India Strategy (Thematic) -...
Transcript of India Strategy (Thematic) -...
India Strategy
(Thematic)
Nikhil Vora / Nikhil Salvi
IDFC Securities Ltd
(Dir) +91-22-6622 2567 / 2566
(M) +91 –98211 32471
Email: [email protected] / [email protected]
SEBI Registration Nos.: INB23 12914 37, INF23 12914 37, INB01 12914 33, INF01 12914 33.
For Private Circulation only. Important
disclosures appear at the back of this report”
Follow the ‘New’ leaders…
‘Follow the leader’….are we playing even today?
Children all over the world have been playing a simple game called ‘Follow the leader’ since many years. This simple game that teaches at an early age to observe, listen and identify who the leader in a group is and follow him/her. The one who does it the best gets rewarded. Everyone likes a leader and the stock market is no exception to this common phenomenon.
From time to time, certain sectors benefit from favourable conditions that propel growth, profitability and emerge as leaders in terms of investor interest. Just as in a rising tide, in which all boats-big and small-rise, similarly in a sector that is benefiting from favourable environment, most stocks rise. Savvy Investors turn risk-adjusted return ratio in their favour by choosing the ‘right’ sector in which to increase exposure, i.e. those sectors which are set to attract increasing investor interest. But how do we identify tomorrow’s leading sectors?
3
Investors seek out sectors that ‘Lead’
3
Savvy Investors turn risk-adjusted return ratio in their favour by choosing the
‘right’ sector in which to increase exposure
Depending on favourable factors different sectors emerge as ‘leaders’ in terms of growth and profitability relative to other sectors
Change
in
Sensex
weight
of
sector
Financials
from 2002-2005
Consumer
goods
from 1997-2001
Oil & Gas
from 2006 - 2009
15
24
32
27 28
10.0
15.0
20.0
25.0
30.0
35.0
1997 1998 1999 2000 2001
(%)
13
17
20
22
10.0
13.5
17.0
20.5
24.0
2006 2007 2008 2009
(%)
6
12
1819
0
5
10
15
20
2002 2003 2004 2005
(%)
4
‘Financials’ sector outpaced others in the past decade
4
Several factors contributed to phenomenal growth of Banking &Finance in past decade
Banking sector
in India has
grown at 25%
CAGR in past
10 years due to
host of factors
High growth in Indian economy during 2000-2010 compared to previous decade (~7% vs ~4%)
High credit demand to finance large scale infrastructure addition programs (share of non-food credit increased from ~3% in 2002 to ~15% in 2012)
Profitability of banks improved (RoA doubled from 0.5% in 2002 to ~1% in 2012)
Bankex increased at 31%
CAGR, as investors chased
banking stocks to capture
growth
‘Technicals’ (Sensex weight) in sync with ‘Fundamentals’ (profitability) for Bankex
Consequently
‘Financials’ weight in Sensex
increased from 6% in 2002 to
26% in 2012
5 5
Sensex weight as barometer of ‘Sector’ leadership
Changes in sector weights act as the ‘Leadership Compass’
6
Sensex weight change driven by index scrip selections
6
Quantitative
criteria for
selection of
constituent
scripts in
Sensex
Index construction methodology based on free float market capitalization
Index constitution mechanism ensures representation to sectors in proportion to investor expectations (reflected in market cap)
Scrip should figure in the Top 100 companies listed by full
market cap
Scrip should have been traded on each and every
trading day for the last one year
Scrip should have been traded on each and every
trading day for the last one year
Scrip should be among Top 150 by average value of shares
traded per day for the last one year
Scrip selected to maintain index sectoral weights that are broadly
in-line with the overall market
Market Capitalisation
Trading Frequency
Average daily trades
Average daily
turnover
Industry
representation
7
Sector weights reflect sector relevance over time
7
Sensex changes reflect changing investor expectations towards sectors
0%
20%
40%
60%
80%
100%
FY93 FY98 FY03 FY07 FY13TD
Metals Construction Oil & Gas Consumer Goods Banking & Finance IT Services
12%
27%
‘New’ economy
sector relevance
increased
42%
21%
‘Old’ economy
sector relevance
declined
32%
40%
8 8
Identifying when a sector leader ‘peaks’
Historical average weight of Consumer goods in Sensex is 16%
Historical peak weight of Consumer goods in Sensex is 28%
28
7
14
0
5
10
15
20
25
30
FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13TD
Weight (%)Consumer Goods
Peak
weight in
Sensex
Bottom weight
in Sensex
Current
weight in
Sensex
9 9
Identifying when a sector leader ‘peaks’
Historical average weight of Oil & Gas in Sensex is 15%
Historical peak weight of Oil & Gas in Sensex is 27%
9
27
0
5
10
15
20
25
30
FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06
Weight (%)Oil & Gas
Bottom
weight in
Sensex
Peak weight
in Sensex
10 10
Identifying when a sector leader ‘peaks’
IT Services ‘highest plateau’ at ~18%
Average weight of IT Services in Sensex is 15%
18 18 18
10
0
5
10
15
20
FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13TD
Weight (%)IT Services
Peak
weight in
Sensex
Bottom
weight in
Sensex
11
Past leaders in Sensex weights and peak weights
11
1992-1996
Construction
(27%)
1997-2003
Consumer Goods
(25%)
2004
Oil & Gas
(20%)
2005
Financials
(19%)
2006-2007
IT services
(19%)
2008 – 2009
Financials and
Oil & Gas alternately
(20%)
2010 – 2012
Financials
(26%)
Investors need to find the ‘next’ leader and leave the ‘current’ leader
2013-…
???
“What goes UP must come DOWN”
― Isaac Newton
12
13
Has ‘Financials’ reached its peak in Sensex weight?
13
6
26
0
5
10
15
20
25
30
FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13TD
Weight (%) Banking & Finance
Bottom
weight in
Sensex
Peak
weight in
Sensex
Overbought signals by
‘Technicals’ 1
Financials currently at 26% of Sensex weight
Historical peak for various sectors is 25-27%
Average weight of financials in Sensex is 16%
‘Fundamentals’
to follow
2
Spectre of looming NPAs unwilling to go away
Competitive pressure may cap gains from lowering of policy rate by RBI
Past driver of growth – Infrastructure lending- unlikely to be revived
quickly
14
Does any other sector hold potential to be leader
14
No clear ‘leader’
among several
sectors
Several sectors are facing their own set of challenges
Construction and Engineering: Infrastructure and capex growth slowed down
IT Services: Weak economic growth in key markets (US, Europe)
Metals: Volatility in global commodity prices and demand
Telecom: Regulatory headwinds and unabated competitive intensity
Power Utilities: Concerns on availability and cost of fuel for existing capacities,
while new capacity additions hampered by delayed clearances for projects
Automobiles: Weak economic growth clouds future prospects
Are Consumer and Pharma next ‘Leaders’?
Consumer goods driven by
strong structural changes
Pharmaceutical sector
driven by favourable global
trend
Strong consumption trend among ‘favourably changing demographics’
Rising income levels
Propensity to consume higher
Premiumisation in established product categories to improve profitability
Steady growth in global spending on medicine expected to continue
The opportunity for Indian companies to increase market share is large
Investors to look favourably at several positive attributes of Indian Pharma
• Low leverage
• Strong FCF
• Proven ability to pursue large ticket acquisitions
• Execution skills demonstrated in acquisition deals that created value
Consumer and Pharma weight in Sensex set to increase
16
Several Consumer Goods and Pharma stocks expected to enter Sensex
Periodic index revisions to take
cognizance of
increased relevance
of Consumer Goods and Pharma stocks
Current
Consumer weight
in Sensex (14%) far
below historical peak
(27%)
Current Pharma
weight in Sensex (5%)
far below historical
peak (10%)
Market cap of non-Sensex consumer stocks
more than bottom Sensex companies
• Market Cap of Nestle (non-Sensex) is higher
than 10 Sensex stocks
• Market Cap of each of United Spirits, United
Breweries and Godrej Consumer is higher
than the bottom-most Sensex stock -
Hindalco
Market cap of non-Sensex Pharma stock
more than bottom Sensex companies
• Market Cap of Lupin Labs is higher than the
last two Sensex stocks by market cap –
Tata Power and Hindalco
‘Caveat Emptor’ to our view on Financials
17
Consumer and Pharma likely to share co-leadership with Financials
If Government allots much awaited banking licenses to new entities….
IDFC, L&T Finance, Bajaj Finserv, M&M Financial Services….
Bank licenses will boost investor sentiment towards banking sector
……will sustain leadership of financials in Sensex weight
1
2
Our view : Follow the ‘New’ leaders
’Consumer Goods and Pharmaceuticals’ weight in
Sensex expected to going forward
18
19
“We always overestimate the change that will occur in the next two years and underestimate the change that will occur in
the next ten”
- Bill Gates
20 November 2012
Disclaimer
This document has been prepared by IDFC Securities Ltd (IDFC SEC). IDFC SEC and its subsidiaries and associated companies are a full-service, integrated investment banking, investment management and brokerage group. Our research analysts
and sales persons provide important input into our investment banking activities.
This document does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction.
The information contained herein is from publicly available data or other sources believed to be reliable. While we would endeavor to update the information herein on reasonable basis, the opinions and information in this report are subject to change
without notice and IDFC SEC, its subsidiaries and associated companies, their directors and employees (“IDFC SEC and affiliates”) are under no obligation to update or keep the information current. Also, there may be regulatory, compliance, or
other reasons that may prevent IDFC SEC and affiliates from doing so. Thus, the opinions expressed herein should be considered those of IDFC SEC as of the date on this document only. We do not make any representation either express or
implied that information contained herein is accurate or complete and it should not be relied upon as such.
The information contained in this document has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. This document is prepared for assistance only and is not intended to be and must not
alone be taken as the basis for an investment decision. The investment discussed or views expressed in the document may not be suitable for all investors. Investors should make their own investigations as they deem necessary to arrive at an
independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved) and investment decisions based upon their own financial objectives and financial resources. Investors
assume the entire risk of any use made of the information contained in the document. Investments in general involve some degree of risk, including the risk of capital loss. Past performance is not necessarily a guide to future performance and an
investor may not get back the amount originally invested.
Foreign currency-denominated securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or the price of, or income derived from, the investment. In addition, investors in securities, the values of which are
influenced by foreign currencies, effectively assume currency risk.
Affiliates of IDFC SEC may have issued other reports that are inconsistent with and reach different conclusions from, the information presented in this report.
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 IDFC SEC and affiliates 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 document may come are required to inform themselves of, and to observe, such applicable restrictions.
Reports based on technical analysis centers on studying charts of a stock's price movement and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals.
IDFC SEC and affiliates, their directors, officers, and employees may from time to time have positions in, purchase or sell, or be materially interested in any of the securities mentioned or related securities. IDFC SEC and affiliates may from time to
time solicit from, or perform investment banking, or other services for, any company mentioned herein. Without limiting any of the foregoing, in no event shall IDFC SEC, any of its affiliates or any third party involved in, or related to, computing or
compiling the information have any liability for any damages of any kind including but not limited to any direct or consequential loss or damage, however arising, from the use of this document. Any comments or statements made herein are those of
the analyst and do not necessarily reflect those of IDFC SEC and affiliates.
This document is subject to changes without prior notice and is intended only for the person or entity to which it is addressed and may contain confidential and/or privileged material and is not for any type of circulation. Any review, retransmission, or
any other use is prohibited.
Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. IDFC SEC will not treat recipients as customers by virtue of their receiving this report.
IDFC Capital (USA) Inc. has reviewed the report and, to the extent that it includes present or past information, it is believed to be reliable, although its correctness cannot be assured.
The analyst certifies that all of the views expressed in this research report accurately reflect his/her personal views about any and all of the subject issuer(s) or securities. The analyst certifies that no part of her compensation was, is, or will be directly
or indirectly related to the specific recommendation(s) and/or views expressed in this report.
Additional Disclosures of interest:
1. IDFC SEC and its affiliates (i) may have received compensation from the company covered herein in the past twelve months for investment banking services; or (ii) may expect to receive or intends to seek compensation for investment-banking
services from the subject company in the next three months from publication of the research report.
2. Affiliates of IDFC SEC may have managed or co-managed in the previous twelve months a private or public offering of securities for the subject company.
3. IDFC SEC and affiliates collectively do not hold more than 1% of the equity of the company that is the subject of the report as of the end of the month preceding the distribution of the research report.
4. IDFC SEC and affiliates are not acting as a market maker in the securities of the subject company.
5. Mr. Vikram Limaye - Director of IDFC Securities is also an Independent Director of eClerx Services Limited
Explanation of Ratings:
1. Outperformer : More than 5% to Index
2. Neutral : Within 0-5% (upside or downside) to Index
3. Underperformer : Less than 5% to Index
Copyright in this document vests exclusively with IDFC Securities Ltd.
21 November 2012
Analyst Sector/Industry/Coverage E-mail Tel.+91 22 6622 2600
Shirish Rane Co-Head of Research; Construction, Power, Cement [email protected] +91 22 6622 2575
Nikhil Vora Co-Head of Research; Strategy, FMCG, Media, Retail, Education, Mid-caps [email protected] +91 22 6622 2567
Prakash Joshi Oil & Gas, Metals [email protected] +91 22 6622 2564
Nitin Agarwal Pharmaceuticals, Real Estate, Agri-inputs [email protected] +91 22 6622 2568
Hitesh Shah, CFA IT Services & Telecom [email protected] +91 22 6622 2565
Bhoomika Nair Logistics, Engineering [email protected] +91 22 6622 2561
Pramod Kumar Automobiles, Auto ancillaries [email protected] +91 22 6622 2562
Ashish Shah Construction, Power [email protected] +91 22 6622 2560
Probal Sen Oil & Gas [email protected] +91 22 6622 2569
Swati Nangalia Media, Education, Exchanges [email protected] +91 22 6622 2576
Abhishek Gupta Telecom, IT services [email protected] +91 22 6622 2661
Saumil Mehta Metals, Pipes [email protected] +91 22 6622 2578
Harit Kapoor FMCG, Retail, Paints, Mid-caps [email protected] +91 22 6622 2649
Vineet Chandak Real Estate, Pharmaceuticals, Agri-inputs [email protected] +91 22 6622 2579
Nikhil Salvi Strategy, Mid-caps [email protected] +91 22 6622 2566
Dharmesh R Bhatt, CMT Technical Analyst [email protected] +91 22 6622 2534
Dharmendra Sahu Database Analyst [email protected] +91 22 6622 2580
Equity Sales/Dealing Designation E-mail Tel.+91 22 6622 2500
Tapasije Mishra Group CEO [email protected] +91 22 6622 2601
Paresh Shah MD, Dealing [email protected] +91 22 6622 2508
Vishal Purohit MD, Co-Head of Sales [email protected] +91 22 6622 2533
Rajesh Makharia Director, Sales [email protected] +91 22 6622 2528
Kalpesh Parekh Director, Sales [email protected] +91 22 6622 2696
Varun Saboo AVP, Sales [email protected] +91 22 6622 2558
Samir Gilani Head of Derivatives [email protected] 91-22-6622 2535
Dipesh Shah Director, Derivatives [email protected] +91 22 6622 2693
Mukesh Chaturvedi SVP, Sales trading [email protected] +91 22 6622 2512
Viren Sompura SVP, Sales trading [email protected] +91 22 6622 2527
Rajashekhar Hiremath VP, Sales trading [email protected] +91 22 6622 2516
IDFC Securities US Designation E-mail Telephone
Ravilochan Pola CEO [email protected] +1 646 756 5865
Sanjay Panicker Director [email protected] +1 212 829 4353
22 November 2012
www.idfc.com
IDFC Securities
Naman Chambers, C-32, 7th
floor,
G- Block, Bandra-Kurla Complex, Bandra (East),
Mumbai 400 051
INDIA
Tel: +91 22 6622 2600
Fax: +91 22 6622 2501
Our research is also available on Bloomberg and Thomson Reuters
For any assistance in access, please contact [email protected]
IDFC Capital (USA) Inc,
350 5th Avenue,
Suite 4711,
New York
NY 10118
Tel: +1 646 756 5864