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The World Bank in its recent
repo rt has pred icted tha t Ind iais set to become the fastest-
g row ing econo my in the w orld
by 2017. We continue to
w i t n e s s r i s e i n i n v e s t o r
c o n f i d e n c e a n d i m p r o v e d
macro-economic indicators .Over the medium-term, the
growth is expected to rise
steadily to 7 per cent as
reform s b eg in to y ield res ults.
G row th impa cts in ma ny w ay s .There is a rea l increa se in
income as per-capita income
goes up. Government is able
Anup BagchiM D & CEO
ICICI Securit ies Ltd.
to co llect m o re taxes a nd therefo re their spe nding g o es up.
There is a n im provem ent in infra s tructure a nd o verall w ell
being . The o ther im pa ct is o n the inves tors w ho invest intothe g row th of the eco nom y thro ugh stock m a rkets. S tock
m a rkets o r eq uity m a rkets reflect the w ea lth ge nerated b y
companies and directly grows with the growth in the
eco no m y. Inves tors in eq uity enjo y the b ene fits o f g ro w th of
businesses they invest into and the overall growth of the
ec o no m y. Therefore inves ting into the sto ck m a rkets ca ng ive a m ultiplier effec t to o ne's w ea lth in s uch tim es .
How do these cha nge s impa ct you? As yo u sta rt the new
year, it is a good idea to sit with your family and have a
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1ICICIdirect M oney Manager January 2015
disc uss io n o n y o ur life g o a ls. Thes e g o a ls sho uld tra nsla te
into where you should be investing. Long-term goals, like
retirem ent, can be co vered throug h investme nts thro ugh a
la rg er inves tme nt into e q uity a nd a sm a ller inves tme nt into
other assets like fixed deposits or gold. Your medium to
short-term goals should be covered through a more
co nse rva tive a llo ca tio n into e q uity. As yo u g o thro ug h the
proc ess of ha ving a clea r investme nt pla n, you ca n g et to
really understand how much you should be investing in
different asset classes. It is also a good idea to find the
surplus a ss ets y o u ha ve, a fter co vering yo ur key life g o a ls.
Given the expected growth in the markets, you could
choose to invest these surplus assets based on your risk
a ppetite, w ith a la rg er po rtio n into eq uity.
Ha ving a n unde rsta nd ing o f your overa ll expo sure to eq uity,
in a structured way, can give you a good indication how
markets could impact growth in your personal wealth.
Given that the value of equity fluctuates, knowing your
expo sure into eq uity w ill a lso g ive a g o o d ind ica tio n o n the
risk yo u ca rry.
As w e m ove a hea d to a new yea r, I w ish that the yea r bring s
you closer to your life goals and dreams. Our message
remains the same - 'Keep investing and stay invested for
yo ur life go a ls'. Throug h this m a g a zine a nd o ur w eb site
www.icicidirect.com w e w a nt to m a ke a n earnest at tem pt to
partner with you in setting and achieving your financial
goals. Do walk into any of your Neighbourhood Financial
S upersto re a nd ta lk to us.
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2
The y ea r g o ne b y s a w a definite reviva l in investo r se ntim ent. As
w e enter the New Yea r, there is g ro w ing o ptim ism tha t this co uld
be a n a ttra ctive y ea r, espe cia lly for fina ncia l a ss ets .
The e q uity m a rket se em s to ha ve s hifted into a hig her grow thtrajectory, the debt market is waiting for a boost from further
so ftening o f interest ra tes , and a further rate cut w ill bo o st o ther
se cto rs like rea l es tate .
With ea ch as set cla ss facing its ow n ups and d ow ns, how sho uld
you position your investment portfolio for the year 2015? Our
cove r story loo ks into ea ch a sse t cla ss a nd the factors that a re
likely to im pa ct them , a lo ng w ith the b est inves tme nt a dvice fo r
the yea r a hea d from so m e o f the lea ding fund m a nag ers in the
industry.
Further, in o rde r to g ive yo u a 'b ig picture' o f ma rkets in pa rticula r,
we bring to you the fundamental, technical and derivatives
m a rket o utlo o k 2015, fro m o ur interna l tea m o f res ea rch expe rts.
Our research team also presents the performance review of
different categories of mutual funds, along with the outlook for
nea r future.
I w o uld a lso like to draw yo ur a ttentio n to o ur G uest Column b y
Ro hit S a lho tra , MD &CEO, ICICI Ho m e Fina nce Com pa ny, w ho
pro vide s us w ith the key de velo pm ents o f rea l esta te se ctor in the
ye a r 2014 a nd the outlo o k fo r 2015. S o rea d o n, stay upda ted a nd
involved. Do write in with your feedback at moneymanager@icicise curities.co m a nd sha re y o ur thoug hts.
Tea m ICICIdirect Mo ney Mana g er w ishe s yo u a ha ppy a nd
pros perous New Yea r.
Editor &Pub lisher : Abh isha ke Math ur, CFA
Coordina ting Editor : Yog ita Kha tri
Editoria l Board : Sam eer Chavan , CWM® , Panka j Pandey
CMEd ito ria l Te am : Aze em Ahm a d, Nithy a kum a r VP CFP , Nitin Kunte , S a chin J a in,
Sheetal Ashar
ICICIdirect M oney Manager January 2015
Your ma g a zine is no w also a vailab le o n w w w.ma gzter.com , a
dig ital new ssta nd.
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M D Desk...................................................................................................1
Editorial.....................................................................................................2
Contents....................................................................................................3
News........................................................................................................4
Fundamental Market Outlook 2015By Pa nka j Pand ey, Hea d - Rese a rch, ICICId irect....................................5
Technical Outlook 2015Dha rmesh S ha h, Head - Tec hnica l Rese a rch, ICICId irect sha res hisview s on m a rkets, c urrency, go ld a nd Brent crude for 2015..............11
Derivatives M arket Outlook 2015By Am it G upta , Hea d - Deriva tives, ICICIdirect...................................28
Top Stock Ideas for 2015.......................................................................... 33
Flavour of t he M onth: Investment Outlook 2015Here w e bring to yo u several fund m ana g ers' view s o n how they see2015 pa nning out fo r m a jo r a ss et cla ss es a nd their a dvice fo r retailinvestors. Read on................................................................................53
Guest Column: Real Estate Outlook 2015By Rohit Sa lho tra, MD &CEO, ICICI Hom e Fina nce Co m pa ny Ltd ......65
M utual Funds Review 2014 and Preview 2015.............................................69
M utual Fund Top PicksHere w e present o ur rese a rch tea m 's to p m utua l fundrecom mend ations , ac ros s eq uity a nd deb t categ ories… ... . .. .. .. .. .. .. .. .74
Ask Our PlannerYour perso na l fina nce q ueries a nsw ered… .........................................76
Updated Equity Model Portfolio..................................................................80
Quiz Time.................................................................................................85
Year ly Trends...........................................................................................86
Premium Educat ion Programmes Schedule.................................................90
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Equity savings scheme could be tw eaked to make it more att ract ive
The g ove rnment's Rajiv G a ndhi Eq uity S a vings S chem e (RGESS ), a iming to draw retail
investo rs into the eq uity ma rket throug h tax exem ptions , could be c ha ng ed in the com ing
Bud g et for 2015-16. Acco rding to s o urces, the g o vernm ent m ig ht reduce the lock-in for
the sche me from the existing three y ea rs to o ne ye ar, to d raw investo rs. Currently, thesc hem e o ffers a fixed loc k-in for the first ye a r and flexible lock-in for the ne xt tw o ye a rs.
Add ition a lly, the plan is to increa se the b ene fits fo r not o nly first-tim e investo rs but tho se
alrea dy do ing s o in eq uity, if they put mo ney in the schem e.
Courtesy: Business Standard
After four yea rs of introd ucing ba se rate a s the b enchm a rk lending rate, Reserve Ba nk of
India (RBI) has shown for the first time that it is thinking of making it more flexible in
ca lcula ting it. In a mo ve to offer operationa l freed om to b a nks, RBI sa id b a nks ca n do it
either on the ba sis o f average cos t of funds o r on ma rginal cost o f funds o r any reaso nab leme thod provided it is c ons istent a nd ma de a vailab le for supe rviso ry review /scrutiny a s
and w hen req uired.
Courtesy: The Economic Times
Banks to get f reedom in fix ing base rate: RBI
Real esta te inves tme nt trusts (REITs), notified la st y ea r, ha ve s o fa r fo und few ta kers d ue to
ta xa tio n-rela ted iss ues . To a dd ress this, th e Cen tral Boa rd o f Direct Ta xes (CBDT) w a nts
this ma rket instrum ent to be m a de exe m pt from Minimum Alterna te Ta x (MAT). “ The idea
be hind g ranting a 'pa ss -throug h' sta tus to REITs w a s no t to levy MAT o n tho se . It is atechnica l issue w e a re w orking to reso lve,” sa id a so urce. REITs a re a security instrume nt
that s ell on bo urses like a sto ck and invests in real estate - properties or mo rtg a ge s.
Courtesy: Business Standard
Real estate investment trusts may get taxation relief
Encouraged by softening inflation, the Reserve Bank of India (RBI) decided to cut the
benc hm ark interest rate b y 0.25 per cent to 7.75 per cent w ith a view to b oo st g row th. The
decision to reduce repo rate com es a fortnight a head of the scheduled d ate o f monetary
policy a nnounce me nt o n Februa ry 3. The RBI has bee n keeping the ben chm a rk interestrate a t eleva ted level at 8 per cent s ince J a nuary 2014.
Court esy: The Hindu
RBI cuts repo rates by 25 basis points
January 2015
The S ecurities a nd Excha ng e Bo a rd of India (S EBI) ha s prop o se d d raft norm s for initia l
pub lic o ffering s (IPOs ) in e lectro nic fo rm a nd fas t trac k follow -on pub lic offering s (FPOs )
a nd rig hts issue s in an effo rt to m inim ize the listing timeline, b oo st reta il pa rticipation a nd
ma ke it ea sier for co mpa nies to raise mo ney. To ena ble electronic-IPOs, S ebi propos ed
allowing investors to submit applications to a registered stock broker, depositorypa rticipant (DP) or reg istra r a nd trans fer a g ent (RTA) a nd se lf-certified sy nd ica te b a nk
(SCSB). Depositories can access the stock exchange platform and, in turn, provide the
sa me to their DPs or RTAs, S ebi propos ed. Investo rs, how ever, w ill continue to ha ve the
option of sub mitting a pplica tions suppo rted by blocked am ount (AS BA) to S CS B o r stock
broker.
Courtesy: Livemint
Sebi floats discussion papers on e-IPOs, fast-tracking FPOs
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FUNDAM ENTALM ARKET OUTLOOK 2015
Grow th nourishment to resurrect economic recovery
E q u i t y m a r ke t s , h a v i n gappreciated 29% this year,
have b een running ahea d of aneconomic recovery, which isexpected to follow with a lag.The g o vernmen t has a lrea dyinitiated several confidence-building measures and takenkey decisions like allowingforeign direct investment (FDI)
in s everal secto rs, railw a y fa rehike, online environment &fo res t clea ra nce, e tc. Ho w ever,a n e c o n o m i c r e c o v e r y i sexpected only at a gradualpa ce . After tra d ing a ro und 14xo n e y e a r f o r w a r d E P S
(ea rning s pe r sha re) for mo st o fthe la st five y ea rs, the S ens ex isnow trading at 14.6x one yearforw a rd EPS (FY16E).
We have already witnessed abo ttom ing out of the eco nom icgrowth cycle, which coupled
with a reduction in crude andother commodity prices hasa ided lo w er infla tio n. This ha sa lso led to ho pes o f a ra te cut inthe first ha lf of ne xt ye a r. Ind ia
is entering a new phase ofeconomic growth that would
be characterised by a multi-ye a r bull run. In this b a ckdrop ,we expect four major themesto play out, which will last forthe forese ea ble future.
Consumption grow th: With arevival in macroeconomic &
per capita income growth,l i festyle-based consumptions e c t o r s w o u l d b e d i r e c tb e n e f i c i a r i e s . W h i l econsumption expenditure hasalways been the driver ofIndian economic growth, thepac e a nd s ize o f co nsumptionspe nds is expected to m ultiplymani fo ld . With f avourabledemographics and the largestworking age population, Indiais set to have largest middleclass by 2050, contributing32% of global middle class
spending. On the one hand,w ith m o re peo ple cross ing thep o v e r t y l i n e , o v e r a l lconsumption is expected toincrease while on the other,
January 2015
Pankaj Pandey,Head-Research,ICICIdirect
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32% of world's middle class spending will be in India by 2050
0%1 0%
2 0%
3 0%
4 0%
5 0%
6 0%7 0%
8 0%
9 0%100%
2 0 0 0
2 0 0
3
2 0 0 6
2 0 0
9
2 0 1 2
2 0 1
5
2 0 1 8
2 0 2
1
2 0 2 4
2 0 2
7
2 0 3
0
2 0 3 3
2 0 3
6
2 0 3 9
2 0 4
2
2 0 4 5
2 0 4
8
China India Other Asia Japan United States EU Others
6ICICIdirect M oney Manager
w i t h r i s i n g i n c o m e l e v e l ,s e v e r a l h o u s e h o l d s w o u l dmove up the va lue cha in
resulting in premiumisation.C o n s u m p t i o n s p e n d i n g i sexpected to cross $3.2 trillionby 2025, 3x o f US $991 billio n in2010. Consumption driven
January 2015
FUNDAM ENTALM ARKET OUTLOOK 2015
sectors like branded apparel,communica t ion , hea l thcare ,housing, consumer durables,
fast-moving consumer goods(FMCG) a nd a utom o bile w o ulds t a n d o u t a n d e x h i b i ta ccelera ted g row th in yea rs tocome.
Low er cost of capital: Secondly,w i t h a n i m p r o v e m e n t i n
m e d i u m -t e r m e c o n o m i c
outlook that would warrant
h i g h e r f o r e i g n i n f l o w s i n
so vereig n and corporate deb t,co st of ca pital w o uld g ra dua lly
come down. In addition, a
s tructura l shift in re ta il infla tio n
by almost 400 basis points
(bps) from double digit to
e x p e c t e d s u s t a i n a b l e 6 %
l e v e l s i s a m a r k e di m p r o v e m e n t l e a d i n g t o
positive real interest rates,
w hich m a y prom pt the Reserve
Bank of India (RBI) to cut
interes t rates by 75-100 bps in
the next calendar year. Both
t h e s e m e a s u r e s w o u l d
facilitate capital investments,
w hich w ould d rive grow th a nd
enha nce pro fita b ility. This, int u r n , w o u l d b e r e f l e c t e d
thro ug h e xpan sio n in va luatio n
m u l t i p l e s . O u r a n a l y s i s
sug g es ts that se ctors like a uto
a n c i l l a r i e s , c a p i t a l g o o d s ,
cement , ceramic products ,
lo g istics ; pa cka g ing a nd pla sticp r o d u c t s w o u l d b e k e y
beneficiaries of lower cost of
capita l and may witness a
m ultiple expa nsion.
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FUNDAM ENTALM ARKET OUTLOOK 2015
-0.5% -1.0% -1.5% -2.0%
Agro Chemical 12.6 12.3 11.9 11.6 11.2 20.1 21.6
Alcoholic Beverages 13.3 13.1 13.0 12.8 12.6 5.1 -12.2
Auto Ancillaries 12.5 12.2 12.0 11.7 11.5 15.3 14.3
Automobile 12.5 12.2 11.9 11.7 11.4 19.7 17.8Cables 12.7 12.5 12.3 12.2 12.0 8.6 6.3
Capital Goods Electrical Eq 12.8 12.5 12.1 11.8 11.5 17.9 8.7
Capital Goods-Non Elec. 13.2 13.0 12.7 12.5 12.3 14.7 12.8
Cement 12.6 12.3 11.9 11.6 11.2 15.0 11.8
Ceramic Products & Tiles 12.5 12.2 11.9 11.7 11.4 15.0 13.2
Chemicals 12.4 12.0 11.7 11.4 11.1 20.7 15.7
Construction 13.6 13.4 13.3 13.2 13.1 6.5 4.6
Consumer Durables 12.2 11.8 11.4 11.0 10.6 29.4 25.3
Crude Oil & Natural Gas 12.3 11.9 11.5 11.2 10.8 22.8 17.1
Gems and Jewellery 12.0 11.8 11.6 11.4 11.2 15.1 12.2
Diversified 13.4 13.2 13.0 12.9 12.7 6.2 7.4
Edible Oil 12.9 12.7 12.5 12.2 12.0 10.8 12.0
Entertainment 12.3 11.9 11.5 11.1 10.8 19.1 19.2
Fertilizers 13.0 12.8 12.5 12.3 12.1 12.8 7.6
FMCG 12.2 11.8 11.4 11.1 10.7 40.1 42.3Gas Distribution 12.4 12.0 11.7 11.4 11.1 19.1 16.1
Glass & Glass Products 12.9 12.8 12.7 12.6 12.6 4.7 5.6
Healthcare 12.0 11.7 11.3 11.0 10.7 10.4 8.1
Hotels & Restaurants 12.9 12.6 12.3 12.1 11.8 4.1 1.3
Infrastructure Developers 13.6 13.5 13.4 13.2 13.1 6.7 6.6
Output based on interest rate sensitivity with cost of capital
FY14
WACC
WACC in diff scenario ROCE (4
yr avg)
ROCE
(FY14)
-0.5% -1.0% -1.5% -2.0%
IT - Hardware 12.0 11.7 11.4 11.1 10.8 14.8 14.3
IT - Software 12.0 11.5 11.1 10.6 10.1 31.0 34.5
Logistics 12.1 11.6 11.2 10.7 10.2 19.2 17.2
Media 12.3 11.9 11.6 11.2 10.9 20.5 22.1
Mining & Mineral products 12.7 12.4 12.0 11.7 11.4 35.8 21.0
Non Ferrous Metals 12.8 12.5 12.2 11.9 11.7 12.1 9.5Packaging 12.4 12.2 11.9 11.6 11.3 14.8 8.8
Paints/Varnish 12.1 11.7 11.2 10.8 10.3 35.1 33.4
Paper 12.6 12.4 12.2 12.0 11.9 6.9 6.3
Pharmaceuticals 12.0 11.7 11.3 11.0 10.6 19.7 21.3
Plantation 12.4 12.0 11.7 11.4 11.1 19.7 14.9
Plastic products 12.5 12.2 11.9 11.7 11.4 12.6 11.7
Power 13.3 13.1 12.9 12.7 12.5 8.3 7.7
Realty 13.2 12.9 12.6 12.3 12.0 7.5 6.7
Refineries 12.5 12.3 12.1 11.8 11.6 9.5 9.7
Retail 12.6 12.4 12.2 12.0 11.8 9.8 7.4
Ship Building 13.5 13.4 13.2 13.1 13.0 8.0 5.3
Shipping 13.1 12.9 12.7 12.5 12.2 7.4 8.4
Steel 13.2 13.1 12.9 12.7 12.5 9.3 6.9
Sugar 13.6 13.5 13.4 13.3 13.2 6.1 -1.3
Telecomm-Service 13.2 13.0 12.7 12.5 12.3 7.0 8.3
Textiles 13.4 13.3 13.2 13.0 12.9 10.3 11.7
Tobacco Products 12.0 11.5 11.0 10.5 10.0 46.1 46.7
Trading 12.7 12.6 12.5 12.4 12.2 7.3 7.4
Tyres 12.4 12.2 11.9 11.6 11.3 17.9 22.7
Output based on interest rate sensitivity with cost of capital
ROCE (4
yr avg)
ROCE
(FY14)
WACC in diff scenarioFY14
WACC
Sof ten ing commod i t y p r i ces : Thirdly, g lo b a l co m m o d ity
p r ic e s h a v e c o r r e c t e d
significantly led by a demand-
supply mismatch as global
supply continued to increase
w hile d em a nd from the la rg est
c o n s u m e r , C h i n a , t a p e r e d
d o w n . G o i n g a h e a d , a
c o m m o d i t y s l o w d o w n i s
expected to sustain led by
excess supply in the medium-
term and a sh i f t t owards
renewable energy sources in
the long run. In the backdrop,
sectors like aviation, paints,
textiles, auto ancillaries (tyre
a n d b a t t e r y ) , lo g i s t i c s ,
teleco m , lubrica nts a nd m ining
co uld b e m a jo r bene ficia ries .
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FUNDAM ENTALM ARKET OUTLOOK 2015
Commodities 2002 2014 Peak % decline from peak
Crude ($/barrel) 27 59 144 (58.9)
Iron 15 67 205 (67.3)
Coal NA 62 195 (68.2)
Copper 1550 6409 9879 (35.1)
Commodity prices have crashed from their peaks ($/tonne)
Favourable regulatory f ramew ork: Finally, the new government
has been effective in breaking
t h e p o l i c y d e a d l o c k w i t h
s e v e r a l d e c i s i o n s o n k e y
policies like increase in FDI
limit in insurance, defence &
ra ilw a y, ea sing o f enviro nm ent
&forest clea ra nce pro cess , etc.
a lready b eing taken. Moreo ver,
there has been considerablepro g res s in o ther key reforms
like implementation of goods
a nd se rvice s ta x (G S T) a nd
i n n o v a t i v e m e a s u r e s l i k e
“ Make in Ind ia” , “ Dig ita l Ind ia”
a nd “ S m a rt c it ies ” . These
m e a s u r e s w i l l i m p r o v e
business sentiments; provide
po licy s tab ility a nd a n im petus
t o a r e v i v a l i n c a p i t a l
expenditure (capex) cycle.
Stalled projects worth Rs. 25
la kh cro re co uld be kick sta rted
bene f i t ing severa l sec tors
ra n g in g f ro m o il & g a s ,d e f e n c e , b a n k s , r a i l w a y s ,
m e t a l & m in in g , te le c o m ,
c o n s t r u c t i o n a n d
infrastructure.
+
FDI in defenc e,
construction, railwa ys a nd
insurance
Investment trust:
Real estate investment
trust, Infrastructure
Long -term bond s for
infrastructure projects, new
restructuring/refinancing
norms for infrastructure
projects
Auction o f coa l mines
to provide predictable
&stable business
environment
Reforms New investments
100 smart c itiesMake in India
Rail infras tructure pro jects like
suburban corridor projects,
dedicated freight lines,
pass enger terminals, bullet
trains, Industrial corridors etc.
Ease of doing businessà GDP Grow th?
M ake in India Digital India
Digital India
Smart Cities
Make in India aims to increase the share of
ma nufacturing in GDP from 16-25% by 2022 andw ill create 100 million a dditiona l job s
The ado ption of key technolog ies across sec torsspurred b y the Digital India initiative co uld help
bo os t India's GDP by $550 billion to $ 1-trillion b y2025
A committee on investment req uirements in urbani n f r a s t r uc t ur e e s t i m a t e s t o t a l i n v e s t m e n t
requirement potential could exceed 7 lakh croreover 20 years
`
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FUNDAM ENTALM ARKET OUTLOOK 2015
Sensex and Nift y target: Fa cto ringi n t h e f a l l i n i n f l a t i o n ,comfortable current account
d e f i c i t ( C A D ) , i m p r o v e dsentiments and pick-up ing ro ss do m es tic prod uct (G DP)g row th, w e expect the S ensexE P S t o g r o w a t a C A G R(compounded annual growthra te) o f 17% o ver FY14-17E. Adec l ine in cos t o f equ i t y
c o u p le d w i t h a d o v is henvironm ent w ill further fuelpo rtfolio flo w s fo r Ind ia ine q u i t i e s a s w e l l a s d e b tins trum ents . The S ens ex istrading at 14.6x one yearfo rw a rd P/E m ultiple (FY16E),in line w ith his torica l m ea n.
H o w e v e r g i v e n t h er e s u r r e c t i o n o f c o r p o r a t eearnings cycle, we believethere exists a case for a re-rating of the Indian markets.We assign a price-to-earnings(P/E) m ultiple o f 15x o n FY17EEPS to arrive at a fair value of
32,500 by end CY15, implyinga n up s id e o f 18.5%. Thecorresponding Ni f ty t a rge tw o uld be 9,750.
Sensex EPS - FY17E 2167
Target Multiple 15x
Sensex / Nifty Target 32500 / 9750
Strategy 2015 - Sensex & Nifty Target
Risks: Tho ug h the m a rketsseem to have shifted into ahigher growth trajectory, wehighlight certain pitfalls that
m a y inhib it ind ex expa nsion.
- Brent crude oil has fallensharply by 47% year-to-date
(YTD), a nd is tra d ing below thefiscal break-even price formost oil exporting countries.We ha ve a lrea dy w itness ed theim pa ct o f cras h in crude priceso n Russ ia n eco no m y. With thefall in crude prices, sovereigncredit default swaps (CDS) of
many oil exporting countrieshas increased several times,highlighting the global riskperceptio n. A g lo ba l co ntag io ncould put investors in risk-offmode, impacting global f lowsin e m erging m a rkets.
- While Ind ia w o uld ind irectlybenefit from divergence offoreign institutional investor(FII) flo w s from such co untriesin fa vo ur o f India a nd m a y no tbe directly a dv ersely im pa ctedw ith cras h in crude prices, o urexports could be hampered.
38% of our exports are tocom mo dity-ba sed econo mies,w hich can face s low er g row tha s e c o n o m i c v a r i a b l e sdeteriorate due to falling oilrevenues.
- Risks w ill a lso em a na te fro mthe complexity of rate cycles
pa nning o ut in va rio us pa rts o fglobe. For instance, stronggrowth prospects for the USe c o n o m y w i l l l e a d t ocommencement of rate hike
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FUNDAM ENTALM ARKET OUTLOOK 2015
cycle in mid 2015 whereasEuropean Central Bank (ECB)h a s t o b e m o r e
accommodative to s tave of ad e f l a t i o n a r y t r e n d i n t h eEurozone while India is all setto s ee the ea sing of rate cy cles.Th e im p lic a t io n s c a n b ehumo ng ous a nd perplexing a sinterest rate dec isio ns w ill ha vea m ea ning ful im pa ct o n Ind ia n
rupee vis-à-vis other globalc u r r e n c y a n d h e n c e o nG DP/co rpora te profita b ility in2015.
- Fina lly, w ith fo rma tio n o fgovernment wi th a s t rongm a nda te and refo rm isto utlo o k,the inves tor expec tat io ns
have built up over the period.While, the government hasshown clear intent and hasi n i t i a t e d s e v e r a l r e f o r m s ,things are yet to start movingo n the g round leve l. There is ah u g e r i s k o f t h e c u r r e n tgovernment falling short of
m e e t i n g e n o r m o u sexpectations.
Sect or Outlook
- S ince w e expect the eco nom yand corporate profitability tomake a meaningful comebackt h e r e b y m a k i n g c y c l i c a l
se ctors the big g est b eneficia ryas pick up in utilisation rates,p o s i t iv e o p e r a t i n g a n dfina ncia l leve rag e w ill lea d to arecovery in profitability and
improve the quality of thebalance sheet. Hence we arepo sitive o n s ec tors like ba nking
(pick-up in lo a ns , lo w er inte res tto c ushio n net interes t m a rg ins(NIMs), lower bond yields toa i d p r o v i s i o n i n g a n d n o nperforming assets (NPA) cyclepeaking), cement (increase incapacity utilisation and lowerinput c o sts to a id profitab ility),
ca pita l g o o ds (revival in ca pexcycle to lead to better ordersa nd execution), autos & autoa ncilla ries (lo w er ra tes to bo o stpent up demand and lowercommodity to help marginrecovery).
- We a re neutra l o n d efensives
like IT (demand intact, richvaluat ion) , pharmaceut ica ls(rich va lua tio n, tepid d o m es ticg row th), oil & g a s (ea rning sdependent on deregulation,l imi ted volume growth) &m e d i a ( e a r n i n g s v i s i b i l i t yinta ct, rich va lua tio n).
- We remain negat ive onsectors like Real estate (Highinventory and huge debt pileup and regulatory hurdles tow eig h o ver po sitives like lo w erinterest rates and pick-up ind e m a n d ) , M e t a l s ( L o w e r
rea l i s a t ions and leveragedbalance sheets) and shipping(Highly dependent on globalt r a d e a n d d e m a n d f o rcommodities).
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TECHNICAL OUTLOOK 2015
Riding the bull w ith zeal to zenith
January 2015
In d i a n e q u i t ie s g a v e a
thunderous applause to the
strong verdict in the generalelec tio ns in Ma y 2014. The
markets have rediscovered
their animal spirits that is very
w e l l r e f l e c t e d i n t h e
p e r f o r m a n c e o f d o m e s t i c
equities, which are up 31%
year-to-date (YTD) and 15%post election results, thereby
a llo w ing Ind ia to to p the g lo ba l
eq uity cha rts.
As w e enter the seco nd y ea r of
changed regime, we believe
the markets will continue to
give a thumbs-up to the pro-r e f o r m s g o v e r n m e n t a n d
continue to rise in a similar
fashion as displayed over the
pas t six mo nths.
The s tro ng reso lutio n pa st the
seven year bullish Ascending
Tria ng le pa ttern ha s m a jo rb u l l i s h i m p l i c a t i o n s a n d
s u p p o r t s u p s i d e s t o w a r d s
35000/10500 (S e ns e x/Nifty )
l e v e l s f o r t h e c u r r e n t
n o r t h w a r d m o v e o v e r t h e
co m ing y ea r.
We do not foresee any major
shift in the current directional
positive bias. However, any
s izab le cor rec t ion towards
25000/7400 (S e n s e x /Nifty )
sho uld b e used as a n attra ctive
increm enta l o ppo rtunity to buyfor the lo ng term
Theme: Cyclicals to be the flavourof 2015
O u r b o t t o m u p a p p r o a c h
ba sed on technica l param eters
a p p l i e d a c r o s s t h e e n t i r euniverse of NS E cash seg m ent
sug g es ts cyc lica ls w ill be a t the
forefront of the rally in 2015.
The m idc a p spa ce ha s a lo t of
headroom to do the catch-up
exercise and will outperform
t h e b e n c h m a r ks , g o i n g
forward.
Top sectors: Auto , a uto a nc illa ry,c a p i t a l g o o d s , P S U s a n d
cement .
Our preferred picks: Bhel (BHEL),BEL (BHAELE), Alstom India
(AB B ALS ), Exid e (EXIIND),F e d e r a l M o g u l G o e t z e
(GOEIND), Asahi India Glass
(ASAIND), Ramco Cement
( M A D C E M ) , G I C H o u s i n g
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2008
21206
2010
21108
2013
21483
Seven year consolidation post2008 peak took the p ictor ialshape of a bul lish A scending
Triangle pattern
ICICIdirect M oney Manager
BSE Sensex – M onthly Candlestick Chart
S ource: Bloo m berg, ICICIdirect.com Rese a rch
January 2015
The b reakout pa st the s even y ea r
c o n s o l id a t io n p a t t e r n h a ssignalled a structural shift in the
market from sideways to bullish.
The co nvincing brea ko ut pa st the
12
se ven ye a r bullish Asc end ing Tria ng le
pattern has major implication ofu p s i d e t o w a r d s 3 5 0 0 0 i n t h e
forthcoming yea rs for the S ensex
TECHNICAL OUTLOOK 2015
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M ult i-fold ral ly fol low ed by
m u l t i - y e a r c o n s o l i d a t i o n ,
perfect recipe for bull market
Historically, the multi-year bull
runs a re fo llo w ed by m ulti-ye a r
co nso lida tio n a s m a rkets enter
a reconciliation phase. As the
co nso lida tio n m a tures w ith the
passage of t ime and price
correction, the market willpierce new highs above the
previous bull cycle peak to
s igna l con t inuance o f the
se cula r uptrend .
In the context of our markets,
there is also one historicalprece dence o f a m ulti-fold rally
f o l l o w e d b y a m u l t i - y e a r
c o n s o l i d a t i o n , w h i c h a d d s
credenc e to the current se cula r
bull market setup. Between
1989 and 1992, the Sensex
w itnesse d a n 11-fold rally fro m
390 to 4546. This w a s follo w ed
by a 11 year consolidation
phas e a s the index g yrated in a
rang e fro m 1992 to 2003. The
breakout from this elongated
consolidation paved way forthe m ulti-fold ra lly fro m 2003 to
2007.
The S ensex w itness ed a seven
fold rally between 2003 and
2007 (2900 to 21206) and,
t h e r e a f t e r , e n t e r e d a
consolidat ion phase last ingse ven y ea rs fro m 2008 to ea rly
2014. The reso lutio n pa s t the
2008 bull cy cle pe a k, the refore,
has the underpinnings of a
burg eo ning bull m a rket, w hich
can lead to unfolding of multi
fold gains over the coming
years .
The cha rac teris tics o f ma rket
interna ls during the pa st s even
year consolidation and post
the b rea ko ut pas t the previo us
bull-cycle peak defines the
changing dynamics o f the
market. Between 2008 and
2014, the index re-tested the
2008 hig h o n tw o o cca sio ns in
2010 and 2013. How ever, bo th
these a ttem pts lac ked broa derm a rket pa rticipa tio n. The firm
resolution past the 2008 peak
in 2014 has the backing of
stro ng pa rticipa tio n o f broa de r
markets that represents the
l a r g e r s e c t i o n o f m a r k e t
pa rticipa nts, w hich a ug urs w ellf o r t h e l o n g e v i t y o f t h e
uptrend.
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BSE Sensex – Quarterly Candlestick Chart
1992
2003
2008
11 Fold rallybetw een 1989-1992
7 year consolidation2008 to 2014
7 Fold rally betw een2003 to 2008
11 year consolidation1992 to 2003
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TECHNICAL OUTLOOK 2015
BSE Sensex M onthly Bar Chart
2008 high21206
2010 high21108
2013 high21483
Seven year consolidationsince 2008 to 2014occur red i n Ascendi ng
Triangle pat tern
Minimum measuring implication of the pattern i .e.w idth of the base of Triangle (13061 points) added tothe breakout point of 21206 projects upside potential
tow ards 34500 levelsfor the current rally
Headroom for current bull run toextend to 35000/10500
Th e b r e a ko u t f ro m t h eAs ce nd ing Tria ng le pa ttern
comprising entire seven year
consolidation since 2008 till
early 2014 has major bullish
implications as it signals the
end of elongated correction
phase and start of a new
u p t r e n d . Th e m i n i m u m
measuring implication of the
price pattern i.e. the width of
the triangle’s base (21206 –
7697= 13509) a dd ed to the
b r e a k o u t p o i n t o f 2 1 2 0 6
projec ts a n upside po tentia l up
to 35000 /10500 (S ensex/Nifty )
for the current ra lly o ver 2015.
The entire up m o ve s ince 2012
h a s o c c u r r e d i n a r i s i n g
channel originating from 2009lows as highlighted in the
adjoining yearly chart. Over
the pas t th ree yea rs , the
indexhas respected the upper
and lower bands of this long
term cha nnel. The pa st tw o
year’s lows are resting uponthe lo w er ba nd o f this cha nnel
while 2014 high is also placed
at the upper band of this
cha nne l. The uppe r ba nd o f
this cha nne l for 2015 is pla ce d
at 35000 levels, making this a
likely ta rget.
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BSE Sensex Yearly Candlest ick Chart
Upper band of Rising
Channel for 2015 @ 35000
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TECHNICAL OUTLOOK 2015
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Conversely, 25000/7400 is strongbase; act bravely if it materialises
Long term investors should
note that secular bull markets
also go through phases of
sec ond a ry co rrections , w hich is
a healthy phenomeno n to w ork
off the excesses developed
during rallies. Even during the
secular bull run from 2003 to
2008 the index was subject toi n t e r m e d i a t e c o r r e c t i o n s
ranging from 13% to 30%.
However, these counter trend
corrections did not alter the
overall bullish fabric of the
market. We have identified a
crucial support zone wheredemand will outstrip supply to
help investors ride the uptrend
and also provide a fresh entry
oppo rtunity for thos e w ho ha ve
m issed the e a rlier rally.
Th e lo n g t e r m t r e n d lin e
co nnec ting ye a rly low s o f 2003
and 2009 acted as a cushion
during 2013 and 2014 as therespect ive yearly lows rest
upon the s a me. The va lue o f this
trendline for 2015 is at 22300
/7000, w hich w ill rem a in a m a jo r
base for the index. We believe
any corrective decline towards
25000 /7400 sho uld be us ed a s
a long term buy ing oppo rtunity.
P la ce m ent o f 52 w eek EMA, the
b ase fo rme d pos t e l e c t i on
results and 38.2% retracement
o f 2013-14 ra lly a ll co inc id ing
a r o u n d a t 2 5 0 0 0 /7 4 0 0 ,
reiterates our view point that
any decl ines towards theselevels s hould b e b oug ht into.
BSE Sensex Yearly Candlestick Chart
Long term trendline2015 value @ 22300
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TECHNICAL OUTLOOK 2015
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BSE Sensex Weekly Bar Chart
Ø52 w eek EM A ~ 25000ØPost Election result base
formation ~ 25000Ø38.2% retracement of 2013 -14
rally ~ 25000
Long term Support @ 25000
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TECHNICAL OUTLOOK 2015
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Broader markets: Brace up forrelatively strong performance
The b ro a der ma rkets a re at the
c u s p , l e d b y a m a j o r
turna ro und in the BS E m idc a p
inde x, as it has steered pa st its
2008 high (10245) w hile the
smal l cap index has a lso
strengthened above its 2010
high (11366). A lo o k ba ck a t the
behaviour of the benchmarkSensex a f t e r i t s b reakout
above 2008 highs provides a
s t r o n g r o a d m a p f o r t h e
b r o a d e r m a r ke t s , g o in g
fo rw a rd. The S ens ex entered a
s t r o n g b u l l t r e n d a f t e r
conquer ing i t s 2008 h igh
(21206) in April 2014 and has
already rallied 35% above its2008 pea k. We b elieve the B S E
m idca p ind ex is a ll se t to follo w
suit with the benchmarks and
enter a strong uptrend as we
head into 2015. A similar
magnitude of rally replicated
on the BSE midcap index(minimum implication) would
projec t upsides tow a rds 14000
over the m edium term .
BSE Sensex and BSE M id-cap index comparative Chart
Midcap index
2008 2010 2013
The Sensex got catapult ed into a higher orbit after confirming a resolute breakoutpast its 2008 -10 highs during early 2014 and has already rallied 35% above its2008 peak. The Midcap Index is follow ing in the footsteps of the benchmark and
has just r isen above its 2008 peak signaling a major trend reversal. A similarmagnitude of up move in the midcap index is on the cards moving into 2015
BSE Sensex
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TECHNICAL OUTLOOK 2015
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Bank Ni f ty : Commander tozenith
The B a nk Nifty em erg ed o ut o f
its four year consolidation by
steering past the yearly highs
o f 2010 a nd 2013 tow a rds m id
2014. The s trong reso lutio n
p a s t t h e f o u r y e a r
c o n s o l i d a t i o n b a n d a b o v e
13300 ha s fla g g ed o ff a s tro ng
bull run, w hich w ill co ntinue top r o p e l t h e s e c t o r a l
heavyweight Bank Nifty in the
fo rthcom ing y ea r a s w ell.
We expect the Bank Nifty to
co ntinue its northw a rd jo urney
in 2015 and travel towards
24000 levels. The current rally
off 2013 low of 8349 to recent
all time high of 18929 has
a l r e a d y s u r p a s s e d t h e
magnitude of 2009-2010 rally
w hich m ea sured a ro und 10000
po ints. The fa ste r pa ce a nd
larger magnitude of currentmove as compared to the
preceding rally clearly signals
an extending m a rket w hich ha s
s i g n i f i c a n t s t e a m l e f t t o
continue its rally in similar
fas hio n. The next lo g ica l price
objec t ive in an extendingmarkets is derived by plotting
the Fibonacci price extension.
The 161.8% Fibonacci price
extension of 2009-2010 rally
(3290 to 13320) m ea sured fro m
2013 lo w o f 8349 pro jec ts the
next destination for current
rally to w a rds 24000 levels ov erthe com ing yea r.
Fro m a structura l po int o f view ,
the lo ng term price cha rt o f the
Bank Nifty exhibits a strong
und erlying trend . Pos t the 2008
market wide deluge, the Bank
Nifty was one of the firstheavyweight index to surpass
its 2008 peak (10806) in 2010
itself.
After a three fold rally during
2009-10 the ind ex w ent into
h i b e r n a t i o n m o d e a n d
c o n s o l i d a t e d b e t w e e n t h ebro a d rang e o f 13300 and 7800
o v e r t h e n e x t f o u r y e a r s
between 2010 and mid-2014.
Price wise, the index retraced
its 2009-10 rally by just 50%
while t ime wise correction
extended to 200% of thepreced ing rally. Elo ng a ted tim e
co rrec tio n w ith lim ited price
decline highlights the inherent
streng th in the trend . The ind ex
f o r m e d a d o u b l e b o t t o m
p r e c i s e l y n e a r t h e 5 0 %
retracement of 2009-10 rally(8000) a nd reg istered a strong
breakout in 2014 to signal the
end of the four year basing
pa ttern a nd co ntinuanc e o f the
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la rge r uptrend .
The m a jo r suppo rt ba se for the
index is placed around 15000
being the confluence of the38.2% retracement of the
2013-14 ra lly a nd inte rmed ia te
ba se formed during six mo nth
consol ida t ion during June-
Octo ber 2014.
CNX Bank Nift y M onthly Bar Chart
200810806
2009
3290
201013320
3 Fold rally betw een2009-2010
Double Bottom near50% retracement of
2009-2010 rall y
201313348
161.8% Fibonacci ext ension
@ 24000
Support zone38.2% @ 14900
The current rally from 2013 low of 8349 to recentall time high of 18929 is already larger than the2009-2010 rally signaling extending market. We
expect the Bank Nifty to continue its northw ard journey in 20 15 and head t ow ards 2400 0 lev els
8349
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TECHNICAL OUTLOOK 2015
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U S D o l l a r I n d e x ( 8 9 . 2 ) :
Greenback w akes up from seven
year slumber
The y ea r 2014 draw s to a n end
a fter w itness ing hug e currency
m o v e s t r i g g e r e d b y t h e
forward guidance of the US
Fed era l Res erve a bo ut interest
rates . As a result, ma jo r g lo ba l
currencies like euro and Yen
hard landed while the US
Do lla r Ind ex rose fro m a m ulti-
ye a r slum ber.
Sharp advance of f May lows
(79.90) steered the US Dollar
Index past 2012-13 highs of84.75 to fresh five year highs
trig g ering a bull trend . The
s h a r p r a l l y i s p r i m a r i l y
contributed by weakness in
e u r o a n d Ye n , w h i c hcontributes around 83% of
weightage in the US dollar
ind ex. In the proc es s, the ind ex
reso lved pas t a mul t i yea r
consolidation.
While in the m ed ium -term, the
i n d e x a p p e a r s t o h a v e
s t r e t c h e d t o o v e r b o u g h t
territory, the price structure
points towards a further rally
g o ing into 2015. The 50%
retracement of the 2002-08
decline (120-71) and value of
the declining trend line drawn
off 1985 and 2002 peaks
projec ts ups ide ta rg et o f 96 fo r
the US dollar index over the
next y ea r.
The m o nthly MACD indica to r,
which has emerged above i ts
signal line provides insight
about the strong underlying
m o m entum in the US do lla r.
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US Dollar Monthly Bar Chart
79.90
71
84.75
50% retracement of 2002-2008 decline @ 96
March 2009
89.62
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Gold Spot ($1197): Bear cycleextended
The po sitive ec o no m ic da ta
out of the US a nd pros pects of
higher US interest rates from
next yea r pushed the do lla r to a
four-ye a r hig h a g a ins t the e uro ,
keeping the precious metal’s
complex close to multi-year
lows a s inves tors showed
be tter risk a ppetite a nd sta ye d
aw ay from the tra dit iona l sa fe-
haven co mm od ity.
Among the precious metal
complex, the sharp decline in
prices of gold since mid-2014
led ye llo w m eta l price s to fresh
four ye a r lo w s. The vio la tio n o f
yea rly lo w s o f 2013 ($1180)
signals a shift of trend from
s i d e w a y s t o n e g a t i v e a n d
o p e n s u p f u r t h e r l o w e r
avenues for prices towards
$1000 levels over a medium
term ho rizon.
After the sha rp d ec line during
2013, bullion prices remained
i n c o n s o l i d a t io n m o d e
thro ug ho ut 2014 a nd o sc illa ted
in the broad range of $1180
1 3 9 0 . T h e f l o o r o f t h i s
consolidation rested upon the
yea rly lo w o f 2013 at $1180.
D e s p i t e s e v e r a l a t t e m p t s
during the first half of 2014,g o ld prices failed to rise a bo ve
$1400 suggesting consistent
ove rhea d press ure.
We believe the breach of the
2013 lo w sig na ls res umptio n o ft h e p r e c e d i n g d o w n t r e n d .
Following the breakdown, we
expect g o ld prices to rem a in in
a downward trajectory and
head towards $1000 over a
m ed ium -term ho rizon.
Monthly declining MACD has
settled in a negative zone and
c o n t i n u e s t o t r e n d l o w e r
s u g g e s t i n g u n d e r l y i n g
negative momentum in pricesf r o m a m e d i u m - t e r m
perspective.
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Gold Yearly Bar Chart
Gold M onthly Bar Chart
13-month EM A
Gold prices breached 2013 low to signal resumption ofthe preceding dow ntrend. W e expect bullion to correcttow ard $1000 in t he coming y ear
Breach of long term rising trendline during
2013 s ignaled a major t rend reversal.Bull ion prices reacted low er after testing
the breakdow n area in 2014 s ignalingcontinuation of dow ntrend
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B r e n t C r u d e ( $ 5 9 . 6 ) :Consolidation to pan out after2014 debacle
G lo ba l com m od ity prices ha ve
been on a slippery path since
J une 2014. The sa fe ha ven
dem a nd for the US do lla r a m id
an uncertain global economic
environment propel led the
Do lla r Ind ex to a five -ye a r hig h.
As a result, do lla r deno m ina ted
co mm od ities have rem ained in
the line of fire. Factors like US
independence in the energy
sector and slowing growth in
China a nd Europe ad de d to thesupply g lut in c rude o il price s.
After trading in a minuscule
range of`
100-120 for 14quarters, crude prices broke
loose as they breached the
lower band of the four year
trading range. Resultant panic
selling led prices to lowest
levels since 2009 triggering
m a jo r bea r cycle fo r bla ck g o ld
s ince the 2008 cris is .
After the s tupendo us fa ll in thepast couple of months prices
are expected to stabilise near
the $52-55 zone , w hich is a
combination of key rising long
term trend line (b lue) a nd 80%
retracement of the 2009-10
ra lly (36-128).
However, given a weak long
term price structure for Brent
crude, upside s rem ain ca pped
t o $ 7 5 b e i n g t h e 3 8 . 2 %
r e t r a c e m e n t o f t h e 2 0 1 4
decline.
26
TECHNICAL OUTLOOK 2015
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147
36
128
Breach of four year low s t riggeredpanic sell off in Crude prices
80% retracementand long termtrendl ine at $ 54
ICICIdirect M oney Manager January 2015
Brent Crude Quarterly Bar
Chart
27
TECHNICAL OUTLOOK 2015
The views expressed in the article are personal view s of the author and do not necessarily represent the view sof ICICI Securit ies.
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DERIVATIVES STRATEGY 2015
Nifty likely to hit 9500 in 2015; key support placed at 7600
Amit Gupta
Head - Derivat ives Research,ICICI Securit ies
Nifty: M ean + 3.5 sigma level is at
9500, w hich is expected target of2015:
As per our a nalysis, mea n+ 3.5
sig m a levels ha ve b een helpful
in predicting the positional
ta rge t o f the Nifty.
In the cyclical up move seen
between 2003 and 2007, the
Nifty on multiple occasions
s a w a s u r g e , w h i c h g o t
arres ted near mea n + 3.5
sigm a leve ls. Thes e leve ls a recurrently plac ed a t 9500, w hich
rema ins the ta rge t for 2015.
January 2015
Once the Nifty gives breakoutabove M ean+ 2 sigma levels, itbecomes a positional support forthe index, w hich is currently placedat 7600:
On the lo w er side, key suppo rt
is placed near 7600, which is
the me an+ 2 sig ma level for theNifty. Po st the electio n verd ict,
t h e N i f t y w e n t i n t o
co nso lida tio n b efore ta king o ut
7600 convincingly. On any
m a jo r decline, this leve l w o uld
a g ain a ct as m ajor support for
the ind ex.This leve l is likely to be tes ted
o nly in the eve nt of a ny m a jo r
g l o b a l e v e n t l i k e U S
Fedincreasing interest rates,
euro a rea co ncerns, etc.
In b etw ee n, a 400-450 po intco rrectio n in the m a rket w o uld
be a strong buying oppo rtunity
for pos itio na l investm ents .
28
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S i n c e O c t o b e r 2 0 1 3 , N i f t yintermediate declines have beenarrested w ithin 5-7%
Since September 2013, whenthe Nifty started moving from
5120, intermediate declines
have been arrested within 5-
7% o n m ultiple o cca sio ns .
One should note that most of
these declines were on the
back of globally driven news
flows.
In 2015 a s w ell, interm ed ia te
dec l ines a re l ike ly to be
t r i g g e r e d b y s o m e g e o -
po litica l risks .
We expect a similar pattern ofi n t e r m e d i a t e f a l l s g e t t i n g
a rres ted in 2015 and it is likely
to continue till the target of
9500 is no t ac hieved .
In the table below, we have
shown how the Ni f ty has
w itnes se d d ec lines o f 5-7%since the c urrent rally em erged
in 2013.
St art date End dat e No of days Points Decline % Decline
19-Sep-13 1-Oct-13 12 442 7.19%
3-Nov-13 13-Nov-13 10 371 5.84%
2-Jan-14 4-Feb-14 33 425 6.68%
25-Apr-14 8-M ay-14 13 231 3.37%
16-M ay-14 30-M ay-14 8 445 5.88%
8-Jul-14 14-Jul-14 7 387 4.95%
25-Jul-14 8-Aug-14 15 301 3.84%
8-Sep-14 16-Oct -14 38 451 5.51%
Nifty de clines since S eptemb er 2013
Nif ty going S&P w ay: Since 2012,S&P declines have also beenarrested w ithin 6-9%
The US S &P500 ha s b ee n in a nuptrend since 2012. During this
t i m e , d e c l i n e s h a v e b e e n
a r r e s t e d w i t h i n 6 -9 %.
However, these declines, as
the evidence suggests, have
a l w a y s b e e n a b u y i n g
o ppo rtunity, as ea ch tim e po stthis d ec line, S &P m a d e a
reco rd hig h.
In the table below, we have
hig hlig hted the m a jo r dec lines
since 2012. As visible, these
decline were intermittent and
sho rt lived a nd w ere follow edbuy s trong buying ac tion.
Start date End date No of days Points Decline % Decline
14-Sep-12 16-Nov-12 63 131 8.90%
22-M ay-13 24-Jun-13 33 127 7.52%
2-Aug-13 28-Aug-13 26 82 4.81%
19-Sep-13 9-Oct-13 20 83 4.82%
15-Jan-14 5-Feb-14 21 113 6.10%
4-Apr-14 11-Apr-14 7 83 4.37%
24-Jul-14 7-Aug-14 14 87 4.35%
19-Sep-14 15-Oct-14 26 199 9.84%
S &P500 major de clines since S eptem ber 2012
Nifty PCR-OI of 0.90 still not
show ing sign that market is
overbought
Des pite this exube ra nce in theNifty, s ce pticism is s till pres en t
in the system and indicators
like Put Call Ratio (PCR) Open
DERIVATIVES STRATEGY 2015
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30ICICIdirect M oney Manager January 2015
Interest (OI) are still trading at
sub -1.0 leve ls . In b ull m a rkets ,
this indicator has even traded
a t 1.5/1.8 leve ls . The lo w
r e a d i n g o f t h i s i n d i c a t o r
s u g g e s t s p a r t i c i p a n t s a r e
sceptical to write Put options
and have been more active in
w riting Ca ll o ptio ns .
Lo o king a t the Nifty P CR OI, thecurrent rea d ing o f 0.90 is eve n
lo w er tha n the PCR OI a verag e
see n s ince 2011 of 1.1. This ha s
happened despite the Nifty
trad ing a t life-tim e highs . This
leaves scope for further Put
writing, which bodes well for
“Buy at declines” strategy for
Nifty.
In the current up leg since
October end, volatili ty has
rem a ined sub d ued . This is
g iv ing an oppor tun i t y f o r
further Put writing. However,
prevailing scepticism due to
secular up move in Nifty has
m a de Put w riters very nervous.
This has kept the Nifty PCR-OI
consistently at lower levelssince the election verdict in
May.
0.60
0.80
1.00
1.20
1.40
1.60
1.80
3 - J a n - 1
1
3 - M a r - 1 1
3 - M a y - 1
1
3 - J u l - 1 1
3 - S e p - 1
1
3 - N o v - 1
1
3 - J a n - 1
2
3 - M a r - 1 2
3 - M a y - 1
2
3 - J u l - 1 2
3 - S e p - 1
2
3 - N o v - 1
2
3 - J a n - 1
3
3 - M a r - 1 3
3 - M a y - 1
3
3 - J u l - 1 3
3 - S e p - 1
3
3 - N o v - 1
3
3 - J a n - 1
4
3 - M a r - 1 4
3 - M a y - 1
4
3 - J u l - 1 4
3 - S e p - 1
4
3 - N o v - 1
4
P C R O I
4,5004,8005,1005,400
5,7006,0006,3006,6006,9007,2007,5007,8008,1008,4008,700
N i f t y S p o t
PCR O I N i f t y Spot
India VIX likely to remain below 20levels af ter w i tnessing sharpcorrection post election outcome
India Volatility Index (VIX) hadseen a sha rp up move tow ards
40 levels in Ma y 2014 a hea d o f
the election verdict. However,
post the event, the volatility
cooled off sharply. In the last
couple of months, India VIX
has been t rad ing subdued
belo w 20 leve ls.
Going ahead, in 2015, we
believe the Volatility Index is
likely to stay subdued for a
major part of 2015. However,
events like Union Budget in
February and the US Fedincreas ing ra tes co uld push the
I n d i a V I X h i g h e r . S u c h
escalation should be used as
an opportunity to create short
vola t i l i t y s t ra teg ies as we
believe the equity markets
could continue to display a
g r a d u a l u p w a r d b i a s w i t h
lower volatility in the coming
year.
DERIVATIVES STRATEGY 2015
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S&P Volatility Index: Also in long
term consolidation after sharp
correc tion seen in early 2012
Af t e r w i t n e s s i n g s h a r p
declines in early 2012, US VIX
has failed to w itness a ny m ajor
reco very in the la st three ye a rs
and has been consolidating at
lower leve l s . In te rmedia te
upsides seen in these years
have translated into 6-9%
co rrec tio n in the S &P Ind ex
w hile VIX fa iled to m o ve a bo vethe levels s een in 2012.
DERIVATIVES STRATEGY 2015
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The view s express ed in the article a re perso na l view s o f the author a nd d o no t neces sa rily
represe nt the v iew s o f ICICI S ecurities .
FII Debt flow s in 2014
-15000
-10000
-5000
0
5000
10000
15000
20000
J a n - 1
4
F e b - 1
4
M
a r - 1 4
A p r - 1 4
M
a y - 1
4
J u n - 1
4
J u l - 1 4
A u g - 1
4
S e p - 1
4
O c t - 1 4
N o v - 1
4
R s .
c r .
Debt inflows of over US$24
billio n w ere the key s tab ilis ing
factor for the currency andb o n d m a r ke t s . Th i s i s
es pecia lly w hen it is co m pa red
w it h o v e r U S $1 1 b illio n
outflow in the last financial
year.
In the current fina nc ia l ye a r, a st h e F I I l i m i t f o r b o n d
i n v e s t m e n t i n c r e a s e d t o
US$25 billion, buying in the
de bt seg m ent picked up.
Co o ling o ff infla tio n a nd falling
c rude & comm odity pricesalong with policy initiatives
taken by the new government
helped to bo o st inves tments in
the d eb t seg m ent further.
Record FII inf low s in equity is keypillar of strength for Nif ty
FIIs Equity flows in 2014
-5000
0
5000
10000
15000
20000
25000
30000
J a n
- 1 4
F e
b - 1
4
M
a r -
1 4
A p r -
1 4
M
a y
- 1 4
J u n
- 1 4
J u
l - 1 4
A u g
- 1 4
S e p
- 1 4
O c
t - 1 4
N o v
- 1 4
R s .
c r .
In the eq uity se g m ent, fo reig n
institutional investors (FIIs)bo ug ht a reco rd US $16 billio n
during the ye a r so fa r. Pos t the
election verdict, FIIs greeted
the new government policy
initia tives w ith strong buying o f
o ver US $9 b illio n.
The curren t inflo w in the Ind iaequity segment is the largest
inf low seen in the Asian,
Middle East and emerging
Euro pea n m a rkets . This ha s
helped the Nifty to register a
strong up move of over 35%,
making India one of the besteq uity m a rkets.
Current ye a r FII inflo w s o f over
US$16 billion are more than
the last year inflow of US$14
billion.
FII inflow s in debt segment equallyremarkable as their debt buyingw as over US$24 billion
DERIVATIVES STRATEGY 2015
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STOCK IDEAS 2015
ICICIdirect M oney Manager January 2015
Credit Analysis & Research Ltd (CARE)Target Price: Rs. 2,175 (53% upside)
CARE, the second la rges t
rating a g ency b y m arket sha re,
is a pure play on the rating
business w ith ~ 99% ( 230
crore) o f its FY14 co re reve nue
genera ted f rom the ra t ing
se g m ent . The hig hlig ht o f
CARE's business is its best-inclass EBITDA (ea rning s b efo re
interest, taxes, depreciation,
and amortization) margin of
60%+ a nd PAT (pro fit a fter tax)
m a rg in of 50%+ . The b usines s
model is asset light in nature
w i t h n o t m u c h c a p i t a lexpend iture o r ca pex ( 10-15
crore) w hile it ge nera tes s tro ng
operating cash flow. Post its
listing, the dividend payout
ratio has improved from 30%
(FY12) to 63% (FY14). We
expect this to g row to ~ 73%by FY17E. Considering the
improving economic outlook
w ith the expected upturn in the
investment cycle, peaking of
interest rates and gradual &
structural development of the
bo nd m arket w e ha ve factored
i n 1 8 % P A T C A G R
(compounded annual growth
rate) in FY14-17E to Rs. 210
`
`
crore vs. 12% CAGR seen in
FY11-14.
In 1993, CARE w a s the third
credit rating agency (CRA) to
b e i n c o r p o r a t e d i n I n d i a .
However, it gained significant
ground to become second
largest CRA by revenue postFY09. It clocked 50% revenue
CAGR in FY08-11 vs. 30% by
peers. CARE is strong in bank
loa n ra t ing (BLR) & bo nd
m a rket w hile it do es n o t have a
significant presence in small
and medium-sized enterprises(SME) space as of now. We
e x p e c t i t t o m a i n t a i n i t s
r e v e n u e m a r k e t s h a r e o f
~ 28%, going a head.
CARE's strong margins can be
a ttributed to : i) rela tive ly lo w ere m p l o y e e c o s t i i ) h i g h
propo rtio n o f la rg e ticket b a nk
loa ns & bo nds (hig h ma rg in
business) and iii) offices being
la rg ely ow ned sa ving o n lea se
cost . Go ing ahea d, ma rg ins a re
expe cted to dec line fro m 64%in FY14 to 62% by FY17E
ow ing to a rising focus on the
low ma rg in S ME business a nd
mainly due to expected rise in
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34ICICIdirect M oney Manager January 2015
staff co sts.
CARE has em erg ed as a strong
player in the rating business
w i t h s t r o n g m a r g i n s a n d
improving market share with
bes t b rand reca ll a fter CRIS IL. It
is trading at a discount to the
c o n s o l i d a t e d b u s i n e s s o f
CRIS IL & ICRA. If w e just
consider CRISIL's core rating
busines s , CARE, tra d ing a t 20x
FY17E EPS (earnings per
sha re), is a t a steep d isco unt to
CRIS IL's ~ 60x m ultiple. The
c o m p a n y h a s s t r o n g R o E(return on equity) of 27% for
FY14 and potential to further
enhance it to 46% by FY17E.
We value CARE at 30x FY17E
EP S (~ 50% d i s c o u n t t o
CRISIL's core rating business
m ultiple) a nd a rrive a t a targ et
price o f 2,175.`Key Financials
Valuations Summary
(EBITDA: Earning s before interest, ta xes, d eprecia tion, a nd a m ortization;PAT: Profit after ta x; EPS: Ea rning s per sha re; P/E: Price -to-ea rning s; EV:
Enterprise va lue; P/BV: Price -to -book/va lue ; RoNW: Return on net w orth;RoCE: Return on Ca pital Em ploy ed )
FY14 FY15 FY16E FY17E
Net sa les ( crore) 230 275 331 380
EBITDA ( cro re) 147 173 207 237
PAT ( crore) 129 161 188 210
EPS ( ) 44.4 55.6 64.7 72.5
`
`
`
`
P/E (x) 32.2 25.7 22.1 19.7
Ta rg et P/E (x) 49 39.1 33.6 30
EV /EBITDA (x) 24.9 21.5 17.9 15.5
P/BV (x) 8.6 11 9.8 9.1
RoNW (%) 26.6 42.8 44.3 46.2
RoCE (%) 29.7 45 48.1 51.2
FY14 FY15 FY16E FY17E
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Castrol India Ltd.Target Price: Rs. 611 (22% upside)
Ca stro l Ind ia , a 71% subsidia ryo f British Petro leum P lc., is o ne
of the leading players in the
domestic lubricants business.
The co m pa ny o perates three
manufacturing plants in India
a nd ha s the la rg es t distributio n
network of 380 distributors,
servicing over 1,05,000 retail
sites . The m a in focus o f Cas tro l
is on the lucrative automotive
lubricant segment where it
commands a market share of
~ 22% in va lue term s. The
co mpa ny de rives ~ 90% of its
revenues from the automotive
s e g m e n t a n d ~ 1 0 % i n
industria l segment . Castrol
repo rted revenues o f 3,179.6
crore a nd PAT o f 508.6 crorein Cy13.
Cas tro l's v o lume ha d rem a ined
subdued over the past few
yea rs d ue to the s low do w n in
the Ind ia n ec o no m y. The
prospects of the lubricant
indus try a re hig hly d epend ent
on growth in the automotive
sector. We expect the
`
`
a utom ob ile se ctor to pos t salesg row th a t 13.2% CAG R o ver
FY14-17E to 314 lakh units in
FY17E. Hence, Castrol's total
vo lume is expe cted to increas e
at 3.8% CAGR over CY13-16E
from 196.8 millio n litre in Cy13
to 220 m illio n litre in CY16E o n
the ba ck o f an im pro vem ent in
a u t o s a l e s a n d i n d u s t r i a l
growth.
Ca stro l is the price m a ker in the
automotive lubricant industry.With the s ha rp de cline in c rude
oil prices over the past few
months, raw materials costs
(ba se o il price s) for Ca s tro l a re
e x p e c t e d t o c o m e d o w n ,
aiding the improvement inmargins . We expect gross
m a rg ins to increas e by 29.1
per litre over CY13-16E from
70.7 pe r litre in CY13 to 99.8
per litre in CY6E. S ubse q uently,
w e e xpect EBITDA to increa se
from 34.9 pe r litre in CY13 to
60.4 per litre in CY16E.
C a s t r o l 's s t r o n g b r a n d
`
`
`
` `
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p o s i t i o n i n g a n d s u p e r i o r
distribution network allows it
to command higher pricing
power and premium for its
pro ducts o ver its co m petitors.
The c o m pa ny's fo cus o n the
perso na l m o bility se g m ent w ill
remain the key driver for the
a utom o tive lubrica nt bus iness
a n d c r e a t e v a l u e f o r
shareholders, going forward.
W e e x p e c t r e v e n u e s a n d
profits to grow at a CAGR of
7.1% a nd 20.5% o ve r Cy13 16E
to 3,910.9 cro re a nd 889.1
crore, respectively. We value
Ca stro l Ind ia a t 34x CY16E EPS
of Rs. 18 to arrive at a target
price o f 611 in 12-18 m o nths .
` `
`
Key Financials
Valuations Summary
(EBITDA: Earning s before interest, ta xes, d eprecia tion, a nd a m ortization;PAT: Profit after ta x; EPS: Ea rning s per sha re; P/E: Price -to-ea rning s; EV: Enterprise va lue; P/BV: Price -to -book/va lue ; RoNW: Return on net w orth;RoCE: Return on Ca pital Em ploy ed )
Net sa les ( cro re) 3,179.6 3,405 3,641 3,910.9
EBITDA ( crore) 687.6 714.9 1,207.1 1,328.6
PAT ( cro re) 508.6 480.1 812 889.1
EPS ( ) 10.3 9.7 16.4 18
CY13 CY14E CY15E CY16E
`
`
`
`
P/E (x) 48.6 51.5 30.5 27.8
Ta rg et P/E (x) 59.4 62.9 37.2 34
EV /EBITDA (x) 35.1 34 19.9 17.9
P/BV (x) 32.9 42.7 35.5 30.7
Ro NW (%) 67.7 82.9 116.5 110.5
Ro CE (%) 87.4 117.6 168.2 160.2
CY13 CY14E CY15E CY16E
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Container Corporat ion of India Ltd.
Target Price: Rs. 1,670 (26% upside)
Conta iner Corpo ratio n o f Ind ia
Ltd . (Co nCo r) is w ell po ise d to
benefit from an improving
eco nom ic sce nario ow ing to its
pa n-India pres ence a nd s tro ng
co m petitive intens ity by virtue
o f i n f r a s t r u c t u r e a n dscalability. It is planning to
garner higher volumes and
provide value added services
a nd is, thus , investing in setting
up private freight terminals
(PFT) a nd m ulti m o da l lo g is ticp a r k s ( M M L P ) a c r o s s 1 5
locations in India. Currently,
the P FTs a t Kha tuw a s a nd
Na g ulpa lly a re o peratio na l a nd
a re expe cted to sca le up in the
near term. Further, ConCorplans to acquire land in the
central and eastern regions of
the co untry, in c lo se proxim ity
t o t h e d e d i c a t e d f r e i g h t
corridor (DFC), to scale up its
PFT bus iness .
O v e r F Y 1 0 - 1 3 , C o n C o r ' s
v o l u m e g r o w t h r e m a i n e d
slugg ish a nd g rew a t a CAG R of
2.2%. How ever, FY14 ha s see n
a reviva l in ca rg o vo lume s w ith
10.9% year-on-year (YoY)
g r o w t h . G o i n g a h e a d , w e
expect total cargo volumes to
grow at a CAG R of ~ 11% over
FY14-17E on account of theimproving economic scenario
a n d C o n C o r ' s s t r a t e g y o f
provid ing be t ter ra tes for
v o l u m e c o m m i t m e n t s b y
clients.
ConCor is the market leader
w ith a d om inant m arket sha re
(79%) among container train
o pera to rs (CTOs) w hile o ther
CTOs a re s till m inisc ule in s ize.
ConCor has an unmatched
infra structure a nd existing pa n-
India presence tha t would
enable it to capture higher
volume g row th in a n im proved
economic scenar io . I t has
made strategic investments in
build ing infra structure clo se to
the proposed DFC with the
intention of capturing higher
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volume share over the longer
t e r m . F u r t h e r , w i t h
implementation of goods and
se rvice tax (G S T) im m inent w e
expec t both expor t- import
(exim) and domestic cargo to
g r o w c o n s i d e r a b l y .
Consequent ly , we envisage
earnings per share (EPS) will
register a CAGR of 16% over
FY14-17E to Rs. 76 w ith re turn
on equi ty improving f rom
13.8% in FY14 to 15.8% in
F Y 1 7 E . C o n s i d e r i n g t h e
e x p e c t e d a c c e l e r a t i o n i n
earning growth, improvement
in return ratios and debt free
sta tus w e a ss ig n a P/E multiple
of 22x FY17E EPS to arrive a
ta rget price o f 1,670.`
Key Financials
Valuations Summary
Net sa les ( cro re) 5,109 5,460 6,478 7,912
EBITDA ( cro re) 1,078 1,269 1,555 1,998
Net pro fit ( crore) 950 904 1,133 1,479
EPS ( ) 48.7 46.3 58.1 75.9
FY14 FY15E FY16E FY17E
`
`
`
`
(EBITDA: Ea rn ings b e f o re in t e res t , t ax es , deprec i a t ion , andamortization; EPS: Earnings per share; P/E: Price-to-earnings; EV: Enterprise va lue; P/BV: Price-to -book/va lue ; RoNW: Return on net w orth;RoCE: Return on Ca pital Em ployed)
P/E (x) 26.8 28.2 22.5 17.2
Ta rg et P/E (x) 34.3 36 28.7 22EV /EBITDA (x) 21.2 17.7 14.2 10.5
P /BV (x) 3.7 3.4 3.1 2.7
RONW (%) 13.8 12 13.6 15.8
ROCE (%) 12.8 11.3 13.2 16
FY14 FY15E FY16E FY17E
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Gujarat Pipavav Port Ltd.
Target Price: Rs. 221 (16% upside)
Guja ra t P ipavav Por t L td .(GPPL) with a capacity of
8,50,000 TEUs (tw enty-fo o t
e q u i v a l e n t u n i t s ) , a n d
strategically located on the
western coast of India with
proxim ity to ind us tria l clustersprovides scope for significant
growth. Besides containers,
the port is well equipped to
handle bulk cargoes including
fertiliser and agri-products.
Further, G PP L pla ns to expa ndits c o ntainer ha ndling ca pa city
to 1.35 millio n TEUs a s the po rt
conta iner volumes ha ve g row n
a t a CAG R o f ~ 12% o ver CY10-
13. In terms of infrastructure,
the port is well connected viaroa d a nd rail bes ide s ho using a
container freight station to
ma nag e its throug hput.
Port revenues g rew a t a CAG R
o f ~ 22% o ver CY10-13 aided
by ~ 12% g row th in container
volume whereas bulk volume
g r o w t h r e m a i n e d m o s t l y
flattish. As nearly 70% of ther e v e n u e i s d e r i v e d f r o m
container, GPPL's growth was
h i g h l y s k e w e d t o w a r d s a
pa rticula r se g m ent. In o rder to
diversify the ca rg o b a se , G PP L
e n t e re d in t o v a rio u sarrangements with tank farms
owners and providing Ro-Ro
(Roll-o n/roll-o ff) fa cility fo r a uto
l o g i s t i c s h a n d l e r s . G o i n g
ahead, as GPPL is present in
pro xim ity to a uto hubs co upledwith ac t ing as a ga teway to
n o r t h e r n h i n t e r l a n d a u t o
m a nufac turers, it is w ell po ise d
to gain through new business
addition.
With the a dd itio n o f a co uple o f
n e w b u s i n e s s l i n e s a n d
improved revenue visibility,
GPPL is expected to post
reve nue CAG R o f nea rly 20% in
CY11-15 w he rea s EBITDA
CAG R is e xpected a t ~ 27% in
the same period. As nearly
70% o f G PPL's co s t is fixed , the
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new business is expected to
further improve the operating
leverage, thereby aiding the
E B I T D A m a r g i n . F u r t h e r ,
G PP L's deb t-free structure a nd
e x t e r n a l c o m m e r c i a l
borrowing (ECB) funding for
new ca pex is expected to b ring
down the interest cost . A
diversified cargo portfolio and
p r e s e n c e i n h i g h g r o w t h
segments like tank farms and
a u t o e x p o r t p r o v i d e
confidence on the earnings
g r o w t h o f G P P L .
Consequently, we revise our
estimates upwards and arrive
at a discounted cash f low
(DCF)-based target price of
221.
`
Key Financials
Valuations Summary
(EBITDA: Ea rn ings b e f o re in t e res t , t ax es , deprec i a t ion , andamortization; EPS: Earnings per share; P/E: Price-to-earnings; EV:
Enterprise va lue; P/BV: Price-to -book/va lue ; RoNW: Return on net w orth;RoCE: Return on Ca pital Em ployed)
Net sa les ( cro re) 416 518 676 831
EBITDA ( cro re) 182 257 381 475
Net pro fit ( crore) 74 192 321 427
EPS ( ) 1.5 4 6.6 8.8
CY12 CY13 CY14E CY15E
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P/E (x) 122.9 47.4 28.3 21.3
Ta rg et P/E (x) 144.8 55.8 33.4 25.1EV/EBITDA (x) 51.3 36 23.5 18.1
P /BV (x) 7.5 6.5 5.3 4.2
RONW (%) 6.1 13.7 18.6 19.8
ROCE (%) 8.2 9.5 17.9 17.4
CY12 CY13 CY14E CY15E
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Heidelberg Cement India Ltd.Target Price: Rs. 105 (28% upside)
Heide lbe rg Cem ent is a pla ye rin the central region that
co ntributes o ver ~ 94% o f its
tota l revenues . The c o m pa ny
h a s r e c e n t l y d o u b l e d i t s
cement capacity to 6 million
to nn es (MT) from 3 MT in Cy 13
a t a tota l ca pex o f 1,570 crore.
With a reviva l in dem a nd a lo ng
w i t h s t a b i l i s a t i o n o f n e w
ca pa city, w e expe ct its m a rg in
to reach over 15% by CY16Ew ith ca pa city utilisa tio n o f ove r
85% during the s a m e pe rio d .
After scaling up capacity, the
company i s now focus ing
tow a rds co st red uction. It hasi n s t a l l e d a c o n v e y o r b e l t
b e t w e e n i t s l i m e s t o n e
reserves and clinker units,
w hich a re 20 km a w a y (a t 200
crore) to trans po rt lim es tone to
its c linkerisa tio n unit, w hich is
currently b eing tra nspo rted b y
trucks. This w o uld he lp the
`
`
company in achieving costs a vin g s o f a b o ut ~ 45-
50/to nne. Furthe r, to red uce its
power costs , the company is
currently setting up a 13 MW
waste hea t recovery p lant
(ca pex o f 150 crore), w hich
w ill be co m m iss io ned by ea rly
2016E. Cons idering the benefit
of co nveyo r belt , eco nom ies of
sca le coup led w i th be t t e r
u t i l i s a t io n s , w e e x p e c toperating margins to improve
to 14.8% in CY15E and 15.4%
in CY16E from 6.3% in Cy13.
A h e a l t h y o p e r a t i n g
env i ronment coup led w i ths t r o n g p r o m o t e r b a c k - u p
(Heidelberg AG: world's third
la rg est cem ent prod ucer) a lla y
o ur co ncerns w ith reg a rd to its
deb t se rvicing a b ility. The deb t
to -eq uity (D/E) ra tio currently
sta nd s a t 1.2x.
Given the scope for margin
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expansion along with better
demand-supply mat r ix , we
expect the co m pany to repo rt a
ne t pro fit o f 104.4 cro re in
C Y 1 6 E . W e e x p e c t
EBITDA/to nne o f Rs . 662/to nne
in CY16E from Rs. 260/to nne in
CY13. On an EV/to nne b a s is ,
t h e s t o c k i s t r a d i n g a t
$86/to nne (o n ca pa city o f 5.4
`
MT), w hich lea ves s co pe fo r
f u r t h e r u p s i d e o n c e i t s
opera t ing mat r ix improves
f u l l y . H e n c e , w e r e m a i n
positive on the stock with a
ta rget p rice o f Rs . 105/sha re
(i.e. valuing at 9.5x CY16E
EV/EB ITDA, $100/to nne o n
ca pa city o f 5.4 MT).
Key Financials
Valuations Summary
(EBITDA: Ea rn ings b e f o re in t e res t , t ax es , deprec i a t ion , and
amortization; PAT: Profit after tax; EPS: Ea rning s per sha re; P/E: Price -to -earnings; EV: Enterprise va lue; P/BV: Price-to -book/va lue; RoNW: Returnon net w orth; RoCE: Return on Ca pita l Em ploy ed )
Net sa les ( crore) 1,364.8 1,638 1,896.6 2,166.5
EBITDA ( crore) 86.4 234.5 281.2 332.6
PAT ( cro re) -40.7 65.5 70.8 104.4
EPS ( ) -1.8 2.9 3.1 4.6
CY13 CY14 CY15E CY16E
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P/E (x) NA 28.4 26.3 17.8
Ta rg et P/E (x) NA 36.3 33.6 22.8
EV /EBITDA (x) 35.9 11.7 9.8 8
P/BV (x) 2.2 2.2 2 1.8
Ro NW (%) -4.9 7.6 7.6 10.2
Ro CE (%) -0.5 6.2 8.2 10.2
CY13 CY14 CY15E CY16E
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Infosys Ltd.Target Price: Rs. 2,400 (23% upside)
In f o s y s a n n o u n c e d t h eselec tio n o f Dr Visha l S ikka , the
former SAP executive board
member, as its new Chief
E x e c u t i v e O f f i c e r a n d
Managing Director (CEO &
MD), effective August 1, 2014,
fo r a pe rio d o f five y ea rs. Und ert h e n e w C E O , I n f o s y s i s
undergoing another strategic
transformation and is broadly
emphasising on two themes:
1) Renew ing the co re b usines s
and 2) Innovating into newbusiness. Acknowledging that
t h i s t r a n s f o r m a t i o n i s
demanding and could stretch,
the management is confident
o f executio n a nd b elieves such
a company could sustain 15-
18% revenue growth and 25-28% EBIT (earnings before
interes t a nd tax) m a rg ins.
Th e n e w m a n a g e m e n t
empha sised m as sive emb race
o f des ig n thinking – new – in
renewing exist ing of ferings
such as consulting services,
product engineering &Finacle
and committing considerable
i n v e s t m e n t s i n t h i s a r e a .Curren tly, ~ 8,300 entry leve l
and 160+ senior employ ees
have been trained on design
thinking while more could
follow. Interestingly, 70% of
US-based consul tants have
b e e n t r a i n e d o n d e s i g nthinking w hile 1,000 peo ple
have been trained on artificial
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