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PhillipCapital – Market Intelligence Earnings and operational performance to gain focus

INDIA | STRATEGY | Bi-Monthly Update

19 December 2017

Earnings will be much in focus from here on: The much talked about Gujarat election results are out and the ruling party BJP has managed to hold on to the state (some rural seats lost) while sweeping Himachal Pradesh which failed to gather any limelight. To be fair, holding on to a state after 22 years of rule (anti incumbency at all-time high) was a challenging task and it should not have become a referendum on PM Modi. We believe, realistically, the market also has the same belief and its heart is actually somewhere else, in corporate earnings. After the big bang reforms, GDP growth seeing a turnaround after muted Q1 and more elections wins are not resulting in big time outperformance versus other emerging markets as should have been the case. Consensus estimates seeing downward pressure is a cause of concern: Even as we head into quarters with benign base, Nifty consensus earnings have seen a downward revision and this is a cause of concern. Nifty consensus EPS estimates have gone down by 9% till Nov end (From 541 in Apr-17 to 495 in Nov-17). Nifty CY18E PE of 21.0 implies yoy growth of 12% in CY18. CY19 multiple is trading at 16.7x. Market Performance has not been inspiring: Nifty gained 2.1% in last 1 month driven by rally in Energy sector (3.9%), FMCG (4.6%) while on 3 month basis it gained only 1.8%. Domestic as well as foreign investors continue to remain optimistic in last 1 month even as India lags the other emerging markets. NIFTY YTD returned 26% vs MSCI Emerging market index returns of 30%. FIIs added US$ 1.2bn while DIIs added US$ 1.8bn in the last one month – with total post-demonetization DII flows now close to US $13.8bn. October & September observed weak flow in FDI of $2.2bn respectively vs strong flow in August of $8.4bn

…global macro support notwithstanding: Global manufacturing PMI continued its expansion phase with November witnessing a strong PMI of 54 suggesting further expansion in Global GDP growth. As widely expected, FED increased the rate by 25bps to 1.25%-1.5% on 14

th Dec. It also signaled to stick to its earlier plan of three rate hikes

in 2018. Earlier this month Trump government has announced much awaited massive tax cut from 35% to 20% in order to boost growth, full policy guidelines still under discussion. This tax stimulus for better growth would further lead to downward pressure on unemployment and could fuel inflation. This could result in FED to tighten the policy more quickly. Indian macros is a mixed bag but there isn’t anything for the markets to get worried: Current macro indicators are improving for Indian economy: Q2FY18 GDP grew by 6.3% (PC exp: 5.8% and consensus estimate: 6.2%) vs. 5.7% in last quarter, led by GFCF (investment) growth. RBI maintained the status quo in rates in its recent monetary policy meeting, left repo/reverse repo unchanged at 6.00%/5.75%. IIP output for the month of Oct grew below expectation at 2.2% (PC estimate: 3.5% and consensus estimate: 3.0%). CPI has continued its upward trend and for November it stood at 4.9% (PC and consensus estimate: 4.3%) vs 3.6% last month. PhillipCapital model portfolio beats benchmark in last 1-year: Our Model portfolio has generated an YTD alpha of 4% (PC portfolio YTD returns 29.2% vs Nifty return 25.10). The alpha has been generated by our overweight position in Metals and Mining and Telecom (non-consensus when initiated). We are currently overweight on Materials, Telecom and PSU banks. All our overweight positions are value focused. Our top value picks are: ICICI, SBI, ITC, Bajaj Electricals, NCC, Adani ports, Idea Cellular

Naveen Kulkarni, CFA, FRM (+91 22 6246 4122) [email protected] Neeraj Chadawar (+91 22 6246 4116) [email protected]

mailto:[email protected]

mailto:[email protected]


MARKET INTELLIGENCE MONTHLY UPDATE

INDEX

Sector strategy and top picks

Value picks ............................................................................................................................................ 4-6

Market performance and valuations

Consensus Estimates ........................................................................................................................... 8

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

Macro portfolio performance .............................................................................................................. 29-30



PHILLIPCAPITAL – MARKET INTELLEGENCE

Sector Strategy & Top Picks



Value picks

ICICI Bank: Operating performance improving backed by valuation comfort ICICIBC IN | RATING: BUY | CMP: Rs 311| TARGET: Rs 400 | Upside 28%

Loan book to be primarily driven by retail loans (54% of loans), while the corporate loan growth (43% of loans including overseas book) continues to underplay due to weak demand. We expect marginal recovery in corporate loan growth while retail loans would be the primary growth driver. We expect loan growth of 13% CAGR over FY17-FY19.

NIM for FY18 will remain over 3%.

Pressure on asset quality continues to persist as corporate slippage will remain high but lower than FY17. However, resolution of some of the stressed exposure will provide cushion to asset-quality shocks.

Credit cost is likely to stay elevated in the near term (NPL ageing + requirement toward the second list), we expect it to moderate from FY19, enabling ICICIBC to deliver better RoE from FY19.

The bank has exposure of Rs 68.9bn to 12 a/c referred to NCLT, it made provision of Rs 6.5bn in Q2 taking the provision coverage to 56.5%, in the second list the bank has exposure to 18 borrowers amounting to Rs 105bn (funded) of which 98.7% is NPA. It carries a provision of 31.5% on second list.

We expect earnings growth of 21%/+27% in FY18/19 translating into RoA to 1.04%/1.20%. At CMP, the bank trades at 1.8/1.6x FY18/FY19 core adjusted BVPS of Rs 113/130 (valuing subsidiaries at Rs 108 per share).

SBI: Turnaround imminent SBIN IN | RATING: BUY | CMP: Rs 313| TARGET: Rs 395| Upside 26%

Earnings are expected to remained subdued in FY18 due to aging related provision in corporate book and additional buffer created for expected loss under IFRS accounting.

The stability in retail NPA post merger; visible recovery in agri NPA; declining stress book and adequate provision for the same is set to bring down credit cost significantly in FY19

Favourable developments like improving steel sector outlook; time bound resolution process in place to aid recovery of stressed assets. We expect strong earnings bounce back in FY19 with expected ROA 0.55% Vs loss in FY17

The outstanding stock of SDR/S4A/5:25 Rs105bn/Rs86bn/Rs200bn. Outstanding exposures to 39 NCLT (list 1&2) cases are Rs 720 bn with provision of Rs 360bn (50%). Watch-list at Rs 212bn (1.12% of gross advances) declined by Rs 32 bn.

At CMP, the bank trades at 1.0x/0.9X FY18/19 BVPS of Rs 234/256 (non-bank sub. value of Rs 76/share). We have a Buy rating with target of Rs 395.

ITC: Worst is behind us; FMCG business available at huge discount ITC IN | RATING: BUY | CMP: Rs 262| TARGET: Rs 310| Upside 18%

We expect cigarette business to stabilize from 2QY19 due to anniversation of steep double digit price hikes taken in 1HFY18, stringent implementation of GST to drive market share gains for organized cigarette players.

FMCG business is expected to see strong volume led growth in medium term (12% revenue CAGR over FY17-FY19) due to ramping up of recently categories (Juices, Coffee, spices, Dairy, chocolates, processed foods and vegetables), entry into newer categories and



distribution expansion. We expect profitability to see significant improvement over the same periods owing to economies of scale, increased in-house manufacturing and setting up of Integrated facilities

Paper business (7% of total revenue) is expected to see strong performance as recently set-up manufacturing facilities come on stream. Hotels business (3% of total revenue) to show healthy growth due to revival in average room rate and improved occupancy levels

ITC has significantly underperformed FMCG index/ Nifty over the past 6 months and we expect underperformance to reverse due to attractive valuations and improved operating performance starting from 1HFY19. ITC is trading at 50% discount to HUL on 1 year forward PE basis vs. Historical discount levels of 20% over the past decade

At CMP, the stock trades at 25x FY19 EPS. We have a BUY with a target of Rs 310 (30x FY19 EPS)

Bajaj Electricals: TOC and RREP are coming into play – rerating soon BJE IN| RATING: BUY | CMP: Rs 498|

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. It has started yields results for BJE (covered more than 70% of the targeted market by Sep’17, expect to complete by FY18).

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

In E&P, it has become more selective about projects, and improved execution. Margins have also improved and it has 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 will fall to 60 by FY19 from 88 in FY16. It 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 16x on FY20 numbers We have BUY rating.

NCC: To be the biggest beneficiary NJCC IN| RATING: BUY | CMP: Rs Rs 116| TARGET: Rs 125| Upside 7%|

Second largest player in the EPC space (after L&T) –present across the segments (Roads, metros, buildings, irrigation)and has a pan-India presence

Remarkable Balance sheet transformation over the last 3 years – debt down from Rs 25bn in FY14 to Rs 16bn in FY17 – leverage down from 1x to 0.5x.

Strong orderbook of Rs 280bn – 3.8x TTM sales – provides high revenue visibility for next three years

Expected to be the biggest beneficiary of the surge in order awards in buildings, roads, irrigation and metros.

Constantly looking to monetize assets – sale of real estate and BOT projects to further provide cash and lower leverage.

Trading at FY19 P/E of 18x – discount to peers



Adani Ports: Virtual Monopoly in the port space ADSEZ IN| RATING: BUY | CMP: Rs Rs 391| TARGET: Rs 450| Upside 15%|

Adani ports is the largest private port developer and operator in India, with a portfolio of 10 port projects, total cargo handling capacity of 375mn tonnes– deploying a capital of Rs 265bn.

It has a virtual monopoly in the Indian ports sector and stands to be the biggest beneficiary of the port expansion projects (Rs200bn pipeline), to be awarded, by various port trusts, over the next few years

It has set up container terminals in partnerships with leading shipping companies (MSC, CMA CGM) – insulating from competition.

Superior financial profile with ROE of 25%, and FCF at ~100% of PAT

New opportunities from expansion outside India, and Logistics and Dredging business in India

Change in capital allocation policy, in the wake of robust cash flow generation, to drive rerating

Idea Cellular: Biggest Telecom Company in the making The consolidation in the Indian Telecom industry has opened growth opportunities for the survivors and Idea merging with Vodafone will create the largest telecom company by revenue market share of ~38%-40%. Our key arguments are:

Idea Vodafone merged entity will result in NPV value of synergies to the tune of US$ 10bn. According to the managements, the annual run rate of synergistic benefits will amount to US$ 2.1bn and 60% of which will be operational from the fourth year of merger. The current market price is capturing only a fractional of the benefits.

Idea-Vodafone is a dream merger as Vodafone has the best in class urban customer base and spectrum assets. Idea Cellular has a very strong rural customer base and exceptional execution capabilities. The

combined entity will have a solid combination of urban and rural customers and best in class spectrum bank.

Idea Vodafone merger has progressed well and the combined entity is likely to emerge from 1st April 2018.

The worst is behind with regulatory challenges of IUC cut while significant consolidation has opened up opportunities for the incumbents. We believe ex IUC Idea should start seeing improvement in revenue growth from Q3FY18 onwards and should gain traction in Q4FY18.

We have a buy recommendation of the stock with a target price of Rs 130.



PHILLIPCAPITAL – MARKET INTELLIGENCE

Market Performance & Valuations



Consensus earnings estimates have declined for most sectors Nifty consensus FY18 earnings expectations have gone down by 9.0% till Nov end (From 541 in Apr-17 to 495 in Nov-17)

Sector Upgrade/Downgrade: Energy sector has upgraded by 14% while Financials have downgraded by 23% since April 17.

Source: Bloomberg, PhillipCapital India Research, Prices as of December 15, 2017

334

367

405 390

379

419

300

400

500

600

Apr/11 Aug/12 Dec/13 Apr/15 Aug/16 Dec/17

Nifty Consensus EPS trends FY12E FY13E FY14E FY15E FY16E FY17E FY18E Actual

14%

4%

0%

-5%

-7%

-7%

-9%

-18%

-23%

-32%

-91%

-40% -30% -20% -10% 0% 10%

Energy

Industrials

Materials

Cons Staples

IT

Utilities

MSCI India

Cons Dics

Financials

Healthcare

Telecom

MSCI Sectors updgrade/downgrade since April 2017



Global Indices Performance NIFTY gained 2.1% in 1m led by rally in Energy sector (up 3.9%), FMCG (up 4.6%) for the same period. YTD return for Nifty is 26% vs emerging market returns of 30% indicates NIFTY has been underperforming its emerging market peers. Out of 15 indices that we track, 13 had shown double digit growth in last 1 year. NIFTY gained about 24% YTD, in line with broader EM and Asian ex Japan performance


4.3% 3.4%

3.2% 2.4%

2.1% 1.4%

1.1% 0.7%

0.4% 0.4%

0.0% -0.4%

-1.3% -1.4%

-2.3%

-3.0% -2.0% -1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0%

US (SPX) US (NASDAQ)

MSCI World Japan

India Nifty Singapore

Australia MSCI EM STOXX50

Asia ex Japan Hong Kong

Hang Seng China ENT INDX Taiwan

Korea CSI 300

1m % performance

11.1% 7.4%

6.7% 5.9%

5.0% 4.5%

3.9% 2.8%

2.7% 2.2%

2.0% 1.8%

0.8% 0.8%

-0.8%

-2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0%

Japan US (NASDAQ)

US (SPX) Singapore

Australia MSCI World

CSI 300 Hong Kong

Korea Hang Seng China ENT INDX

Asia ex Japan India Nifty

STOXX50 MSCI EM

Taiwan

3m % performance

31.1% 29.8% 29.7%

28.9% 26.2%

22.5% 21.0%

20.3% 19.5%

19.1% 18.6%

18.0% 13.4%

8.2% 5.8%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0%

Hong Kong Asia ex Japan

MSCI EM US (NASDAQ)

India Nifty Korea

Hang Seng China ENT INDX CSI 300 US (SPX)

MSCI World Singapore

Japan Taiwan

STOXX50 Australia

YTD % performance

32.1% 31.4%

30.2% 27.5%

27.1% 21.8%

21.2% 19.6%

18.6% 18.3%

17.3% 16.3%

13.6% 9.3%

7.8%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0%

Hong Kong MSCI EM

Asia ex Japan India Nifty

US (NASDAQ) Korea

Hang Seng China ENT INDX CSI 300

MSCI World US (SPX)

Singapore Japan

Taiwan STOXX50 Australia

1 yr % performance



NIFTY Valuations Nifty CY18 PE of 21.0x implies yoy growth of ~12% in CY18, Nifty trading at 17.6x on 1-year Fwd PE which is 1.4 std above long term avg

Nifty vs. other regions Nifty Dividend Yield Country/Region ____Earnings Growth (%)____ ____________P/E____________ CY 2017 CY 2018E CY 2019E CY 2017 CY 2018E CY 2019E

S&P 500 9% 12% 10% 22.5 20.0 18.2

Japan 37% 2% 12% 19.7 19.3 17.2

India 10% 12% 26% 23.6 21.0 16.7

France 12% 17% 7% 18.4 15.7 14.7

Germany 15% 30% 10% 19.2 14.8 13.4

MSCI Asia ex Japan 19% 6% 13% 15.2 14.4 12.7

Shanghai 9% 15% 13% 16.5 14.4 12.7

MSCI EM 19% 12% 14% 15.4 13.8 12.1

Brazil 1436% 30% 16% 18.1 13.9 12.0

Hong Kong 20% 4% 10% 13.5 13.0 11.8

South Korea 55% 21% 16% 12.9 10.7 9.2

Russia 37% 0% 10% 7.4 7.4 6.7

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


50%

70%

90%

110%

130%

150%

170%

190%

210%

230% Nifty Dividend yield Average (+/- stdev)

Mean

Mean + 1SD

Mean -1SD

7

9

11

13

15

17

19

21

Jul/05 Oct/06 Dec/07 Mar/09 Jun/10 Sep/11 Dec/12 Mar/14 Jun/15 Sep/16 Dec/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 Jan/08 Apr/09 Jun/10 Sep/11 Dec/12 Mar/14 Jun/15 Sep/16 Dec/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

Dec/07 Dec/08 Dec/09 Dec/10 Dec/11 Dec/12 Dec/13 Dec/14 Dec/15 Dec/16 Dec/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 gained 2.1% in last 1 month driven by rally in Energy sector (3.9%), FMCG (4.6%). On 3 month basis Nifty gained only 1.8%. However, Both FII & DII have added in the month of November. PSU banks gained 15% in last 3 month mainly due to banks recapitalization.


Sector Performance

6.6%

6.4%

5.2%

4.6%

4.1%

3.9%

3.8%

3.1%

2.7%

2.6%

2.1%

2.1%

1.9%

1.5%

1.0%

0.9%

0.8%

0.1%

-4.3%

-6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0%

NIFTY MEDIA

NIFTY REALTY

NIFTY MNC

NIFTY FMCG

NIFTY Midcap 50

NIFTY ENERGY

NIFTY Midcap 100

NIFTY AUTO

NIFTY500

NIFTY NEXT 50

Nifty

NIFTY COMMODITIES

NIFTY SERV SECTOR

NIFTY IT

NIFTY INFRA

NIFTY BANK

NIFTY PHARMA

NIFTY METAL

NIFTY PSU BANK

1m % sector price performance

15.1%

8.9%

5.9%

5.9%

5.3%

4.9%

4.5%

3.1%

3.0%

2.8%

2.7%

2.5%

2.4%

2.1%

1.8%

1.6%

1.2%

0.1%

-2.1%

-5.0% 0.0% 5.0% 10.0% 15.0%

NIFTY PSU BANK

NIFTY REALTY

NIFTY IT

NIFTY ENERGY

NIFTY MEDIA

NIFTY Midcap 50

NIFTY Midcap 100

NIFTY FMCG

NIFTY500

NIFTY MNC

NIFTY NEXT 50

NIFTY AUTO

NIFTY SERV SECTOR

NIFTY INFRA

Nifty

NIFTY BANK

NIFTY COMMODITIES

NIFTY METAL

NIFTY PHARMA

3m % sector price performance



Top YTD leaders: Realty (+91.9%), MNC (+45.9%), and Banks (+40.0%), and Notable yoy gains by Energy (+40.1%) on rising oil prices.


91.9%

45.9%

42.8%

40.0%

39.1%

39.1%

38.3%

38.2%

32.0%

30.6%

30.4%

28.3%

27.6%

27.4%

26.2%

25.2%

25.2%

8.5%

-11.4%

-22.0% -2.0% 18.0% 38.0% 58.0% 78.0% 98.0%

NIFTY REALTY

NIFTY MNC

NIFTY Midcap 50

NIFTY BANK

NIFTY NEXT 50

NIFTY Midcap 100

NIFTY ENERGY

NIFTY METAL

NIFTY500

NIFTY COMMODITIES

NIFTY SERV SECTOR

NIFTY INFRA

NIFTY MEDIA

NIFTY FMCG

Nifty

NIFTY PSU BANK

NIFTY AUTO

NIFTY IT

NIFTY PHARMA

YTD % sector price performance

91.2%

48.1%

41.1%

40.1%

39.3%

38.7%

37.3%

35.0%

32.7%

32.4%

31.5%

31.1%

30.3%

28.0%

27.5%

25.8%

19.1%

10.4%

-13.8%

-30.0% -10.0% 10.0% 30.0% 50.0% 70.0% 90.0% 110.0%

NIFTY REALTY

NIFTY MNC

NIFTY Midcap 50

NIFTY ENERGY

NIFTY BANK

NIFTY NEXT 50

NIFTY Midcap 100

NIFTY METAL

NIFTY500

NIFTY FMCG

NIFTY COMMODITIES

NIFTY SERV SECTOR

NIFTY MEDIA

NIFTY INFRA

Nifty

NIFTY AUTO

NIFTY PSU BANK

NIFTY IT

NIFTY PHARMA

1yr % sector price performance



Market Valuations Almost all the NIFTY sectors along with index 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


11 12 16

16 18 18 20 21 21

28 30

34

18

0

5

10

15

20

25

30

35

40 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 (PSU banks also entered into this zone post recapitalization). 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%

Dec/11 Jun/13 Dec/14 Jun/16 Dec/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 Jan/11 Apr/13 Aug/15 Dec/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%

110%

Nov/08 May/10 Nov/11 May/13 Nov/14 Jun/16 Dec/17

PSU Banks 12m fwd PE rel mkt



Sector Valuations Cyclical sectors like Metal & Energy have gained momentum due to improvement in commodity prices but still trading below long term average. Realty valuations also look stretched.


LPA

+ 1SD

-1SD

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

Apr/11 May/12 Jun/13 Aug/14 Sep/15 Oct/16 Dec/17

Realty 12m fwd PE rel mkt

LPA

+ 1SD

-1SD

45%

55%

65%

75%

85%

95%

105%

115%

125%

Jan/12 Mar/13 May/14 Jul/15 Oct/16 Dec/17

Metals 12m fwd PE rel mkt

LPA

+ 1SD

-1SD

90%

100%

110%

120%

130%

140%

Nov/08 Sep/10 Jun/12 Apr/14 Feb/16 Dec/17

Infra 12m fwd PE rel mkt

LPA

+ 1SD

-1SD

120%

140%

160%

180%

200%

220%

240%

Jan/12 Mar/13 May/14 Jul/15 Oct/16 Dec/17

Media 12m fwd PE rel mkt

LPA

+ 1SD

-1SD

60%

70%

80%

90%

100%

110%

Nov/08 Feb/11 May/13 Sep/15 Dec/17

Energy 12m fwd PE rel mkt

LPA

+ 1SD

-1SD

80%

90%

100%

110%

120%

130%

Nov/08 Feb/11 May/13 Sep/15 Dec/17

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

Biocon Ltd 523.0 32.6 Bank of India 177.3 -14.8 Balkrishna Industries Ltd 2497.4 19.8 Union Bank of India 151.5 -11.1 AIA Engineering Ltd 1653.1 18.8 L&T Finance Holdings Ltd 171.5 -9.7 TV18 Broadcast Ltd 54.1 18.4 Bank of Baroda 166.0 -9.6 NCC Ltd/India 120.7 15.8 Punjab National Bank 172.7 -9.5 Thermax Ltd 1181.0 15.7 Rural Electrification Corp Ltd 147.3 -8.3 Gillette India Ltd 6902.5 14.4 Canara Bank 356.9 -8.1 Apollo Hospitals Enterprise Ltd 1190.5 13.6 Glenmark Pharmaceuticals Ltd 538.3 -7.8 Vakrangee Ltd 747.0 13.5 Indiabulls Real Estate Ltd 201.5 -7.1 Ajanta Pharma Ltd 1440.0 13.2 Cadila Healthcare Ltd 415.3 -7.0

BSE200 Top Gainers & Losers last 3m

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

Vakrangee Ltd 747.0 47.1 Reliance Communications Ltd 11.9 -40.9 Biocon Ltd 523.0 46.5 Strides Shasun Ltd 802.0 -20.1 Balkrishna Industries Ltd 2497.4 43.1 Suzlon Energy Ltd 13.5 -19.8 Tata Global Beverages Ltd 290.4 36.1 L&T Finance Holdings Ltd 171.5 -18.1 NCC Ltd/India 120.7 32.8 PNB Housing Finance Ltd 1342.0 -17.6 Bharti Airtel Ltd 522.7 31.7 Reliance Power Ltd 36.2 -17.1 United Breweries Ltd 1041.8 30.6 Indiabulls Real Estate Ltd 201.5 -16.7 Titan Co Ltd 840.4 30.1 Siemens Ltd 1182.0 -16.4 Shriram Transport Finance Co Ltd 1411.0 29.9 Central Bank of India 76.9 -14.9 Steel Authority of India Ltd 78.8 27.7 Yes Bank Ltd 317.0 -14.7




BSE200 Top Gainers & Losers

BSE200 Top Gainers & Losers yoy

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

Edelweiss Financial Services Ltd 289.3 247.7 Reliance Communications Ltd 11.9 -66.5 Indiabulls Real Estate Ltd 201.5 188.3 Glenmark Pharmaceuticals Ltd 538.3 -42.1 Vakrangee Ltd 747.0 175.7 Lupin Ltd 867.8 -40.9 Titan Co Ltd 840.4 161.0 Strides Shasun Ltd 802.0 -27.1 Dewan Housing Finance Corp Ltd 604.2 149.9 Multi Commodity Exchange of India Ltd 972.1 -25.8 Tata Global Beverages Ltd 290.4 133.8 Tata Motors Ltd 228.0 -23.5 Jindal Steel & Power Ltd 167.3 129.0 Dr Reddy's Laboratories Ltd 2396.0 -22.9 Balkrishna Industries Ltd 2497.4 125.2 Ajanta Pharma Ltd 1440.0 -20.6 Adani Enterprises Ltd 159.1 116.5 CRISIL Ltd 1835.0 -18.5 Dalmia Bharat Ltd 3176.8 113.3 Sun Pharmaceutical Industries Ltd 529.1 -18.2

BSE200 Top Gainers & Losers YTD

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

Edelweiss Financial Services Ltd 289.3 196.4 Reliance Communications Ltd 11.9 -65.0 Indiabulls Real Estate Ltd 201.5 182.6 Lupin Ltd 867.8 -41.5 Vakrangee Ltd 747.0 173.4 Glenmark Pharmaceuticals Ltd 538.3 -39.4 Titan Co Ltd 840.4 158.0 Strides Shasun Ltd 802.0 -24.4 Dewan Housing Finance Corp Ltd 604.2 147.9 Tata Motors Ltd 228.0 -23.8 Jindal Steel & Power Ltd 167.3 142.1 Multi Commodity Exchange of India Ltd 972.1 -23.3 Tata Global Beverages Ltd 290.4 137.9 Dr Reddy's Laboratories Ltd 2396.0 -21.7 Dalmia Bharat Ltd 3176.8 134.3 Ajanta Pharma Ltd 1440.0 -19.3 Balkrishna Industries Ltd 2497.4 126.7 CRISIL Ltd 1835.0 -17.0 TVS Motor Co Ltd 768.2 113.0 Sun Pharmaceutical Industries Ltd 529.1 -16.0

Source: Bloomberg, PhillipCapital India Research, Prices as of December 15, 2017.



Styles Performance Growth & Value performance was neck to neck on YTD but post bank recapitalization the momentum has shifted towards value. Large caps are a clear winner over Small-caps, but in line with midcaps. 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

0.63

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

1.5

Sep/10 Feb/12 Aug/13 Jan/15 Jun/16 Dec/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



Style Valuations Post recapitalization the momentum has shifted towards value & looks attractive over growth, Midcaps are still trading at premium to large caps 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 December 15, 2017.

40%

45%

50%

55%

60%

65%

70%

75%

80%

85%

90%

Aug/05 May/07 Feb/09 Nov/10 Aug/12 May/14 Mar/16 Dec/17

MSCI India Value rel Growth 12m fwd PE

Average (+/- stdev)

0%

20%

40%

60%

80%

100%

120%

Jul/05 Apr/07 Jan/09 Nov/10 Aug/12 May/14 Feb/16 Dec/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

Apr/07 May/09 Jul/11 Aug/13 Oct/15 Dec/17

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

0.45

0.55

0.65

0.75

0.85

0.95

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

Nifty Midcap rel Nifty price to book

Average (+/- stdev)




FII & DII Analysis



Flows Update FIIs added US$ 1.2bn while DIIs added US$ 1.8bn in last one month – with total post-demonetization DII flows now close to US $13.8bn. Financials remain the attractive sector for FII with 22% weight followed by Discretionary, Tech. October & September observed weak flow in FDI of $2.2bn respectively vs strong flow in August of $8.4bn FII, DII Flows vs. NIFTY Index (in USD mn) Cumulative FII, DII flow trends ($ mn)

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

Source: Bloomberg, NSDL, PhillipCapital India Research, Prices as of December 15, 2017

5000

6000

7000

8000

9000

10000

11000

-1000

-500

0

500

1000

1500

Dec/15 Mar/16 Jun/16 Sep/16 Dec/16 Mar/17 Jun/17 Sep/17 Dec/17

in $

mn

)

DII inflows FII inflows NIFTY Index, rhs

-10000

0

10000

20000

30000

40000

Sep/14 May/15 Jan/16 Aug/16 Apr/17 Dec/17

(in

$ m

n)

Cumulative Flows DII FII

4657

2214

3084 3348

4189

2550

4702

8430

2187 2212

0

2000

4000

6000

8000

10000

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

India Foreign Direct Investment (USD million) 91 86

42 35 32 29 29

24 17 13

8 4

22% 21%

10% 9% 8% 7% 7%

6% 4% 3% 0%

5%

10%

15%

20%

25%

0

20

40

60

80

100 Sector-wise FII holdings, as of 15th Nov, 2017

In $ bn

AUM % of Total equity (%), RHS




Macro & Market Indicators



Macro Indicators – Global – Steady as she goes Global manufacturing PMI reached at 3 year high of 54 for the month of November which suggests further pick up in global GDP growth, MSCI world 4wk earnings revision have turned positive & rising. Inflation expectations have stabilized & show healthy signs of recovery in global market. China witnessed PPI of 5.8% yoy for Nov vs 6.9% for previous month, indicating some loss of momentum for H2. 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

55

2.3

2.8

3.3

3.8

4.3

Sep/14 May/15 Dec/15 Aug/16 Mar/17 Nov/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

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

US Europe Japan

0

0.5

1

1.5

2

2.5

3

3.5

-6

-4

-2

0

2

4

6

8

Feb/13 Dec/13 Sep/14 Jul/15 Apr/16 Jan/17 Nov/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 Q2FY18 GDP grew by 6.3% (PC exp: 5.8% and consensus estimate: 6.2%) vs. 5.7% in last quarter, led by GFCF (investment) growth. RBI maintained the status quo in rates in its recent monetary policy meeting, left repo/reverse repo unchanged at 6.00%/5.75%. IIP output for the month of Oct grew below expectation at 2.2% (PC estimate: 3.5% and consensus estimate: 3.0%). CPI for November stood at 4.9% (PC and consensus estimate: 4.3%) vs 3.6% last month

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%

6.3%

3%

4%

5%

6%

7%

8%

9%

GD

P G

row

th Y

oY

%

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

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0 WPI YoY (%) CPI YoY (%)

-10

-5

0

5

10

15

20

25

Oct/06 Apr/08 Nov/09 Jun/11 Jan/13 Aug/14 Mar/16 Oct/17

IIP Growth Rate (%)

3

4

5

6

7

8

9

10

Jul/01 Nov/03 Mar/06 Jul/08 Nov/10 Mar/13 Jul/15 Nov/17

%

CRR Repo Reverse Repo



Market Indicators INR gained (vs. US$) 6.13% YTD vs 1.5% gained post rating upgrade by Moody on 17th Nov 17. Long term 10 year bond yields is elevated & hover around 7% post rating upgrade but still below long term average. Brent crude surged 11% in last 2 month and trading at 2.5 year high mainly due to downward in inventories especially for US also factoring geopolitical risk

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

Mar/16 Jun/16 Aug/16 Oct/16 Dec/16 Mar/17 May/17 Jul/17 Sep/17 Dec/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 Nov/09 Nov/11 Nov/13 Nov/15 Dec/17

Brent Crude ($/bbl)

0

10

20

30

40

50

60

70

80

Nov/07 Dec/08 Feb/10 Mar/11 May/12 Jun/13 Jul/14 Sep/15 Oct/16 Dec/17

India VIX



Commodities Tracker We have observed fall in all the major commodities in last 1 month, Aluminum prices dropped by 3% vs 1% drop in Gold prices in last 1 month


400

600

800

1000

1200

1400

1600

1800

2000

Dec/07 Dec/09 Dec/11 Dec/13 Dec/15 Dec/17

Gold ($/OZ)

0

20

40

60

80

100

120

140

160 Indonesian Coal Price ($/ton)

0

200

400

600

800

1000

1200


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 Change in Model Portfolio in Last 1 yr - we were biggest overweight to Telecom (6.7%) in Dec-16 which has now changed to Materials (9.2%) in Dec-17. We are currently overweight on Materials, Telecom and PSU banks. All our overweight positions are value focused. Overweight/ Underweight Position in Model Portfolio over Nifty 50:

6.7%

3.6%

2.8%

2.8%

1.0%

-0.2%

-0.3%

-1.5%

-5.9%

-9.1%

-13.0% -8.0% -3.0% 2.0% 7.0%

Telecom

Cons Disc

Materials

Health Care

Cons Stap

Utilities

Industrials

Financials

Energy

IT PC Model Portfolio

Dec-16

9.2%

4.4%

2.7%

-0.1%

-0.2%

-0.6%

-1.1%

-2.7%

-5.4%

-6.2%

-13.0% -8.0% -3.0% 2.0% 7.0%

Materials

Telecom

Cons Disc

Utilities

Health Care

Cons Stap

Industrials

Financials

Energy

IT

PC Model Portfolio

Dec-17

30%

15%

10% 9% 9% 9%

5% 5% 4% 4%

33%

13%

7%

4% 7%

16%

5% 5%

7%

3%

0%

5%

10%

15%

20%

25%

30%

35%

PC Portfolio Weight (%), as of...

Dec-16 Dec-17

Position chg in Model portfolio in 1 yr

Increased Decreased

Materials Health care Financials Cons Stap

Energy Cons Disc

Telecom

Utilities



Model Portfolio Performance

Name Weight (%) Div Yield (%) P/E P/CF P/B

PC MODEL PORTFOLIO 100 1.1 28.5 19.6 2.8 Consumer Discretionary 13 0.8 27.1 15.8 5.0 Consumer Staples 7 1.7 35.8 31.8 9.1 Energy 7 0.6 18.0 14.1 2.0 Financials 33 0.7 28.8 66.6 2.6 Health Care 4 0.6 17.8 15.5 3.6 Industrials 5 0.7 52.3 106.2 2.4 Information Technology 5 2.9 15.1 14.9 3.0 Materials 16 1.4 34.1 11.7 2.2 Telecommunication Services 7 0.8 na 9.8 2.4 Utilities 3 2.6 13.9 11.2 1.5

Note: Prices as of 1st Dec 2017

-3

2

7

12

17

-5

0

5

10

15

20

25

30

35 Diff(%), rhs

PC Total Returns (%)

Nifty 50 Total returns (%) As of 1st Dec 2017 YTD returns 3m 6m

PC Portfolio 29.2% 4.19% 10.80% Nifty 50 25.10 1.65% 6.15% Alpha 4.18% 2.54% 4.65%



Model Portfolio

Weight Weight _____________EPS (Rs)______________ ___________EPS Growth (%)__________ ______________P/E (x)______________

Company Dec-16 Dec-17 FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E

Consumer

9.3%

HUL 0.0% 2.4% 20 24 27 3% 20% 12% 66 55 49 Bajaj Electricals 0.0% 2.0% 11 15 22 -2% 41% 46% 45.5 32.2 22

ITC 6.0% 4.9% 9 9 11 11% 6% 14% 30.5 28.7 25 Automobile

8.5%

Maruti 3.0% 4.1% 243 265 312 61% 9% 18% 37.6 34.5 29

Tata motors 3.0% 1.9% 19 27 53 -46% 43% 101% 22.2 15.5 8 Bajaj Auto 2.5% 2.5% 132 143 166 5% 8% 16% 24.1 22.3 19 IT 5.0% 5.04%

Infy 5.0% 5.04% 63 72 78 7% 14% 9% 15.9 13.9 13 Pharmaceuticals 8.5% 3.72%

Sun Pharma 5.0% 2.56% 29 14 20 20% -51% 42% 18.3 37.5 26

Aurobindo 3.5% 1.16% 39 46 51 12% 17% 10% 17.5 15.0 14 Cement 4.0% 3.9%

Ultratech 3.0% 2.64% 99 118 169 19% 20% 43% 42.7 35.6 25

Dalmia Bharat 1.0% 1.26% 39 74 99 81% 92% 33% 80.9 42.2 32 Metals & Mining

13.47%

Tata Steel 3.0% 3.87% 41 71 82 326% 74% 15% 17.2 9.9 9

JSW Steel 0.0% 2.25% 179 210 233 212% 18% 11% 1.4 1.2 1.1 Hindalco 2.0% 2.2% 15 16 22 285% 12% 34% 16.4 14.7 11 NTPC 3.3% 3.23% 13 14 16 5% 6% 19% 13.8 13.0 11

Vedanta 0.0% 1.92% 15 26 39 43% 71% 52% 19.2 11.3 7 Industrial 4.0% 4.56%

L&T 2.0% 2.12% 42 51 58 43% 21% 13% 28.8 23.8 21

NCC 2.0% 2.44% 5 7 8 17% 33% 25% 24.8 18.6 15 Finance

33.03%

Axis bank 4.0% 3.47% 15 19 29 -55% 26% 51% 35.5 28.1 19

IndusInd bank 3.0% 3.35% 48 64 83 25% 34% 29% 34.9 26.0 20 SBI 3.0% 4.16% (2) 11 21 -117% -598% 90% (144.5) 29.0 15 Cholamadalam Fin 2.5% 2.66% 46 57 71 26% 24% 25% 28.1 22.6 18

HDFC Ltd 5.0% 5.16% 47 50 57 4% 6% 14% 36.3 34.3 30 PNB Bank 0.0% 1.73% 6 10 19 -131% 56% 99% 27.9 17.9 9 HDFC bank 6.0% 6.58% 57 69 83 17% 22% 20% 32.5 26.7 22

ICICI Bank 5.3% 5.92% 17 12 15 1% -28% 27% 18.4 25.5 20 Oil & Gas 4.0% 7.38

Reliance Industries 4.0% 7.38% 74 101 108 -19% 35% 7% 12.3 9.1 8

Telecom and Media

9.05%

Bharti Infratel 2.0% 1.19% 15 17 19 18% 13% 12% 24.8 22.0 20 Bharti Airtel 3.0% 3.84% 13 10 23 37% -27% 132% 39.4 53.9 23

Idea 2.0% 1.73% (1) (6) (7) -115% 396% -83% (86.3) (17.4) (14) Zee Entertainment 2.5% 2.29% 11 16 19 12% 47% 19% 53.2 36.3 30 Others

2.09%

Aarti Industries 0.0% 2.09% 38 43 56 23% 12% 29% 23.0 20.6 16



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Sr. no. Particulars Yes/No

1 Whether compensation has been received from the company(ies) covered in the Research report in the past 12 months for investment banking transaction by PCIL No

2 Whether Research Analyst, PCIL or its associates or relatives of the Research Analyst affiliates collectively hold more than 1% of the company(ies) covered in the Research report

No

3 Whether compensation has been received by PCIL or its associates from the company(ies) covered in the Research report No

4 PCIL or its affiliates have managed or co-managed in the previous twelve months a private or public offering of securities for the company(ies) covered in the Research report No

5 Research Analyst, his associate, PCIL or its associates have received compensation for investment banking or merchant banking or brokerage services or for any other products or services from the company(ies) covered in the Research report, in the last twelve months

No

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