India | Strategy Strategy Monthlyjmflresearch.com/.../pdf/IndiaStrategyMonthly-Sept2016.pdf ·...

JM Financial Institutional Securities Limited

Trim midcaps; Tactical overweight in IT services

Over the past month, the broader market rose another 1.7% and is now up

10.8% YTD as net FII inflows topped US$1.5bn for the month and to US$4.8bn

YTD. As is well articulated by now, the 12m forward market PE at 17.7x

remains supported more by compression of cost of capital than growth reset.

In 1QFY17, the PAT for Nifty grew by 9% YoY (ex. financials at 14%) vs. 1% in

4Q16 and above muted expectations but still fell short of the double-digit

run rate expected for the full year. Earnings growth was strong in materials

(cement), industrials (Eicher, improving T&D), pharma and oil & gas and came

in lower than estimated in financials ex-NBFCs (-2%), IT services and in

telecom (-18%). Our recommended, bottom-up, model portfolio continues to

recommend heavyweight in private financials (banks and NBFCs), domestic-

centric healthcare, and consumer discretionary (2-wheelers), while

maintaining tactical overweight in IT services, primarily through Infosys. In

view of recent performance, we recommended removing weight from Titan

(3% weight to 0%), Cholamandalam Finance (2% to 0%), Techno Electric,

Ashoka Buildcon (0.5% to 0%) and adding to cash (3.3% to 9.3%)

Performance of JM portfolio, winners/losers: Since inception in Jan’15, our

model portfolio has outperformed the Nifty by 14.5% (excl. transaction costs)

with highest contributors being financials (35% wt/39% return) and consumer

discretionary (10%/30%) even as IT (17%/-5%) and consumer staples (5%/-5%)

dragged it down. The best performers were Bajaj Finance (220% holding

period returns) and Bajaj Finserv (136%) while the bottom two are TechM (-

27%) and IPCA (-26%). YTD, the model portfolio has outperformed by 420bps

with Bajaj Finance and HDFC Bank being highest contributors. 1.

Earnings ahead of toned down estimates in Q1FY17: 1Q17 Nifty earnings

(PAT) grew at 9% YoY (ex. financials at 14%) recovering from the lows of ~1%

in 4Q16 (due to high credit costs for financials). Earnings growth was strong

in materials (cement), industrials, pharma and oil & gas. PAT, however,

declined for telecom (-18%) and financials (-2%) during the quarter. For JM

coverage, earnings grew at 10.8% YoY (ex. financials at 17%) and recovered

from a 9% decline in 4Q16 with similar trend across sectors. The

Beats/Misses ratio stands at 110% (vs last four-quarter average of 76%) with

strong results in NBFC( 6/2), Metals (3/1), Utilities (2/1) and Media (1/0)

while Pvt. Banks (1/3), SOE banks, Midcaps and IT (2/4) lagged.

Telecom auctions key to govt. capex in 2HFY17: YTD, the fiscal deficit

stands at `3.94tn (2.6% GDP/73.7% FY17BE) vs. `3.85tn (2.8% GDP/69.3%

FY16BE) in FY16 on healthy growth in revenue receipts (22% YoY) vs. nominal

total expenditure (9.3% YoY). The revenue generation is boosted by the

healthy net tax revenue (44% YoY), while non-tax revenue actually fell (-38.2%

YoY). The government seems to be taking a cautious approach as far as

spending goes with capital expenditure declining 17.1% YoY that we expect

to be corrected in 2H. Given the aggressive launch prices of Reliance JIO’s

mobile services, we now expect higher interest in the auctions vs. our earlier

scenario of the auctions’ missing the government’s budget targets. 2.

Changes to the model portfolio: In view of the recent performance, we

recommend removing: a) Titan (current weight 3% to 0%) as a steep rise in gold

prices (+24% YTD) could negatively impact jewellery demand and in turn revenue

growth expectations, b) Cholamandalam Finance (2% to 0%) due to margin risks

in home equity (c.30% exposure), c) Techno Electric (0.5% to 0%) due to

suppressed RoEs on delays in wind asset sales, and d) Ashoka Buildcon (0.5% to

0%) as revenues in the construction business has not picked up as expected. We

recommend adding to cash (3.3% to 9.3%). 3.

Suhas Harinarayanan

[email protected]

Tel: (+91 22) 66303037

Varsha Bhansali

[email protected]

Tel: (+91 22) 6630 3372

Arshad Perwez

[email protected]

Tel: (+91 22) 66303080

Exhibit 1: India vs. Others

Source: Bloomberg, JM Financial

Exhibit 2: Sensex forward P/E

Source: Factset, JM Financial

Exhibit 3: JMF model portfolio return*

Source: Bloomberg, JM Financial,*since inception

6.5

3.3 3.0 2.9 2.9 2.2 1.9 1.7 1.2 0.9 0.8

0.1 0.1

(0.2)

(4)

0

4

8

CN ID RU EM DE BR JP IN TR SK UK US DM ZA

MoM (%)

17.7

6

8

10

12

14

16

18

20

22

24

Mar-05 Jan-09 Nov-12 Aug-16

(x)

12.3% premium to historical average of 15.8

(20)

(15)

(10)

(5)

0

5

10

15

20

25

5-Jan 1-Apr 26-Jun 20-Sep 15-Dec 10-Mar 4-Jun 29-Aug

Excess Portfolio Nifty(%)(%)

Strategy Monthly

6 September 2016

India | Strategy

JM Financial Research is also available

on: Bloomberg - JMFR <GO>,

Thomson Publisher & Reuters,

S&P Capital IQ and FactSet.

Please see Appendix I at the end of this

report for Important Disclosures and

Disclaimers and Research Analyst

Certification.

India Strategy 6 September 2016


Event calendar

Exhibit 4. Event calendar

Source: JM Financial, Bloomberg

Calendar 2016

May Jun July Aug

• Q4FY16 Earnings season • MSP hikes (Kharif)

• RBI Monetary Policy

• OPEC Meeting

• ECB Monetary Policy meeting

• FOMC meeting

• Q1FY17 Earnings

• Monsoon Session of Parliament

(Jul-Sep)


• FOMC meeting


• Q1FY17 Earnings

Sep Oct Nov Dec

• Raghuram Rajan’s term

ends

• Monsoon retreats

• 1st advance Kharif

estimates


• FCNR deposits mature

• FOMC meeting

• ECB Monetary Policy

meeting

• Buildup to UP elections

• Festive Season Dispatches

• Q2FY17 Earnings


• Italy Referendum

• MSP hikes (Rabi)

• Winter Session of Parliament

(Nov-Dec)

• FOMC Meeting

• US Elections


• FOMC Meeting


Jan’17 Feb’17 Mar’17 Apr’17

• Q3FY17 Earnings

• ECB Monetary Policy

meeting

• Railway budget

• Union Budget


• FOMC Meeting

• FOMC meeting

• Dutch elections

• Q4FY17 Earnings

• 1st round of French Presidential

election


• 1st

IMD monsoon forecast



JMF model portfolio update

Exhibit 5. Changes to the model portfolio

Action Rationale

Remove

Titan (3% to

0%)

We recommend removing Titan (current weight: 3% to 0%) as the recent quick, steep rise in gold prices (+24% YTD) could negatively impact

jewellery demand and in turn revenue growth expectations for Titan. Overall consumer demand also remains subdued. Titan’s share price is

+17–18% over the past 3 months and valuations are also quite expensive now at 41x one-year forward earnings (19% premium to the five-year

average).

Remove

Cholamandal

am Finance

(2% to 0%)

We recommend removing Cholamandalam Finance (current weight:2% to 0%), though it is ahead of the curve when it comes to NPL

transitioning and has strong geographically diversified loan book, as it has 30% exposure in home equity, which is witnessing some pricing

pressure that could compress the company’s margin, going ahead. Thereby, exerting some pressure on profitability, in our view. Also, the

stock has outperformed the Bankex by 76% in the last one year and is currently trading at 3.6x FY18 book.

Remove

Techno

Electric (0.5%

to 0%)

We recommend removing Techno Electric (current weight: 0.5% to 0%) even as the strong order book, 2.6x TTM sales, is likely to translate into

19%/25% sales/PAT CAGR over FY16–18E, as: a) RoEs are at suppressed levels of 12–13% due to delays in sale of wind assets (RoEs of 5% on

low offtake of wind power and elongated NWC cycle), b) sharp outperformance in the past one year (+45% vs. +4% for NIFTY), and c) current

valuations of 18x FY18E earnings offer limited upsides.

Remove

Ashoka

Buildcon

(0.5% to 0%)

We recommend removing Ashoka Buildcon (current weight: 0.5% to 0%) as the revenue momentum for the construction business has failed to

pick up with most EPC projects won in the past 15 months or so taking much longer than expected in ramp up. Furthermore, the adverse

media reports over the company’s alleged irregularities may create an overhang, thereby implying that re-rating may take much longer than

expected with risk continuing to linger till then. The stock currently trades at 15.4x FY18E earnings.

Source: JM Financial

Exhibit 6. JMF model portfolio vs. Nifty (Excl. execution costs)

Since inception, model portfolio has outperformed the Nifty by 14.5% YTD also, model portfolio has beaten markets

Source: Bloomberg, JM Financial, as on 30th August 2016, inception on 05Jan’15

(20)

(15)

(10)

(5)

0

5

10

15

20

25

5-Jan 1-Apr 26-Jun 20-Sep 15-Dec 10-Mar 4-Jun 29-Aug


(16)

(12)

(8)

(4)

0

4

8

12

16

20

1-Jan 31-Jan 1-Mar 31-Mar 30-Apr 30-May 29-Jun 29-Jul 28-Aug




Exhibit 7. JM financial model portfolio

Sector/stock Nifty wt (%) Portfolio wt

(%) Stance

Mkt cap

(`bn)

CMP

(`/sh.) Perf (%) 1-yr (%)

Consumer Discretionary 10.2 9.5 MW

Hero Motocorp 1.3 3.0 707 3,541 37 48

Bajaj Auto 1.2 2.5 862 2,979 23 33

Aditya Birla Fashion Retail 2.0 120 156 11 (19)

Indocount Industries 1.0 32 818 (23) (18)

Suprajit Engineering 0.5 26 195 54 38

Somany Ceramics 0.5 25 590 64 71

Consumer Staples 8.8 5.0 UW

Bajaj Corp

1.0

59 400 3 (21)

Hindustan Unilever 2.1 4.0

1,985 917 1 7

Energy 7.5 5.7 UW

Reliance Industries 5.3 5.7

3,437 1,060 14 24

Financials 30.8 31.5 MW

HDFC Bank 7.9 8.0

3,269 1,291 35 26

Axis Bank 2.9 4.0

1,425 597 15 18

IndusInd Bank 1.8 5.0

707 1,186 45 38

Bajaj Finance

3.0

593 11,011 221 119

Bajaj Finserv 3.5 472 2,967 136 64

HDFC Ltd 6.9 6.0

2,222 1,405 22 18

Mahindra Finance 2.0 203 356 29 41

Healthcare 6.8 10.0 OW

Cipla 0.8 3.5 460 573 (9) (16)

Torrent Pharma 3.0 276 1,632 17 3

Sun Pharma 2.8 1.0

1,867 776 6 (14)

Alembic Pharma

1.5

118 629 16 (12)

IPCA 1.0 68 541 (26) (32)

Industrials 6.7 3.0 UW

Bharat Forge

1.0

198 850 12 (27)

Cummins India 1.0 255 920 19 (16)

V Guard

1.0

57 190 68 112

Information Technology 14.6 17.0 OW

Tech Mahindra 1.0 4.0 455 469 (27) (8)

Infosys 6.8 8.0 2,379 1,036 4 (5)

TCS 4.4 4.0

4,948 2,511 0 (2)

NIIT

1.0

15 93 (2) 29

Materials 6.3 3.0 UW

JK Lakshmi

2.0

53 452 13 28

SRF Ltd 1.0 99 1,722 45 46

Telecom 3.4 3.0 MW

Bharti Airtel 1.5 3.0

1,326 332 (2) (6)

Utilities 4.8 3.0 UW

NTPC 1.2 3.0 1,313 159 20 31

Cash 9.3

Source: Bloomberg, JM Financial, as on 01Aug’16



Q1FY17 Earnings ahead of toned down estimates

Nifty PAT grows by 9% in 1Q: 1Q17 Nifty revenues grew at 4.3%, while PAT

grew 9% YoY (ex- Financials: 14%) led by growth in Materials (Cement),

Industrials (Eicher, improving T&D), Health-care and Energy. Telecom sector

reported weak numbers with 18% YoY decline, while Financials de-grew by 2%

YoY during the quarter.

Higher beats than misses: During 1Q17, the beats/misses ratio improved to

110% from 74% in the past 4 quarters. The number of companies that beat

expectations was higher in the cement, media, metals, agri, pharma, NBFC

and utilities sectors, while misses were higher than beats in consumer, IT,

mid-caps, private and SOE banks.

Revenue growth still to pick up meaningfully: After three quarters of

revenue decline over 1Q16–3Q16, 1QFY17 saw revenue growth (1.0%), but

still lower than the previous quarter growth of 3.7% YoY. Revenues continued

to indicate a declining trend in metals and oil & gas, while industrials

reported revenue growth against the fall during the past four quarters. The

revenue growth trajectory was ahead for building materials, media, utilities

and IT, while it slowed down for the auto, cement, consumer, and pharma

segments.

Exhibit 8. Q1FY17 earnings so far

Sector No.

Sales growth (%) EBITDA growth (%) PAT growth (%) Change in margin (bps)

Expected Actual Expected Actual Expected Actual EBITDA PAT

Auto + 14 11.1 10.9 6.5 11.1 2 12 2 4

Building mat. 6 11.2 8.9 21.4 19.8 27 32 143 135

Cement 11 9.4 7.8 51.5 46.6 82 89 595 507

Consumer 13 4.7 4.7 14.1 12.1 16 13 138 104

Industrials 8 (4.0) 6.4 8.6 53.2 8 17 456 75

Infra 1 9.9 9.1 34.7 16.1 47 45 52 69

IT 11 21.9 21.2 11.7 11.6 8 9 (205) (204)

Media 2 14.5 14.8 22.0 31.9 16 28 444 243

Metals 4 (11.4) (7.6) (3.4) 12.6 (9) (7) 476 6

Midcaps 6 12.0 7.0 13.1 8.3 24 20 17 94

Realty 4 72.0 34.5 6.2 21.7 (17) 24 (194) (73)

Oil & gas 6 (15.9) (14.5) (13.3) 22.3 (21) 26 421 291

Pharma 9 14.0 7.1 12.9 2.9 35 25 (106) 247

NBFC 11 (18.5) 15.1 2.0 23.0 1 23 455 238

Pvt. banks 7 17.4 14.8 15.6 17.9 6 3 229 (471)

SOE banks 5 (8.2) (1.0) (6.8) 13.8 (27) (44) 1,030 (1,077)

Telecom 3 7.9 8.2 11.1 12.9 (38) (15) 158 (177)

Utilities 3 30.7 17.8 33.7 38.4 0 24 633.7 93.4

Financials 23 (2.3) 7.8 3.4 17.3 (6) (8) 642.8 (484.0)

Total 124 0.3 1.0 6.5 17.6 (1.4) 10.8 351.1 110.5

Ex-Oil 115 10.0 10.2 10.6 16.6 4 7 163.3 (41.7)

Ex-Fin 101 0.5 0.4 7.8 17.7 0 17 286.8 153.6

Ex-Fin Ex-Oil 95 11.9 10.6 14.5 16.2 8 14 108.4 32.7


Steady profitability growth: Despite tepid revenue growth, EBITDA margins

continued to expand and were up 310bps YoY, with significant increases

across BM, cement, industrials, media, metals, oil & gas and private

financials, while it declined for IT, pharma and real estate.

Earnings growth recovery in 1QFY17: 1Q17 earnings (PAT) grew at 10.8%

YoY (ex. financials at 17%) and recovered from a 9% decline in 4Q16

(suffered due to high credit costs for financials). Earnings growth was strong

in cement, BM, industrials, media, oil & gas and pharma. PAT, however,



declined for metals (-7%, but the drop was lower than the decline of 39% in

4Q16), telecom (-15%) and financials (-8% due to a 44% YoY decline by SOE

banks. During 4Q16, financials as a whole declined -68% YoY, which reduced

overall to 2% this quarter. TTMT reported a 62% YoY PAT decline on reported

basis during 1Q17, and adjusted for forex related changes was up by 9%

YoY. The 1Q17 PAT, including TTMT results on reported basis, would be a

growth of 6.9%, against 10.8% now.

Exhibit 9. Improvement in beats/misses ratio to 110% in 1QFY17 vs. 76% over the past 4 quarters

Media, metals, pharma, NBFC and utilities had higher beats,

while IT, consumer, mid-caps and banks had higher misses

Strong earnings recovery during the quarter

Source: JM Financial, Company

Exhibit 10. Revenue growth in line with expectations

Revenue growth was largely in line with expectations Ex. energy (oil & gas), revenues grew 10.2% YoY in 1Q17


82

6677

85

110

0

20

40

60

80

100

120

1QFY16 2QFY16 3QFY16 4QFY16 1QFY17

Beats/Misses (%)(%)

-3.1

(7.0)-5.5

3.7

1.03.1 3.2

1.1

-8.9

10.8

(10)

(5)

0

5

10

15

1QFY16 2QFY16 3QFY16 4QFY16 1QFY17

Revenue growth (%) PAT growth (%)(%)

0.3

10.0

0.5

11.9

1.0

10.2

0.4

10.6

0

2

4

6

8

10

12

14

Total Ex-Oil Ex-Fin Ex-Fin Ex-Oil

Revenue growth Expected Revenue growth Actual(%)

21.2

17.8

14.8

10.9

8.9

8.2

7.8

7.8

7.1

6.4

4.7

1.0

(7.6)

(14.5)

(20.0) (10.0) - 10.0 20.0 30.0

IT

Utilities

Media

Auto & Ancs

Building Materials

Telecom

Financials

Cement

Pharma

Industrials

Consumer

JMF Coverage

Metals

Energy

Revenue Growth



Exhibit 11. Margin expansion continued in 1Q17

Overall EBITDA grew across sectors led by industrials, cement

and utilities

Cement, building materials, media, energy, pharma and utilities

saw healthy PAT growth


Exhibit 12. Consumers: Volume growth in selected pockets

Volume growth remains tepid for consumer staples

Paints as a segment remains strong in volume growth


Exhibit 13. Auto sector: Rural volumes remain weak, urban growth supportive

Tractor sales growth improved in 1Q17 Mixed performance across BM and Consumer Electricals


53.2

46.6

38.4

31.9

22.3

19.8

17.6

17.3

12.9

12.6

12.1

11.6

11.1

- 10.0 20.0 30.0 40.0 50.0 60.0

Industrials

Cement

Utilities

Media

Energy

Building…

JMF Coverage

Financials

Telecom

Metals

Consumer

IT

Auto & Ancs

EBITDA Growth

89.0

31.9

27.7

25.5

25.4

23.8

16.6

13.1

11.6

10.8

9.2

(7.1)

(7.5)

(14.6)

(20.0) - 20.0 40.0 60.0 80.0 100.0

Cement

Building Materials

Media

Energy

Pharma

Utilities

Industrials

Consumer

Auto & Ancs

JMF Coverage

IT

Metals

Financials

Telecom

PAT Growth

(5)

0

5

10

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

2QFY

16

3QFY

16

4QFY

16

1QFY

17

Dabur HUL Colgate(%Yo

0

5

10

15

201Q

FY1

5

2QFY

15

3QFY

15

4QFY

15

1QFY

16

2QFY

16

3QFY

16

4QFY

16

1QFY

17

Asian Berger(%YoY)

(30)

(20)

(10)

0

10

20

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

2QFY

16

3QFY

16

4QFY

16

1QFY

17

Tractor 4W 2W(%YoY)

(10)

(5)

0

5

10

15

20

25

30

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

2QFY

16

3QFY

16

4QFY

16

1QFY

17Somany Kajaria Havells V-Guard

(%YoY)



Exhibit 14. Sector commentary on 1Q17 results

Sector Beat/In-line/Miss Overall Sector Commentary

Auto + Auto OEMs: Operationally in-line

Auto Ancs: Mixed bag

PV (MSIL): Weak volumes with higher realisation leading to operationally in-line

performance.

2-wheelers: Executive segment volumes are yet to pick up meaningfully, although

premium motorcycles are growing at a healthy pace. Scooters continue to register

healthy growth, driven by urban markets. Following the monsoon, 2HFY17 is likely to

see better volumes. Healthy operational performance (ex. TVS).

CV: MHCV seeing moderation in growth. LCV volumes showing signs of pick up. Ex.

TTMT, healthy operational performance.

Auto Ancs: Tyre companies are not yet impacted by the rise in natural rubber prices.

NR price rise would impact from Q2. Other auto-ancillaries were a mixed bag.

Agri. inputs In-line

Normal monsoons have paved way for improvement in acreages (rice up 3%, pulses up

35%) and demand has picked up at dealer levels. Q2 is expected to lead to better pick

up in the domestic business. International agronomy continues to remain muted. PI's

domestic biz grew in line with the industry at 10% YoY. CSM exports grew 20% YoY on

higher order book execution and benefits on scale up at SEZ.

PI Industries’ sales growth (+17% YoY) is in line with expectations. Margin expansion of

154bps on better product mix.

Aviation In-line

In line with expectations, the quarterly earnings remain muted given the drop in

average ticket prices. Gain in crude correction was frittered away by the mismatch in

load factors and yields.

Building

materials

Ceramics/Sanitary: In-line

Plywood: Beat

Strong volume growth. Lower RM costs resulted in gross margin improvements. Lower

power and fuel costs also improved EBITDA margins. Accordingly, companies reported

strong YoY PAT growth.

Cement In-line

On expected lines, the cement sector reported a strong set of numbers. Particularly,

North-based players, which saw a sharp jump in realisation led by strong pricing

improvement in northern markets. The sector performance was further aided by lower

P&F cost as most companies used low cost pet-coke inventories from previous quarters.

Chemicals

SRF reported better-than-

estimated results based on lower

RM costs

Chemical companies are likely to continue to benefit from the China crackdown (recent

news reports indicate China proposing draft rules to impose pollution cess). While it is

difficult to quantify the impact, chemical companies likely in structural growth phase.

Consumer HPC: Miss

Paints: Beat

HPC’s revenue growth remained tepid on subdued volumes. Benign RM costs and softer

A&P spend aided earnings growth. Paints posted a strong performance on resilient

volume growth and continued GPM expansion.

Industrials

(Power

Equipment)

In-line

BTG demand remains subdued, given high capacity addition with low demand growth—

negative for BHEL. T&D capex cycle is yet to pick up from SEB end driven by UDAY,

while PGCIL capex is tapering, restricting near-term growth for the likes of ABB, Alstom

T&D and more. T&D’s EPC contractors are seeing good traction from low-end rural

electrification and distribution capex being down by SEBs.

Industrials Beat

Industrials results were a mixed bag, as long gestation capex segments such as captive

power and mining (exports) were weak, while T&D and consumer durable (room ACs)

players reported a sharp growth in profitability, leading to a marginal beat on an overall

basis.

Infra Miss

The execution pick up in the domestic market is still elusive right from L&T to smaller

road EPC players. L&T numbers were further impacted by changed reporting norms as

per IndAS, which necessitated various non-cash provisioning.

IT Beat

USD revenue growth was weaker for most companies, despite seasonal strength largely

because of demand transition underway as discretionary spend is shifting to digital.

This is leading to cannibalisation of traditional services. Margin performance was better

than expectations on more calibrated wage revisions. Management commentary was

generally cautious on the near-term outlook due to Brexit-led demand uncertainties

especially in the UK/BFSI sector.

Media EBITDA beat from broadcasters

ZEEL reported a revenue-miss, but an EBITDA-beat on lower content cost, sports-profits

and income from the super-hit movie Sairat.

Sun reported a revenue beat and a strong EBITDA beat due to higher ad and pay TV

revenues, and lower IPL Cricket losses as well as lower programming and movie

amortisation costs.

Metals Beat

Steel companies reported higher-than-expected EBITDA, given the sharp run up in steel

prices with the imposition of MIP. Lower imports aided volume growth, which were

higher than expected.




Exhibit 15. Sector commentary on 1Q17 results (continued)

Sector Beat/In-line/Miss Overall Sector Commentary

Real estate In-line

Sales continue to remain muted with limited realisation change across projects; limited

addition to supply in 1QFY17 as developers await better visibility on demand;

commercial and retail real estate are doing well with low vacancy and rentals increasing

5–10% YoY. Improvement in demand and implementation of RERA remains the key for

the sector.

Oil & gas

All OMCs and RIL report

inventory gains between $2 and

$4; thus, net profits are higher

than estimated; gas companies

yet to report results

Broadly, results and net of inventory gains are in line. With GRMs likely to decline in 2Q

and no inventory gains, 2Q earnings are likely to be lower and therefore, 1QFY17 could

be near peak earnings.

Pharma In-line

Results were directionally in line with expectations; the US continued to face pricing

pressures in the base business and domestic business grew in single digits impacted by

price cuts, FDC bans and NLEM expansion. Dr.Reddy's and to a lesser extent Sun

Pharma underperformed due to product concentration risk and lower base biz/gGleevec

contribution, respectively. We do not expect a material change in the operating

environment in the next quarter, as companies with a high US base and acute therapy

focused companies are likely to face pressure.

NBFC

PAT beat from Bajaj Finance;

miss on SHTF, CIFC due to

margin pressure; miss on MMFS,

LICHF due to higher provisions

Bajaj Finance reported a stupendous quarter, while HFCs’ performance was in line,

except for LICHF, which witnessed a one-time provisioning hit in the developer book.

It was a cyclically weaker quarter for MMFS; SHTF witnessed some margin pressure due

to the shift towards newer vehicles, while CIFC witnessed some margin pressure in the

home equity book.

Pvt. banks In line

HDFC and IIB continue to witness strong retail growth; Axis continued with the clean-up

process on expected lines, while corporate pressures intensified for ICICI Bank; KMB's

performance was impacted by lower credit and fee growth.

SOE banks In-line

1Q17 witnessed lower corporate growth for most PSBs, while retail growth continued to

be strong. SBI reported strong top-line growth of 15% led by margin expansion and

higher treasury gains. The merger process with associates is progressing on-track and

slippages were in line with no negative surprises; BOB witnessed improved operating

metrics with adj. NIM expansion. However, asset quality stress sustained. PNB reported

higher recoveries, but asset quality stress persisted and impacted the top-line with

interest reversals.

Telecom EBITDA beat from Bharti Airtel;

Idea missed; Bharti Infratel In-line

1Q saw a pickup in mobile voice realisations, while the slowdown in data revenue

growth continued. The key differences between Airtel and Idea's performance were: (a)

voice minutes growth; and (b) the EBITDA margin trend—Bharti FY17 EBITDA forecast

remains largely unchanged despite a material 1Q beat, because of impending currency

impact in Nigeria, and the sale of two op-cos in Africa. Bharti Infratel results are yet to

fully reflect: (a) the impact of tenancy exits in 1Q; and (b) the rental-freeze per MSA

amendments.

Utilities In-line

1Q has seen better PLFs across plants due to summer power demand leading to better

earnings. However, commentary on power demand revival in the long term depends on

industrial demand. Merchant prices, however, continued to decline, indicating power

surplus scenarios continue in the medium term. Regulated utilities remain a safer

haven, while plans with open capacities will see impact.




YTD fiscal deficit at c.74% of budget target

Apr–Jul’16 fiscal deficit reaches c.74% of FY17BE levels: YTD fiscal deficit

stands at `3.94tn (2.6% GDP/73.7% FY17BE) vs. `3.85tn (2.8% GDP/69.3%

FY16BE) in FY16 on healthy growth in revenue receipts (22% YoY) vs. nominal

total expenditure (9.3% YoY). The revenue generation is boosted by the healthy

net tax revenue (44% YoY), while non-tax revenue actually declined (-38.2% YoY).

The government seems to be taking a cautious approach as far as spending goes

with capital expenditure declining 17.1% YoY that we expect to correct in 2H.

Expenditure has primarily been directed towards revenue expenditure (89%

share; 13.7% YoY) with focus on planned expenditure (36% YoY) vs. non-planned

expenditure (4% YoY).

Net tax revenues grow at healthy rate: Healthy growth in the centre’s net tax

revenues (44.1% YoY; 21% FY17BE) ensured sound revenue receipts YTD’17, even

as non-tax revenues declined 38.2% YoY. Indirect taxes, which contribute c.58%

of the total tax revenues, grew at 29.3% YoY (vs. 35.4% YoY last year) on strong

excise duty collections (55.6% YoY) and service taxes (26.1% YoY).

Rise in petroleum, renewable energy and agricultural spending: Among key

ministries and departments, on an FYTD level, a sharp hike (base effect) is

evident in spending on skill development, housing and poverty alleviation

measures, heavy industries, and new renewable energy. Other sectors that

attracted major spending are coal (137% FYTD), power (40%), public distribution

system (42%) and agri. (39%), while ministries such as labour & employment (-

64%), railways (-59%) and roads (-51%) witnessed a significant spending decrease.

Exhibit 16. Fiscal deficit at a glance

(` bn) FY17BE % YoY Apr–Jul'16 Share of BE % YoY Apr–Jul'15

Central govt. net tax revenue 10,541 11.2 2,217 21.0 44.1 1,539

Non-tax revenue 3,229 24.9 341 10.6 (38.2) 551

Central govt. revenue receipts 13,770 14.2 2,558 18.6 22.4 2,090

Non-debt capital receipts 671 51.8 74 11.1 7.8 69

Total receipts 14,442 15.5 2,632 18.2 21.9 2,159

Non-planned expenditure 14,281 9.2 4,589 32.1 3.6 4,431

Of which capital expenditure 1,006 5.4 298 29.6 (13.3) 344

Of which revenue expenditure 13,274 9.5 4,291 32.3 5.0 4,087

Planned expenditure 5,500 15.3 1,978 36.0 25.3 1,578

Of which capital expenditure 1,464 2.9 415 28.3 (19.7) 516

Of which revenue expenditure 4,036 20.5 1,563 38.7 47.2 1,062

Total expenditure 19,781 10.8 6,567 33.2 9.3 6,010

Fiscal deficit -5,339 (0.2) -3,935 73.7 2.2 -3,851

Fiscal deficit/GDP (%) 3.5

2.6

2.8

Source: CGA, JM Financial

Exhibit 17. Even as planned exp. grows at healthy pace, total expenditure has grown only nominally

Cumulative direct and indirect tax growth Cumulative planned and non-planned expenditure growth


(20)

0

20

40

60

80

Sep-

13

Dec-

13

Mar

-14

Jul-1

4

Oct-1

4

Feb-

15

May

-15

Aug-

15

Dec-

15

Mar

-16

Jul-1

6

Direct tax Indirect tax(%YoY Cumulative FYTD)

(20)

(10)

0

10

20

30

40

50

60

Sep-

13

Dec

-13

Mar

-14

Jul-1

4

Oct

-14

Feb-

15

May

-15

Aug

-15

Dec

-15

Mar

-16

Jul-1

6

plan expenditure non-plan expenditure(%YoY Cumulative FYTD)



Exhibit 18. Energy sector spending (renewables, coal and power) grows sharply on low base

Cumulative revenue and capital expenditure growth Cumulative expenditure growth for key ministries


(40)

(20)

0

20

40

60

80

100

120

Se

p-1

3

De

c-1

3

Ma

r-1

4

Jul-

14

Oct-

14

Fe

b-1

5

Ma

y-1

5

Au

g-1

5

De

c-1

5

Ma

r-1

6

Jul-

16

Capital Expenditure Revenue Expenditure(%YoY Cumulative FYTD)

(70) (20) 30 80 130 180

RenewablesCoal

PowerPDSAgri

Urban DevDrinking Water

Rural Dev.MSME

SteelAviation

PetroleumRoad

ShippingRailways

Labour(%Growth YTD)



Equity market performance

Emerging markets continue to remain more attractive

Exhibit 19. Financials and energy outperform, while telecom and utilities underperform

US EU GB DE JP AU ES CN BR IN RU ZA MX ID MY

Index 0.1 0.8 1.3 3.0 (0.0) (1.4) 1.2 8.1 0.9 1.0 3.0 (0.2) 1.7 2.7 1.6

Consumer Discretionary (1.2) 1.1 3.6 1.4 2.2 (0.9) 3.0 7.1 (3.8) 4.0 - 7.6 4.0 1.9 (1.1)

Consumer Staples (0.8) (0.5) 0.4 2.9 (4.9) 2.8 (1.3) 7.3 (0.0) (0.5) 5.3 (1.8) (0.2) 1.2 3.1

Energy 2.1 0.1 (0.5)

0.3 2.8 7.2 0.7 6.8 5.1 3.2 1.9 - 15.3 5.6

Financials 3.3 4.4 6.9 3.6 1.2 (2.3) 3.8 10.0 2.6 3.6 5.0 (3.5) 0.7 4.7 1.5

Healthcare (3.1) (4.4) (1.8) (0.1) (7.6) (3.0) (2.3) 8.6 1.5 (1.4) - (2.1) - 6.3 0.2

Industrials 1.1 3.4 2.2 8.9 (0.9) (7.7) (2.5) 3.1 (0.6) (0.3) - (3.7) 0.9 (1.3) 2.8

Information Technology 2.0 1.0 1.8 1.4 1.5 11.3 (0.1) 11.4 (9.5) (3.1) - - - - -

Materials 0.9 3.5 (2.0) 8.2 6.6 3.9 - 4.0 (0.8) 5.5 2.4 (8.7) 4.3 7.1 2.0

Telecom (5.4) (0.6) (1.7) (0.9) 2.5 (8.9) 2.3 2.1 (2.1) (10.1

) (4.0)

(11.9

) 3.1 (2.5) 0.4

Utilities (6.3) (4.4) (2.6) (11.6

) (5.2) (5.2) (3.6) 6.4 (2.0) 2.8 10.4 - - (5.8) 1.9

Source: Bloomberg, JM Financial - Based on MSCI Indices

Exhibit 20. India outperforms developed markets, underperforms emerging markets

Indian markets remain ahead of developed markets Mid-caps outperform large and small caps

Source: Bloomberg, JM Financial – L-cap: BSE100 index, M-cap: BSE Mid-cap index and S-cap: BSE Small-cap index

Exhibit 21. Metals, bank and energy outperformed Nifty, while telecom and IT were weak

Metals and banks shine while telecom and realty lag behind Markets turn less volatile


6.5

3.3 3.0 2.9 2.9 2.2 1.9 1.7 1.2 0.9 0.8

0.1 0.1

(0.2)

(4)

0

4

8

CN ID RU EM DE BR JP IN TR SK UK US DM ZA

MoM (%)

4.0

1.9 1.4

0

1

2

3

4

5

M-cap L-cap S-cap

MoM (%)

5.7 4.5 4.5 4.3

1.1 1.1

(0.4) (1.1) (1.7)(3.4) (4.0)

(10.1)(12)

(8)

(4)

0

4

8

Me

tals

Ba

nk

s

En

erg

y

Au

to

FM

CG

Po

we

r

Ph

arm

a

Infra

Ca

p. G

ds.

IT Re

alty

Te

leco

m

NiftyMoM (%)

0

5

10

15

20

25

(40)

10

60

110

160

Sep

-15

Oct-1

5

No

v-15

De

c-15

Jan-1

6

Feb

-16

Mar-1

6

Ap

r-16

May-1

6

Jun

-16

Jul-1

6

Au

g-16

Cash Derivatives INVIX (RHS)(Index) (%)



Valuations – Sensex at 17.7x NTM P/E

Markets continue to trade at a premium

Exhibit 22. Sensex continues to trade at above average valuations

Sensex NTM P/E Sensex NTM P/B

Source: Factset, JM Financial, As of 30th

Aug 2016

Exhibit 23. RoE remains closer to FY09–10 bottom

Sensex NTM RoE Sensex NTM EV/EBITDA

Source: Factset, JM Financial, As of 30th

Aug 2016

Exhibit 24. Premium of PEG to historical averages is substantial

Sensex NTM dividend yield Sensex NTM PEG

Source: Factset, JM Financial, As of 30Aug’16

17.7

6

8

10

12

14

16

18

20

22

24


(x)


2.8

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0


(x)

1.8% discount to historical average of 2.8

15.7

14

16

18

20

22

24


(%)

11.9% discount to historical average of 17.8

10.5

6

7

8

9

10

11

12

13

14


(x)


1.6

0.0

0.5

1.0

1.5

2.0

2.5

3.0


(%)

2% premium to historical average of 1.6

1.07

0.3

0.5

0.8

1.0

1.3

1.5


(x)




Exhibit 25. Global valuations

Country

Now Long-term averages Premium/discount

NTM EPS

growth NTM P/E NTM P/B NTM RoE

NTM EPS


NTM EPS


India 15.0 17.7 2.8 15.7 15.7 15.8 2.7 17.4 (4.2) 12.2 1.3 (9.7)

US 9.2 17.1 2.7 15.9 10.9 14.0 2.2 16.0 (15.8) 21.6 20.4 (1.0)

Japan 8.3 16.2 1.4 8.9 24.8 17.8 1.4 7.8 (66.4) (8.8) 3.8 13.9

Brazil 25.3 13.5 1.3 9.5 23.0 9.9 1.4 14.4 10.1 36.9 (9.4) (33.8)

South Africa 19.0 13.8 2.0 14.3 17.2 12.0 2.1 17.9 10.4 15.6 (8.0) (20.4)

Russia 14.4 6.4 0.7 11.5 16.4 22.7 0.6 2.8 (12.2) (71.9) 16.7 314.6

China 24.2 25.7 3.1 12.0 27.2 20.2 2.7 13.6 (11.1) 27.5 12.8 (11.5)

Indonesia 15.9 17.9 2.6 14.7 15.3 13.8 2.6 19.1 4.0 29.5 (0.4) (23.1)

Mexico 22.4 19.3 2.5 12.7 18.4 16.0 2.5 15.5 21.8 20.7 (0.7) (17.7)

Taiwan 5.7 13.9 1.6 11.7 15.5 13.9 1.7 12.2 (63.4) 0.3 (3.9) (4.2)

Thailand 14.7 15.4 1.9 12.3 13.7 11.7 1.7 14.8 7.6 31.1 8.7 (17.1)

Source: Factset, consensus numbers, JM Financial

Exhibit 26. Financial estimates and valuation for key sectors

Revenue growth

(%) EBITDAM (%) PAT growth (%) P/E P/B RoE (%)

FY17E FY18E FY17E FY18E FY17E FY18E FY17E FY18E FY17E FY18E FY17E FY18E

Auto & ancs 13.1 14.7 14.2 14.1 16.6 17.7 19.3 16.4 3.7 3.2 20.7 20.8

Building Material 12.4 14.0 13.4 14.4 41.3 32.5 31.7 23.9 5.3 4.5 17.8 20.3

Cement 15.5 14.7 21.6 22.8 67.2 31.6 27.1 20.6 3.4 3.0 13.4 15.6

Consumer 11.4 13.8 22.0 22.3 12.1 15.5 37.3 32.4 12.2 10.8 34.1 35.4

Industrials 17.1 19.3 7.7 9.3 104.2 39.7 36.8 26.3 2.6 2.4 7.2 9.5

Infra 12.2 14.8 13.9 14.9 17.6 26.9 24.7 19.5 2.7 2.4 11.4 13.0

IT 11.5 10.5 24.8 24.8 9.3 11.3 16.4 14.7 4.0 3.5 26.0 25.4

Media 16.3 15.2 34.9 35.7 19.9 18.0 29.8 25.3 6.4 6.0 22.5 24.4

Metals 9.9 6.1 15.0 15.8 173.8 17.9 14.7 12.4 1.3 1.2 9.3 10.2

Midcaps 16.9 15.5 15.3 15.7 18.7 22.0 20.4 16.7 4.9 4.1 25.8 26.7

Oil & Gas 1.0 5.8 13.5 13.8 14.8 10.6 12.4 11.2 1.4 1.3 11.6 11.9

Pharma 8.6 13.6 25.9 27.7 7.8 26.6 26.0 20.5 4.7 4.0 19.4 21.0

Realty 17.0 10.4 18.0 20.2 27.1 34.2 23.8 17.7 2.3 2.0 9.9 12.1

Telecom 4.9 5.9 37.7 37.8 (11.3) 3.7 27.3 26.4 2.1 2.0 7.6 7.8

Utilities 14.7 12.7 31.0 33.0 2.4 18.8 14.0 11.8 2.4 2.2 17.7 19.5

NBFC* 10.8 11.5 89.5 88.1 11.1 9.1 15.4 14.1 2.6 2.3 18.3 17.4

Pvt. Banks* 15.8 20.5 85.9 85.8 24.2 26.8 20.7 16.3 2.8 2.5 14.7 16.3

PSU Banks* 15.0 17.2 76.0 77.6 111.4 40.2 8.5 6.3 0.8 0.7 10.5 12.6

Total 8.5 10.5 22.9 23.7 22.3 18.6 18.0 15.2 2.6 2.3 15.1 16.1

Source: Company, JM Financial, * NII, PPP and PAT for Financials

Exhibit 27. Sector valuations at a glance

Earnings growth vs. P/E P/B vs. RoE

Source: Bloomberg, Factset, JM Financial

Auto

Building Material

Cement

ConsumerIndustrials

Infra

IT

Media

Metals

Midcaps

Oil&Gas

PharmaRealty

Telecom

UtilitiesNBFC

Pvt. Banks

0

5

10

15

20

25

30

35

40

-5 0 5 10 15 20Earnings Growth (%)

PE

(x)

Auto

Building Material

Cement

IndustrialsInfra

IT

Media

Metals

Midcaps

Oil&Gas

Pharma

Realty

Telecom

UtilitiesNBFCPvt. Banks

0

2

4

6

8

10

12

0 10 20 30 40

PB(x

)

RoE (%)



Flows on a steady path

FIIs bought US$1.5bn from equities, DMF flows improve

Exhibit 28. FIIs even as they are buying, the magnitude remained weak as DMF flows keep up the pace

FII equity remain benign as debt falls to negative DMF equity inflows

Source: Bloomberg, AMFI, JM Financial

In Aug’16 markets saw net inflow of US$1.5bn into equities as FIIs withdrew US$0.4bn from debt. In Jul’16, domestic mutual

funds (DMFs) have garnered funds at a net tally of US$585mn of equity inflows.

Exhibit 29. DMFs attracted equity inflows

(US$ bn) 2012 2013 2014 2015 YTD-2016

FII 31.4 11.3 42.4 10.8 4.8

Equity 24.5 19.8 16.2 3.3 6.1

Debt 6.9 (8.5) 26.3 7.6 (1.3)

DMF equity (3.0) (1.9) 8.8 16.7 4.0

Source: Bloomberg, AMFI, JM Financial, * Jan-Jul for DMF Equity flows

Exhibit 30. RBI continues to maintain sound forex reserves


-2.6

-0.9

0.8

-1.1

0.0

-1.7-1.2

4.1

0.60.4

0.8

1.7 1.5

-0.1

0.0

2.4

-0.6 -0.6

0.2

-1.2

0.2 0.5

-0.8 -1.0

1.0

-0.4

(3)

(2)

(1)

0

1

2

3

4

5

Aug-15 Nov-15 Feb-16 May-16 Aug-16

FII-Equity FII-Debt(US$bn)

(2,000)

0

2,000

4,000

6,000

Jun

-06

Jan

-07

Jul-

07

Jan

-08

Au

g-0

8

Feb

-09

Au

g-0

9

Mar

-10

Sep

-10

Ap

r-1

1

Oct

-11

Ap

r-1

2

No

v-1

2

May

-13

No

v-1

3

Jun

-14

De

c-1

4

Jun

-15

Jan

-16

Jul-

16

Net Inflows Total Inflows(US$mn)

365

200

220

240

260

280

300

320

340

360

380

Apr-

13

Jul-1

3

Nov

-13

Feb-

14

Jun-

14

Sep-

14

Jan-

15

Apr-

15

Aug-

15

Nov

-15

Mar

-16

Jul-1

6

US $bn



INR remains a stable currency

Exhibit 31. Rupee has been stable against developed market currencies

MoM change in INR exchange rate INR remained stable against a stable USD


Exhibit 32. REER and NEER valuation remains stable, INR continues to be overvalued

Volatility in INR remains stable REER and NEER suggestive of an over-valued INR


Exhibit 33. RBI continues to maintain sound forex reserves


3.7

1.0

0.3 0.0

(0.2) (0.3) (0.4)(0.8)

(1.5)(2)

0

2

4

ZARINR CHFINR GBPINR USDINR EURINR JPYINR CADINR BRLINR RUBINR

(%MoM)Aug-16

57

59

61

63

65

67

69

71

900

950

1,000

1,050

1,100

1,150

1,200

1,250

1,300

Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16

Dollar Index (LHS) USDINR (RHS)

4

5

5

6

6

7

7

8

8

9

9


(%)

60

64

68

72

60

70

80

90

100

110

120

Aug-15 Nov-15 Feb-16 May-16 Aug-16

REER NEER USDINR (RHS)

365

200

220

240

260

280

300

320

340

360

380

Apr-

13

Jul-1

3

Nov

-13

Feb-

14

Jun-

14

Sep-

14

Jan-

15

Apr-

15

Aug-

15

Nov

-15

Mar

-16

Jul-1

6

US $bn



Commodities witness slowdown

Energy prices on a rise, while precious metals moderate

Exhibit 34. Most commodities stay stable even as crude witnessed surge

Commodity prices moving down Only zinc continued to pick up though slowly


Exhibit 35. Gold & silver corrected while agri-commodities continue to be a mixed bag

Silver prices corrected more than gold Prices of cotton and wheat fell c.10–11% MoM


Exhibit 36. Energy prices picked up momentum; Baltic Dry Index too moves upwards

Brent increased 14+% MoM, gas became cheaper Baltic Dry Index moves upwards


65

70

75

80

85

90

95

100

105

110


BCOM Index CRB CMDT Index CRY Index

65

75

85

95

105

115

125

135


Copper Zinc Aluminium

70

80

90

100

110

120

130

140

150


Gold Silver

50

70

90

110

130

150

170

190


Sugar Wheat Cotton Coffee Tea Copra Palm Oil

40

50

60

70

80

90

100

110

120


Brent Gas

40

140

240

340

440

540

640

740

840

940

1,040


BDIY Index



Exhibit 37. Performance on select commodities

(% YoY) 2006 2007 2008 2009 2010 2012 2013 2014 2015 Last

month

Current

month

Commodity Indices

CRY Index -7.4 16.7 -36.0 23.5 17.4 -3.4 -5.0 -17.9 -23.4 -6.0 1.0

Bcom Index -2.7 11.1 -36.6 18.7 16.7 -1.1 -9.6 -17.0 -24.7 -5.1 -1.1

CRB Index 19.6 14.1 -23.8 33.7 23.6 0.4 -5.7 -4.1 -14.4 -1.1 -0.9

Energy

Brent 5.5 56.1 -58.4 96.9 20.1 2.8 0.9 -48.6 -36.3 -13.1 14.5

Gas

-0.4 -19.8 -9.3 -6.6 -15.7 -26.3 -1.1 -2.9

Coking Coal

4.1 10.6

Thermal Coal

4.1 4.5

Precious Metals

Gold 23.2 30.9 5.8 24.4 29.6 7.1 -28.3 -1.4 -10.4 2.2 -2.7

Silver 46.4 14.6 -22.9 48.0 83.2 9.0 -35.8 -19.3 -11.9 8.7 -7.9

Base Metals

Copper 44.0 5.5 -54.0 140.2 30.2 4.4 -7.2 -14.4 -25.3 1.7 -6.5

Aluminium 23.1 -14.1 -36.1 44.8 10.8 2.6 -13.2 2.9 -18.7 -0.3 -0.9

Zinc 121.6 -44.0 -49.0 111.9 -4.1 12.7 -1.2 6.0 -26.1 6.6 3.0

Agri-Produce

Cotton

-1.6 15.4 -11.2

Sugar

-11.8 -11.7 -6.3 6.8

Corn

-9.5 -12.3 -7.7 -7.9

Wheat 3.3 - - - - - - 59.2 -18.0 -6.4 -10.0

Coffee 17.8 7.9 -17.7 21.3 76.9 -36.6 -23.0 50.5 -23.9 1.5 -1.0

Palm Oil 41.4 55.4 -45.1 53.0 47.9 -26.9 13.3 -12.8 4.7 -1.1 17.5

Milk 1.6 52.2 -26.1 -6.1 -7.0 7.8 2.1 -16.2 -14.8 0.1 9.3

TiO2

-11.3 18.8 -17.9 10.9 -11.0 -6.6 - -

PFAD

69.8 -54.1 103.0 52.7 -27.0 20.2 -18.6 -24.2 -1.7 10.3

Copra 18.8 -3.8 17.8 -13.9 72.5 -11.0 54.3 23.2 -30.2 1.3 19.1

Tea 9.0 34.1 -11.9 79.5 -28.8 51.2 -11.4 -37.0 51.0 -8.4 9.8




Lead industrial indicators await trigger

Eight core industries slow down to 3.1% YoY in Jul’16: Growth in eight core

industries has slowed down in Jul’16 to 3.1% YoY vs. 5.3% YoY in Jun’16. In

Q1FY17, the index grew 5.4% YoY (though stagnated on QoQ basis at -0.1%).

The Jul’16 progress can be primarily attributed to the improved refinery

sector (weight: 5.9%, 13.7% YoY), while other sectors grew at almost less than

5% levels with the steel sector turning negative. Typically power demand

tends to be weak during Q2 due to the onset of monsoons; we observe power

generation has nearly stagnated in Jul’16 (1.6% YoY) as effects of one-off

events subside.

IIP moving only slowly: Even as core sectors, which account for c.38% of IIP,

witnessed 5.4% YoY (5.3% YoY) increase in Q1FY17 (Jun’16), the broader

index remained static at 0.6% YoY (2.1%). While Q1FY17 has been weaker than

Q4FY16 (-5.1% QoQ), the YTD performance (0.4% CYTD) also shows no

significant signs of pick up. Weak manufacturing (weight: 76%; 0.9% YoY) and

capital goods (9%;-16.5% YoY) continue to drag the overall index.

Foreign trade continues to remain weak as exports decline 7% in Jul’16:

After turning positive in Jun’16, exports declined 7% to $22bn in Jul’16, as

exports of engineering goods (share: 23%) and POL products (12%) declined

by 12% and 22% YoY, respectively. However, lower commodity prices,

including crude oil prices, have meant that the trade balance position

continues to improve as the value of imports fell 19% YoY in Jul’16.

Interestingly, both growth in exports and imports turned positive in Q1FY17

to 1.8% and 1.5% QoQ, respectively.

Surplus from services trade contracted 6% YoY: Although, India runs a

surplus in services trade, its magnitude has either remained nearly stagnant

or contracted in the past eight months. In Jul’16, surplus fell 6% to $4.9bn as

growth in payments (12%) outpaces receipts (4.4%). 38.

Commercial vehicles (CV) segment moderates, passenger vehicles (PV)

segment witnesses healthy growth in Jul’16: While sales of new CVs grew

13% YoY in Q1FY17, the pace seemed to stagnate in Jul’16 due to weak

M&HCVs segment, declined 7.6% YoY (vs. 30% growth in FY16), and nominal

growth in LCVs at 6.3% YoY. However, on YTD basis, CV volumes continue to

post healthy growth of 14%+ as both M&HCVs and LCVs witness double-digit

growth of 19% and 11%, respectively.39.

PV segment picks up pace in Jul’16, 2-wheelers (2W) outshine: Even as the

passenger vehicle segment witnessed strong growth of 17% in Jul’16 and 6.7%

YoY in Q1FY17, it was unable to keep Q4FY16 momentum and declined 3.6%

QoQ. The 2W segment, on the other hand, outperformed other market

segments with a healthy increase in sales in Q1FY17 (14.3% YoY, 8.4% QoQ),

Jul’16 (13.5% YoY) and YTD (11.8% YoY). 40.

Going ahead, the payouts under the 7th

Pay Commission may provide an

impetus to PV volumes, even as improvement in the rural economy and sound

macro trends are crucial for full-fledged demand recovery in FY17. 41.

Cement production grew at 5.7% YoY in Q1FY17: While cement volumes

grew a strong 10%+ in Jun’16, Q1 growth came in at moderate levels of 5.7%

(vs. 11.4% YoY in the last quarter). However, growth slowed down to 1.4% YoY

in Jul’16. In YTD, cement demand has grown 8.5% with much of the boost

attributable to higher public spending on infrastructure and irrigation

development. 42.

Exhibit 38: Core sector growth slows

down

Source: MoSPI, JM Financial

Exhibit 39: IIP growth trend


Exhibit 40: Trade deficit narrows

Source: CMIE, JM Financial

Exhibit 41: CV Volumes moderate

Exhibit 42: PV Volumes pick-up

-3

0

3

5

8

10

120

160

200

Apr

-15

May

-15

Jun-

15

Jul-1

5

Aug

-15

Sep

-15

Oct

-15

Nov

-15

Dec

-15

Jan-

16

Feb-

16

Mar

-16

Apr

-16

May

-16

Jun-

16

Jul-1

6

Eight Core %YoY (RHS) (%)(index)

-5

-3

-1

1

3

5

7

9

160

170

180

190

200

210

Apr

-15

May

-15

Jun-

15

Jul-1

5

Aug

-15

Sep

-15

Oct

-15

Nov

-15

Dec

-15

Jan-

16

Feb-

16

Mar

-16

Apr

-16

May

-16

Jun-

16

IIP %YoY(%)

(index)

(30)

(10)

10

30

50

70

(1,200)

(1,000)

(800)

(600)

(400)

(200)

0

Jun-12 Jan-13 Aug-13 Mar-14 Oct-14 May-15 Dec-15 Jul-16

(Rsbn) Trade Balance (LHS) Import growth Export growth

-10

0

10

20

30

0

20

40

60

80

Apr

-15

May

-15

Jun-

15

Jul-

15

Aug

-15

Sep-

15

Oct

-15

Nov

-15

Dec

-15

Jan-

16

Feb-

16

Mar

-16

Apr

-16

May

-16

Jun-

16

Jul-

16

CV %YoY (RHS)(%)

('000 nos)

(5.0)

-

5.0

10.0

15.0

20.0

25.0

0

50

100

150

200

250

300

Apr

-15

May

-15

Jun-

15

Jul-1

5

Aug

-15

Sep-

15

Oct

-15

Nov

-15

Dec

-15

Jan-

16

Feb-

16

Mar

-16

Apr

-16

May

-16

Jun-

16

Jul-1

6Domestic PV %YoY (RHS)('000 nos)



Diesel consumption growth at 1.8% YoY, petrol at 14.7% YoY in Jul’16: We

observe that petrol consumption accelerated at a healthy pace of 14.7% YoY

(10% YoY) in Jul’16 (Q1FY17) as against diesel, which grew slowly at 1.8% YoY

(4.8% YoY). While fuel demand increased on: a) the expanding PV segment, b)

shift of freight to road, and c) pick up in construction activity, it is expected

to benefit further from the recent rail freight hike.

However, RBI’s capacity utilisation (OBICUS) remained stagnant at an average of

72% in FY16, indicative of weak demand and excess capacity in the system. To

that extent, revival in the private capex cycle seems a distant reality at least in

the near term, implying that continued government spending remains critical. To

conclude, traces of a pick up in growth momentum are evident only in select

sectors and as such broad-based recovery will be only gradual.

Exhibit 43. Eight core industries improve in Jun’16 though growth stagnates in Q1 at -0.1% QoQ

Monthly trend in core industries Trend in QoQ growth


Exhibit 44. Overall IIP remains weak at 0.4% CYTD, declines vis-à-vis Q4FY16

Monthly trend in IIP Trend in QoQ growth


-3

0

3

5

8

10

120

160

200

Apr-1

5

May

-15

Jun-

15

Jul-1

5

Aug-

15

Sep-

15

Oct

-15

Nov-

15

Dec-

15

Jan-

16

Feb-

16

Mar

-16

Apr-1

6

May

-16

Jun-

16

Jul-1

6

Eight Core %YoY (RHS) (%)(index)

(0.5)

(1.6)

2.7

4.4

(0.1)

(2)

(1)

0

1

2

3

4

5

Q1 FY16 Q2 FY16 Q3 FY16 Q4 FY16 Q1 FY17

Eight Core Index(%QoQ)

-5

-3

-1

1

3

5

7

9

160

170

180

190

200

210

Ap

r-1

5

May-1

5

Ju

n-1

5

Ju

l-1

5

Au

g-1

5

Se

p-1

5

Oct-

15

No

v-1

5

De

c-1

5

Ja

n-1

6

Fe

b-1

6

Mar-

16

Ap

r-1

6

May-1

6

Ju

n-1

6

IIP %YoY(%)

(index)

(5.5)

(0.3) (0.6)

7.1

(5.1)

(8)

(6)

(4)

(2)

0

2

4

6

8


IIP(%QoQ)



Exhibit 45. Tepid global demand continues to weaken Indian exports

Merchandise trade Services trade


Exhibit 46. On QoQ basis, both exports and imports improved in Q1FY17

Merchandise trade Trend in engineering goods trade


Exhibit 47. Even as CV sales moderate in Jul’16, it grew 14%+ CYTD

CV growth trend QoQ trend in CVs

Source: SIAM, JM Financial

(40)

(10)

20

50

80

(25)

(20)

(15)

(10)

(5)

0

Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16

(US$bn)Trade Balance (LHS) Import growth Export growth (%YoY)

(30)

(10)

10

30

0

2

4

6

8

Ap

r-1

2

Jul-

12

No

v-1

2

Feb

-13

Jun

-13

Sep

-13

Jan

-14

May

-14

Au

g-1

4

De

c-1

4

Mar

-15

Jul-

15

Oct

-15

Feb

-16

Jun

-16

(US$bn)Net Services Payment growth Receipt growth

(%YoY)

(4.6)(1.3)

(4.8)

2.2 1.8 3.6 2.4

(7.5)(12.5)

1.5

25.9

9.9

(12.4)

(41.8)

0.3

(50)

(40)

(30)

(20)

(10)

0

10

20

30


Exports Imports Trade Balance(%QoQ)

(40)

(30)

(20)

(10)

0

10

20

Ap

r-1

5

May

-15

Jun

-15

Jul-

15

Au

g-1

5

Sep

-15

Oct

-15

No

v-1

5

De

c-1

5

Jan

-16

Feb

-16

Mar

-16

Ap

r-1

6

May

-16

Jun

-16

Jul-

16

Engineering goods Imports Engineering good exports(%YoY)

-10

0

10

20

30

0

20

40

60

80

Ap

r-1

5

Ma

y-1

5

Jun

-15

Jul-

15

Au

g-1

5

Se

p-1

5

Oct

-15

No

v-1

5

De

c-1

5

Jan

-16

Fe

b-1

6

Ma

r-1

6

Ap

r-1

6

Ma

y-1

6

Jun

-16

Jul-

16

CV %YoY (RHS)(%)

('000 nos)

(30)

(20)

(10)

0

10

20

30

40

50


CV MHCV LCV(%QoQ)



Exhibit 48. Passenger vehicles (PV) witnessed healthy sales in Jul’16, though Q1FY17 weaker than Q4FY16

PV growth trend QoQ trend in PVs


Exhibit 49. Domestic sales in 2-wheelers have increased 12% CYTD

2-wheelers growth trend 2W witness sharp hike of 8.4% QoQ in volumes


Exhibit 50. Even as diesel consumption slows to 1.8% YoY in Jul’16, it increased 7% CYTD

Diesel consumption growth trend Diesel consumption improves marginally in Q1FY17 vs. Q4FY16

Source: PPAC, JM Financial

(5.0)

-

5.0

10.0

15.0

20.0

25.0

0

50

100

150

200

250

300

Ap

r-15

May

-15

Jun

-15

Jul-

15

Au

g-15

Sep

-15

Oct

-15

No

v-15

Dec

-15

Jan-

16

Feb

-16

Mar

-16

Ap

r-16

May

-16

Jun

-16

Jul-

16

PV %YoY (RHS)('000 nos)

(7.3)

3.6

8.8

(1.8)

(3.6)

(10)

(8)

(6)

(4)

(2)

0

2

4

6

8

10


PV(%QoQ)

-5

0

5

10

15

20

25

1,000

1,200

1,400

1,600

1,800

Ap

r-1

5

May

-15

Jun

-15

Jul-

15

Au

g-1

5

Sep

-15

Oct

-15

No

v-1

5

De

c-1

5

Jan

-16

Feb

-16

Mar

-16

Ap

r-1

6

May

-16

Jun

-16

Jul-

16

2W %YoY (RHS)(000 nos) (%)

3.0

4.2

0.0

1.2

8.4

0

1

2

3

4

5

6

7

8

9


2W(%QoQ)

(5)

0

5

10

15

20

25

May

-15

Jun-

15

Jul-1

5

Aug

-15

Sep

-15

Oct

-15

Nov

-15

Dec

-15

Jan-

16

Feb

-16

Mar

-16

Apr

-16

May

-16

Jun-

16

Jul-1

6

Diesel Consumption(%YoY)

9.6

(11.3)

11.2

2.9 3.2

(15)

(10)

(5)

0

5

10

15


Diesel Consumption(%QoQ)



Exhibit 51. Petrol consumption increased 14.7% YoY in Jul’16 and 12.9% CYTD

Petrol consumption growth trend QoQ petrol consumption witnesses moderation in Q1FY17

Source: PPAC, JM Financial

Exhibit 52. Cement production slows down in Jul’16, moderation in early Q1FY17 leads to 3.3% QoQ fall

Cement production drops to 1.4% YoY in Jul’16 QoQ trend in cement production


Exhibit 53. Power generation moderates in Jul’16 after 7.2% QoQ, 8.1% YoY growth in Q1FY17

Power generation almost stagnates in Jul’16 Q1 turned out strong for power generation with 7.2% QoQ

Source: CEA, JM Financial

0

5

10

15

20

25

30

May

-15

Jun-

15

Jul-1

5

Aug

-15

Sep

-15

Oct

-15

Nov

-15

Dec

-15

Jan-

16

Feb

-16

Mar

-16

Apr

-16

May

-16

Jun-

16

Jul-1

6

Petrol Consumption(%YoY)

8.9

(1.3)

2.4

4.7 3.9

(2)

0

2

4

6

8

10


Petrol Consumption(%QoQ)

-4

0

4

8

12

16

10

15

20

25

30

Apr

-15

May

-15

Jun-

15

Jul-1

5

Aug

-15

Sep-

15

Oct

-15

Nov

-15

Dec

-15

Jan-

16

Feb-

16

Mar

-16

Apr

-16

May

-16

Jun-

16

Jul-1

6

(MT) (%YoY)

2.0

(7.7)

1.4

16.7

(3.3)

(10)

(5)

0

5

10

15

20


Cement(%QoQ)

-4

0

4

8

12

16

80

85

90

95

100

Ap

r-1

5

May

-15

Jun

-15

Jul-

15

Au

g-1

5

Sep

-15

Oct

-15

No

v-1

5

De

c-1

5

Jan

-16

Feb

-16

Mar

-16

Ap

r-1

6

May

-16

Jun

-16

Jul-

16

(Bn Kwh) (%YoY)

7.1

4.2

(3.7)

1.3

7.2

(6)

(4)

(2)

0

2

4

6

8


Electricity(%QoQ)



Jul’16 CPI inflation at 6.1%

Retail inflation raises concerns as it reaches 23-mth high

Jul’16 CPI inflation at 6.1% YoY above consensus: Inflation in May’16 came

in at a high of 6.1% YoY (vs. 5.8% last month), 17bps above market

consensus. Food inflation continued to push the overall price index,

contributing over 62% to the hike. The impact was even more pronounced for

the rural (urban) sector where food prices, c.66% (57%) contribution drove

inflation rate to 6.7% (5.4%). Core inflation, i.e., non-food, non-oil inflation,

however continues to remain within comfortable limits at c.4.6% YoY.

Pulses, sugar and vegetables get more expensive: Within the food basket,

the prices of pulses, sugar and vegetables grew extraordinarily by 28.4%,

17.2% and 12.4%, respectively. While in rural areas, pulses witnessed the

highest increase at 27.5% YoY, it was sugar and confectionery products that

witnessed the highest surge of 32%+ YoY. Interestingly, for urban India

prices of vegetables were stagnant YoY.

Inflation expectations: The steady increase in retail inflation FYTD,

increased from 4.9% in FY16 to c.5.8% along with the recent jump in WPI to

c.3.5% YoY (to its 23-month high) are suggestive of a possible build-up of

inflationary pressures given RBIs target of 5% by Mar’17. RBI continues to

keep close watch on the CPI from a policy perspective, as there could be

further upsides as the impact of a pay hike under the 7th

Pay Commission is

felt on disposable incomes.

Exhibit 54. CPI inflation at a glance

Weight (%) Jul16 Jun16 May16 Apr16 Mar16 Feb16

CPI 100.0 6.07 5.77 5.76 5.47 4.83 5.26

Food and beverages 45.9 7.96 7.46 7.20 6.29 5.19 5.52

Pan, tobacco and intoxicants 2.4 6.83 7.35 7.66 8.04 8.51 8.55

Fuel and light 6.8 2.75 2.92 2.94 3.03 3.47 4.59

Housing 10.1 5.42 5.46 5.35 5.37 5.31 5.33

Clothing and footwear 6.5 5.23 5.01 5.37 5.56 5.50 5.60

Miscellaneous 28.3 4.01 3.85 3.96 4.26 4.01 4.38


Exhibit 55. CPI inflation trend

Urban and Rural CPI Inflation All-India CPI Inflation sub-indices


2

4

6

8

10

12

14

De

c-1

2

Mar

-13

Jul-

13

Oct

-13

Feb

-14

May

-14

Sep

-14

Jan

-15

Ap

r-1

5

Au

g-1

5

No

v-1

5

Mar

-16

Jul-

16

(%) India Urban Rural

-2

1

4

7

10

13

16

De

c-1

2

Mar

-13

Jul-

13

Oct

-13

Feb

-14

May

-14

Sep

-14

Jan

-15

Ap

r-1

5

Au

g-1

5

No

v-1

5

Mar

-16

Jul-

16

(%) Food+ Fuel and light Clothing+

Housing Miscellaneous



Exhibit 56. CPI Inflation trend

Urban CPI Inflation Sub-indices Rural CPI Inflation Sub-indices


Exhibit 57. Contributors to CPI Inflation

All-India CPI inflation sub-indices Rural CPI inflation sub-indices


Exhibit 58. Contributors to CPI inflation and core inflation trend

Urban CPI inflation sub-indices Core inflation has remained in sub-5% levels


-3

0

3

6

9

12

15

18

De

c-1

2

Mar

-13

Jul-

13

Oct

-13

Feb

-14

May

-14

Sep

-14

Jan

-15

Ap

r-1

5

Au

g-1

5

No

v-1

5

Mar

-16

Jul-

16

(%) Food+ Fuel and light Clothing+

Housing Miscellaneous

1

4

7

10

13

16

De

c-1

2

Mar

-13

Jul-

13

Oct

-13

Feb

-14

May-…

Sep

-14

Jan

-15

Ap

r-1

5

Au

g-1

5

No

v-1

5

Mar

-16

Jul-

16

(%) Food+ Fuel and light Clothing+ Miscellaneous

0

20

40

60

80

100

120

Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16

Food+ Fuel+ Clothing+ Housing Misc. Tobacco+

0

20

40

60

80

100

120


Food+ Fuel+ Clothing+ Misc. Tobacco+

(20)

0

20

40

60

80

100

120


Food+ Fuel+ Clothing+ Housing Misc. Tobacco+

1

3

5

7

9

11

13

15

17

19

De

c-1

2

Ma

r-1

3

Jul-

13

Oct

-13

Fe

b-1

4

Ma

y-1

4

Se

p-1

4

Jan

-15

Ap

r-1

5

Au

g-1

5

No

v-1

5

Ma

r-1

6

Jul-

16

(%) Food+ Fuel+ Core



Exhibit 59. RBI’s projection of CPI inflation

% MoM inflation build-up RBI’s targets inflation at 5% by Mar’17

Source: MoSPI, JM Financial, RBI’s Apr’16 monetary policy

Exhibit 60. Key CPI components

Jul-16 Rural Urban All India

Cereals and products 4.27 2.92 3.88

Meat and fish 6.08 7.37 6.57

Egg 6.23 14.31 9.34

Milk and products 4.58 3.21 4.13

Oils and fats 5.29 4.42 4.96

Fruits 3.90 3.16 3.53

Vegetables 12.43 0.25 14.06

Pulses and products 28.40 26.02 27.53

Sugar and confectionery 17.22 32.21 21.91

Spices 8.83 9.43 9.04

Non-alcoholic beverages 5.29 2.87 4.25

Prepared meals, snacks, sweets etc. 6.30 4.88 5.63

Food and beverages 7.92 7.95 7.96*

Pan, tobacco and intoxicants 6.65 7.36 6.83

Clothing 6.52 3.56 5.37

Footwear 5.34 2.71 4.33

Clothing and footwear 6.39 3.42 5.23

Housing - 5.42 5.42

Fuel and light 4.23 0.17 2.75

Household goods and services 5.61 3.35 4.62

Health 4.80 4.22 4.54

Transport and communication 2.02 0.18 1.06

Recreation and amusement 6.10 3.17 4.44

Education 6.51 4.31 5.14

Personal care and effects 7.19 7.43 7.30

Miscellaneous 4.83 3.10 4.01


(2.0)

(1.5)

(1.0)

(0.5)

0.0

0.5

1.0

1.5

2.0

2.5

Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar

FY14 FY15 FY16 FY17(%MoM)



Other highlights of the month

Q1FY17 GDP grows 7.1% YoY, capital formation remains weak: GDP for

Q1FY17 grew below expectations at 7.1% YoY (vs. 7.9% last quarter) and

actually declined -3.1% QoQ. By components, growth was primarily driven by

consumption expenditure—private consumption (52% contribution to GDP

growth, 6.7% YoY) and govt. consumption (29% contribution, 19% YoY)—while

declining capital formation (-4.6% YoY) dragged economic growth (-23.3% YoY

contribution to growth). This is the second consecutive quarter of falling

capex growth suggesting, as also highlighted in our earlier report (Link), that

cash-rich PSUs may have to step in a big way to cover for the capex shortfall

as private capex remains muted on existing excess capacity and weak

demand RBI’s OBICUS remained stagnant at an average of 72% in FY16. 61.

While SW monsoon slowed down in Aug’16, sowing is progressing well:

After two years of rainfall deficit (-12% in 2014 and -14% in 2015), rainfall

during the 2016 monsoon season has been -3.4% of normal, as of August 30.

After the first week of August, rainfall slowed down, particularly in South

India. IMD so far has not revised down its forecast of 106% of LPA for the

monsoon (Jun–Sept), while private forecaster Skymet is now expecting a

normal monsoon (100% of LPA). However, water level (for 91 reservoirs across

the country) continues to improve, c.11% YoY (as of 25th

Aug). This has helped

in kharif sowing, which is up c.5% YoY, primarily on 34% growth in pulses, 6%

coarse cereals and 3% paddy (rice), even as sugarcane/cotton plantation is

down c.8–9% YoY.62.

GST Bill—passed by Parliament, now closer to becoming a law: In a

landmark decision, the Parliament of India passed the awaited GST bill,

almost 16 years after formal discussions first began (the GST committee was

set up in 2000 by the then central government). Even as finer details like the

GST rate, inclusions/exclusions and more are expected to emerge only in a

few months’ time, states are fast moving to ratify the bill. The fact that 16

state legislatures have already ratified the bill implies that GST law will soon

be a reality. Our earlier note (Link) had highlighted that the auto, cement,

consumer and media (distribution) sectors are likely to be the primary

beneficiaries of GST, while it could have negative impact on telecom and

industrials (power BTG and T&D) sectors.63.

Dr. Urjit Patel to step in as the next RBI Governor: The appointment of Dr.

Urjit Patel, current deputy governor of RBI, as the next governor can be seen in

positive light, particularly from the perspective of foreign investors, as it

strengthens the ground for balanced monetary policy efforts directed towards

strong macroeconomic fundamentals, while ensuring adequate liquidity. 64.

Exhibit 61: Q1 FY17 GDP growth below

expectations


Exhibit 62: PFCE continues to drive growth


Exhibit 63: Sharp increase in Govt.

consumption expenditure in Q1


Exhibit 64: Gross fixed capital formation

remains weak

5.0 4.7

6.2

7.7

6.0 6.7

7.5

8.3

6.6

4.4

7.5 7.6 7.2 7.9

7.1

0

1

2

3

4

5

6

7

8

9

Dec-12

Mar-13

Jun-13

Sep-13

Dec-13

Mar-14

Jun-14

Sep-14

Dec-14

Mar-15

Jun-15

Sep-15

Dec-15

Mar-16

Jun-16

(%YoY)

6.2

3.2

0.2

2.1

4.0

7.0

8.2

9.2

1.5

4.2

6.9 6.3

8.2 8.3

6.7

0

1

2

3

4

5

6

7

8

9

10

Dec-12

Mar-13

Jun-13

Sep-13

Dec-13

Mar-14

Jun-14

Sep-14

Dec-14

Mar-15

Jun-15

Sep-15

Dec-15

Mar-16

Jun-16

(%YoY)

0.7

6.5

11.1

15.0

11.1

(1.4)

8.3

2.2 3.7

10.0

7.1

9.7

1.2

(1.9)(3.1)

(6)(4)(2)02468

10121416

Dec-12

Mar-13

Jun-13

Sep-13

Dec-13

Mar-14

Jun-14

Sep-14

Dec-14

Mar-15

Jun-15

Sep-15

Dec-15

Mar-16

Jun-16

(%YoY)

http://jmflresearch.com/JMnew/JMCRM/analystreports/PDF/India_Strategy_Capex_23Sep2015.pdf

http://jmflresearch.com/JMCRM/analystreports/analyst%20documents/IndiaStrategy-GST7Dec2015.pdf



Exhibit 65. Gross NPA increased for most banks sequentially during 1Q17

Public sector banks 1Q16 2Q16 3Q16 4Q16 1Q17

SBI 4.3% 4.2% 5.1% 6.5% 7.0%

BoB 4.1% 5.6% 9.7% 10.0% 11.2%

PNB 6.5% 6.4% 8.5% 12.9% 13.7%

Union Bank 5.6% 6.1% 7.1% 8.7% 10.2%

Bank of India 6.8% 7.6% 9.2% 13.1% 13.4%

Canara Bank 4.0% 4.3% 5.8% 9.4% 9.7%

Oriental Bank of Commerce 5.7% 5.7% 7.5% 9.6% 11.0%

Private sector banks

Axis Bank 1.5% 1.5% 1.8% 1.8% 2.7%

Federal bank 2.6% 2.9% 3.1% 2.8% 2.9%

HDFC Bank 0.9% 0.9% 1.0% 0.9% 1.0%

ICICI Bank 3.7% 3.8% 4.7% 5.8% 5.9%

IndusInd Bank 0.8% 0.8% 0.8% 0.9% 0.9%

Kotak Mahindra 2.3% 2.3% 2.3% 2.4% 2.5%

Yes Bank 0.5% 0.6% 0.7% 0.8% 0.8%

Source: Company data

Exhibit 66. Net NPA increased across most banks

Public sector bank 1Q16 2Q16 3Q16 4Q16 1Q17

SBI 2.2% 2.1% 2.9% 3.8% 4.1%

BoB 2.1% 3.1% 5.7% 5.1% 5.7%

PNB 4.0% 4.0% 5.8% 8.6% 9.1%

Union Bank 3.1% 3.4% 4.1% 5.2% 6.2%

Bank of India 4.1% 4.3% 5.2% 7.8% 7.8%

Canara Bank 2.7% 2.9% 3.9% 6.4% 6.7%

Oriental Bank of Commerce 3.7% 3.5% 4.8% 6.7% 7.8%

Private sector banks

Axis Bank 0.5% 0.5% 0.8% 0.7% 1.2%

Federal Bank 1.0% 1.3% 1.7% 1.6% 1.7%

HDFC Bank 0.3% 0.2% 0.3% 0.3% 0.3%

ICICI Bank 1.6% 1.6% 2.3% 3.0% 3.3%

IndusInd Bank 0.3% 0.3% 0.3% 0.4% 0.4%

Kotak Mahindra 1.0% 1.0% 1.0% 1.1% 1.2%

Yes Bank 0.1% 0.2% 0.2% 0.3% 0.3%

Source: Company data



APPENDIX I


Corporate Identity Number: U65192MH1995PLC092522

Member of BSE Ltd. and National Stock Exchange of India Ltd. and Metropolitan Stock Exchange of India Ltd.

SEBI Registration Nos.: BSE - INZ010012532, NSE - INZ230012536 and MSEI - INZ260012539, Research Analyst – INH000000610

Registered Office: 7th Floor, Cnergy, Appasaheb Marathe Marg, Prabhadevi, Mumbai 400 025, India.

Board: +9122 6630 3030 | Fax: +91 22 6630 3488 | Email: [email protected] | www.jmfl.com

Compliance Officer: Mr. Sunny Shah | Tel: +91 22 6630 3383 | Email: [email protected]

Definition of ratings

Rating Meaning

Buy Total expected returns of more than 15%. Total expected return includes dividend yields.

Hold Price expected to move in the range of 10% downside to 15% upside from the current market price.

Sell Price expected to move downwards by more than 10%

Research Analyst(s) Certification

The Research Analyst(s), with respect to each issuer and its securities covered by them in this research report, certify that:

All of the views expressed in this research report accurately reflect his or her or their personal views about all of the issuers and their

securities; and

No part of his or her or their compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed

in this research report.

Important Disclosures

This research report has been prepared by JM Financial Institutional Securities Limited (JM Financial Institutional Securities) to provide

information about the company(ies) and sector(s), if any, covered in the report and may be distributed by it and/or its associates solely for the

purpose of information of the select recipient of this report. This report and/or any part thereof, may not be duplicated in any form and/or

reproduced or redistributed without the prior written consent of JM Financial Institutional Securities. This report has been prepared

independent of the companies covered herein.

JM Financial Institutional Securities is registered with the Securities and Exchange Board of India (SEBI) as a Research Analyst, Merchant Banker

and a Stock Broker having trading memberships of the BSE Ltd. (BSE), National Stock Exchange of India Ltd. (NSE) and Metropolitan Stock

Exchange of India Ltd. (MSEI). No material disciplinary action has been taken by SEBI against JM Financial Institutional Securities in the past

two financial years which may impact the investment decision making of the investor.

JM Financial Institutional Securities provides a wide range of investment banking services to a diversified client base of corporates in the

domestic and international markets. It also renders stock broking services primarily to institutional investors and provides the research

services to its institutional clients/investors. JM Financial Institutional Securities and its associates are part of a multi-service, integrated

investment banking, investment management, brokerage and financing group. JM Financial Institutional Securities and/or its associates might

have provided or may provide services in respect of managing offerings of securities, corporate finance, investment banking, mergers &

acquisitions, broking, financing or any other advisory services to the company(ies) covered herein. JM Financial Institutional Securities and/or

its associates might have received during the past twelve months or may receive compensation from the company(ies) mentioned in this

report for rendering any of the above services.

JM Financial Institutional Securities and/or its associates, their directors and employees may; (a) from time to time, have a long or short

position in, and buy or sell the securities of the company(ies) mentioned herein or (b) be engaged in any other transaction involving such

securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company(ies) covered under

this report or (c) act as an advisor or lender/borrower to, or may have any financial interest in, such company(ies) or (d) considering the

nature of business/activities that JM Financial Institutional Securities is engaged in, it may have potential conflict of interest at the time of

publication of this report on the subject company(ies).

Neither JM Financial Institutional Securities nor its associates or the Research Analyst(s) named in this report or his/her relatives individually

own one per cent or more securities of the company(ies) covered under this report, at the relevant date as specified in the SEBI (Research

Analysts) Regulations, 2014.

The Research Analyst(s) principally responsible for the preparation of this research report and members of their household are prohibited

from buying or selling debt or equity securities, including but not limited to any option, right, warrant, future, long or short position issued by

company(ies) covered under this report. The Research Analyst(s) principally responsible for the preparation of this research report or their

relatives (as defined under SEBI (Research Analysts) Regulations, 2014); (a) do not have any financial interest in the company(ies) covered

under this report or (b) did not receive any compensation from the company(ies) covered under this report, or from any third party, in

connection with this report or (c) do not have any other material conflict of interest at the time of publication of this report. Research

Analyst(s) are not serving as an officer, director or employee of the company(ies) covered under this report.

While reasonable care has been taken in the preparation of this report, it does not purport to be a complete description of the securities,

markets or developments referred to herein, and JM Financial Institutional Securities does not warrant its accuracy or completeness. JM

Financial Institutional Securities may not be in any way responsible for any loss or damage that may arise to any person from any inadvertent

error in the information contained in this report. This report is provided for information only and is not an investment advice and must not

alone be taken as the basis for an investment decision. The investment discussed or views expressed or recommendations/opinions given

herein may not be suitable for all investors. The user assumes the entire risk of any use made of this information. The information contained



herein may be changed without notice and JM Financial Institutional Securities reserves the right to make modifications and alterations to this

statement as they may deem fit from time to time.

This report is neither an offer nor solicitation of an offer to buy and/or sell any securities mentioned herein and/or not an official

confirmation of any transaction.

This report is not directed or intended for distribution to, or use by any person or entity who is a citizen or resident of or located in any

locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or

which would subject JM Financial Institutional Securities and/or its affiliated company(ies) to any registration or licensing requirement within

such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to a certain category of investors.

Persons in whose possession this report may come, are required to inform themselves of and to observe such restrictions.

Persons who receive this report from JM Financial Singapore Pte Ltd may contact Mr. Ruchir Jhunjhunwala ([email protected]) on

+65 6422 1888 in respect of any matters arising from, or in connection with, this report.

Additional disclosure only for U.S. persons: JM Financial Institutional Securities has entered into an agreement with JM Financial Securities,

Inc. ("JM Financial Securities"), a U.S. registered broker-dealer and member of the Financial Industry Regulatory Authority ("FINRA") in order to

conduct certain business in the United States in reliance on the exemption from U.S. broker-dealer registration provided by Rule 15a-6,

promulgated under the U.S. Securities Exchange Act of 1934 (the "Exchange Act"), as amended, and as interpreted by the staff of the U.S.

Securities and Exchange Commission ("SEC") (together "Rule 15a-6").

This research report is distributed in the United States by JM Financial Securities in compliance with Rule 15a-6, and as a "third party research

report" for purposes of FINRA Rule 2241. In compliance with Rule 15a-6(a)(3) this research report is distributed only to "major U.S.

institutional investors" as defined in Rule 15a-6 and is not intended for use by any person or entity that is not a major U.S. institutional

investor. If you have received a copy of this research report and are not a major U.S. institutional investor, you are instructed not to read, rely

on, or reproduce the contents hereof, and to destroy this research or return it to JM Financial Institutional Securities or to JM Financial

Securities.

This research report is a product of JM Financial Institutional Securities, which is the employer of the research analyst(s) solely responsible for

its content. The research analyst(s) preparing this research report is/are resident outside the United States and are not associated persons or

employees of any U.S. registered broker-dealer. Therefore, the analyst(s) are not subject to supervision by a U.S. broker-dealer, or otherwise

required to satisfy the regulatory licensing requirements of FINRA and may not be subject to the Rule 2241 restrictions on communications

with a subject company, public appearances and trading securities held by a research analyst account.

JM Financial Institutional Securities only accepts orders from major U.S. institutional investors. Pursuant to its agreement with JM Financial

Institutional Securities, JM Financial Securities effects the transactions for major U.S. institutional investors. Major U.S. institutional investors

may place orders with JM Financial Institutional Securities directly, or through JM Financial Securities, in the securities discussed in this

research report.

Additional disclosure only for U.K. persons: Neither JM Financial Institutional Securities nor any of its affiliates is authorised in the United

Kingdom (U.K.) by the Financial Conduct Authority. As a result, this report is for distribution only to persons who (i) have professional

experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion)

Order 2005 (as amended, the "Financial Promotion Order"), (ii) are persons falling within Article 49(2)(a) to (d) ("high net worth companies,

unincorporated associations etc.") of the Financial Promotion Order, (iii) are outside the United Kingdom, or (iv) are persons to whom an

invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000) in

connection with the matters to which this report relates may otherwise lawfully be communicated or caused to be communicated (all such

persons together being referred to as "relevant persons"). This report is directed only at relevant persons and must not be acted on or relied

on by persons who are not relevant persons. Any investment or investment activity to which this report relates is available only to relevant

persons and will be engaged in only with relevant persons.

Additional disclosure only for Canadian persons: This report is not, and under no circumstances is to be construed as, an advertisement

or a public offering of the securities described herein in Canada or any province or territory thereof. Under no circumstances is this report

to be construed as an offer to sell securities or as a solicitation of an offer to buy securities in any jurisdiction of Canada. Any offer or sale

of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the

relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively, pursuant

to an exemption from the registration requirement in the relevant province or territory of Canada in which such offer or sale is made. This

report is not, and under no circumstances is it to be construed as, a prospectus or an offering memorandum. No securities commission or

similar regulatory authority in Canada has reviewed or in any way passed upon these materials, the information contained herein or the

merits of the securities described herein and any representation to the contrary is an offence. If you are located in Canada, this report has

been made available to you based on your representation that you are an “accredited investor” as such term is defined in National

Instrument 45-106 Prospectus Exemptions and a “permitted client” as such term is defined in National Instrument 31-103 Registration

Requirements, Exemptions and Ongoing Registrant Obligations. Under no circumstances is the information contained herein to be

construed as investment advice in any province or territory of Canada nor should it be construed as being tailored to the needs of the

recipient. Canadian recipients are advised that JM Financial Securities, Inc., JM Financial Institutional Securities Limited, their

affiliates and authorized agents are not responsible for, nor do they accept, any liability whatsoever for any direct or consequential loss

arising from any use of this research report or the information contained herein.

India | Strategy Strategy Monthlyjmflresearch.com/.../pdf/IndiaStrategyMonthly-Sept2016.pdf ·...

Documents

Transcript of India | Strategy Strategy Monthlyjmflresearch.com/.../pdf/IndiaStrategyMonthly-Sept2016.pdf ·...