Views on Markets and Sectors

8/9/2019 Views on Markets and Sectors

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Beyond Markets New Delhi

19 th June 2010


2/19

L&T Mutual Fund

Views on Markets and

Sectors


3/19

Global Equity Markets Performance at glance

Emerging Markets YTD 1 month 3 month 6 month 12 month

India -0.3% 2.5% 1.4% 3.2% 17.1%

Russia -3.3% -3.1% -7.8% 0.0% 29.7%

Brazil -6.0% 1.6% -6.6% -7.0% 23.8%

Hong Kong -8.3% -0.4% -4.8% -8.0% 8.5%

Taiwan -9.0% -4.1% -2.4% -4.5% 19.7%

China -21.6% -4.7% -13.7% -21.5% -7.9%

Developed Markets YTD 1 month 3 month 6 month 12 month

Germany 3.7% 2.0% 4.6% 6.3% 26.3%

Korea 0.4% -0.3% 2.5% 1.5% 19.7%

US -0.2% -2.0% -2.2% -0.5% 20.8%

UK -3.6% -0.9% -6.7% -1.3% 20.6%

Japan -6.2% -5.5% -8.0% -1.9% -1.5%

France -7.0% 2.8% -5.9% -4.5% 13.7%

Source: Bloomberg Notre: Prices used for reference are at the end of 15 th June 2010


4/19

Indian Markets Performance at glanceBroader Markets YTD 1 month 3 month 6 month 12 month

BSE 200 1.2% 2.1% 2.5% 4.6% 22.0%

S&P CNX Nifty 0.4% 2.5% 1.8% 3.8% 16.5%

BSE Sensex -0.3% 2.5% 1.4% 3.2% 17.1%

CNX 500 -0.3% 1.8% 1.9% 3.4% 20.0%

Midcap & Small cap Indices YTD 1 month 3 month 6 month 12 month

CNX Midcap 7.2% 0.7% 6.6% 11.3% 45.4%

BSE Small cap 5.6% 0.2% 5.5% 12.8% 49.9%

Sectoral Indices YTD 1 month 3 month 6 month 12 monthConsumer durables 17.6% -4.3% 8.0% 28.6% 51.0%

Healthcare 11.4% 4.1% 10.7% 13.0% 53.7%

FMCG 11.3% 7.7% 10.4% 10.9% 37.3%

Bank 8.2% 0.1% 6.1% 12.0% 35.4%

Auto 7.7% 2.8% 6.5% 12.5% 67.0%

IT 2.6% 1.5% -1.6% 7.5% 64.2%

Capital Goods 0.7% 7.5% 4.3% 3.1% 13.6%

Teck -0.5% 2.3% -2.0% 3.6% 23.5%Oil& Gas -1.6% 4.4% 5.1% 0.9% 2.7%

PSU -2.8% 3.7% 3.6% 0.7% 11.8%

Metals -14.4% -6.3% -13.6% -8.0% 26.8%

Real Estate -20.3% -6.6% -8.6% -20.8% -13.3%Source: Bloomberg Notre: Prices used for reference are at the end of 15 th June 2010


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Capital Goods - PositiveRelative Performance

Period YTD 1mth 3 mths 6 mths 12 mths

BSE CapitalGoods Index 0.7% 7.5% 4.3% 3.1% 13.6%

Nifty 0.4% 2.5% 1.8% 3.8% 16.5%

Sensex -0.3% 2.5% 1.4% 3.2% 17.1%

Capital Goods sector has performed largely in line withmarkets

While power sector continued to be intact,announcements of new industrial capex has beenlargely subdued.

Stocks exposed to power sector capex have faredbetter in terms of performance in last couple ofquarters.

Expect the sector to outperform with the return of capex cycle

Source: Bloomberg

We believe the capex cycle, which peaked in FY2007 would return for upswing from FY2011-12onwards

While we expect power capex to remain strong, we believe industrial capex cycle would return in next3-6 months as strong economic growth would lead to capacity constraints. Companies would startplanning in advance to prepare themselves to meet the demand.

Risk to our view

Though there are no major domestic problems, global events could only play the spoil sports as it maycurtail funds flows to the country. In the past it has been seen that Investment cycle has highcorrelation with the flow of foreign capital.


8/19

FMCG - Positive

Relative Performance


BSE FMCG

Index 11.3% 7.70% 10.39% 10.90% 37.34%

Nifty 0.4% 2.53% 1.82% 3.76% 16.47%

Sensex -0.3% 2.46% 1.44% 3.17% 17.06%

Reasons of outperformance

Play on Indian consumer

Sector has been consistent outperformer on back of pick up inconsumption demand especially in rural/semi urbanhousehold.

Double digit volume growth has been aided by higher ruralincome through NREGA, rural infrastructure development andhigher farm produce prices.

Urban demand pick has lagged in traditional segments suchas soap, detergents, but robust pick up seen in paints,

Source: Bloomberg

nutrition/wellness segmentsOut Performance to continue

We remain positive on the sector as robust GDP growth of more than 8% will continue to boost income levelsand thus demand for FMCG products

Risks to our View

Sharp up move in raw material prices such as crude and other derivative products can lead to higher price andthus lower demand.

Consumer price inflation also poses challenge to Industry as food inflation may impact consumer discretionaryspend


9/19

Metals - Positive



BSE MetalIndex -14.4% -6.30% -13.65% -8.03% 26.75%

Nifty 0.4% 2.53% 1.82% 3.76% 16.47%

Sensex -0.3% 2.46% 1.44% 3.17% 17.06%

Reasons for Underperformance in last couple ofquarters

Concerns related to Global recovery

Overheating of economy in China

Unwinding of Metal blocked in financing deals

We have a positive outlook on the SectorSource: Bloomberg

rom next year onwar s we expect g o afocus to shift from crisis management to growth.Demand to remain at elevated level as Indiaand China continues to create Infrastructure

Risk to our view

Delay in Global Recovery

Globally rise in Interest rates


10/19

Oil and Gas - Positive


Period YTD 1mth 3 mths 6 mths 12 mthsBSE Oil& Gas -1.6% 4.40% 5.05% 0.91% 2.69%

Nifty 0.4% 2.53% 1.82% 3.76% 16.47%

Sensex -0.3% 2.46% 1.44% 3.17% 17.06%

Mixed Bag

Sectoral Index has under performed in medium term owning tounder performance of Reliance. Despite increasing refiningcapacity by nearly 100%, sharp fall in refining margins (40%)subdued the profitability.

While, increase in Natural Gas production from KG basin hasdiversified its revenue stream and has catapulted pipelinetransmission volumes and benefited companies such as Guj StatePetronet, GAIL etc.

Government recent policy decisions such as market pricing ofAPM gas has benefitted ONGC earnings. Further Govt iscontem latin freein auto fuel rices and artiall de-re ulate

Source: Bloomberg

cooking fuels bode well for oil marketing companies .Sector will Out Perform

We remain positive on the sector as we believe Govt pro reform measures will re-rate the sector.Quality of refining throughput and efficiency can make the larger players survive the downturn in refining sector.

Key Risks

Sharp downturn in world economy and demand for petroleum fuels.

Lack of pro-reform measures such as de-regulating auto fuels.


11/19

Pharmaceuticals - Positive


Period YTD 1mth 3 mths 6 mths 12 mthsBSEHealthcare 11.4% 4.14% 10.75% 12.99% 53.69%

Nifty 0.4% 2.53% 1.82% 3.76% 16.47%

Sensex -0.3% 2.46% 1.44% 3.17% 17.06%

Reasons for Outperformance in last couple of quarters

Strong momentum in core formulations business.Domestic formulations business as a whole grew at~15% with midcap companies exhibiting growth inexcess of 18-20% in this segment.

M&A activity has picked up with MNC companies tryingto acquire companies which have a strong domesticformulations business. Abotts acquisition of the domesticformulations business of Piramal healthcare at 9 XEV/Sales in an example to interest expressed b MNC

Source: Bloomberg

companies.

Abundant company specific events such as

o New product approvals for companies such as Dr.Reddy, Lupin, Sun Pharma, Glenmark, etc.o Tie ups with MNC companies for supply arrangements such as the ones entered into by

Aurobindo with Pfizer, Cadila with Abott, Dr Reddy with Glaxo, Biocon with numerous

companies for Tacrolimus, etc.o Balance sheet restructuring in companies such as Jubilant Organosys, Aurobindo, etc.o Milestone based payments received by Glenmark, Biocon, etc.

Midcap pharma companies continue to remain attractive on valuations parameters


12/19

We remain Positive on the sector on account of

Momentum in core business continues to remain strong. Domestic formulations continues to grow at~15% with midcap companies growing in excess of 18-20% in this segment. US FDA Approvals for newproducts is expected to aid growth for generic companies focused on the US geography.

Supply arrangement expected to provide the base for growth for some companies.

Milestone payments and new product approvals for some companies to chart a new growth path forsome companies.

Expectation of M&A activity in companies with strong products in domestic market to maintain themomentum in stock prices in these stocks.

Opening up of new geographies such as Japan for generic medicine to provide new growthopportunities for stocks such as Lupin, Cadila and Ranbaxy which have established their presence inJapan.

Clearance by USFDA for plants under inspection to pave way for revenue growth and better profitabilityfor some companies.

Risk to our view

Expectation of site clearance by USFDA not coming through could hurt stocks such as Ranbaxy andSun Pharma.

Weaker Euro could impact the business of companies in the Euro region such as Ranbaxy, Dr Reddy,etc.

Adverse judgment on products under litigation to hurt companies involved in the same.


13/19

Real Estate PositiveRelative Performance


BSE RealtyIndex -20.3% -6.64% -8.62% -20.76% -13.26%

Nifty 0.4% 2.53% 1.82% 3.76% 16.47%

Sensex -0.3% 2.46% 1.44% 3.17% 17.06%

Reasons for underperformance in last couple ofquarters

Companies continue to reel under the debt burden,though a lot of companies have managed to repayand reduce debt through issuance of equity.

Steep price hikes have resulted in lesser volume ofunits sold over the last 2 quarters. Current prices areunsustainable since affordability is low.

Company specific issues such as Unitechs

Source: Bloomberg

,

with itself at premium to market expectation, Anantrajfacing problem with respect to its Hauz Khas project,etc. are resulting in stocks not performing.

Pace of execution of projects has not picked up asper expectation.

Investors who had subscribed to the equity issuancebooking profits generated by the strong performancein stocks during the first half of CY09.


14/19

We are Positive on the sector on account of

Improvement in balance sheets of companies achieved through equity issuance and asset sales

Bankruptcy no longer remains a threat

Volume pickup is slowing but margins remain good

We expect execution to pick up going forward resulting in better numbers

Holding power of builders is strong

City centric locations are being priced higher than ever with strong demand as well

Risk to our view

Real estate stocks being high beta will suffer with a fall in equity markets globally

We believe that the current prices are not sustainable and fall in prices will impact the profitability ofcompanies

Slow rate of execution to impact earnings


15/19

Software - PositiveRelative Performance


BSE ITIndex 2.6% 1.46% -1.64% 7.47% 64.21%

Nifty 0.4% 2.53% 1.82% 3.76% 16.47%

Sensex -0.3% 2.46% 1.44% 3.17% 17.06%

Reasons for Outperformance in last couple of quarters

Business momentum has picked with new order inflows.BFSI vertical which was a laggard during FY09 turnedout to be a strong business growth driver during theprevious 2-3 quarters. Along with BFSI other verticalssuch as Energy, Utilities, and manufacturing also pickedup momentum resulting in strong 5% CQGR in volumesover the last 2-3 quarters.

Good cost management helped Companies maintain oreven improve margins consistently during the periods of

Source: Bloomberg

s ow grow .

Strong US Dollar helped margins of companies duringthe whole of FY10.


16/19

We remain Positive on the sector on account of

Continued momentum in business over the next few quarters. We expect volume growth to continue in

the 5% CQGR range over the next 4-6 quarters.We expect the pent up demand to result in larger orders coming through further. Announcement oftransformation orders which comprises of moving the work offshore is picking momentum with the higheracceptance of offshoring work with the idea of cutting costs.

The ongoing shift from high cost locations to offshore locations to continue benefitting Indian companies.

The branding (quality perception, service standards) of Indian companies continues to improve which is aresult of Indian companies winning prestigious and mission critical projects.

Service lines such as Remote Infrastructure services, BPO, Package implementation, etc. are picking upmomentum.

We expect M&A activity to pickup in midcap companies with strong quality standards.

Strong employee additions announced by companies is a sign of strong business wins expectation bycompanies.

Risk to our viewIf the Euro continues to remain weak, then it could impact the margins of companies with high exposure

to the Euro region.Attrition and in turn Wage inflation to impact margins going forward.

Valuations for the tier 1 IT companies is no longer cheap and disappointment on numbers would result inunderperformance.


17/19

Telecom- Negative



Telecom -12.2% 4.40% 5.05% 0.91% 2.69%

Nifty 0.4% 2.53% 1.82% 3.76% 16.47%

Sensex -0.3% 2.46% 1.44% 3.17% 17.06%

Reasons of underperformance

High Intensity competition

Sector has under performed severely in 6-12 monthshorizon because of sharp fall in tariffs initiated by newplayers such as Rcom, Tata Docomo etc . This has

resulted in earnings downgrade across the sector.High intensity competition also resulted in mindboggling bidding for 3G spectrum resulting in puttingfurther strain on profitability in terms of higher debt andinterest burden.

Source: Bloomberg

Under Performance to continue

We believe the competitive intensity in terms ofpressure on ARPU may come down, but there isnothing which make us believe that the sector is backon growth path in terms of profitability.

Key Risks

Consolidation among players can lead to faster thanexpected stability in the sector.


18/19

Thank YouThank You


19/19

Disclaimers & Risk Factors

This document have been prepared by L&T Investment Management Limited (LTIML) forinformation purposes only and should not be construed as an offer or solicitation of an offer forpurchase of any securities/ instruments or any of the Funds of L&T Mutual Fund. Market viewsexpressed herein are for general information only and do not have regards to specific investmentobjectives, financial situation and the particular needs of any specific person who may havereceive this information. Investments in mutual funds and securities markets inherently involverisks including possible loss of capital and recipient should consult their legal, tax and financialadvisors before investing. Recipient of this document should understand that statements madeherein regarding future prospects may not be realized. He/ She should also understand that anyreference to the securities/ instruments/ sectors in this document is only for illustration purpose.

e v ews expresse are o , ne er s ocumen nor e un s o u ua un ave

been registered in any jurisdiction. The distribution of this document in certain jurisdictions maybe restricted or totally prohibited and accordingly, persons who come into possession of thisdocument are required to inform themselves about, and to observe, any such restrictions.

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