Auto:
Axis CapitalBSE -0.19 % expects demand to recover from FY14 driven by increasing money supply in the system, falling interest rates, and pre-election consumption stimulus. However, we lower our FY14/ FY15 industry volume estimates to factor in higher fuel pass through and inflationary pressures.
Lower than expected economic recovery can impact volumes and valuation multiples.
Banks:
Banks with retail focus (mainly private) would be major beneficiaries of pick up in consumption-related demand. We prefer HDFC BankBSE -0.03 %, ICICI BankBSE 0.62 % and LIC HousingBSE 0.67 % in the space.
Key triggers will be policy rate cuts and signs of revival in capex demand. Increase in FDI in insurance will unlock value mainly for ICICI Bank, HDFC and SBIBSE 0.86 %.
Key developments expected: New bank licenses to bring new business models (eg. Yes BankBSE 0.70 % and Kotak created niche models which suited their product offerings) and improve competitive landscape.
Cement:
Cement demand has been weak since Nov '12 and is unlikely to recover over next six months. FY13 demand growth is expected to be 2 per cent. We have lowered our CY13/CY14 EPS estimates for ACCBSE -0.19 % and Ambuja by 10-18% to factor in (a) cost pressures in coal and freight and (b) subdued cement prices in the near term.
Demand growth is expected to recover to 6 per cent in FY14 and 8 per cent in FY15 led by pre-election spending and expected recovery in capex. Slow pace of fresh capacity additions to lead to improved capacity utilizations.
Steep increase in coal and logistics costs, thus limiting industry's ability to pass on cost pressures are some of the key risk factors for the sector.
Engineering:
Our channel checks suggest recovery from FY14 driven by capex in Railways (tariff hike+ DFC+ Metro), Oil & Gas (largely RILBSE 0.58 % & ONGCBSE -1.08 %), and Power Distribution (SEB debt restructuring). Power (Generation & Transmission), Metals and Roads will remain weak. We expect L&T and ThermaxBSE -0.49 % to be the key beneficiary of this capex.
We expect execution growth to pick-up in FY14 driven by government push to kick start the investment cycle by forcing cash rich PSUs do capex (or pay dividend) in the pre-election year. We expect revenue growth of 12 per cent for L&T and 22 per cent for Thermax in FY14.
FMCG:
Squeeze in disposable income and weak sentiments impacted off-take in select discretionary categories. Revenue growth for 9MFY13 was at 16 per cent YoY (vs. 19.5 per cent in FY12).
We expect pre-poll spending, increase in planned expenditure by government, and moderation in inflation levels to drive consumption demand. Expect revenue growth of 17 per cent in FY14.
Rupee depreciation will be a mixed bagger. It will negatively impact companies with higher imported raw materials content such as Asian PaintsBSE 0.66 % and HULBSE 1.17 %. No major P&L impact on companies with sizable US$ denominated debt (Dabur, GCPL, NestleBSE 0.40 % and Marico) is expected as they follow AS11. Translation gains on exports and international business will have positive impact on reported earnings (not cash flow) of GCPL, DaburBSE 3.36 % and MaricoBSE 0.78 %.
Pricing power may weaken if demand remains sluggish, which could impact operating margin in FY14.
Infrastructure:
While ports exhibited strong volume growth, airport traffic witnessed marginal de-growth. Roads lagged on account of low NHAI awards and players exiting unviable projects, citing delays in approvals.
We expect ports with spare capacity to continue to see strong growth, while a significant improvement in NHAI awards to result in more viable project wins.
Technology:
Key factors are US recovery, concerns on growth from Europe/ BFSI vertical are now abating, deal pipeline is better YoY, better prospects from sizeable renewal market is expected (~USD 220 bn over CY13-15).
Pricing is expected to remain stable as commoditization of the traditional ADM segment (55-60 per cent of revenue) will largely be offset by likely uptick in discretionary spend and new spend areas - cloud, mobility, data analytics etc.
Margins are seen improving by 30-60 bps on higher offshore penetration in Europe and rupee depreciation. We expect part of gains to be channelized towards client mining, non-linear initiatives, S&M investments, expansion at onsite locations etc. However higher depreciation and tax due to onsite investments and lower growth in interest income will lead to lower growth in PAT versus topline.
Metals:
Though we expect a gradual demand recovery in developed countries and China, overcapacity in China will keep metal prices subdued. However, there is limited downside as CMP of non-ferrous metals is at/ below marginal cost of production.
We lower our non-ferrous metal price estimates for FY14 and FY15 by 5-9 per cent. However, domestic metal companies to benefit significantly from expected rupee depreciation. We have raised our FY15 EPS estimates by 10-20 per cent and target prices by ~10-15 per cent.
Further disruption in mining activity is seen as a key risk factor for the sector.
Oil & Gas:
Domestic gas price hike (as per Rangarajan committee's recommendation) would be favorable for RIL, ONGCBSE -1.08 % and OIL. We expect gas price to be hiked to US$ 6/mnbtu (vs. Street expectations of US$ 8/mnbtu) due to likely opposition from fertilizer/ power ministry ahead of elections. Approvals for E&P plans, which have been delayed for long, will improve production outlook for RILBSE 0.58 % and CairnBSE 5.02 %.
Pharmaceuticals:
US is still an attractive market for Indian pharma players. Medium term outlook for the sector: 13-14 per cent p.a. growth; implementation of proposed pricing policy will impact growth, but only in the short-term.
Power:
State governments of three SEBs (TN, Rajasthan, and UP) have approved debt restructuring scheme. These SEBs account for 70 per cent of all-India losses. This will enable them to absorb higher power prices and lead to improvement in PLFs and receivables for gencos.
Coal price pooling mechanism has received approval from the Cabinet. An inter-ministerial group has been set up to sort out issues raised by some states. Success of this scheme is crucial to viability of private gencos dependent on CILBSE -1.25 % linkage and have signed fixed price PPAs.
Merchant prices now showing regional divergence: In 9MFY13, merchant tariffs showed divergent trend with realizations significantly higher in South India at over Rs 5/Kwh vs. East and North India at Rs 3- 3.5/Kwh due to transmission bottlenecks. We expect merchant prices at Rs 3.5-5/kWh in FY14 despite pre-election spike in demand, as banks are unwilling to fund SEBs any further and increasing consumer-level prices will be a challenge
Realty:
While MMR and NCR saw a pick up in volumes towards the end of CY12 (regulatory de-bottlenecking), Bangalore continued to see strong volumes throughout CY12 on account of project launches at regular intervals.
RBI is expected to cut interest rates by 100 bps in FY14 which shall benefit all real estate developers. Possible passage of the Land Acquisition Bill will re-rate land prices, benefiting large land owners ( DLFBSE 7.91 %, JP Infratech, Sobha and Puravankara).
De-bottlenecking of regulatory process shall result in a flurry of new launches which will help revive volumes across micro markets.
Several developers have built up significant quantum of unbooked revenue from projects which are expected to cross revenue recognition threshold in FY14 and thus augment revenue and profitability significantly ( Prestige EstatesBSE 0.49 %, Sunteck RealtyBSE 1.61 %, Oberoi Realty).
Telecom:
Industry consolidation and withdrawal of promotional offers (since August 2012) is to improve RPM. We expect 3.5 per cent/ 3 per cent RPM growth in FY14/ FY15 respectively (50 per cent of our inflation forecast).
Old operators are to benefit as minutes migrate from new operators (few have exited while some like Telewings, Sistema are scaling down operations). Expect old operators to deliver total minutes growth of 6-8 per cent in FY14.
Consecutive failure of auctions (Nov-12 and Mar-13) and increased spectrum supply (Supreme Court directions) will result in lower spectrum prices. Hence, regulatory charges will be lower.
Axis CapitalBSE -0.19 % expects demand to recover from FY14 driven by increasing money supply in the system, falling interest rates, and pre-election consumption stimulus. However, we lower our FY14/ FY15 industry volume estimates to factor in higher fuel pass through and inflationary pressures.
Lower than expected economic recovery can impact volumes and valuation multiples.
Banks:
Banks with retail focus (mainly private) would be major beneficiaries of pick up in consumption-related demand. We prefer HDFC BankBSE -0.03 %, ICICI BankBSE 0.62 % and LIC HousingBSE 0.67 % in the space.
Key triggers will be policy rate cuts and signs of revival in capex demand. Increase in FDI in insurance will unlock value mainly for ICICI Bank, HDFC and SBIBSE 0.86 %.
Key developments expected: New bank licenses to bring new business models (eg. Yes BankBSE 0.70 % and Kotak created niche models which suited their product offerings) and improve competitive landscape.
Cement:
Cement demand has been weak since Nov '12 and is unlikely to recover over next six months. FY13 demand growth is expected to be 2 per cent. We have lowered our CY13/CY14 EPS estimates for ACCBSE -0.19 % and Ambuja by 10-18% to factor in (a) cost pressures in coal and freight and (b) subdued cement prices in the near term.
Demand growth is expected to recover to 6 per cent in FY14 and 8 per cent in FY15 led by pre-election spending and expected recovery in capex. Slow pace of fresh capacity additions to lead to improved capacity utilizations.
Steep increase in coal and logistics costs, thus limiting industry's ability to pass on cost pressures are some of the key risk factors for the sector.
Engineering:
Our channel checks suggest recovery from FY14 driven by capex in Railways (tariff hike+ DFC+ Metro), Oil & Gas (largely RILBSE 0.58 % & ONGCBSE -1.08 %), and Power Distribution (SEB debt restructuring). Power (Generation & Transmission), Metals and Roads will remain weak. We expect L&T and ThermaxBSE -0.49 % to be the key beneficiary of this capex.
We expect execution growth to pick-up in FY14 driven by government push to kick start the investment cycle by forcing cash rich PSUs do capex (or pay dividend) in the pre-election year. We expect revenue growth of 12 per cent for L&T and 22 per cent for Thermax in FY14.
FMCG:
Squeeze in disposable income and weak sentiments impacted off-take in select discretionary categories. Revenue growth for 9MFY13 was at 16 per cent YoY (vs. 19.5 per cent in FY12).
We expect pre-poll spending, increase in planned expenditure by government, and moderation in inflation levels to drive consumption demand. Expect revenue growth of 17 per cent in FY14.
Rupee depreciation will be a mixed bagger. It will negatively impact companies with higher imported raw materials content such as Asian PaintsBSE 0.66 % and HULBSE 1.17 %. No major P&L impact on companies with sizable US$ denominated debt (Dabur, GCPL, NestleBSE 0.40 % and Marico) is expected as they follow AS11. Translation gains on exports and international business will have positive impact on reported earnings (not cash flow) of GCPL, DaburBSE 3.36 % and MaricoBSE 0.78 %.
Pricing power may weaken if demand remains sluggish, which could impact operating margin in FY14.
Infrastructure:
While ports exhibited strong volume growth, airport traffic witnessed marginal de-growth. Roads lagged on account of low NHAI awards and players exiting unviable projects, citing delays in approvals.
We expect ports with spare capacity to continue to see strong growth, while a significant improvement in NHAI awards to result in more viable project wins.
Technology:
Key factors are US recovery, concerns on growth from Europe/ BFSI vertical are now abating, deal pipeline is better YoY, better prospects from sizeable renewal market is expected (~USD 220 bn over CY13-15).
Pricing is expected to remain stable as commoditization of the traditional ADM segment (55-60 per cent of revenue) will largely be offset by likely uptick in discretionary spend and new spend areas - cloud, mobility, data analytics etc.
Margins are seen improving by 30-60 bps on higher offshore penetration in Europe and rupee depreciation. We expect part of gains to be channelized towards client mining, non-linear initiatives, S&M investments, expansion at onsite locations etc. However higher depreciation and tax due to onsite investments and lower growth in interest income will lead to lower growth in PAT versus topline.
Metals:
Though we expect a gradual demand recovery in developed countries and China, overcapacity in China will keep metal prices subdued. However, there is limited downside as CMP of non-ferrous metals is at/ below marginal cost of production.
We lower our non-ferrous metal price estimates for FY14 and FY15 by 5-9 per cent. However, domestic metal companies to benefit significantly from expected rupee depreciation. We have raised our FY15 EPS estimates by 10-20 per cent and target prices by ~10-15 per cent.
Further disruption in mining activity is seen as a key risk factor for the sector.
Oil & Gas:
Domestic gas price hike (as per Rangarajan committee's recommendation) would be favorable for RIL, ONGCBSE -1.08 % and OIL. We expect gas price to be hiked to US$ 6/mnbtu (vs. Street expectations of US$ 8/mnbtu) due to likely opposition from fertilizer/ power ministry ahead of elections. Approvals for E&P plans, which have been delayed for long, will improve production outlook for RILBSE 0.58 % and CairnBSE 5.02 %.
Pharmaceuticals:
US is still an attractive market for Indian pharma players. Medium term outlook for the sector: 13-14 per cent p.a. growth; implementation of proposed pricing policy will impact growth, but only in the short-term.
Power:
State governments of three SEBs (TN, Rajasthan, and UP) have approved debt restructuring scheme. These SEBs account for 70 per cent of all-India losses. This will enable them to absorb higher power prices and lead to improvement in PLFs and receivables for gencos.
Coal price pooling mechanism has received approval from the Cabinet. An inter-ministerial group has been set up to sort out issues raised by some states. Success of this scheme is crucial to viability of private gencos dependent on CILBSE -1.25 % linkage and have signed fixed price PPAs.
Merchant prices now showing regional divergence: In 9MFY13, merchant tariffs showed divergent trend with realizations significantly higher in South India at over Rs 5/Kwh vs. East and North India at Rs 3- 3.5/Kwh due to transmission bottlenecks. We expect merchant prices at Rs 3.5-5/kWh in FY14 despite pre-election spike in demand, as banks are unwilling to fund SEBs any further and increasing consumer-level prices will be a challenge
Realty:
While MMR and NCR saw a pick up in volumes towards the end of CY12 (regulatory de-bottlenecking), Bangalore continued to see strong volumes throughout CY12 on account of project launches at regular intervals.
RBI is expected to cut interest rates by 100 bps in FY14 which shall benefit all real estate developers. Possible passage of the Land Acquisition Bill will re-rate land prices, benefiting large land owners ( DLFBSE 7.91 %, JP Infratech, Sobha and Puravankara).
De-bottlenecking of regulatory process shall result in a flurry of new launches which will help revive volumes across micro markets.
Several developers have built up significant quantum of unbooked revenue from projects which are expected to cross revenue recognition threshold in FY14 and thus augment revenue and profitability significantly ( Prestige EstatesBSE 0.49 %, Sunteck RealtyBSE 1.61 %, Oberoi Realty).
Telecom:
Industry consolidation and withdrawal of promotional offers (since August 2012) is to improve RPM. We expect 3.5 per cent/ 3 per cent RPM growth in FY14/ FY15 respectively (50 per cent of our inflation forecast).
Old operators are to benefit as minutes migrate from new operators (few have exited while some like Telewings, Sistema are scaling down operations). Expect old operators to deliver total minutes growth of 6-8 per cent in FY14.
Consecutive failure of auctions (Nov-12 and Mar-13) and increased spectrum supply (Supreme Court directions) will result in lower spectrum prices. Hence, regulatory charges will be lower.
Leave a Reply
Note: only a member of this blog may post a comment.