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PhillipCapital – Market Intelligence Festive times: Market finds new reasons to cheer!

INDIA | STRATEGY | Monthly Update

16 October 2017

Market commentary: Nifty has moved up by 3.5% in 3m led by metals

and Oil & Gas which were up by 20% & 11% respectively. Domestic

investors continue to remain optimistic is even as India lags the other

emerging marketing. NIFTY YTD returned 24% vs MSCI Emerging market

index returned 30.6%. FIIs turn net sellers (sold US$ 1.55bn), while DIIs

added US$ 3.9bn in last one month – with total post-demonetization DII

flows are now close to US $15bn.

Global macro support: Global manufacturing PMI continued its

expansion phase with September witnessing a strong PMI of 53.2

suggesting further expansion in Global GDP growth. Last month US

Federal Reserve left interest rates unchanged but signaled one more

rate hike by the end of year. It also said that it would begin unwinding

its US$4.2 trillion of bonds in October notwithstanding the recent bout

of low inflation. All these factors are clear signs of confidence in growth

prospects of the world economy is improving.

Indian macros are a mixed bag but growth worries waning: Current

macro indicators give a mixed picture of Indian economy: GDP growth

rate slowing to 5.7% for Q1FY18 (Slowest during Modi Government)

largely pulled down by short term challenges of demonetization & GST.

But CPI inflation is quite stable at 3.3% for September (Consensus

expectation: 3.5%) vs 3.4% last month. IIP growth rate rose to 4.3% for

August (Consensus expectation: 2.1%) vs 1.2% last month, led by

favorable base effect & strong growth seen in mining, electricity,

primary & capital goods. Trade deficit for September plunged to a 7-

month low to US$ 9bn vs. last 6-month average of US$ 12bn, led by a

surge in exports.

Reasonable Q2FY18 Earnings: While the uncertainty over India’s

growth story unlikely to completely disappear as Nifty FY18 earnings

expectations have been down by almost 7% after not so inspiring 1Q

results. Most of the cuts were in PSU banks and export driven sectors.

However, we expect a reasonable revenue and earnings growth for

Q2FY18 driven by metals, oil and gas, and the financials sectors. We

forecast our coverage universe’s sales/EBIDTA/PAT to grow by

10%/6%/9% yoy. Earnings growth ex-financials will be 4% yoy, while ex-

financials and metals it will be -4%. Revenue growth in the consumer

sector, both staples and discretionary such as automobiles, will be

robust, but earnings will be slower. Key factors driving growth for the

quarter are:

Positive momentum in commodity prices driving metals sector’s

earnings

Domestic consumption, especially in automobiles and some

durables categories in which sales have picked up due to the

upcoming festival season

Price growth, restocking, and new product launches in the

consumer sector will provide support for revenue growth

Midcap companies will see margin improvement and lower

financial leverage driving earnings growth

IT services and pharmaceuticals will continue to face pressure on

revenue and earnings growth. The telecom sector, hit by

unprecedented competitive pressures and seasonality, will see a sharp

decline in revenues and an even sharper decline in earnings.

PhillipCapital Diwali picks: We present 10 bottom-up ideas which will

deliver solid returns in the next one year. Our ideas are a mix of

turnaround stories like Magma, JK Lakshmi cement, Idea Cellular,

Nestle and Bajaj Electricals, continued re-rating ideas like Aarti

Industries, Va Tech and earnings play like Nalco and Repco. All the

above stocks are likely to beat their peer set or market returns by a

substantial margin.

PC Diwali Picks CMP Target Price Upside (%)

Magma Fincorp 180 250 39%

Repco Home Finance 640 850 28%

VA Tech Wabag 581 775 33%

JK Lakshmi Cement 390 600 54%

Nestle 7317 7700 5%

Idea 82 130 58%

Bajaj Electricals 390 440 13%

Navkar corp 193 250 30%

Nalco 86 100 16%

Aarti industries 901 1150 28%

Naveen Kulkarni, CFA, FRM (+91 22 6246 4122) [email protected] Neeraj Chadawar (+91 22 62464116) [email protected]

mailto:[email protected]

mailto:[email protected]


MARKET INTELLIGENCE MONTHLY UPDATE

INDEX

Sector strategy and top picks

Diwali picks ........................................................................................................................................... 5-7

Market performance and valuations

Global indices performance ................................................................................................................. 9

NIFTY valuations .................................................................................................................................. 10

Global valuations ................................................................................................................................. 11

Sector performance ............................................................................................................................. 12-13

Market valuation .................................................................................................................................. 14

Sector valuations ................................................................................................................................. 15-16

BSE200 top gainers & losers ................................................................................................................ 17-18

Styles performance .............................................................................................................................. 19

Styles valuations .................................................................................................................................. 20

FII and DII analysis

Flows update ........................................................................................................................................ 22

Macro and market indicators

Macro indicators – global .................................................................................................................... 24

Macro indicators – India ...................................................................................................................... 25

Market indicators ................................................................................................................................ 26

Commodities tracker ............................................................................................................................ 27

Model portfolio .................................................................................................................................... 28



PHILLIPCAPITAL – MARKET INTELLEGENCE

Sector Strategy & Top Picks



Diwali Picks

Magma Fincorp: Rising like a phoenix MGMA IN | RATING: BUY | CMP: Rs 180| TARGET: Rs 250| Upside 39%

New branch structure to drive sustainable improvement in asset quality.

Improved branch quality and favourable macro environment to drive growth. As balance sheet expands, opex ratio to turn healthier.

Rural recovery to drive sharp improvement in profitability. We expect RoA to improve to 2.5%/2.8% in FY19/20 from an average RoA of 1.3% in FY12‐ 16; RoE to increase to 15%/17% from 11%.

Historically, MGMA has traded at a 50‐60% discount to its peers (MMFS, CIFC, SHTF) due to sub‐optimal profitability ratios. While the discount has narrowed in the last 6‐9 months – aided by improvement in asset quality and a likely sharp turnaround in profitability – it remains high at 40%.

At CMP, the stock trades at 1.5x/1.3x FY18/19 BVPS of Rs 113/132. We have a BUY with a target of Rs 250 per share at 2.2x FY19 BVPS.

Repco Home Finance: Emerging from de-monetisation blues REPCO IN | RATING: BUY | CMP: Rs640 | TARGET: Rs 850| Upside 28%

Repco is a play on the structural growth in the mortgage market with a niche focus on the under-served self‐employed segment in smaller towns and cities in India.

Repco is in a good position to gain from the strong opportunity in rural and affordable housing, and incentives offered by the government. The correction in the stock price factors near-term growth headwinds and asset-quality woes due to the cash crunch. We believe that REPCO will return to normalised growth and recover overdue loans in the next two quarters.

Risk-based pricing, strong underwriting standards, and efficient monitoring, will drive earnings.

At CMP, the stock trades at 3.1x/2.6x FY18/19 BVPS of Rs 208/244. We have a BUY with a target of Rs 850 per share at 3.5x FY19 BVPS.

VA Tech Wabag: Strong order pipeline and improvement in working capital VATW IN | RATING: Buy | CMP: Rs 581| TARGET: Rs 775| Upside 33%

Wabag is a direct play on global and domestic opportunities in the water and waste water treatment sector.

It has robust order opportunity pipeline of Rs 160bn (4x of FY18E order inflow target) over next 24 months. Key areas highlighted are Middle East, North Africa, Latam, and industrial orders from South East Asia. Domestic ordering will be driven by Namami Gange and bunched up municipality projects.

We see improvement in its working capital as cash flows from the APGENCO project are progressively released, coupled with beneficial terms in the Petronas project (12‐15% of FY18 revenues).

Strong visibility of revenues as current order book (Rs 74bn, 2.3x TTM sales) can support 15% CAGR in FY18-19 revenues.

Further, expansion in EBITDA margins over FY17-20 on completion of low margin APGENCO project in FY18

Our target multiple of 20x September 2019 earnings is at a discount to its long‐term average (22x).

We believe that VATW’s rerating beyond its averages will depend on its ability to reduce its working capital intensity, which is currently 26.5% of sales vs. 19% in FY14.

JK Lakshmi Cement: A play on FY19 JKLC IN | RATING: BUY | CMP: Rs 390 | TARGET: Rs 600| Upside +54%



JKLC is a rare mid-cap stock which has not rallied as it is yet to deliver on its earnings which the company will be able to deliver in FY19 on cost efficiency measures and improving capacity utilisation.

Delivery of cost efficiencies from east India operations with power plants and commissioning of conveyor belts for limestone transfer from mines to plant. Opportunity to improve on logistics cost in east India by installing railway sidings.

Phenomenal scope for brownfield capacity (nearly 2x current capacity) at half the industry capex (US$ 70/tonne).

From cost perspective, the company can easily improve its cost by Rs 200/tonne in H2FY19 at its eastern sites.

Launched composite cement in east India under the brand name ‘Platinum Heavy Duty Cement’, which should also give the company an incremental cost advantage over peers (as the clinker ratio in composite cement is further much lower than OPC/PPC). We understand that it has been able to scale up volumes of this brand to nearly 4% of its overall production in just a month of launching it.

It can scale up volumes from its recently commissioned plant at Udaipur (one of the best placed plants in terms of location).

We see the earnings for JKLC improving FY19 and onwards driven by increased efficiencies and delivery of better EBITDA/tonne. We Ebitda/tonne to scale upto +Rs800/tonne vs. current ~Rs500/tonne. It currently trades at EV/tonne of ~US$75-80 which is easily scalable to at par with replacement costs (at US$120/tonne)

Nestle India- Best in class innovations NEST IN | RATING: BUY | CMP: Rs 7,317 | TARGET: Rs 7,700 | UPSIDE: 5%

Nestle is the only large FMCG company talking about double digit revenue growth on account of its strong innovation pipeline.

In 1HCY17, domestic volume grew by 9.5% yoy led by prepared dishes (maggi) at 16% yoy; Beverages (Nescafe) at 25% yoy; Chocolates at 6% yoy

In the last 18 months it has launched 43 products which are highest among any FMCG companies. Several new launches include Maggi Hotheads, Milo RTD and Ceregrow was well received by the consumers

Notwithstanding the Maggi fiasco in Jun’2015, demonetisation and recently GST implementation Maggi consistently grew its market share which now currently stands at 60%

Nestle has one of the strongest brands and a long history of delivering superior growth. However, it was punching below its weight because of its conservative approach to the market. This has clearly changed after the Maggi debacle and the focus on volume growth is more evident than ever.

With aggressive new product launches in the recent months and go to market strategy, we believe Nestle is capable of delivering higher than industry growth for a sustainable period.

Hence, we believe Nestle will be one of the fastest growing FMCG companies in our coverage universe going forward and rate it as our top Buy in the FMCG space.

Idea Cellular: Biggest Indian Telco in the making IDEA IN | RATING: BUY | CMP: Rs 82 | TARGET: Rs 130| UPSIDE: 58%

Idea Cellular and Vodafone merger is on fast track and it has managed to secure the approvals of Competition Commission of India, SEBI and share holders’ approval in quick time. The merger is likely to be consummated by March 2018 and Idea should start reporting Vodafone consolidated numbers in FY19. Post merger, Idea Vodafone combined will be the biggest telecom company in India on revenue market share terms.

The combined entity has synergistic benefits valued at more than US$ 10bn is significant considering the implied EV of the combined entity at the current market price is US$ 27bn. As visibility on synergy



benefits increases equity valuation will rise towards the fair value of the firm.

The tariff cycle is bottoming out and with increased value the industry should start growing by H2FY18. Industry growth combined with consolidation benefits will mean that valuations are likely to sustain and earnings upgrades will follow.

Current valuations (9.2x/8.4x FY18/19 EV/EBITDA) do not reflect the business strengths of individual companies and are not capturing the synergy benefits that will come after the merger. We value the company on DCF basis with a target price of Rs 130 only taking into consideration 25% of the synergy benefits.

Bajaj Electricals: TOC and RREP are coming into play – rerating soon BJE IN| RATING: BUY | CMP: Rs 390| TARGET: Rs 440| UPSIDE: 13%

Bajaj is one of the oldest brands in consumer durables with Pan India presence. Market leader in products like - Irons, Water heaters, mixers and juicers.

TOC (Theory of Constraints) and RREP (Range and Reach Expansion Program) started ~2 years ago, started yields results for BJE (covered more than 60% of the targeted market by Sep’17, expect to complete by FY18).

Increasing touch points and product mix under RREP is resulting in improving revenue visibility and margin improvement for consumer durable (CD) business.

In E&P, it became more selective about projects, and increased execution. It also improved margins and reduced WC through lower inventory (Order book of Rs 33.8bn).

Tight control on working capital and channel financing under TOC is resulting in lower working capital needs. BJE’s WC days to fall to 60 by FY19 from 88 in FY16; will lead FCF of Rs 10.0bn over FY16‐19 – highest in the last 8 years.

we expect the valuation gap between BJE and its peers to narrow as: (1) BJE focuses on leveraging distribution network through geographical and product expansion,(2) working capital could improve because of TOC and as BJE adopts channel financing, resulting in higher FCF and improving return ratios.

At CMP stock is trading at PE 17x on FY19 numbers. We assign BJE’s CD segment PE of 27x on FY19 CD-EPS and EV/EBITDA of 7x to E&P businesse get a per share value of Rs 440 (287 +154).

Navkar Corporation: Differentiating business NACO IN | RATING: BUY | CMP: Rs 193 | TARGET: Rs 250| Upside 30%

Leading player in container-handling and storage with CFS and ICD facilities in Mumbai and Vapi. It has significantly outperformed industry growth with market share gains. (It controls 14% market share at JNPT with FY17 utilizing of 90% compared to average utilization of 50% for CFS at JNPT)

Creating new market opportunities in Vapi to cater to Gujarat’s industrial belt with strong business model offering cost benefit to customers. Total addressable container market in Gujarat is 1.5mn TEU per annum and Navkar is currently working with 40 shipping lines in its Vapi ICD. Construction work for the rail facility at Vapi is complete; expects it to start soon after Indian Railway’s inspection. Sees logistics park revenue coming in when rail operation at Vapi begin from 2HFY18.

It has started handling DPD (Direct port delivery) containers and benefit of rail connectivity. Strong asset base and operational expertise will help to grow in other locations in future. Navkar board approved Rs 5bn for capitalising certain opportunities in CFS / ICD and warehousing.

At CMP, the stock trades at 14x our FY19 expected earnings of Rs 14, and 10x EV/EBITDA. With a strong execution background, Navkar is



likely to capture the market at Vapi (we see sustainable growth). We have a Buy with target Rs 250 (18x FY19)

Nalco – Biggest beneficiary of Aluminium price rally NACL IN | RATING: BUY | CMP: Rs 86 | TARGET: Rs 100 | UPSIDE: 16%

Supply side reforms in China have resulted in a sharp rally in the aluminium prices in CY17. We expect this to continue with closures removing excess supply from the market while consumption continues to stay strong. Upcoming winter curbs in China are expected to further support aluminium and alumina prices which have already rallied by ~26% and 21% since the start of CY17.

Nalco is expected to be the biggest beneficiary of this aluminium price rally given hedges will restrict Hindalco’s profit surge while Vedanta will see part of the gains getting erased due to higher alumina cost. Given complete integration for Nalco, higher prices will majorly flow through in terms of higher profitability.

Nalco is in the process of ramping up its aluminium production which will drive 14%/5% volume growth in FY18/19. Given high cost base, it is expected to drive strong operating leverage for the company.

At the CMP, the stock offers a strong dividend yield of 4%. We expect the dividend to stay strong given strong cash flow generation expected. We value the stock at 6.5x FY19 Ebidta arriving at a target price of Rs 100

Aarti Industries: A true specialty chemical company! Buy with TP Rs 1150 ARTO IN | RATING: BUY | CMP: Rs 901| TARGET: Rs 1150| Upside 28%

One of the most assured growth visibility with Sales/Profit CAGR of 17%/23% over FY17-20E.

We believe ARTO’s unique business model of manufacturing customised/specialty products for global MNCs stands out among its Indian peers. Pure Specialty chemicals play given its expertise in Benzene chemistry.

Its key strengths and ability to exploit global changes are 1) Global scale leadership, 2) presence in longest chain of benzene derivatives, 3) Long standing supply pacts with global MNCs, 4) established supply chain mgmt 5) India specific cost advantage 6) weakening Chinese competition.

ARTO has signed a multiyear contract with a global agrochemical company to manufacture and supply high-value agrochemical intermediary. As per the deal, supplies are to begin from FY20 and should generate revenues of ~Rs 40bn over the contract term. ARTO’s supply revenue (~Rs 4bn) will start in FY20 and will be evenly distributed across the deal term.

At CMP of Rs 901, it trades at 21x/16x FY18/19 EPS and 12x/10x FY18/19 EV/EBITDA.

The multi-year high-margin customised supply pact enhances long-term earnings visibility, and strengthens its growth trajectory. Supported by the deal, we see strong earnings growth of 27% in FY20 (boosting earnings CAGR to 23% over FY17-20). Reiterate our conviction BUY.



PHILLIPCAPITAL – MARKET INTELLIGENCE

Market Performance & Valuations



Global Indices Performance NIFTY gained 3.5% in 3m led by metals and Oil & Gas which were up by 20% & 11% respectively. YTD return for Nifty is 24% vs emerging market returns of 30.6% indicates NIFTY has been underperforming its emerging market peers. Out of 15 indices that we track, 14 had shown double digit growth in last 1 year. NIFTY gained about 24% YTD, in line with broader EM and Asian ex Japan performance

Source: Bloomberg, PhillipCapital India Research, Prices as of October 16, 2017

6.5% 4.8%

3.0% 2.7%

2.4% 2.3%

2.3% 2.2%

2.1% 2.1% 2.1% 2.0%

1.8% 1.2%

0.9%

0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0%

Japan Korea

Hang Seng China ENT INDX Singapore MSCI EM STOXX50

US (NASDAQ) US (SPX)

Asia ex Japan Hong Kong MSCI World

CSI 300 Taiwan

Australia India Nifty

1m % performance

7.4% 7.1%

6.9% 6.9%

5.8% 5.5%

4.1% 4.0%

3.8% 3.6%

3.5% 2.3%

2.2% 2.0%

0.4%

0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0%

Hong Kong Hang Seng China ENT INDX

CSI 300 MSCI EM

Japan Asia ex Japan US (NASDAQ)

MSCI World US (SPX)

STOXX50 India Nifty

Taiwan Australia

Korea Singapore

3m % performance

30.6% 29.4%

28.9% 24.2%

22.7% 22.6%

22.1% 18.5%

15.9% 15.8%

15.2% 14.0%

10.7% 9.5%

2.6%

-2.0% 3.0% 8.0% 13.0% 18.0% 23.0% 28.0% 33.0%

MSCI EM Hong Kong

Asia ex Japan India Nifty

US (NASDAQ) Hang Seng China ENT INDX

Korea CSI 300 Taiwan

MSCI World Singapore

US (SPX) Japan

STOXX50 Australia

YTD % performance

27.0% 25.8%

25.2% 23.9%

23.6% 22.0%

20.7% 20.2% 20.1%

19.8% 19.6%

19.3% 17.8%

16.9% 7.9%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0%

US (NASDAQ) MSCI EM

Japan Asia ex Japan

Hong Kong Korea

Hang Seng China ENT INDX MSCI World

US (SPX) STOXX50 CSI 300

India Nifty Singapore

Taiwan Australia

1 yr % performance



NIFTY Valuations Nifty CY18 PE of 20.5x implies yoy growth of ~16% in CY18, indicating some downside risks to consensus estimates

Nifty vs. other regions Nifty consensus FY18 earnings expectations have gone down by 7% till sep end Country/Region ____Earnings Growth (%)____ ____________P/E____________ CY 2017 CY 2018E CY 2019E CY 2017 CY 2018E CY 2019E S&P 500 8% 13% 11% 21.8 19.4 17.5 Japan 30% 5% 11% 19.2 18.3 16.5

India 7% 16% 24% 23.8 20.5 16.5

France 11% 18% 8% 18.6 15.8 14.7

Brazil 885% 62% 11% 24.1 14.9 13.4

Germany 21% 25% 9% 18.2 14.5 13.3 Shanghai 5% 21% 13% 17.8 14.7 13.1

MSCI Asia ex Japan 14% 9% 18% 15.8 14.6 12.4

Hong Kong 12% 10% 9% 14.3 13.0 12.0 MSCI EM 12% 17% 18% 16.4 14.1 12.0

South Korea 23% 51% 12% 16.0 10.6 9.5 Russia 12% 6% 12% 7.8 7.4 6.6

Nifty one-year forward PE trading at more than 1 stdev Nifty one-year forward PB


334

367

405 390 379

419

300

400

500

600

Apr/11 Jul/12 Nov/13 Mar/15 Jun/16 Oct/17

Nifty Consensus EPS trends FY12E FY13E FY14E

FY15E FY16E FY17E

FY18E Actual

Mean

Mean + 1SD

Mean -1SD

7

9

11

13

15

17

19

21

Jul/05 Sep/06 Dec/07 Mar/09 May/10 Aug/11 Nov/12 Jan/14 Apr/15 Jul/16 Oct/17

12M Fwd Nifty PE

Mean

Mean + 1SD

Mean -1SD

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Jul/05 Oct/06 Dec/07 Mar/09 Jun/10 Aug/11 Nov/12 Feb/14 May/15 Jul/16 Oct/17

12M Fwd Nifty PB



Global Valuations US S&P 500 & MSCI developed market trading at a significant premium to its long-run average, while MSCI AEJ & EM valuations look attractive

US S&P 500: One-year forward PE Developed markets: One-year forward PE

MSCI Asia ex Japan: One-year forward PE trends Emerging markets: One-year forward PE


Mean

Mean + 1SD

Mean -1SD

8

10

12

14

16

18

20

Oct/07 Oct/08 Oct/09 Oct/10 Oct/11 Oct/12 Oct/13 Oct/14 Oct/15 Oct/16 Oct/17

S&P 500 12m fwd PE

Mean

Mean + 1SD

Mean -1SD

7

9

11

13

15

17

19


MSCI developed mkt 12m fwd PE

Mean

Mean + 1SD

Mean -1SD

8

10

12

14

16

18


MSCI Asia ex Japan 12m fwd PE

Mean

Mean + 1SD

Mean -1SD

5

7

9

11

13

15


MSCI EM 12m fwd PE



Sector Performance Nifty’s lost some ground in the month of September due to release of weak macro economic data. FIIs turned to be net sellers as compared to DIIs. However Metal sector gained 3%/19% in last 1m/3m driven by positive momentum in commodity prices.


4.4%

4.0%

3.1%

2.0%

1.5%

0.9%

0.9%

0.8%

0.8%

-0.1%

-0.5%

-0.6%

-0.6%

-0.8%

-0.9%

-1.5%

-2.3%

-2.4%

-6.9%

-9.0% -7.0% -5.0% -3.0% -1.0% 1.0% 3.0% 5.0%

NIFTY PHARMA

NIFTY IT

NIFTY METAL

NIFTY ENERGY

NIFTY AUTO

NIFTY COMMODITIES

Nifty

NIFTY500

NIFTY SERV SECTOR

NIFTY Midcap 50

NIFTY Midcap 100

NIFTY BANK

NIFTY NEXT 50

NIFTY FMCG

NIFTY INFRA

NIFTY MNC

NIFTY REALTY

NIFTY MEDIA

NIFTY PSU BANK

1m % sector price performance

19.6%

10.5%

9.4%

5.5%

4.8%

4.1%

4.0%

3.8%

3.6%

3.5%

2.8%

2.8%

1.8%

1.1%

0.2%

-0.4%

-2.5%

-4.8%

-13.5%

-18.0% -13.0% -8.0% -3.0% 2.0% 7.0% 12.0% 17.0% 22.0%

NIFTY METAL

NIFTY ENERGY

NIFTY COMMODITIES

NIFTY MNC

NIFTY NEXT 50

NIFTY IT

NIFTY500

NIFTY Midcap 50

NIFTY SERV SECTOR

Nifty

NIFTY Midcap 100

NIFTY BANK

NIFTY REALTY

NIFTY AUTO

NIFTY INFRA

NIFTY FMCG

NIFTY MEDIA

NIFTY PHARMA

NIFTY PSU BANK

3m % sector price performance



Sector Performance Top YTD leaders: Realty (+71%), Metal (+43%), and MNC (+39%). Notable yoy gains by Energy (+37%) on rising oil prices, led by soaring oil demand. Hurricane Harvey has also played a catalyst role in rising oil prices.


70.9%

42.7%

38.9%

35.8%

33.6%

33.2%

33.2%

30.5%

29.9%

28.0%

27.5%

24.2%

23.6%

22.6%

21.2%

15.3%

5.0%

2.1%

-7.0%

-15.0% 5.0% 25.0% 45.0% 65.0% 85.0%

NIFTY REALTY

NIFTY METAL

NIFTY MNC

NIFTY BANK

NIFTY NEXT 50

NIFTY Midcap 50

NIFTY ENERGY

NIFTY Midcap 100

NIFTY COMMODITIES

NIFTY500

NIFTY SERV SECTOR

Nifty

NIFTY INFRA

NIFTY FMCG

NIFTY AUTO

NIFTY MEDIA

NIFTY IT

NIFTY PSU BANK

NIFTY PHARMA

YTD % sector price performance

44.9%

39.0%

37.0%

31.0%

29.5%

26.3%

23.7%

23.2%

21.2%

21.0%

20.8%

19.3%

19.2%

18.8%

10.7%

7.5%

4.8%

-1.5%

-15.4%

-23.0% -13.0% -3.0% 7.0% 17.0% 27.0% 37.0% 47.0%

NIFTY METAL

NIFTY REALTY

NIFTY ENERGY

NIFTY MNC

NIFTY BANK

NIFTY COMMODITIES

NIFTY SERV SECTOR

NIFTY NEXT 50

NIFTY Midcap 50

NIFTY500

NIFTY INFRA

Nifty

NIFTY Midcap 100

NIFTY FMCG

NIFTY AUTO

NIFTY IT

NIFTY MEDIA

NIFTY PSU BANK

NIFTY PHARMA

1yr % sector price performance



Market Valuations Almost all the NIFTY sectors look optically expensive, trading at premium to long term average on 12m fwd PE, IT is the exception.

* For few sectors average is less than 10 year due to limited history


12 12 13

15 18 19 19

20 23

25 28

33

18

0

5

10

15

20

25

30

35

40

PSU Banks

Metal Energy IT Service sec

Auto Banks Infra Pharma Realty Media FMCG Nifty

Nifty & Nifty Sectors

12m fwd PE 10 yr Avg *

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

0.4

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

2006 2008 2010 2012 2014 2015 2017

MSCI India earning revisions

13wk 4wk, rhs

50%

70%

90%

110%

130%

150%

170%

190%

210%

MSCI india Dividend yield Average (+/- stdev)

-0.5

-0.3

-0.1

0.1

0.3

0.5 MSCI India Price momentum (% dev from 6mma)

Average (+/- stdev)



Sector Valuations Most sectors are trading above their peak historic one-year forward PE multiples. IT valuations continue to remain depressed due to structural challenges like pricing, technology changes and US regulations.


LPA

+ 1SD

-1SD

70%

75%

80%

85%

90%

95%

100%

105%

110%

Oct/11 Apr/13 Oct/14 Apr/16 Oct/17

Autos 12m fwd PE rel mkt

LPA

+ 1SD

-1SD

50%

60%

70%

80%

90%

100%

110%

120%

Banks 12m fwd PE rel mkt

LPA

+ 1SD

-1SD

102%

122%

142%

162%

182%

202%

222%

242%

262%

Sep/08 Dec/10 Mar/13 Jul/15 Oct/17

FMCG 12m fwd PE rel mkt

LPA

+ 1SD

-1SD

70%

80%

90%

100%

110%

120%

130%

140%

150%

160%

IT 12m fwd PE rel mkt

LPA

+ 1SD

-1SD

80%

100%

120%

140%

160%

180%

200% Pharma 12m fwd PE rel mkt

LPA

+ 1SD

-1SD

30%

40%

50%

60%

70%

80%

90%

100%

Sep/08 Mar/10 Sep/11 Mar/13 Sep/14 Apr/16 Oct/17

PSU Banks 12m fwd PE rel mkt



Sector Valuations Cyclical sectors like Metal & Energy have gained momentum due to improvement in commodity prices. Realty valuations also look stretched.


LPA

+ 1SD

-1SD

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

Feb/11 Mar/12 Apr/13 Jun/14 Jul/15 Aug/16 Oct/17

Realty 12m fwd PE rel mkt

LPA

+ 1SD

-1SD

45%

55%

65%

75%

85%

95%

105%

115%

125%

Nov/11 Jan/13 Mar/14 May/15 Aug/16 Oct/17

Metals 12m fwd PE rel mkt

LPA

+ 1SD

-1SD

90%

100%

110%

120%

130%

140%

Sep/08 Jul/10 Apr/12 Feb/14 Dec/15 Oct/17

Infra 12m fwd PE rel mkt

LPA

+ 1SD

-1SD

120%

140%

160%

180%

200%

220%

240%

Nov/11 Jan/13 Mar/14 May/15 Aug/16 Oct/17

Media 12m fwd PE rel mkt

LPA

+ 1SD

-1SD

60%

70%

80%

90%

100%

110%


Energy 12m fwd PE rel mkt

LPA

+ 1SD

-1SD

80%

90%

100%

110%

120%

130%


Service Sector 12m fwd PE rel mkt



BSE200 Top Gainers & Losers

BSE200 Top Gainers & Losers this month

Top Gainers Last Price % 1m Chg Top Losers Last Price % 1m Chg

Natco Pharma Ltd 985.6 22.4 Reliance Communications Ltd 17.1 -16.8 Bharti Infratel Ltd 450.2 20.6 Welspun India Ltd 65.7 -15.2 Avenue Supermarts Ltd 1234.3 13.4 Indiabulls Real Estate Ltd 215.0 -14.1 Jubilant Foodworks Ltd 1512.9 11.3 Central Bank of India 79.0 -13.6 Coal India Ltd 288.1 10.8 Strides Shasun Ltd 867.5 -12.1 South Indian Bank Ltd/The 32.4 10.6 Bank of India 136.0 -12.0 SRF Ltd 1730.3 9.6 Bayer CropScience Ltd/India 3721.8 -11.4 Bata India Ltd 788.3 9.4 Canara Bank 308.2 -11.3 GAIL India Ltd 436.8 9.2 Amara Raja Batteries Ltd 688.9 -10.9 Jindal Steel & Power Ltd 162.7 9.1 Jain Irrigation Systems Ltd 92.9 -10.8

BSE200 Top Gainers & Losers last 3m

Top Gainers Last Price % 3m Chg Top Losers Last Price % 3m Chg

Edelweiss Financial Services Ltd 289.9 48.9 Reliance Communications Ltd 17.1 -29.8 Bata India Ltd 788.3 41.0 Welspun India Ltd 65.7 -27.3 Avenue Supermarts Ltd 1234.3 38.4 ITC Ltd 265.9 -21.2 L&T Finance Holdings Ltd 204.3 36.6 Ajanta Pharma Ltd 1176.1 -21.1 Indraprastha Gas Ltd 1522.9 35.7 Bayer CropScience Ltd/India 3721.8 -19.4 Bajaj Holdings & Investment Ltd 2924.0 31.4 Central Bank of India 79.0 -18.7 Bajaj Finance Ltd 1954.9 30.4 Amara Raja Batteries Ltd 688.9 -18.5 Oil India Ltd 349.4 29.8 Suzlon Energy Ltd 15.6 -17.7 Jubilant Foodworks Ltd 1512.9 29.8 Union Bank of India 127.9 -17.5 Hindalco Industries Ltd 266.2 29.6 Strides Shasun Ltd 867.5 -16.9




BSE200 Top Gainers & Losers

BSE200 Top Gainers & Losers yoy

Top Gainers Last Price % yoy Chg Top Losers Last Price % yoy Chg

Indiabulls Real Estate Ltd 215.0 157.9 Reliance Communications Ltd 17.1 -64.4 Edelweiss Financial Services Ltd 289.9 149.2 Ajanta Pharma Ltd 1176.1 -39.4 Vakrangee Ltd 505.6 114.5 Glenmark Pharmaceuticals Ltd 603.2 -34.6 Jindal Steel & Power Ltd 162.7 112.5 Tata Motors Ltd 237.6 -34.2 L&T Finance Holdings Ltd 204.3 105.7 Amara Raja Batteries Ltd 688.9 -33.8 Bajaj Finance Ltd 1954.9 84.2 Divi's Laboratories Ltd 872.2 -29.4 Indraprastha Gas Ltd 1522.9 79.5 Sun Pharmaceutical Industries Ltd 534.7 -28.3 TVS Motor Co Ltd 699.0 78.8 Wockhardt Ltd 630.5 -28.0 Dewan Housing Finance Corp Ltd 537.9 78.7 Lupin Ltd 1061.4 -27.5 Adani Enterprises Ltd 119.9 77.4 Alembic Pharmaceuticals Ltd 495.2 -27.3

BSE200 Top Gainers & Losers YTD

Top Gainers Last Price % YTD Chg Top Losers Last Price % YTD Chg

Indiabulls Real Estate Ltd 215.0 201.5 Reliance Communications Ltd 17.1 -49.9 Edelweiss Financial Services Ltd 289.9 197.0 Ajanta Pharma Ltd 1176.1 -34.1 Jindal Steel & Power Ltd 162.7 135.4 Glenmark Pharmaceuticals Ltd 603.2 -32.1 L&T Finance Holdings Ltd 204.3 133.6 Lupin Ltd 1061.4 -28.5 Bajaj Finance Ltd 1954.9 132.9 IDBI Bank Ltd 53.1 -23.6 Dewan Housing Finance Corp Ltd 537.9 120.7 Dr Reddy's Laboratories Ltd 2351.9 -23.1 Dalmia Bharat Ltd 2727.1 101.1 Amara Raja Batteries Ltd 688.9 -21.0 Indiabulls Housing Finance Ltd 1285.1 97.6 Tata Motors Ltd 237.6 -20.6 TVS Motor Co Ltd 699.0 93.8 Strides Shasun Ltd 867.5 -18.2 Titan Co Ltd 625.4 92.0 CRISIL Ltd 1820.0 -17.7

Source: Bloomberg, PhillipCapital India Research, Prices as of October 16, 2017.



Styles Performance Growth & Value performance is neck to neck on YTD but current macro environment tilts the momentum towards growth. Large caps are a clear winner over Small-caps, but in line with mid- caps. Value vs. growth Large-cap vs. small-cap

Large vs. mid-caps Mid vs. small-caps


0.56

0.57

0.58

0.59

0.60

0.61

0.62

MSCI Value vs. Growth

Growth Outperforms

Value Outperforms

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

Sep/10 Feb/12 Jul/13 Dec/14 May/16 Oct/17

MSCI Large Cap vs. Small Cap

Large Caps outperform

Small Cap outperforms

0.5

0.6

0.7

0.8

0.9

1.0


MSCI Large vs Mid-Caps

Mid-Cap outperforms

Large Cap outperforms

1.0

1.2

1.4

1.6

1.8

2.0

2.2


MSCI Mid vs Small-Caps

Mid Cap outperforms

Smalll cap outperforms



Styles Valuations Notwithstanding higher valuations, Mid-caps looks attractive and have potential to further re-rate. Value vs. growth: One-year forward PE Value vs. growth: PB

Large vs. mid-cap: One-year forward PE Large vs. mid-cap: PB

Source: Bloomberg, PhillipCapital India Research, Prices as of October 16, 2017.

40%

45%

50%

55%

60%

65%

70%

75%

80%

85%

90%

Aug/05 Apr/07 Jan/09 Oct/10 Jul/12 Apr/14 Jan/16 Oct/17

MSCI India Value rel Growth 12m fwd PE

Average (+/- stdev)

0%

20%

40%

60%

80%

100%

120%

Jul/05 Apr/07 Jan/09 Oct/10 Jul/12 Apr/14 Jan/16 Oct/17

MSCI India Value rel Growth 12m fwd PB

Average (+/- stdev)

0.5

0.6

0.7

0.8

0.9

1

1.1

1.2

1.3

1.4

Feb/07 Mar/09 May/11 Jun/13 Aug/15 Oct/17

Nifty Midcap 12m fwd PE rel Nifty Average (+/- stdev)

0.45

0.55

0.65

0.75

0.85

0.95

Oct/05 Oct/07 Oct/09 Oct/11 Oct/13 Oct/15 Oct/17

Nifty Midcap rel Nifty price to book

Average (+/- stdev)




FII & DII Analysis



Flows Update FIIs turn net sellers (sold US$ 1.55bn), while DIIs added US$ 3.9bn in last one month – with total post-demonetization DII flows now close to US $15bn. Financials remain the attractive sector for FII with 26% weight followed by Discretionary, Tech. August is the strong month for FDI with $8.4bn inflows

FII, DII Flows vs. NIFTY Index (in USD mn) Cumulative FII, DII flow trends ($ mn)

Foreign Direct Investment (USD, mn) Sector-wise FII assets under management (USD, mn)

Source: Bloomberg, NSDL, PhillipCapital India Research, Prices as of October 16, 2017

5000

6000

7000

8000

9000

10000

11000

-1000

-500

0

500

1000

1500

Oct/15 Jan/16 Apr/16 Jul/16 Oct/16 Jan/17 Apr/17 Jul/17 Oct/17

in $

mn

)

DII inflows FII inflows NIFTY Index, rhs

-10000

0

10000

20000

30000

Jul/14 Mar/15 Oct/15 Jun/16 Feb/17 Oct/17

(in

$ m

n)

Cumulative Flows DII FII

4657

2214

3084 3348

4189

2550

4088

8438

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

Jan/17 Feb/17 Mar/17 Apr/17 May/17 Jun/17 Jul/17 Aug/17

India Foreign Direct Investment (USD million) 104

77

41 34 31 30

24 22 18

14 6 4

26%

19%

10% 8% 8% 7%

6% 5% 4%

3% 0%

5%

10%

15%

20%

25%

30%

0

20

40

60

80

100

120 Sector-wise FII holdings, as of 15th Sep, 2017

In $ bn

AUM % of Total equity (%), RHS




Macro & Market Indicators



Macro Indicators – Global – Steady as she goes Global manufacturing PMI suggests further pick up in global GDP growth, MSCI world earnings revision have turned positive & rising. Inflation expectations have stabilized & show healthy signs of recovery in global market. China witnessed strong PPI of 6.9% yoy in sep, indicating strong momentum in second half. Global Manufacturing PMI still in expansionary territory Global Inflation expectations (5y5y Inflation Swap Forward)

China PPI gains further strength


49

50

51

52

53

54

2.3

2.8

3.3

3.8

4.3

Sep/14 May/15 Dec/15 Jul/16 Feb/17 Sep/17

Global GDP growth (%yoy)

Global Manufacturing PMI new order, rhs

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Oct/12 Aug/13 Jun/14 Apr/15 Feb/16 Dec/16 Oct/17

US Europe Japan

0

0.5

1

1.5

2

2.5

3

3.5

-6

-4

-2

0

2

4

6

8

Dec/12 Oct/13 Jul/14 May/15 Feb/16 Nov/16 Sep/17

China PPI YOY (%)

China CPI YOY (%), rhs

-15%

-10%

-5%

0%

5%

10%

15%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

2010 2012 2013 2014 2015 2016 2017

MSCI world earning revisions

13wk 4wk, rhs



Macro Indicators - India Q1FY18 GDP fell to 5.7% against consensus exp: 6.5%, CPI stable at 3.3% for September (Consensus exp: 3.5%) vs 3.4% last month. IIP growth rate rose to 4.3% for August, led by favorable base effect & strong growth seen in mining, electricity, primary & capital goods. Last week RBI left interest rates unchanged and retained a neutral policy stance. Quarterly GDP growth rate (%) Inflation

IIP growth rate (%) Rates


5.0%

7.7%

5.4%

4.6%

6.7%

7.8%

6.4%

5.8%

7.5%

8.3%

6.6% 6.7%

7.8% 7.8%

6.5%

7.9%

7.2% 7.4%

7.0%

6.1% 5.7%

3%

4%

5%

6%

7%

8%

9%

GD

P G

row

th Y

oY

%

Real GDP Growth (YoY %) Avg GDP (YoY %)

-6

-4

-2

0

2

4

6

8

10

12

14 WPI YoY (%) CPI YoY (%)

-10

-5

0

5

10

15

20

25

Aug/06 Feb/08 Sep/09 Apr/11 Nov/12 Jun/14 Jan/16 Aug/17

IIP Growth Rate (%)

3

4

5

6

7

8

9

10

May/01 Sep/03 Jan/06 May/08 Sep/10 Dec/12 Apr/15 Aug/17

%

CRR Repo Reverse Repo



Market Indicators INR continued with its recent strength gained 6% YTD till 15th Sep on continuing foreign fund inflows, but recently lost ground due to stronger dollar after US Federal has unchanged the interest rates last week & signaled it still expect one more increase in rate by end of year. Brent crude saw almost 17% gain in last three months on soaring oil demand. 10 year bond yields are below long term average. INR appreciated another 1% in April following a 3% jump in March 10-yr G-Sec yields

Brent Crude (USD/bbl) India VIX


63

64

65

66

67

68

69

70

May/16 Jul/16 Sep/16 Nov/16 Jan/17 Mar/17 May/17 Aug/17 Oct/17

USD/INR

4

5

6

7

8

9

10

11

12

10yr GOI Yields

LTA

0

20

40

60

80

100

120

140

160

Oct/01 Oct/03 Oct/05 Oct/07 Oct/09 Oct/11 Oct/13 Oct/15 Oct/17

Brent Crude ($/bbl)

0

10

20

30

40

50

60

70

80

Nov/07 Dec/08 Jan/10 Mar/11 Apr/12 May/13 Jun/14 Jul/15 Aug/16 Oct/17

India VIX



Commodities Tracker In addition to oil, all other commodity prices are also extended gains; steel & zinc prices jumped 32% in last 4 months followed by 15% jumped in Aluminum prices


400

600

800

1000

1200

1400

1600

1800

2000

Oct/07 Oct/09 Oct/11 Oct/13 Oct/15 Oct/17

Gold ($/OZ)

0

20

40

60

80

100

120

140

160 Indonesian Coal Price ($/ton)

0

200

400

600

800

1000

1200

Oct/07 Oct/09 Oct/11 Sep/13 Sep/15 Sep/17

Steel ($/ton) - China HRC

1000

1500

2000

2500

3000

3500


LME Aluminium ($/ton)

0

2000

4000

6000

8000

10000

12000


LME Copper ($/ton)

1000

1500

2000

2500

3000

3500


LME Zinc ($/ton)



Model Portfolio

___________EPS (Rs)_____________ ________EPS Growth (%)________ ____________P/E (x)____________

Company Weight FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E

FMCG 10.0%

HUL 2.0% 20 24 27 3% 20% 12% 62 52 46

Colgate Palmolive India Ltd 2.0% 21 23 29 -6% 9% 24% 52.2 47.7 38

ITC 6.0% 9 9 11 11% 6% 14% 30.7 28.9 25

Automobile 8.5%

Maruti 3.0% 243 265 312 61% 9% 18% 32.5 29.9 25

Tata motors 3.0% 19 27 53 -46% 43% 101% 22.7 15.8 8

Bajaj Auto 2.5% 132 143 166 5% 8% 16% 23.9 22.1 19

IT 6.0%

Infy 6.0% 63 72 78 7% 14% 9% 14.7 12.9 12

Pharmaceuticals 6.0%

Sun Pharma 4.0% 29 14 20 20% -51% 42% 18.6 38.2 27

Aurobindo 2.0% 39 46 51 12% 17% 10% 19.0 16.2 15

Cement 4.0%

Ultratech 3.0% 99 118 169 19% 20% 43% 39.6 33.1 23

Dalmia Bharat 1.0% 39 74 99 81% 92% 33% 70.2 36.6 28

Metals & Mining 12.3%

Tata Steel 3.0% 41 71 82 326% 74% 15% 17.0 9.8 8

JSW Steel 2.0% 179 210 233 212% 18% 11% 1 1 1

Hindalco 2.0% 15 16 22 285% 12% 34% 18.2 16.3 12

NTPC 3.3% 13 14 16 5% 6% 19% 13.6 12.8 11

Vedanta 2.0% 15 26 39 43% 71% 52% 21.1 12.4 8

Industrial 4.0%

L&T 2.0% 42 51 58 43% 21% 13% 27.0 22.3 20

NCC 2.0% 5 7 8 17% 33% 25% 17.9 13.4 11

Finance 33.3%

Axis bank 4.0% 15 19 29 -55% 26% 51% 34.2 27.1 18

IndusInd bank 3.0% 48 64 83 25% 34% 29% 36.4 27.1 21

SBI 4.5% 13 10 17 3% -22% 66% 19.1 24.6 15

Cholamandalam Fin 2.5% 46 57 71 26% 24% 25% 25.1 20.1 16

HDFC Ltd 5.0% 47 50 57 4% 6% 14% 37.5 35.3 31

LIC Housing Finance 2.0% 38 40 45 16% 4% 12% 17.0 16.3 15

HDFC bank 6.0% 57 69 83 17% 22% 20% 32.0 26.3 22

ICICI Bank 6.3% 17 12 15 1% -28% 27% 15.9 22.1 17

Oil & Gas 5.0%

Reliance Industries 5.0% 74 101 108 -19% 35% 7% 11.7 8.7 8

Telecom 7.5%

Bharti Infratel 2.0% 15 17 19 18% 13% 12% 29.1 25.8 23

Bharti Airtel 3.0% 13 10 23 37% -27% 132% 30.0 40.9 18

Zee Entertainment 2.5% 11 16 19 12% 47% 19% 48.4 33.0 28

Others 3.5%

Aarti Industries 2.0% 10 15 26 -11% 50% 70% 66.6 44.4 26

Tata Comm 1.5% 38 43 56 23% 12% 29% 23.5 21.0 16



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Sr. no. Particulars Yes/No

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No

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No

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