Jul-18
Jun-17
Dec-17
Jun-18
Dec-18
Source: Bloomberg
Kotak Securities – Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 52019 Market Strategy January 2019
US unemployment rate (%) US CPI Urban Consumer (YOY)
12 3.5
3.0
10
2.5
8
2.0
6 1.5
1.0
4
0.5
2 0.0
0 -0.5
Nov-17
Mar-18
Nov-14
Nov-15
Nov-16
Mar-16
Mar-17
Mar-14
Mar-15
Nov-18
Jul-18
Jul-16
Jul-17
Jul-14
Jul-15
Sep-06
May-08
Sep-11
May-13
Sep-16
May-18
Mar-04
Nov-05
Mar-09
Nov-10
Mar-14
Nov-15
Jan-05
Jan-10
Jan-15
Jul-07
Jul-12
Source: Bloomberg Jul-17 Source: Bloomberg
Brexit – Vote on Brexit deal to take place in Jan, 2019 with UK exit happening on March, 2019
deadline
UK is heading towards March 29 deadline to officially exit the European Union. It’s uncertain
whether members of parliament will approve Prime Minister Theresa May’s deal proposal, but
even if they don’t, Britain has to exit. The UK will therefore leave the EU by March 29, 2019,
although there is a 21-month "transition period".
If UK and EU are unable to reach any withdrawal agreement, it would mean a “no deal” Brexit.
Leaving the EU in March with a “no deal” would mean that World Trade Organization rules
would apply. This would inevitably raise tariffs and costs for both producers and consumers.
At the moment, the U.K. is a member of the EU single market of goods, meaning that trade is
frictionless and with zero tariffs. The Government would not have to pay the annual £13 billion
contribution to the EU budget. However Britain would lose out on some EU subsidies. There
would be immense disruption and uncertainty, including in the energy market, the supply of
medicines and medical devices, as well as in the car industry. A no deal exit could lead to a
swift drop in the Pound, similar to the aftermath of the Brexit referendum in 2016.
British Pound Spot Currency
1.7
1.6
1.5
1.4
1.3
1.2
1.1
Sep-18
Sep-16
May-17
Sep-17
May-18
May-15
Sep-15
May-16
Nov-18
Nov-15
Nov-16
Nov-17
Mar-17
Mar-18
Mar-15
Mar-16
Jan-16
Jan-17
Jan-18
Jul-18
Jul-15
Jul-16
Jul-17
Source: Bloomberg
Kotak Securities – Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 62019 Market Strategy January 2019
China in 2019 – Early March, 2019 is the timeline for reaching an agreement on trade;
Monetary policy meet in China too in March, 2019
China has slowed down significantly in 2018 led by tightened financial conditions and fears of
trade war with US leading to slowdown in domestic demand. IMF forecast the China’s GDP to
grow by 6.6 percent in CY18 which is likely to decline to 6.2 percent in CY19.
China GDP Constant Price (%)
13.0
12.0
11.0
10.0
9.0
8.0
7.0
6.0
5.0
Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18
Source: Bloomberg
US and China agreed last month to halt levy of new tariffs on each other’s goods till 1st March,
2019. During this period, both China and the US will try to find common ground on some of the
most difficult issues concerning forced transfer of technology, doing away with industrial
subsidies as well as state-owned enterprises, enhanced intellectual property provisions for
stopping the alleged theft of technologies etc. If negotiations aren’t satisfactory, the US is
planning to raise tariffs on $200 billion in Chinese imports to 25% from 10%, and China is
expected to retaliate. This will have repercussions on the growth of both these economies.
Chinese economy is also continuously grappling with the twin pressures of US tariffs &
economic slowdown and top policymakers have confirmed that more monetary and fiscal
support will be rolled out in CY19. These could be in the form of tax cuts, extra government
spending and reductions to the required reserve ratio for major banks, details of which will be
largely known by March, 2019 when the central bank is scheduled to meet for Monetary policy
meeting. The focus of the macro policy is more on boosting the short term demand.
Kotak Securities – Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 72019 Market Strategy January 2019
Oil – Production cut by OPEC eyed from January, 2019
Oil prices have corrected sharply by 38% from the October highs on concerns around future oil
demand and weakening global economic growth led by higher US interest rates and US-China
trade dispute. Reports of big climb in US inventories and forecast of record shale output also
stoked concerns about oversupply.
Crude oil price
120
100
80
60
40
20
Dec-12
Jun-13
Dec-13
Jun-14
Dec-14
Jun-15
Dec-15
Jun-16
Dec-16
Jun-17
Dec-17
Jun-18
Dec-18
Source: Bloomberg
Domestically, lower oil prices will result in stable macroeconomic conditions and from an
election standpoint – (1) keep domestic retail auto fuel prices under check and (2) provide the
current government more fiscal freedom to spend before Lok Sabha election.
However, from January 2019, OPEC, Russia and several other producers are likely to launch
new production cuts that aim to remove 1.2 million barrels per day from the market. The
alliance will again meet in April, 2019 to determine whether market conditions warrant keeping
the curbs in place which expire in June, 2019. This can result in some upward spurt in oil prices
from the current levels. But we believe that if developed market growth slows down then it will
impact oil prices negatively.
India’s macro position depends meaningfully on oil given its influence on several key variables
– a USD 10/bbl change in crude oil prices results in (1) 55 bps impact CAD/GDP, (2) 30-35 bps
impact on inflation & (3) modest impact on Gross Fiscal Deficit through higher subsidies on
kerosene and LPG.
Kotak Securities – Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 82019 Market Strategy January 2019
DOMESTIC EVENTS LINED UP FOR 2019
The recent fall in the crude price will lead to some improvement in the macro-economic
prospects of India and alleviation of inflationary and currency related concerns. Easing of
inflation has increased the probability of rate cut by RBI as early as February itself but GST
collections and upcoming divestments by Government will be keenly watched out in order to
maintain fiscal discipline. With an election heavy first half of the year, volatility is likely to
remain.
GST meet in Jan, 2019
In order to streamline GST, government during Dec, 2018 reduced the tax rate on 23 commonly
used items with tax rate on 7 items in the 28% slab has been brought down. With the latest tax
cuts, only 28 items remain in the 28% slab, most of them either luxury or sin items with the
exception of cement and automobile components which still remain within the 28% bracket.
The GST Council in its next meeting in January, 2019 would consider rationalization of tax
rates on residential properties and raising the threshold limit for Micro, Small and Medium
Enterprises (MSMEs) from the current Rs.20 lakh. At present, the Goods and Service Tax (GST)
is not to be levied on buyers of real estate properties for which completion certificate is issued
at the time of sale. However, 12 per cent GST is applicable on sale of under-construction
property or ready to move in flats where completion certificate is not issued at the time of sale.
Any decision on the same is expected to be positive for organized real estate players.
Union Budget or Vote-on-account in Feb 2019
As against the general practice of government coming out with a Vote on accounts in an
election year, there are reports suggesting that government may present a full-fledged Union
Budget before the election schedule for Lok Sabha commences from April 2019. If it’s an
interim budget or vote-on-accounts, then we expect the new government to present a full-
fledged budget in July 2019.
Government had budgeted a 3.3% GFD/GDP for FY19 while we expect it to be around 3.5% for
FY19. While GST collections are expected to be lower than the government’s initial target, but
with a monthly run rate of Rs 900 bn (with centre’s portion of nearly Rs 400 bn per month),
overall net tax collections are likely to grow by 12% in next year. On expenditure side, we expect
expenditure growth of 10% led by 10% growth in revenue expenditure and 10% growth in capital
expenditure.
RBI policy meet to be eyed in Feb, 2019
Easing of CPI inflation to 2.33% in Nov’18 and moderation in the prices of cereals, vegetable,
fuel and light has increased the probability of a rate cut in the February meeting itself. Though
minutes of the Dec’18 MPC meeting reaffirmed that the sharper-than-expected softening of
food inflation had been abrupt and thus faces the risk of a reversal. With CPI inflation expected
to average around 3.6% for FY19, we expect MPC to change their stance in the next monetary
policy and expect a 50 bps rate cut in CY2019. The RBI will be watchful of (1) global factors
such as developed markets Central Banks’ monetary policies, crude price movements and (2)
domestic factors such as any sharp and sudden reversal in inflation of food items.
Core inflation also moderated to 5.7% in Nov’18 driven by softening in inflation across housing,
health and personal care though the print over Nov’17 continued to be supported by transport,
education, and health items. Excise cuts and the recent correction in oil prices have begun to
weigh on transport and communication segment, moderating to 6.1%. Sequentially, core
inflation stood flat after expanding by 1% MoM in October.
Kotak Securities – Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 92019 Market Strategy January 2019
Elections and result announcement– April/May 2019
With the recent setback suffered in three state elections, BJP is likely to up its ante for the Lok
Sabha elections in April-May 2019 and may announce populist measures in the coming
months. Loan waivers, as they were helpful in winning the recent three state elections, could
be a tool to garner extra votes. This may be good for banks in near term but will have a
structural negative impact on the government finances and deficit likely spiraling into higher
fiscal deficit and higher interest rates.
On the outcome of the elections, we believe that BJP still enjoys a better chance given the
popularity of PM Narendra Modi. Post losing out all the three key state elections of Rajasthan,
Madhya Pradesh & Chhattisgarh, it is not going to be very easy like in 2014. These three states
contributed significantly to the BJP’s superlative performance in the 2014 general elections.
However, we note that BJP’s vote share loss was only 4-8% in all these three states in the
recent state elections. We would have a positive stance on the market if there is a clear
mandate for either a BJP/Congress led coalition Government. In case of a fractured mandate
and a weak third front kind of coalition formation would be perceived negatively by the
markets.
Along with general elections in April-May 2019, major states such as Andhra Pradesh, Haryana,
Maharashtra and Odisha and smaller states such as Arunachal Pradesh and Sikkim will also
hold state elections between April and October 2019.
Election schedule
S No. Elections Term completion date Election Month Total No of seats
1 Lok Sabha 03.06.2019 Apr-May, 2019 543+2
2 Sikkim 27.05.2019 Apr-May, 2019 32
3 Arunachal Pradesh 01.06.2019 Apr-May, 2019 60
4 Odisha 11.06.2019 May-June, 2019 147
5 Andhra Pradesh 18.06.2019 May-June, 2019 175
6 Haryana 02.11.2019 Sep-Oct, 2019 90
7 Maharashtra 09.11.2019 Sep-Oct, 2019 288
8 Jharkhand 05.01.2020 Nov-Dec, 2019 81
9 NCT Delhi 22.02.2020 Jan-Feb, 2020 70
10 J&K 16.03.2021 Jan-Feb, 2021 87
Source: Election commission
Focus on economic and earnings recovery – 2HCY19
With a sharp reduction in the crude prices from the peak seen in Oct, 2018, rupee appreciating
to 69.69 a Dollar, inflationary expectations coming down and strong IIP growth led by capital
goods & construction has improved the macroeconomic condition of our economy. Our
economist expects FY20 GDP growth at 7.2%, average CPI inflation at 4.1% with March-2020
inflation target of 4.3% and CAD at 2.6% of GDP.
Macroeconomic position
FY16 FY17 FY18 FY19E FY20E
Real GVA growth (%) 8.1 7.1 6.5 6.9 7
CPI inflation (%) 4.9 4.5 3.6 3.6 4.1
WPI inflation (%) -3.6 1.8 2.9 4.5 3.3
IIP growth (%) 3.3 4.6 4.4 4.8 5.2
GFD/GDP (%) 3.9 3.5 3.5 3.5 3.2
CAD/GDP (%) -1.1 -0.7 -1.9 -2.7 -2.6
BOP ($ bn) 17.9 21.6 43.6 -20.1 -6.7
USD/INR (average) 65.4 67.2 64.5 69.9 72
Source: RBI, CEIC, Kotak Institutional Equities
Kotak Securities – Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 102019 Market Strategy January 2019
As per our institution forecast, Nifty earnings are likely to grow by 14%/27% for FY19/20
respectively and a significant proportion of earnings growth is likely to be led by banks (i.e.
NPL resolution) & diversified NBFC (i.e. improved liquidity conditions). These two sectors alone
are expected to contribute around 60% of incremental profits of the Nifty Index in FY20. Any
disappointment in earnings of banking sector in FY20 could lead to sharp correction in the
FY20E of Nifty EPS. On a broader basis, Banks, IT services, and oil & gas sectors are likely to
drive incremental profits for Nifty in the next two years.
Sector outlook
Sectors 2019 Outlook
Automobiles Lower crude prices to help the sector. Current slowdown in volumes has made stock prices
attractive. Raw Material price situation likely to improve in FY20E.
Auto ancillaries Healthy replacement demand and recovery in volume growth expected in FY20E. Tyre
stocks also look appealing. Exports and currency could aid growth in FY20.
Corporate Banks Expect sharp surge in earnings of corporate banks due to steep decline in loan-loss
provisions. NPL cycles has peaked & NCLT resolutions happening.
Building Materials Valuations have gone far below 10 year averages. Challenges still persist on the demand
side for the building material sector, but we expect leaders to outperform in terms of better
cost structure.
Construction Many near term concerns like, financial closures, NBFC funding & election hangover should
abate from middle of next year. Beaten down prices make valuations attractive.
Power Power demand has revived. Capacity addition in non-renewable segment has been
miniscule leading to improvement in utilization levels.
Metals & Mining Global growth to be steady in CY19. Amongst LME, Aluminium could see good growth
prospects. Mining companies could also do well in FY20.
Information Tech. The real benefit of currency depreciation will reflect in FY20 earnings. Demand across
sectors including BFSI is healthy.
Source: Kotak Securities – Private Client Research
Kotak Securities – Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 112019 Market Strategy January 2019
FII and MF inflows
Overseas funds have remained net buyers in last two months of Nov’18 & Dec’18 led by INR
appreciation against the USD and steep fall in crude price. YTD in this calendar year, FIIs have
sold stocks worth Rs.329 bn whereas domestic Mutual Funds have bought stocks worth
Rs.1180.5 bn. However, on a monthly basis, FII inflows stood at Rs.35.31 mn till 27th Dec’18
and MF inflows stood at Rs.5.13 bn.
Back to back we had two years of net annual investment of USD 17-18 bn by local mutual funds
into Indian equities. Average monthly SIP flows which was ~Rs.50 bn in CY17 has moved up
to ~Rs.73 bn in CY18. After 2011, FIIs were net sellers for the first time in CY18 (~USD 4.6 bn),
but they have turned buyers in the last two months. Going forward if we see Fed pausing
sometime in the first half of CY19 then we can expect FII inflows to resume in emerging
markets and India. Flows in CY19 could also be a function of the election outcome.
FII/MF
40,000
30,000 FII MF
20,000
10,000
-
(10,000)
(20,000)
Jul
Jul
Sep
Sep
Sep
Jan_16
Jan_17
Jan_18
Mar
May
Mar
May
Mar
May
Nov
Nov
July
Nov
Source: Bloomberg
Kotak Securities – Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 122019 Market Strategy January 2019
Valuation and Outlook
Based on 14%/27% estimated growth in earnings of FY19E/20E, the Nifty is currently trading
at 19.8x/15.8x FY19E/20E, respectively. Valuation of Nifty looks reasonable when viewed
against recent historical valuations of ~18-20x on forward PE basis (mainly due to high
earnings growth expectation). However, we note that valuations of ‘quality’ stocks are quite
expensive while those of ‘value’ stocks are very inexpensive. In a Bear case (i.e. a fractured
mandate in Central elections) we expect Nifty to range between 10,000-10,500 by end of
Dec’19, while in Bull case (i.e. either a clear mandate or BJP/Congress led coalition
Government) we expect Nifty to range between 12,500-13,000 by end of Dec’19.
Nifty EPS vs valuation
Nifty EPS (Rs.) PE-14 PE-15 PE-16 PE-17 PE-18 PE-19
600 8,400 9000 9600 10200 10800 11400
620 8,680 9300 9920 10540 11160 11780
640 8,960 9600 10240 10880 11520 12160
660 9,240 9900 10560 11220 11880 12540
680 9,520 10200 10880 11560 12240 12920
700 9,800 10500 11200 11900 12600 13300
720 10,080 10800 11520 12240 12960 13680
740 10,360 11100 11840 12580 13320 14060
760 10,640 11400 12160 12920 13680 14440
780 10,920 11700 12480 13260 14040 14820
Source: Kotak Private Client Group Estimates
Based on Bloomberg consensus estimates, the one year forward PE of Mid Cap Index has now
converged near Nifty PE of ~16x. We feel the froth and over valuation in the Mid Cap space
has come off sharply due to the underperformance vis-à-vis Nifty. Going by recent
developments we can presume that the recent lows of Mid & Small Index could be the floor for
them. Mid & Small caps are an ocean and many of them are now trading below their 10 year
average valuations. We feel there is very high probability of mid & small caps outperforming
the large caps in CY19. For this thing to fully materialize in CY19, we need earnings recovery
and a clear mandate or a single party led coalition Government at the Centre. Scope of
valuation re-rating remains very high in host of mid & small caps provided earnings come in
line with estimates.
There is wide dispersion in valuations of sectors. Few sectors like ‘retail’ led private sector
banks, certain NBFCs, consumer staples, consumer discretionary and pharma sector are
trading at rich valuations. On the other hand ‘corporate’ private sector banks, PSU banks,
utilities, metals & mining, and oil & gas sectors trade at inexpensive valuations. Based on our
institutional research forecasts, banks, IT services, metals & mining and oil & gas sectors are
expected to drive incremental profits of the Nifty-50 Index in FY19-20E.
Our strategy, keeping in mind the volatility expected in 2019 led by factors such as developed
market slowdown, US-China trade fears, Brexit, domestic elections, oil prices, would be to have
a bottom up approach and pick and choose good quality, beaten down stocks from respective
sectors. To weather the on-going volatility which may remain till middle of CY19 (i.e. till Central
elections), it is ideal to have higher allocation into high earnings growth large caps and mid-
caps (with strong management pedigree and reasonable valuations). Among the large caps
one can focus on select stocks from sectors like corporate banks, select NBFCs, IT services,
metals & mining and oil & gas. In the mid caps, one can focus on select stocks from sectors
like capital goods, construction and auto ancillaries.
Kotak Securities – Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 132019 Market Strategy January 2019
One Yr Fw PE chart: Nifty Vs Mid Cap Index Bond PE Vs Fw Equity PE of Nifty
30.0 21.0
NSE Mcap Nifty 50 Bond PE Nifty 50
19.0
25.0
17.0
20.0
15.0
15.0 13.0
11.0
10.0
9.0
5.0 7.0
Aug-07
Aug-08
Aug-09
Aug-10
Aug-11
Aug-12
Aug-13
Aug-14
Aug-15
Aug-16
Aug-17
Aug-18
Aug-07
Aug-08
Aug-09
Aug-10
Aug-11
Aug-12
Aug-13
Aug-14
Aug-15
Aug-16
Aug-17
Aug-18
Source: Bloomberg Source: Bloomberg
MSCI Emerging Market Vs MSCI India 1 Yr rolling FW PE MSCI India Vs MSCI EM - Premium (on FW PE basis)
21 MSCI EM Fw PE 80%
19 MSCI India FW PE 70%
17 60%
15 50%
13 40%
11 30%
9 20%
7 10%
5 0%
Sep-08
Sep-09
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
Sep-16
Sep-17
Sep-18
Sep-08
Sep-09
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
Sep-16
Sep-17
Sep-18
Source: Bloomberg Source: Bloomberg
Kotak Securities – Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 142019 Market Strategy January 2019
Recommended Stocks
Sr.No. Company CMP Target Price Potential Upside 52 Week H/L Mkt Cap
(Rs.) (Rs.) (%) (Rs.) (Rs.mn)
1 State Bank of India 300 380 26.80% 335 / 232 2673807
2 Cholamandalam Inv. & Fin 1253 1425 13.70% 1761 / 1038 195909
3 Tech Mahindra 719 865 20.30% 781 / 500 705292
4 Petronet LNG 229 280 22.30% 254 / 197 343500
5 Power Grid Corp. 200 250 25.00% 217 / 174 1046318
6 Finolex Industries 549 642 16.90% 713 / 460 68128
7 Maharashtra Seamless 489 805 64.50% 552 / 406 32783
8 JK Paper 156 200 28.50% 194 / 97 27735
9 Mold-Teck Packaging 270 320 18.50% 374 / 246 7477
Source: Kotak Institutional Equities; Kotak Securities – Private Client Research & Bloomberg
Kotak Securities – Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 15State Bank of India
Analyst: MB Mahesh, CFA / Nischint Chawathe / Dipanjan Ghosh (Email: kspcg.research@kotak.com; Contact: +91 22 6218 6427)
CMP (Rs) Target Price (Rs) Potential Upside (%) 52 Week H/L (Rs) Mkt Cap (Rs mn)
300 380 26.8% 335 / 232 2673807
Key Highlights:
SBI reported a profit of Rs 9.5 bn in 2QFY19, as provisions declined 40%. Revenue declined 12% YoY despite NII
growth of 12% YoY, primarily due to weak fee income growth and lower contribution from treasury book.
2QFY19 saw the second consecutive quarter of improvement in gross and net NPL ratios. Gross NPLs declined 75
bps QoQ to less than 10% while net NPLs declined 45 bps QoQ on to 4.8% of loans. Slippages for the quarter
declined to 2.3% of loans with most of the corporate slippages coming from the watch-list.
SBI has negligible exposure to IL&FS and subsidiaries. The bank reported Rs 2.5 bn exposure to the holding
company and Rs 35 bn (0.01% of loans) of exposure to the group via SPVs (around 14 in number).
Overall loan growth (net) improved to 9% YoY driven by robust growth in retail loans and gradual revival in corporate
loan growth; albeit at a muted pace. On gross basis, retail loans saw robust increase at 14% YoY. SME growth stood
at 5% YoY.
Retail segment constitutes ~28% of the loan book (up 120 bps YoY). Corporate book comprises 36% of loan book
(up 70 bps QoQ). Bank will look at maintaining the share of corporate book in 36-40% range based on the
opportunities in the corporate segment.
CASA ratio stood at 44% in 2QFY19 (up 50 bps YoY and 20 bps QoQ) led by strong growth in SA balances. SA
growth improved to 9% YoY while CA revived to 6% YoY. Bank has benefitted from higher average balances in
savings accounts post demonetization, greater traction in corporate salary packages and new current accounts.
CAR and CET-1 stood comfortable at 12.6% and 9.7%, respectively.
We expect the stock to re-rate as we believe -
the bank has embarked on a favorable journey of NPL resolution; loan growth is accelerating; NIM has scope for
expansion; Operating expenses are not showing any negative surprises.
Financials (Rs mn)* FY18 FY19E FY20E Price Performance (3 Years)
Net Interest Income 748,537 883,160 1,011,236
State Bank of India
Non-interest Income 446,007 367,283 483,846 150
Nifty
Total Income 1,194,544 1,250,443 1,495,083
Growth (%) 1.4% 4.7% 19.6% 120
PBT (155,282) 95,676 501,653
90
Net profit (65,475) 66,974 351,157
EPS (Rs) (7.7) 7.5 39.3 60
Book Value (Rs) 135.4 156.8 214.7
Feb-16
Feb-17
Feb-18
Nov-15
May-16
Aug-16
Nov-16
May-17
Aug-17
Nov-17
May-18
Aug-18
Nov-18
P/B (x) 2.1 1.8 1.3
Slippages (%) 6.0% 2.5% 1.5% Source: Bloomberg
Gross NPL (%) 10.7% 8.3% 6.8%
Net NPL (%) 5.7% 3.9% 2.6% Share Holding Pattern (%)
ROE (%) -3.2% 3.0% 14.5% Others
RoA (%) -0.2% 0.2% 0.9% 7.5%
Source: Kotak Insitutional Equities
DII
Financials (Rs mn)* 1H-FY18 1H-FY19 % Chg
23.8%
Net Interest Income 361,919 427,041 18.0%
Non-Interest Income 240,217 160,545 -33.2%
Promoter
Total Income 602,136 587,586 -2.4% 58.6%
PBT 38,063 (54,425) -243.0%
PAT 35,871 (39,310) -209.6% FII
10.2%
Slippages (%) 4.2% 2.6%
Source: Kotak Insitutional Equities; *Consolidated Source: Bloomberg
This one pager on the company is extracted from last KIE update dated November 5, 2018 and it does not contain events beyond that date. We take no obligation to update the KIE
recommendations. Above company recommendation is of KIE which has a different rating system than Kotak PCG as disclosed in the end of the report (before Disclaimer). While
source of all other information is taken from Kotak Institutional Equities, the price performance and shareholding pattern chart is inputted by Kotak 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.Cholamandalam Investment & Finance Co Ltd
Analyst: Nischint Chawathe / M B Mahesh CFA / Dipanjan Ghosh / Shrey Singh (Email: kspcg.research@kotak.com; Contact: +91 22 6218 6427)
CMP (Rs) Target Price (Rs) Potential Upside (%) 52 Week H/L (Rs) Mkt Cap (Rs mn)
1253 1425 13.7% 1761 / 1038 195909
Key Highlights:
Cholamandalam's 2QFY19 performance was driven by improving recoveries and control over expenses-exactly in line with
its articulated strategy. NIMs were weak likely due to high growth in low-yield segments like HCV and rising borrowing costs
Current challenges in debt market will put pressure on NIM though liquidity may not be an issue for the company due to its
long track-record, parentage of the Murugappa group and high credit standing
In the past, management had guided that reduction in operating expenses will be one of the key drivers of FY2019E earnings
growth. The company reported 600 bps YoY improvement in operating expenses to loan ratio in 2QFY19-this will likely
continue in the near term.
The company is well positioned from an ALM perspective, It has surplus in all buckets up to 1st year. It has CP of Rs 46 bn.
Management believes that based in its asset profile, it can have short-term borrowings (CP and bank CC) of up to 20%. It has
maintained the ratio at 10-15%; and proposes to bring down the ratio to 10%.
We expect overall yields in vehicle finance to inch up largely on the back of change in AUM mix towards high yielding
products (used CV, older vehicles and tractors) and rise in lending rates. However, rising borrowing cost will put pressure on
net interest margin, with NIM compressing by 20 bps between 1HFY19 and 2HFY19E due to rise in borrowing cost.
Asset quality has improved, with all asset quality metrics showing improvements in recoveries. GNPL declined to 2.8% in
2QFY19 from 4.5% in 2QFY18 and 3% in 1QFY19. Stage 3 loans declined to 3.4% in 2QFY19 from 5.1% in 2QFY18 and 3.6% in
1QFY19. Coverage on stage 3 loans increased to 36.8% from 33.2% in 2QFY18 and 36.5% in 1QFY19.
We expect the positive collection trends to continue over the next few quarters. While NPLs in the vehicle finance business
have almost bottomed out, we find scope of improvement in the home equity business. The company is in the process of
auctioning repossessed properties, which will lead to lower net provisions.
We forecast operating expenses to grow at 15% CAGR over FY2018-21E and cost-loans ratio to moderate to 2.5% by
FY2021E from 3% in FY2018. Slowdown in expansion and cost efficiencies resulting from increase in per branch productivity
is the primary driver.
Financials (Rs mn)* FY18 FY19E FY20E Price Performance (3 Years)
Net Interest Income 26,403 29,570 35,811 330 Cholamandalam Investment & Finance Co Ltd
Growth (%) 52.6% 12.0% 21.1%
280 Nifty
PAT 9,168 11,773 14,273
Growth (%) 27.6% 28.4% 21.2% 230
Net loans 421,985 521,766 626,584 180
Total borrowings 385,351 477,364 573,206 130
EPS (Rs) 58.6 75.3 91.3 80
Book Value (Rs) 326.5 391.2 469.6
Dec-15
Mar-16
Dec-16
Mar-17
Dec-17
Mar-18
Dec-18
Jun-16
Sep-16
Jun-17
Sep-17
Jun-18
Sep-18
P/B (x) 3.6 3.0 2.5
Net Interest Margin (%) 7.1% 6.0% 6.0% Source: Bloomberg
Gross NPL (%) 2.9% 3.0% 3.0%
Net NPL (%) 1.7% 1.9% 1.9% Share Holding Pattern (%)
ROE (%) 19.5% 21.0% 21.2% Others
RoA (%) 2.4% 2.4% 2.4% 10.6%
FY18 is IGAAP; FY19E & FY20E are Ind-AS Source: Kotak Insitutional Equities
DII
Financials (Rs mn)* 1H-FY18 1H-FY19 % Chg 15.9%
Net Interest Income 12,589 14,681 16.6%
PAT 4,136 5,899 42.6% Promoter
53.1%
Gross NPL (%) 4.5% 2.8% -170 bps
NNPL (%) 2.9% 1.6% -130 bps
NIM % 7.1% 6.5% -60 bps FII
20.4%
Cost to Income 41.2% 39.0% -220 bps
Source: Kotak Insitutional Equities; *Consolidated Source: Bloomberg
This one pager on the company is extracted from last KIE update dated November 1, 2018 and it does not contain events beyond that date. We take no obligation to update the KIE
recommendations. Above company recommendation is of KIE which has a different rating system than Kotak PCG as disclosed in the end of the report (before Disclaimer). While
source of all other information is taken from Kotak Institutional Equities, the price performance and shareholding pattern chart is inputted by Kotak 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.Tech Mahindra Ltd
Analyst: Kawaljeet Saluja / Sathishkumar S (Email: kspcg.research@kotak.com; Contact: +91 22 6218 6427)
CMP (Rs) Target Price (Rs) Potential Upside (%) 52 Week H/L (Rs) Mkt Cap (Rs mn)
719 865 20.3% 781 / 500 705292
Key Highlights:
Tech Mahindra is a USD 4.9 bn company with 118390+ professionals across 90 countries, helping over 930 global
customers including Fortune 500 companies. It is a part of the USD 21 bn Mahindra Group.
Tech Mahindra’s profitability will move on a more predictable path after last few years of immense volatility. Base
communications business will deliver mid single digit growth with 5G opportunity being an enhanced contributor.
Tech Mahindra’s telecom business growth potential of 5-7% in FY 2020 without 5G contribution and 8-10% growth
potential in enterprise backed by stable to improving margins. The 5G opportunity can be large with revenue flow
uptick in FY 2021.
5G is a large opportunity for which the company is well positioned due to – 1) enhanced investments in network
capability through LCC, 2) investments in platforms and IP and 3) investments in partnerships to develop an eco-
system play viz. Intel, Rakuten, stake in Altio Star, among others. This positions the company well to capitalize on
the 5G opportunity across networks and IT services, unlike in the past where the participation was restricted to IT
applications.
The manufacturing vertical is within the enterprise segment with over US $1bn+ of annual revenues. Tech Mahindra
has a comprehensive portfolio of offerings, depth in engineering services and strong digital offerings in the
manufacturing vertical.
Financial services accounts for 13.5-14% of revenues for the company. Unlike competition, Tech Mahindra derives
60-70% of revenues from discretionary spending of clients and only 30-40% is from the run the business offerings. It
focus on Tier 2 companies where the competitive intensity is lower.
Tech Mahindra stock has traded at material discount to peers in the past three years due to multiple reasons.
However lot has changed in the past three years including focus on profitable growth, tightening of operations,
investments in automation and digital competencies, better cash conversion and increase in the payout ratio.
Financials (Rs mn) FY18 FY19E FY20E Price Performance (3 Years)
Sales 307,730 350,034 388,542
Tech Mahindra Ltd
Growth (%) 5.6 13.7 11.0 150
Nifty
EBITDA 47,170 63,824 73,966
EBITDA margin (%) 15.3 18.2 19.0 120
PBT 48,789 56,734 67,938
90
Net profit 38,000 42,547 50,667
Adjusted EPS (Rs) 42.6 47.7 56.3 60
Growth (%) 32.7 11.9 18.0
Dec-15
Mar-16
Dec-16
Mar-17
Dec-17
Mar-18
Dec-18
Jun-16
Sep-16
Jun-17
Sep-17
Jun-18
Sep-18
P/E (x) 16.9 15.1 12.8
Source: Bloomberg
ROAE (%) 21.5% 20.8% 21.0% Share Holding Pattern (%)
Free cash flow 20483 32935 44310
Others
Debt/Equity 0.1 0.1 0.1 17.9%
Source: Kotak Insitutional Equities
Promoter
Financials (Rs mn) 1H-FY18 1H-FY19 % Chg DII 36.0%
Revenues 149,425 169,061 13.1% 7.4%
EBITDA 20,404 29,755 45.8%
EBITDA Margin (%) 13.7 17.6
PAT 16,347 19,620 20.0%
PAT Margin (%) 10.94 11.61 FII
38.7%
EPS (Rs) 18.51 22.09 19.3%
Source: Kotak Insitutional Equities Source: Bloomberg
This one pager on the company is extracted from KIE update dated November 22, 2018 & December 17, 2018, company and it does not contain events beyond that date. We take
no obligation to update the KIE recommendations. Above company recommendation is of KIE which has a different rating system than Kotak PCG as disclosed in the end of the
report (before Disclaimer). While source of all other information is taken from Kotak Institutional Equities, the price performance and shareholding pattern chart is inputted by
Kotak 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.Petronet LNG Limited
Analyst: Tarun Lakhotia (Email: kspcg.research@kotak.com; Contact: +91 22 6218 6427)
CMP (Rs) Target Price (Rs) Potential Upside (%) 52 Week H/L (Rs) Mkt Cap (Rs mn)
229 280 22.3% 254 / 197 343500
Key Highlights:
PLNG has set up the country's first LNG receiving and regasification terminal at Dahej and another terminal at
Kochi. While the Dahej terminal has a nominal capacity of 15 MMTPA, the Kochi terminal has a capacity of 5
MMTPA. It is in the process to build a third terminal at Gangavaram, Andhra Pradesh.
It is promoted by GAIL (India) Limited, Oil & Natural Gas Corporation Limited, Indian Oil Corporation Limited and
Bharat Petroleum Corporation Limited. They hold 12.5% stake each.
We remain sanguine on medium-term earnings growth driven by expansion of Dahej terminal by Jun’19, ramp-up in
Kochi utilization post a likely delayed commissioning of pipeline and contractual escalation in tariffs.
Dahej expansion project (+2.5 mtpa of re-gasification capacity) remains ahead of schedule and may complete by
April 2019; the company, however, has maintained its commissioning timeline of June 2019.
We seek comfort on incremental volumes for Dahej terminal post expansion, noting (1) healthy 14% yoy increase in
LNG consumption in India during 1HFY19, which has led to sharp increase in utilization at Hazira (only-other fully
available terminal) to 95% in 1HFY19 as compared to 59% in FY2018 and (2) apparent delays in
commissioning/commercialization of new LNG terminals at Mundra and Jaigadh.
Likely delay in Kochi-Mangalore pipeline due to Kerala floods. We expect slight delay in commissioning of Kochi-
Mangalore pipeline versus earlier timeline of December 2018 due to likely slower pace of work post recent floods in
Kerala. Once the pipeline gets commissioned, Kochi utilization is expected to ramp up led by connectivity with
several new customers on way to Mangalore, including MCF, MRPL and OMPL.
We remain positive on PLNG and recommend BUY with a TP of Rs. 280 seeking adequate margin of safety from
inexpensive valuation and healthy dividend yield. We have discounted future cashflows at 12% WACC.
Uncertainty on cash utilization remains a key overhang.
Financials (Rs mn)* FY18 FY19E FY20E Price Performance (3 Years)
Sales 305,986 451,413 445,966 250 Petronet LNG Limited
Growth (%) 24.3 47.5 (1.2) 220 Nifty
EBITDA 33,194 37,018 41,856 190
EBITDA margin (%) 10.8% 8.2% 9.4% 160
PBT 30,621 36,158 41,554 130
Net profit 20,826 23,965 27,383 100
Adjusted EPS (Rs) 13.9 16.0 18.3 70
Growth (%) 21.9 15.1 14.4
Dec-15
Mar-16
Dec-16
Mar-17
Dec-17
Mar-18
Dec-18
Jun-16
Sep-16
Jun-17
Sep-17
Jun-18
Sep-18
P/E (x) 16.5 14.3 12.5
Adjusted CROCI 25.5 27.8 29.4
Debt/equity (%) 25.0 17.0 9.0 Source: Bloomberg
Net debt/equity 17.0 5.0 (5.0)
ROAE (%) 21.2 21.1 22.2 Share Holding Pattern (%)
RoACE (%) 22.7 27.0 31.3 Others
Free cash flow 16,913 23,009 24,233 14.5%
Source: Kotak Insitutional Equities; *Consolidated
Financials (Rs mn)* 1H-FY18 1H-FY19 % Chg DII
Revenues 142,053 199,145 40.2 11.5%
Promoter
EBITDA 16,499 18,391 11.5 50.1%
EBITDA Margin (%) 11.6% 9.2%
PAT 10,264 11,499 12.0
PAT Margin (%) 7.2% 5.8% FII
23.9%
EPS (Rs) 6.9 7.8 13.0
Source: Kotak Insitutional Equities; *Consolidated Source: Bloomberg
This one pager on the company is extracted from last KIE update dated November 5, 2018, company and it does not contain events beyond that date. We take no obligation to
update the KIE recommendations. Above company recommendation is of KIE which has a different rating system than Kotak PCG as disclosed in the end of the report (before
Disclaimer). While source of all other information is taken from Kotak Institutional Equities, the price performance and shareholding pattern chart is inputted by Kotak 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.Power Grid Corporation of India Limited
Analyst: Murtuza Arsiwalla / Samrat Verma (Email: kspcg.research@kotak.com; Contact: +91 22 6218 6427)
CMP (Rs) Target Price (Rs) Potential Upside (%) 52 Week H/L (Rs) Mkt Cap (Rs mn)
200 250 25.0% 217 / 174 1046318
Key Highlights:
Power Grid Corporation of India Limited, is a Navratna state-owned electric utility company.
Power Grid undertakes transmission of electricity through Inter-State Transmission System (ISTS). It transmits about
50% of the total power generated in India on its transmission network.
Power Grid continues to report healthy earnings growth (+8% yoy) with incremental asset capitalization of Rs47.3 bn
and capex of Rs58.7 bn in 2QFY19.
Concerns on growth beyond FY2021E and the regulatory review may be overplayed, and are already factored in trading
multiples.
Visibility for projects beyond FY2022E will likely improve closer to end-FY2019 with a likely spike in approval and
ordering activity.
Electricity demand in the country has been rising steadily and is expected to rise further. In order to meet the increasing
demand for electricity in the country, strengthening of the transmission network is needed.
It is exploring new business areas like Smart Grid / Smart City Projects, Energy Audit & Energy Efficiency, Desert Power
of India / Integration of SOlar Power Projects, Dedicated Transmission System for Railways & other bulk users, Off-
Shore Wind Generation Integration, Distribution(Wire Business) and Manufacturing of Transmission Products - TL Tower
parts, Conductor, Insulator, etc.
CERC has left the rate of regulated return unchanged at 15.5%, a key matter of debate over the past two years since the
reduction of regulated return for renewable capacities.
Stock performance of regulated utilities has borne the brunt of regulatory uncertainty and government stake sale.
We view the current draft regulations favorably as they would put to rest an element of uncertainty, subject to
finalization of regulations post the public hearing (end-January 2019).
With Power Grid starting investment in interstate transmission infrastructure, it can deliver high growth earnings
trajectory up to FY2022E based on incremental project visibility.
Financials (Rs mn)* FY18 FY19E FY20E Price Performance (3 Years)
Sales 301,140 361,716 402,531 Power Grid Corporation of India Limited
Growth (%) 17.1 20.1 11.3 180 Nifty
EBITDA 262,992 307,594 342,974 160
EBITDA margin (%) 87.3 85.0 85.2 140
PBT 104,906 128,118 145,743 120
Net profit 82,527 100,453 116,174 100
Adjusted EPS (Rs) 15.8 19.2 22.2 80
Growth (%) 10.0 21.5 15.6
Dec-17
Dec-18
Dec-15
Dec-16
Mar-18
Mar-16
Mar-17
Jun-18
Sep-18
Jun-16
Sep-16
Jun-17
Sep-17
P/E (x) 12.7 10.4 9.0
BV (Rs/share) 109.0 121.0 135.0
Net Debt / Equity (%) 220.0 203.0 187.0 Source: Bloomberg
ROE (%) 17.5 18.1 18.0
ROCE (%) 8.0 8.9 9.4 Share Holding Pattern (%)
Net cash (debt) (1,234,302) (1,301,502) (1,354,593)
Others
Source: Kotak Institutional Equities; *Consolidated 5.0%
DII
Financials (Rs mn)* 1H-FY18 1H-FY19 % Chg 15.7%
Revenues 145,848 170,244 14.3
EBITDA 128,259 145,139 11.6
Promoter
EBITDA Margin (%) 87.9% 85.3%
56.3%
PAT 41,935 45,500 7.8 FII
PAT Margin (%) 28.8% 26.7% 23.1%
EPS (Rs) 8.0 8.7 8.0
Source: Kotak Institutional Equities; *Consolidated Source: Bloomberg
This one pager on the company is extracted from last KIE update dated November 6, 2018, December 17, 2018 & company annual report and it does not contain events beyond
that date. We take no obligation to update the KIE recommendations. Above company recommendation is of KIE which has a different rating system than Kotak PCG as disclosed
in the end of the report (before Disclaimer). While source of all other information is taken from Kotak Institutional Equities, the price performance and shareholding pattern chart is
inputted by Kotak 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.Finolex Industries Ltd
Analyst: Pankaj Kumar (Email: pankajr.kumar@kotak.com; Contact: +91 22 6218 6434)
CMP (Rs) Target Price (Rs) Potential Upside (%) 52 Week H/L (Rs) Mkt Cap (Rs mn)
549 642 16.9% 713 / 460 68128
Key Highlights:
Finolex Industries Ltd (FIL) is the leading brand in PVC pipes and fittings market catering to agri and plumbing
segment with ~70% of FIL’s revenue is contributed by agri segment.
The company manufactures and sells PVC pipes, fittings and PVC resin. 82% of its revenue is contributed by PVC
pipes and fittings and balance 18% is contributed by PVC resins.
FIL is the largest player in terms of market share in agriculture pipes segment and is a leading player in PVC resin
business (after RIL and Chemplast) in India.
FIL has three pipes manufacturing plants located in Pune (Maharashtra), Ratnagiri (Maharashtra) and Masar (near
Vadodara, Gujarat) with installed capacity of 330000 tonne per annum.
FIL has strong distribution network with over 700 dealers and 18,000+ retail touch points across country.
FIL is targeting to grow its product range across both agri and non-agri pipes in the longer run. Addition of CPVC
pipes is one such step in that direction. Further, it is expanding its product range in fittings segments.
Based on strong brand and quality products, the company passes on any increase in raw material prices which also
protects margin during rising raw material prices.
The company is positive on its growth in pipes segment in the longer run. It believes that GST will have positive
impact for organized players in the longer run.
The company intends to add 10-15% capacity through internal accruals in the next 2 years. Its capacity addition
plans is based on achieving double digit volume growth in the longer run.
We believe that FIL would be a major beneficiary from government’s focus on irrigation and improvement in rural
consumption in long term.
The stock is presently trading at a discount to its peers in the plastic/PVC pipes sector.
Financials (Rs mn)* FY18 FY19E FY20E Price Performance (3 Years)
Sales 27,378 31,852 36,793 Finolex Industries Ltd Nifty
300
Growth (%) 5.2 16.3 15.5
EBITDA 4,839 5,528 6,349 250
EBITDA margin (%) 17.7 17.4 17.3 200
PBT 4,388 5,048 5,855 150
Net profit 2,985 3,434 3,983 100
Adjusted EPS (Rs) 24.1 27.7 32.1 50
Growth (%) (15.2) 15.0 16.0
Mar-16
Mar-17
Mar-18
Dec-15
Jun-16
Sep-16
Dec-16
Jun-17
Sep-17
Dec-17
Jun-18
Sep-18
Dec-18
P/E (x) 22.8 19.8 17.1
BV (Rs/share) 222.8 238.8 259.2
Dividend / share (Rs) 10.0 10.0 10.0 Source: Bloomberg
ROE (%) 11.8 12.0 12.9
ROCE (%) 16.1 16.4 17.6 Share Holding Pattern (%)
Net cash (debt) (773) (98) 1,399
Source: Company; Kotak Securities - Private Client Research *Consolidated
Others
34.4%
Financials (Rs mn)* 1H-FY18 1H-FY19 % Chg
Revenues 12,059 13,705 13.6 Promoter
52.7%
EBITDA 1,802 3,188 76.9
EBITDA Margin (%) 14.9% 23.3%
PAT 1,080 1,797 66.3 DII
9.5% FII
PAT Margin (%) 9.0% 13.1%
3.4%
EPS (Rs) 8.7 14.5 66.3
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 November 27 2018 and it does not contain events beyond that date.
Above company recommendation is of Kotak Securities – Private Client Research which has a different rating system than Kotak Institutional Equities as disclosed in the end of
the report (before Disclaimer). It is advisable to read the full Kotak Securities – Private Client Research report before taking any investment decision on the above company
recommendation.Maharashtra Seamless Limited
Analyst: Ruchir Khare (Email: ruchir.khare@kotak.com; Contact: +91 22 6218 6431)
CMP (Rs) Target Price (Rs) Potential Upside (%) 52 Week H/L (Rs) Mkt Cap (Rs mn)
489 805 64.5% 552 / 406 32783
Key Highlights:
MSL business suffered severely between FY12-16 due to dumping of cheap products by Chinese players into
Indian markets. Earlier until 2012, MSL used to command nearly 70% market share in India.
In a bid to protect the domestic industry from cheap Chinese imports, Directorate General for Anti-dumping and
Allied Duties (DGAD) had recommended to impose provisional anti-dumping duty on import of certain types of iron
and steel pipes from China used in oil and gas exploration including seamless pipes.
Anti-dumping duty levied on Chinese imports along with fading competition from other Indian players offers
advantageous position to the MSL.
MSL is well positioned to benefit from recovery in increasing capex in domestic hydrocarbon industry. New
Exploration Licensing policy (NELP) and Hydrocarbon Exploration Policy (HELP), has emphasized on maximizing
the domestic exploration of oil and gas to attain self-sufficiency by 2022. We believe that this auger well for
company’s business as it would entail huge capital expenditure of over Rs 2.3 trillion through FY17-20 by major
Hydrocarbon companies
International footage offers geographical diversification to take advantage of the growing demand in Europe/US
market as well.
MSL has emerged as the lead bidder for USPL in NCLT. Management highlighted that USPL has capacity of 350000
MT and potential acquisition would enhance MSL capacity substantially (MSL current Seamless pipe capacity is
reported at 550000 MT).
We project 27.9% CAGR between FY18-20 in consolidated revenues from Rs.21.4 Bn in FY18 to Rs 35.1 Bn in
FY20E. In our projections, we build EBITDA margin at 20.5% and 21.4% in FY19E and FY20E respectively.
Financials (Rs mn)* FY18 FY19E FY20E Price Performance (3 Years)
Sales 21,497 28,282 35,170 Maharashtra Seamless Limited Nifty
Growth (%) 49.9 31.6 24.4 360
EBITDA 3,110 5,798 7,537 310
260
EBITDA margin (%) 14.5 20.5 21.4
210
PBT 2,921 5,476 7,115
160
Adjusted Net profit 2,001 3,724 4,838 110
Adjusted EPS (Rs) 29.9 55.6 72.2 60
Growth (%) 73.1 86.1 29.9
Dec-15
Mar-16
Jun-16
Sep-16
Dec-16
Mar-17
Jun-17
Sep-17
Dec-17
Mar-18
Jun-18
Sep-18
Dec-18
P/E (x) 16.4 8.8 6.8
BV (Rs/share) 437.3 489.2 557.4
Net debt/equity (x) 0.2 0.2 0.2 Source: Bloomberg
ROE (%) 7.1 12.0 13.8
ROCE (%) 5.6 10.4 12.0 Share Holding Pattern (%)
Free cash flow (1,589) 716 1,465
Source: Kotak Securities - Private Client Research; *Standalone Others
27.9%
Financials (Rs mn)* 1H-FY18 1H-FY19 % Chg
Revenues 9,343 13,109 40.3
EBITDA 1,208 2,721 125.2
DII Promoter
EBITDA Margin (%) 12.9% 20.8% 7.6% 62.1%
Adjusted PAT 712 1,892 165.7
Adjusted PAT Margin (%) 7.6% 14.4% FII
2.4%
Adjusted EPS (Rs) 10.6 28.2 166.0
Source: Kotak Securities - Private Client Research; *Standalone Source: Bloomberg
This one pager on the company is extracted from last Kotak Securities – Private Client Research update dated November 6, 2018 and it does not contain events beyond that date.
Above company recommendation is of Kotak Securities – Private Client Research which has a different rating system than Kotak Institutional Equities as disclosed in the end of
the report (before Disclaimer). It is advisable to read the full Kotak Securities – Private Client Research report before taking any investment decision on the above company
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