Investment Management


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Investment Management

  1. 1. Investment ManagementPortfolio of Dr. D.N PanigrahiSenior Faculty Member @ IMT-Nagpur Group No.: 06 (SEC: AB) Ankit Gupta Anshul Garg Ayan Chatterjee Dhairya Gada Kallol Sarkar
  2. 2. Economic AnalysisIndian Economy: Outlook and Prospects: FY12 and FY13We projects that India’s GDP growth in FY12 will be 6.5%, which is likely to rise to around 7% inFY13 under certain assumptions made relating to the global economy and domestic policyresponses. Inflation on the other hand is to moderate to 7.5% in FY13 based on a good harvest andstable global commodity prices.The projection for the fiscal deficit for FY12 has been placed at 5.5% which is expected to rangebetween 5-5.5% in FY13 mainly due to pressure on the expenditure side. The RBI is expected tolower interest rates in the course of the year, with the repo rate coming down by 100-150 bps. Theoutlook further expects the rupee to remain volatile as euro conditions will remain in flux while thedomestic current account deficit will be under pressure at 4% of GDP which will still be animprovement over the 4.5% deficit expected in FY12.Growth expectationsGDP growth is to be driven mainly by the services sector which excludes any stimulus from the partof the government. Overall growth is expected to be in the range of 6.5% in FY12. This iscreditable and would still be one of the highest in the world with only China, Argentina, and Turkeybeing ahead.Farm growth at around 3% will be major comfort for GDP growth and will also mean a secondsuccessive harvest after the drought of FY10. Production is to be boosted mainly by cereals such asrice and wheat and cash crops such as cotton, jute and sugarcane. This has provided both demandfor non-farm goods as well as supplies for the manufactured food products which has in turn helpedgrowth of industry.Industrial production (including construction), which was to grow in the region of 6-7% for the yearwould be fairly subdued even from the 7.1% projection made by the PMEAC in July. With fairlyvolatile numbers so far this year and negative growth in October, overall projections have beenlowered to the range of 5%, which will still mean a substantial recovery in the last 4 months of theyear, which on a high base, will be an achievement. Major risks in this area are in the mining andcapital goods sector. For the former, policy action is required while for the latter, a revival ininvestment is called for. Absence of affirmative action in areas such as reforms in mining, land,insurance, pensions, banking, taxation etc. along with high interest rates have come in the way ofinvestment growth. While it is expected that we have reached the end of the interest rate cycle, theprogress on reforms is expected to be tardy till the first quarter of FY13. The service sector, with aweight of around 60% in GDP will be the chief driver with growth of around 9% during the year.Growth is expected to be broad based with only the government sector showing a slowdown.
  3. 3. Fiscal outcomeThe fiscal deficit for FY12 will not meet the Budget’s target of 4.6% of GDP and would be higheron account of revenue slippages and excess expenditure. Based on the revenue loss from indirecttaxes announced in mid -2011 as well as the higher government borrowings of over Rs 90,000 crannounced by the RBI for the year, the ratio is to slip towards the 5.5% mark, assuming that thereare no further shocks.The question marks remain over the progress of the disinvestment programme of Rs 40,000 cr (onlyRs 1,444 cr has been mobilized until now) and subsidy bill which has already overshot the budgetedamount of around Rs 145,000 cr. While there are mechanisms being put in place for enabling thedisinvestment programme, it is uncertain as to what could be the level of success. Hence, the deficitlevel of 5.5% of GDP is a more conservative estimate, which is subject to an increase if theseassumptions are violated. Also it should be noted that statistically the deficit ratio is being supportedby a higher denominator as the overall growth of GDP at current market prices would be between 2-3% higher than was envisaged at the time of presentation of Budget 2011-12.Inflation viewInflation as given by the WPI will move towards the 7% mark earlier than expected and could touch6-6.5% by March end on a point to point basis guided by negative food inflation. The present trendof negative food inflation is being assisted by the base year effect which will wane by the end of theyear. However, pressure will continue to be exerted by core and fuel inflation as the internationalcrude prices will remain at the existing level which together with a weak rupee will exert pressureon prices. The government at best will not increase petro product prices this financial year and takeon the additional cost aa part of the subsidy bill.Monetary developmentsMonetary indicators look to be weaker this year with growth in credit being 16% and deposits 18%.Growth in deposits is well ahead of that in credit and will continue to be so for the rest of the year.Surplus funds are being deployed in government paper thus enabling the government’s borrowingprogramme.Given the uncertainty over inflation, the RBI is unlikely to touch rates till March end even if theinflation number declines to 6-7% before that as core inflation is a concern and the central bank hasto be certain that inflation will remain at lower levels before invoking an about turn in policy.Policy actionWhile a CRR cut is possible to induce liquidity to ensure that the borrowing programme of thegovernment goes through, the RBI may prefer to use OMOs as a CRR cut is viewed as being ratherpermanent, as a part of policy stance and reducing the same could send contradictory messages tothe markets. The RBI has been following an anti-inflationary policy stance since early 2010.Liquidity will continue to be under pressure this year since, with credit growth also picking up tosupport commerce there will be additional demand from both the government and industry. This
  4. 4. will keep G Sec yields steady and that on 10 -years will range between 8.2-8.5%. More borrowingswill increase supply of paper that will depress prices, and consequently move yields upwards.External sector outlookThe external account will be under pressure till March 2012. The trade deficit has been wideningwith growth in exports slowing down while imports continue to increase at a steady pace. This yearso far, remittances and software flows have provided support to the current account. With theseflows continuing to increase, albeit at a gradual pace, the current account deficit will in the range of3.5% of GDP this year.Capital receipts have in the past provided support to the current account deficit. However, this year,FII flows have been just $ 6 bn till December and concentrated in debt. This number is not likely toimprove substantially and would at best be around $ 10-12 bn by the end of the year. FDI howeveris the major supporting factor here, with around $ 20 bn coming in the first 7 months of the year.The target of around $ 30 bn is likely to be achieved. In case of ECBs, the target of over $ 35 bn isunlikely to be met, thus leading to pressure on the overall balance of payments and reserves. Giventhe pressure on the balance of payments, the rupee will continue to be under pressure in the range ofRs 50 -52/$ till March. However, any major shock in the global economy would change this range.Outlook for 2012The outlook for 2012 and further till March 2013 will be based on two sets of factors.Global factors:The world economy is in a state of flux with the euro rescue package still being implemented. Therecent downgrading of 9 nations has further added to the uncertainty with a possibility of furtherdefault problems in Greece resurfacing. Assuming that there are no further failures in the euroregion and the rescue packages are to be implemented, there would be a tendency for countries toresort to fiscal austerity which in turn will slow down these economies. Therefore, overall growthhere will be muted for a second successive year, and at around 0.5-1% compared with 1.5% in2011. This would also be contingent on strong recovery in Germany and France. While ECB couldlower rates in the course of the year by up to 50 bps, it is unlikely to have a perceptible impactgiven the fiscal concerns in most of these nations. This said, markets will continue to be volatile asthe debt ridden nations will continuously be under stress to service their debt which in turn willaffect sentiment that will be reflected mainly in the exchange rate with the dollar.The USA, which will probably continue its upward movement from around 1.8-2% in 2011 tobetween 2-2.5% in 2012, will not be able to propel the world economy on its own given that theemerging markets will also be under strain especially so on account of high commodity inflationwhich has invoked stringent monetary measures in these countries. Therefore, the overall globalperformance, which will have a bearing on trade flows and capital movements, is likely to at best beat present levels with marginal improvement towards the end of the year.Domestic factors
  5. 5. Domestic economic developments will be largely driven by three sets of policy responses:Monetary policy, Fiscal stance, and, Economic reforms. However, the starting point will be theinflation direction as it has an overbearing impact on all policies. Inflation should be under controlduring the year at around 5% assuming that global commodity prices stay stable, in particular oil. With the global economy moving at a slow rate, this is a reasonable assumption which in turn willexert some control over imported inflation. The other caveat is a normal monsoon as this is onefactor which can tilt the scales. Further, the Ministry of Petroleum’s view on administered fuelprices will also have a bearing on inflation as these products have a direct weight of around 7.5% inthe WPI and also influence prices of other products, especially food products through transport cost.Keeping this factor as a constant, the following is the outlook for the Indian economy in FY13. • GDP growth to move upwards of the present rate of 7% towards the 7.5% marka. Agriculture to pose a modest 2-3% growth which will come over two very good years of farmproduction. The base year effect will play a leading role in the final outcome.b. Industrial growth will start moving up based more on consumption rather than investmentdemand. The impact of high interest rates and inflation on investment first witnessed in FY12 willcontinue to be a downside risk to industrial growth and this will slow down the recovery process. Alarger role of the government is envisaged in the new fiscal which will provide a stimulus toindustrial growth. Overall industrial growth would be in the 7-8% region in FY13 based on threefactors, the absence or delay of which will upset these projections. In fact growth would be more inthe 6-7% region in case of such slippage.I. Base year effect provides a boostii. Interest rates are rolled backiii. Government spending also increasesc. Services sector will continue to be the engine to growth with a lead of 9% which will besupported by both the banking sector, retail space, transport and communication and more importantly the social and community services, which means more government spending. • The government will have to weigh the overall external and internal environment while formulating the Budget. While the external environment is quite nebulous, the domestic economy deserves a push that can be provided by the government. It is expected that the focus will be on project expenditure this time to provide a boost to the infrastructure sector so that the linkages are forged. The deficit will be at between 5.0-5.5% of GDP based on assumptions of moderate inflation and growth for revenue targeting. A review of the anti- poverty programme as well as implementation of the Food Security Bill will pressurize resources and hence lowering the fiscal deficit level further will be a challenge. Also the disinvestment programme of the government will have to be scaled down given the uncertain times on the bourses.
  6. 6. • Monetary policy will tend to be cautiously open with the repo rate to be lowered sequentially by 100-150 bps during the course of the year. The trigger would depend on when the core inflation number dips over the next three months. CRR cut would be invoked only in case of tight liquidity conditions prevail and would be in conjunction with the interest rate stance. Given that demand for funds is typically less compelling in the first quarter of the year, it would be considered only in case of a liquidity crunch in the second or third quarter of the year and will not be contrary to the interest rate stance.• G Sec yields will tend to move downwards, and the 10-year rate would move in the range of 8.0-8.5% mark depending on overall liquidity conditions as well as the fiscal deficit. Liquidity will continue to be stable with some pressure and RBI intervention will be necessitated as larger government borrowing along with increase in domestic credit will put pressure on the banking system.• The rupee would be impacted by both global exchange rate movements as well as forex inflows. The dollar would tend to be stable vis-à-vis the euro, but given lower demand conditions in this region, there could be a tendency for the dollar to move in the range of $ 1.25-35/euro which will cause volatility from this end. Two factors will be at work: the nebulous euro region climate will make the euro weaker, while the recovery in USA accompanied by the growing current account deficit can make the dollar weaken. The current account deficit may be targeted at 3% of GDP with exports reviving, though the slowdown in euro region will continue to pressurize the deficit. Support through remittances and software would be required to prop up the external balance. While FDI will continue to increase FII flows will be marginally better given a recovery in the world economy. This will help to prop up the domestic stock markets too. The rupee will be in the range of Rs 48- 52/$ during the year.• Concerns will remain on external debt and its composition as the debt to reserves ratio has exceeded 1 after a long time. Debt service especially that of short term loans will continue to be a concern going ahead.
  7. 7. Therefore, while a gradual recovery is expected in the economy in FY13-15 , it is contingent onvarious other assumptions holding. More importantly, policy action would be the key. While easingof rates and liquidity will be in accordance with broader monetary policy goals of inflation, thegovernment’s deficit will be critical as it will have to be a growth oriented budget, which givesincentives where it is needed through taxes, spends money on infrastructure to provide a stimulusand also meets its own social commitment expenditures.
  8. 8. INDUSTRY ANALYSISPower Sector AnalysisThe Indian Power Industry is one of the largest and most important industries in India asit fulfills the energy requirements of various other industries. It is one of the most criticalcomponents of infrastructure that affects economic growth and the well-being of ournation.India has the world’s 5th largest electricity generation capacity and it is the 6th largestenergy consumer accounting for 3.4% of global energy consumption. Due to the fast-paced growth of the Indian economy, the country’s energy demand has grown at anaverage of 3.6% p.a. over the past 30 years.In India, power is generated by State utilities, Central utilities and Private players. Theshare of installed capacity of power available with each of the three sectors can be seenin the pie-chart below:As per the latest Report of CEA (Central Electricity Authority) i.e. as on 31-03-2011, theTotal Installed Capacity of Power in India is 173626.40 MW. Of this, more than 75% of theinstalled capacity is with the public sector (state and central), the state sector having thelargest share of 48%.Thermal Power: - In India, major proportion of power is generated from thermal sourceswhere the main raw material used is coal. Around 83% of thermal power is generated usingcoal as a raw material whereas 16% of thermal power is generated with the help of Gas and1% of thermal power is generated with the help of Oil.Hydro Power: - Hydroelectric power or hydroelectricity is electrical power which is generatedthrough the energy of falling water. India has hydro power generation potential worth1,50,000 MW, of which only 25 % has been harnessed till date.Nuclear Power: - A Nuclear Power Plant is a thermal power station in which the heat sourceis one or more nuclear reactors. A nuclear reactor is a device to initiate and control a sustainednuclear chain reaction. In the process, heat is generated which is then used to generateelectricity.
  9. 9. Renewable Energy Sources: – The energy obtained from renewable sources like sun, wind,biomass can be converted into power. Renewable energy sources have great potential tocontribute to improving energy security of India and reducing green-house gas emissions.India is among the five largest wind power generators in the world.As seen in the graph below, there is a positive correlation between the GDP Growth rate andthe growth in Power Generation. As will be seen in the later part of this Shastra, India iscurrently facing acute shortage of power. The Indian growth story looks positive which willlead to higher economic growth and more demand for power. In order to sustain the growth inGDP, India needs to add power generation capacity commensurate with this pace.
  10. 10. Plant Load Factor, a critical efficiency parameter in the power industry is a measure of theactual output of a power plant compared to the maximum output it can produce.The State sector, that has the highest installed capacity is the least efficient. The private sectorutilities have clocked good efficiency rates and the Central utilities have managed to achievecompetent efficiency rates. Going forward, with private players being encouraged to enter thePower Sector, the state utilities will be required to work on improving their efficiency.Looking at the table below, it can be clearly observed that hydro-power producers like NHPCand SJVN operate at substantially higher profit margins than thermal power producers. This isbecause thermal power producers are required to spend a lot on Fuel (Coal, Gas, Oil).Looking at the companies with a diversified portfolio of power, NTPC is the largest company(on Net Sales), but Tata Power has registered the highest growth rates in Sales and Net Profit.Among hydro power producers, NHPC’s performance has been very good, its Net Profitgrowing at a CAGR of 28%.
  11. 11. 1) Demand-Supply Gap: – India has always been a power-deficient country. The demand for power is huge in India. As seen in the above graph, the supply of power in India has not been able to meet its demand. Under the Government’s “Power for all by 2012” plan, it has targeted per capita consumption of 1000 kWh by the end of the 11th Five Year Plan (2007-2012) as compared to levels of 734 kWh in 2008-09. In order to provide per capita availability of over 1000 kWh of electricity by year 2012, it is estimated that capacity addition of more than 1,00,000 MW would be required. This shows that huge capacity additions are required at good efficiency rates, indicating that the opportunities available in this sector are huge. 2) Government: - The role of the Government in the development of Indian power industry has been very crucial. Government’s policies aim at protecting consumer interests and making the sector commercially viable. Government regulates this industry in various ways (Tariff control, Subsidies, environment norms, etc.) due to its linkages to various industries and to the growth of the economy. - Regulatory role of Government: - As far as regulation is concerned, Electricity Act, 2003 is a very important Act as it allowed private sector participation in the generation of power, thus creating competition. It also allowed 100% FDI participation in the power generation, transmission and distribution, thus inducing investments in the power sector. - Government Schemes: - The Government is investing in this industry through various development schemes: -o The Rural Electrification Program is an effort to lighten up villages which have faced acute shortage of Power over the years.o ‘Power for All by 2012 plan aims at a per capita consumption of 1000kWh by the end of the 11th Five Year Plan (2007-12).o The Accelerated Power Development and Reform Program me (APDRP) program me is being implemented so that the desired level of 15 per cent AT&C (Aggregate Technical and Commercial) loss can be achieved by the end of 11th plan (Currently it is 30%). - Projects under pipeline: - The Government of India is planning nine Ultra Mega Power
  12. 12. Projects (UMPP) of 4 GW each with an estimated individual investment of US$ 4 billion(Rs. 192 billion). Four of these projects are expected to be commissioned between 2011and 2017. The UMPP is an initiative by the government to collaborate with powergeneration companies to set up 4,000 MW projects to ease the country’s power deficitsituation.3) Raw Materials: -Thermal power segment, which has the largest capacity generation share in the Indianpower industry, is dependent on inputs like coal, oil and gas for the generation of power.Coal shortages and the low thermal quality of coal supplies cause disruptions in powergeneration and result in lower plant load factors. When domestic supply of coal isinsufficient, coal is imported. This is unfavorable for power companies as it leads to risein costs.With these problems associated with thermal power, the Power Companies enter in toLong Term Agreements (LTA) with coal suppliers or acquire coal mines to ensureregular supply of coal. Besides, currently coal players in India are adopting aggressivestrategies by acquiring Coal mines outside India. Domestically, a good number of coalmines have received environmental clearances. Such actions will be beneficial forthermal power players.Gas-based power plant face problems because of shortages in gas supply. Thediscoveries in the Krishna-Godavari Basin are expected to improve gas availability inIndia which is a big positive for India’s gas-based plants.4) Transmission and Distribution: –Transmission of electricity is defined as the bulk transfer of power over a long distanceat a high voltage. Transmission and Distribution is as important as generation. Thecapacity additions to meet India’s growing power demand should be supplemented byadequate transmission infrastructure. Globally, every dollar invested in generation has anequal amount invested in transmission and distribution. However, in India traditionallyevery dollar invested in generation has a corresponding half a dollar invested intransmission and distribution. Due to this, transmission capacity in India lags behind thegeneration capacity. Huge investments are required in Transmission and Distribution ifIndia’s power sector is to meet the rising power demand.5) FDI Equity Flows in Power Sector: -
  13. 13. In India, 100% FDI is allowed in the Generation, Transmission and Distributionsegments of the Power Sector. The FDI inflow in the Power Sector has been on the risein the last 5 years. This trend is expected to continue in the coming years considering thehuge opportunities available in the sector. FDI inflow is important for the power sectorbecause it brings in money and India’s power sector is in huge need of investments.More importantly, FDI also brings in advanced technology making the sector moreefficient. Hence, this proves to be a major growth driver for the power sector.6) Growth Drivers for Power from Nuclear, Hydro and Renewable Energy Sources: –With the thermal power generation segment facing the issue of shortages of coal (majorraw material), other power generation sources like nuclear, hydro and renewable energysources will get attention in the coming years.Nuclear power projects account for 2.75% of India’s total installed capacity which isabout 4.77 GW. The Planning Commission’s expert committee on an Integrated EnergyPolicy has suggested in its report that there is a possibility of reaching a nuclear powercapacity of 21-29 GW by 2020 and 48-63 GW by 2030.The hydro power segment offers investment opportunities as India is considered to havehydro power generation potential worth 1,50,000 MW; of which only 25% has beenharnessed till dateUsing renewable sources to generate electricity has several advantages like a perennialenergy source, potential for lower reliance on imported fossil fuels and lower CO2emissions. However, at present the major hurdle facing rapid expansion of renewablepower is high initial cost as compared to the competing fuels. But taking in toconsideration the environmental concerns, this segment receives encouragement fromthe Government. Its share in the country’s total generation capacity has increased from1.1% in 2001-02 to 10.63% as on 31st March, 2011 and is expected to increase in thefuture.These three non-thermal sources of power also offer good investment opportunities.Companies are diversifying their power portfolios to take advantage of opportunitiesavailable in hydro power and renewable energy sources.Power Sector is a highly capital-intensive industry with long gestation periods, beforethe commencement of revenue generation. Since most of projects have a long time frame(4-5 years of construction period and operating period of over 25 years), there are someinherent risks which this sector faces.Availability of Coal: -Coal is the mainstay of the power production in India and is expected to remain so in thefuture. India has limited coal reserves, plus, availability of domestic coal is a challengeon account of various bottlenecks such as capacity expansion of Coal India Limited (thelargest coal producing company in the world, coal block allocation, tribal landacquisition, environmental and forest clearances, etc.Transportation of coal is a big concern in itself. Within the country, coal is transportedby Indian Railways and in case of imports; coal is to be unloaded at ports. In both cases,India currently faces capacity shortage. Hence, a project developer has to account forand manage its logistics chain in a manner that ensures regular fuel supply which is a bigchallenge.
  14. 14. Dependence on Equipment Suppliers: -The power sector is heavily dependent on Equipment suppliers. In fact, equipmentshortages have been a significant reason for India missing its capacity addition targetsfor the 10th five year plan. While the shortage has been primarily in the corecomponents of boilers, turbines and generators, there has been lack of adequate supplyof Balance of Plant (BOP) equipment as well. These include coal handling, ash-handlingplants, etc. Apart from these, there is shortage of construction equipment as well. Hence,inadequate supply of equipments is a cause of concern for the power companies.Aggregate Commercial and Technical Losses: -The Aggregate Technical and Commercial Loss (AT&C) is defined as the power lostdue to inefficient transmission and distribution infrastructure. India’s AT&C losses areas high as 30% compared with 5-10% in the developed markets which means out ofevery 100 units produced, 30 are lost during transmission and distribution. Technicallosses are due to inadequate investments over the years for system improvement works.Commercial losses are mainly due to low metering efficiency, pilferage and theft ofpower. This is a huge problem for the power sector.Other Roadblocks leading to Demand Supply Gap: -The power sector has other concerns like shortage of skilled manpower for constructionand commissioning of projects, contractual disputes between project authorities,contractors and their sub-vendors, delay in readiness of balance of plants by theexecuting agencies. Difficulties have been experienced by developers in landacquisition, rehabilitation, environmental and forest – related issues, inter-state issues,geological surprises (particularly for Hydro projects) and contractual issues. These issuescontinue to pose challenges to maintain the pace of development of power projects.India has stepped its development agenda and power is an inevitable element ofeconomic growth and development. Growth in the power sector is related to India’sGDP growth rate and hence, in order to sustain the growth of 8-9% in GDP, India needsto continuously add power generation capacity to commensurate with this pace.Although, the Indian power sector is one of the fastest growing sectors in the world andenergy availability has increased by around 36% in the past 5 years, the demand forpower outstrips its supply. Nearly 60 crore Indians do not have access to electricity. Theenergy and peaking deficits have been hovering around double digits for the past twoyears and the condition might worsen in the coming years considering the huge demandof power from India’s rising population and rapid industrialization and urbanization.Hence, there is no slowing down of demand for the Power Sector, thus offering amplescope for rapid capacity expansion.The Government is investing in this industry through various development schemes likeRajeev Gandhi Rural Electrification Program, ‘Power for all by 2012 and AcceleratedPower Development and Reform Programme (ARDRP), Ultra Mega Power Projects etc.It has also been is encouraging participation of private players in this Sector.Renewable energy sources are also being encouraged considering the growingenvironmental concerns. Hence, the future prospects of nuclear power, hydro power andpower from renewable energy sources are also goodLooking at the above points, the long term future prospects of the Indian Power Sectorappear to be Green (Very Good).
  15. 15. It is very important that while investing in a company, an investor selects an industry,where the long-term future prospects are bright. We have seen that in the long run theIndian Power sector is expected to have good growth.Banking SectorRecently, the RBI took a few important steps to make the Indian Banking industry morerobust and healthy. This includes de-regulation of savings rate, guidelines for newbanking licenses and implementation of Basel Norm III. Since March 2002, Bankex(Index tracking the performance of leading banking sector stocks) has grown at acompounded annual rate of about 31%. After a very successful decade, a new era seemsto have started for the Indian Banking Industry. According to a Mckinsey report, theIndian banking sector is heading towards being a high-performing sectorAccording to an IBA-FICCI-BCG report titled ‘Being five star in productivity – roadmap for excellence in Indian banking’, India’s gross domestic product (GDP) growthwill make the Indian banking industry the third largest in the world by 2025. Accordingto the report, the domestic banking industry is set for an exponential growth in comingyears with its assets size poised to touch USD 28,500 billion by the turn of the 2025from the current asset size of USD 1,350 billion (2010)”. So, before going in its future,let’s have a glance at its historical performance.If we look at 5 years historical performance of different types of players in the bankingindustry, public sector bank has grown its deposits, advances and business per employeeby the highest rate – 21.7%, 23% and 21.1% respectively. As far as net interest incomeis concerned, private banks are ahead in the race by reporting 24.2% growth, followedby pubic banks (21.4%) and then by foreign banks (14.8%). Though the growth in thebusiness per employee and profit per employee has been the highest for public sectorbanks, in absolute terms, foreign banks have the highest business per employee as wellas profit per employee.
  16. 16. In the last 5 years, foreign and private sector banks have earned significantly higherreturn on total assets as compared to their pubic peers. If we look at its trend, foreignbanks show an overall decreasing trend, private banks an increasing trend and Publicbanks have been more or less stagnant. The net NPA of public sector bank was alsosignificantly higher than that of private and foreign banks at the end of FY11, whichindicates the asset quality of public banks is comparatively poor. The Capital Adequacyratio was also very high for private and foreign bank as compared to public banks.In conclusion, we could say that the current position of ROA, Net NPA and CAR ofdifferent kinds of players in the industry indicates that going ahead, public banks willhave to face relatively more problems as compared to private and foreign banks.After looking at industry performance, let’s see how the different players in the BankingIndustry have performed in the last five years
  17. 17. The table above indicates that overall the top private banks have grown faster than thatof public banks. Axis Bank, one of the new private sector bank, has shown the highest
  18. 18. growth in all parameters i.e. net interest income, deposits, advances, total assets andbook value. Among public sector banks, Bank of Baroda has been the outperformer inthe last five years.Kotak Mahindra Bank has reported the highest 5-year average net interest margin andcurrently, it also has the highest CAR whereas HDFC Bank has the highest CASA, thelowest net NPA to net advances ratio and the highest five-year-average ROA. On theother hand, India’s largest bank, SBI reported the lowest five-year-average ROA.Currently, it has the highest net NPA to net advances ratio and the lowest CAR.Looking at all of the above, it is expected that Private Banks are better placed to garnergrowth in the Indian Banking Industry.High growth of Indian Economy: The growth of the banking industry is closely linkedwith the growth of the overall economy. India is one of the fastest growing economies inthe world and is set to remain on that path for many years to come. This will be backedby the stellar growth in infrastructure, industry, services and agriculture. This is expectedto boost the corporate credit growth in the economy and provide opportunities to banksto lend to fulfil these requirements in the future.Rising per capita income: The rising per capita income will drive the growth of retailcredit. Indians have a conservative outlook towards credit except for housing and othernecessities. However, with an increase in disposable income and increased exposure to arange of products, consumers have shown a higher willingness to take credit,particularly, young customers. A study of the customer profiles of different types ofbanks, reveals that foreign and private banks share of younger customers is over 60%whereas public banks have only 32% customers under the age of 40. Private Banks alsohave a much higher share of the more profitable mass affluent segment.New channel – Mobile banking is expected to become the second largest channel forbanking after ATMs: New channels used to offer banking services will drive the growthof banking industry exponentially in the future by increasing productivity and acquiring
  19. 19. new customers. During the last decade, banking through ATMs and internet has showna tremendous growth, which is still in the growth phase. After ATMs, mobile banking isexpected to give another push to this industry growth in a big way, with the help of new3G and smart phone technology (mobile usage has grown tremendously over the years).This can be looked at as branchless banking and so will also reduce costs as there is noneed for physical infrastructure and human resources. This will help in acquiring newcustomers, mainly who live in rural areas (though this will take time due to technologyand infrastructure issues). The IBA-FICCI-BCG report predicts that mobile bankingwould become the second largest channel of banking after ATMs.Financial Inclusion Program: Currently, in India, 41% of the adult population don’t havebank accounts, which indicates a large untapped market for banking players. Under theFinancial Inclusion Program, RBI is trying to tap this untapped market and the growthpotential in rural markets by volume growth for banks. Financial inclusion is thedelivery of banking services at an affordable cost to the vast sections of disadvantagedand low income groups. The RBI has also taken many initiatives such as FinancialLiteracy Program, promoting effective use of development communication and usingInformation and Communication Technology (ICT) to spread general banking conceptsto people in the under-banked areas. All these initiatives of promoting rural banking aretaken with the help of mobile banking, self help groups, microfinance institutions, etc.Financial Inclusion, on the one side, helps corporate in fulfilling their socialresponsibilities and on the other side it is fueling growth in other industries and so as awhole economy.
  20. 20. More stringent capital requirements to achieve as per Basel III: Recently, the RBIreleased draft guidelines for implementing Basel III. As per the proposal, banks willhave to augment the minimum core capital after a stringent deduction. The two newrequirements – capital conservative buffer(an extra buffer of 2.5% to reduce risk) and acounter cyclical buffer (an extra capital buffer if possible during good times) – have alsobeen introduced for banks. As the name indicates that the capital conservative buffer canbe dipped during stressed period to meet the minimum regulatory requirement on corecapital. In this scenario, the bank would not be supposed to use its earnings to makediscretionary payouts such as dividends, shares buyback, etc. The counter cyclicalbuffer, achieved through a pro-cyclical build up of the buffer in good times, is expectedto protect the banking industry from system-wide risks arising out of excessiveaggregate credit growth.The above table reveals that even under current Basel Norm II, Indian banks followmore stringent capital adequacy requirements than their international counterparts. ForIndian Banks, the minimum common equity requirement is 3.6%, minimum tier I capitalrequirement is 6% and minimum total capital adequacy requirement is 9% as against2%, 4% and 8% respectively recommended in the Basel II Norm. Due to this the capitaladequacy position of Indian banks is at comfortable level. So, going ahead, they shouldnot face much problem in meeting the new norms requirements. But as we saw earlier,private sector banks and foreign banks have considerable high capital adequacy ratio,hence are not expected to face any problem. But, public sector banks are lagging behind.So, the Government will have to infuse capital in public banks to meet Basel IIIrequirements. With the higher minimum core Tier I capital requirement of 7-9.5% andoverall Tier I capital of 8.5-11%, Banks ROE is expected to come down.Increasing non-performing and restructured assets: Due to a slowdown in economicactivity in past couple of years and aggressive lending by banks many loans have turnednon-performing. Restructuring of assets means loans whose duration has been increasedor the interest rate has been decreased. This happens due to inability of the loan takingcompany/individual to pay off the debt. Both of these have impacted the profitability ofbanks as they are required to have a higher provisioning amount which directly eats intothe profitability. The key challenge going forward for banks is to increase loans andeffectively manage NPAs while maintaining profitability.Intensifying competition: Due to homogenous kind of services offered by banks, largenumber of players in the banking industry and other players such as NBFCs, competition
  21. 21. is already high. Recently, the RBI released the new Banking License Guidelines forNBFCs. So, the number of players in the Indian banking industry is going to increase inthe coming years. This will intensify the competition in the industry, which will decreasethe market share of existing banks.Managing Human Resources and Development: Banks have to incur a substantialemployee training cost as the attrition rate is very high. Hence, banks find it difficultmanage the human resources and development initiatives.Currently, there are many challenges before Indian Banks such as improving capitaladequacy requirement, managing non-performing assets, enhancing branch sales &services, improving organization design; using innovative technology through newchannels and working on lean operations. Apart from this, frequent changes in policyrates to maintain economic stability, various regulatory requirements, etc. are additionalkey concerns. Despite these concerns, we expect that the Indian banking industry willgrow through leaps and bounds looking at the huge growth potential of Indian economy.High population base of India, mobile banking – offering banking operations throughmobile phones, financial inclusion, rising disposable income, etc. will drive the growthIndian banking industry in the long-term. The Indian economy will require additionalbanks and expansion of existing banks to meet its credit needs.CEMENTIndia is the world’s second largest producer of cement. Indian cement industry hasoutpaced the growth rates of other prominent industries in the country on the back offactors, such as rising demand from the housing sector, increased activity ininfrastructure, and construction recovery. Recent industry developments and thegovernment supportive policies are attracting global cement giants and sparking off aspate of mergers & acquisitions to spur growth.Our report has found that, the Indian cement industry sustained its growth rate even inthe tough conditions of economic slowdown. Cement production is expected to increaseabove 9% year-on-year during 2010-11 against the previous fiscal year. Almost everycement major expanded their installed capacity in the backdrop of the governmentbacked construction projects as these projects have created strong demand for cement inthe country. Moreover, it is anticipated that the industry players will continue to increasetheir annual cement output in coming years and the country’s cement production willgrow at a CAGR of around 12% during 2011-12 - 2013-14 to reach 303 Million MetricTons.At the regional front, Southern Region (including Andhra Pradesh, Tamil Nadu, andKarnataka) was leading the country in terms of cement production in 2009-10. Sufficientraw material availability and various incentives provided by the state governments makethis region lucrative for investments. Numerous domestic and international cementcompanies are striving hard to establish their production base in this region.India cement production increased by 6.7% to 230.50 million tonne in FY 2011-12, as sagainst 4.5% increase to 216.0 million tonne in FY 2010-11. But the pace of growth hasbeen decelerating sharply in the recent times from robust 17.0% rise in November 2011
  22. 22. to modest 7.1% in March 2012. Still the second half has recorded much better growththan the first half of FY 2011.12.Cement dispatches of members of Cement Manufacturers Association (CMA) improvedby 6.1% to 17.97 million tonne while their production grew by 5.2% to 17.91 milliontonne in March 2012. In FY 2011-12, the members of CMA recorded 6.3% rise incement production to 179.79 million tonne and 6.5% increase in cement dispatches to178.90 million tonne. The cement production and dispatches of mini cement plants aswell as that of Holcim group companies, ACC and Ambuja Cement are not part of dataprovided by CMA.India recorded impressive 10% growth in demand for cement in the quarter ended March2012, as against a nominal growth of 5.6% in the nine months ended December 2011,over the same period of the previous year. Southern region remains plagued with overcapacity, but here too there are signs of improvement in demand. In the southern region,the demand for cement improved by 9.4% in the quarter ended March 2012, as against3% fall in demand during the nine months ended December 2011, as per India Cements.Ambuja Cements indicated that the cement demand over the last few months have beenrobust, backed by revival in infrastructure and construction activities. But the companycautioned that despite improved realization, the cost-push from higher energy cost andrail freight increase is expected to keep the profit margin under pressure.Financial performanceACC consolidated revenues during the quarter were up 18% to Rs 3044.95 crore mainlydue to 20% growth in cement business to Rs 2854.94 crore which forms 94% ofrevenues. OPM worsened by 140bps to 21.3% mainly due to rise in power, fuel andutilities costs despite fall in purchase of traded cement, employee and raw material costsas % to sales which led to only 10% rise in operating profits to Rs 647.73 crore. PATwas down by 57% to Rs 151.55 crore during the quarter despite higher other income asthere was an EO of Rs 335.38 crore related to change in depreciation policy fromstraight line to written down value on captive power plants. While the company results sbenefited from better volumes during the quarter, manufacturing costs and realizationswere affected by steep escalations in the cost of inputs such as coal, fly ash and gypsum.The cost of transportation also rose significantly as a result of the hike in rail freight andincrease in diesel prices.Another Holcim group Company, Ambuja Cement posted 23% de-growth in net profitsto Rs 312.22 crore on 20% growth in revenues to Rs 2660.93 crore during the quarterended March 2012. OPM improved by 80 basis points to 29% which led to 23% rise inoperating profits to Rs 772.1 crore. PBT before EO was up by 29% to Rs 721.48 croredue to significant increase in other income and comparatively lower increase indepreciation charges. There was an EO expense of Rs 279.13 crore on account ofonetime charge arising out of change in depreciation policy from fair value to writtendown value on captive power plants against nil and effective tax jumped by 200 basispoints to 29% leading to 23% de-growth in PAT to Rs 312.22 crore. Profit after tax forthe current quarter would have been higher by Rs 195.29 crore to Rs 507 crore, if thecompany continued to use the earlier method of depreciation. This change would haveno effect on EBITDA and cash profit for the quarter ended March 2012.
  23. 23. Aditya Birla group Company Ultratech Cement recorded 19% rise in Net Sales to Rs5391.57 crore for quarter ended March 2012. Operating margins improved by 60bps to24.5% due to decline in freight& transport, employees and consumption of raw materialscosts as % of sales. The resulting operating profits grew by 22% to Rs 1319.1 crore.While other income jumped by 225% to Rs 145 crore during the quarter, interestexpenses declined by 29% to Rs 58.56 crore and depreciation rose at a marginally lowerrate of 3% to Rs 233.21 crore thereby leading to 43% growth in PBT to Rs 1172.3 crorebut 1500bps increase in tax rate to 26% moderated PAT growth to 19% to Rs 867.32crore.The results of Ultratech Cement for the year ended 31st March 2011 have been recastedto include Samruddhi Cement Limited performance for the period 1st April 2010 sto 30th June 2010 for a like-for-like comparison. The results are strictly not comparablewith the corresponding period of the previous year. Based on re-casted figures, for thefinancial year ended March 2012, Net Sales increased to Rs 18166 crore against Rs15406 crore in FY11. PBIDT also increased to Rs 4519 crore compared to Rs 3453crore. PAT increased from Rs 1719 crore to Rs 2446 crore.India Cements, the southern cement major has registered 17% increase in net profit to Rs64.92 crore during the quarter ended March 2012 on 12% growth in sales to Rs 1118.48crore. The growth was backed by a smart recovery in the selling prices and sustainedefforts on cost reduction through better blending and reduction of power and fuelconsumption.The growth was backed by a smart recovery in the selling prices and sustained efforts oncost reduction through better blending and reduction of power and fuel consumption.This performance was backed by an improved selling price and sustained efforts on costreduction through better blending and operating parameters. There was flat growth indemand in South, which together with the capacity addition in the region forced lessercapacity utilization of the industry. The rise at the bottom line was led by smartimprovement in operating performance since OPM jumped by 140bps to 19.5% due tofall in Raw material as well as Transportation costs despite increase in Power& Fuel andstaff costs with operating profits subsequently up by 20% to Rs 217.64 crore.FY12 sales of India cements grew 20% to Rs 4215.19 crore. OPM jumped by 910bps to21.7% leading the operating profits growth by 107% to Rs 915.14 crore. Net profit grew330% to Rs 292.97 crore on the back of muted increase in depreciation charges.Production and dispatch numbersDuring the quarter, Ultratech combined cement and clinker sales of grey cement were s11.54 MMT (10.70 MMT), for white cement 1.6 LMT (1.5 LMT) and for wall care putty1.1 LMT (0.8LMT). During the year, the combined cement and clinker sales of greycement was 40.73 MMT (39.74 MMT), for white cement 5.6 LMT (5.5 LMT) and forwall care putty 3.7 LMT (2.9 LMT).During the 4 th quarter, India cements produced 19.66 lakh tons of clinker (17.77 lakhtons), the cement production was at 25.11 lakh tons (24.72 lakh tons) and achieved a sale
  24. 24. of 25.28 lakh tons as compared to 25.32 lakh tons. The clinker sale was at 0.72 lakh tonsas compared to 0.17 lakh tons.Other developmentsUltratech initiative towards setting up of additional clinkerisation plants at Chhattisgarh sand Karnataka together with grinding units, bulk packaging terminals and ready mixconcrete plants is progressing on schedule and are expected to be operational from earlyFY14. Consequently, the company cement capacity will be enhanced by 10.2 mtpa. sIn July 2011, Orient Paper and Industries indicated that it would hive off its cementdivision to a wholly owned subsidiary Orient Cement, which will subsequently be listed.In FY 2011-12, the company derived 56% of revenues from cement, 30% from electricfans and 14% from paper and boards. The company reported 26% rise total income to Rs2512.93 crore and 48% rise in net profit to Rs 212.28 crore. The company indicated thatthe cement division, proposed to be hived off into Orient Cement, recorded profit of Rs237.81 crore in FY 2011-12. Thus, the hived off cement entity profit is more than the sprofit of the pre-restructuring cement cum paper cum electric fan entity! This is due tooverwhelming losses in its paper division.Cement demand recorded better growth in the quarter ended March 2012The growth in cement demand has registered a marginal improvement to 6.6% as against4.7% in the previous year as per the information furnished by CMA. However furtheranalysis reveal that during the last quarter of this year, the demand had moved up by animpressive 10% as compared to a nominal growth of 5.6% in the previous nine months.Similarly in south, the demand improved by 9.4% in the last quarter as opposed to anegative growth of 3% during first 9 months of the fiscal. While the all India capacityutilization was at 75%, the utilization of the industry in south was only 63% though thecompany achieved a 67% utilization.Economic growth to facilitate acceleration in cement consumptionIndia cements indicated that as the Prime Minister Economic Advisory Council has sprojected a GDP growth of 7.5 to 8% for the year 2012-13, we can minimum expectsimilar growth in cement demand. In addition, there are certain positive developmentson the global front, with the US economy estimated to grow by 2% in 2012 and forwardlooking indicators of OECD showing improvement in the advanced countriesoutlookand prospects.With the industrial sector showing signs of revival in the last quarter and given thegovernment intention to boost the agricultural development and a fillip to industrial sgrowth, the projected growth in GDP could well be achievable. The recent proposal ofthe Reserve Bank of India in its Credit Policy to reduce Repo rates by 50 basis points isalso expected to soften the housing loan interest rates which also augur well for theindustry growth prospects. s
  25. 25. Total productionThe cement industry comprises of 125 large cement plants with an installed capacity of148.28 million tonnes and more than 300 mini cement plants with an estimated capacityof 11.10 million tonnes per annum. The Cement Corporation of India, which is a CentralPublic Sector Undertaking, has 10 units. There are 10 large cement plants owned byvarious State Governments. The total installed capacity in the country as a whole is159.38 million tonnes. Actual cement production in 2002-03 was 116.35 million tonnesas against a production of 106.90 million tonnes in 2001-02, registering a growth rate of8.84%. Major players in cement production are Ambuja cement, Aditya Cement, J KCement and L & T cement. Apart from meeting the entire domestic demand, the industryis also exporting cement and clinker. The export of cement during 2001-02 and 2003-04was 5.14 million tonnes and 6.92 million tonnes respectively. Export during April-May,2003 was 1.35 million tonnes. Major exporters were Gujarat Ambuja Cements Ltd. andL&T Ltd. The Planning Commission for the formulation of X Five Year Plan constituteda Working Group on Cement Industryfor the development of cement industry. TheWorking Group has identified following thrust areas for improving demand for cement;Further push to housing development programmes; Promotion of concrete Highways androads; and Use of ready-mix concrete in large infrastructure projects. Further, in order toimprove global competitiveness of the Indian Cement Industry, the Department ofIndustrial Policy & Promotion commissioned a study on the global competitiveness ofthe Indian Industry through an organization of international repute, viz. KPMGConsultancy Pvt. Ltd. The report submitted by the organization has made severalrecommendations for making the Indian Cement Industry more competitive in theinternational market. The recommendations are under consideration.Cement industry has been decontrolled from price and distribution on 1st March 1989and de-licensed on 25th July 1991. However, the performance of the industry and prices
  26. 26. of cement are monitored regularly. Being a key infrastructure industry, the constraintsfaced by the industry are reviewed in the Infrastructure Coordination Committeemeetings held in the Cabinet Secretariat under the Chairmanship of Secretary(Coordination). The Committee on Infrastructure also reviews its performance.Technological changeContinuous technological upgrading and assimilation of latest technology has beengoing on in the cement industry. Presently 93 per cent of the total capacity in theindustry is based on modern and environment-friendly dry process technology and only7 per cent of the capacity is based on old wet and semi-dry process technology. There istremendous scope for waste heat recovery in cement plants and thereby reduction inemission level. One project for co-generation of power utilizing waste heat in an Indiancement plant is being implemented with Japanese assistance under Green Aid Plan. Theinduction of advanced technology has helped the industry immensely to conserve energyand fuel and to save materials substantially.India is also producing different varieties of cement like Ordinary Portland Cement(OPC), Portland Pozzolana Cement (PPC), Portland Blast Furnace Slag Cement (PBFS),Oil Well Cement, Rapid Hardening Portland Cement, Sulphate Resisting PortlandCement, White Cement etc. Production of these varieties of cement conform to the BISSpecifications. Also, some cement plants have set up dedicated jetties for promotingbulk transportation and export.After posting the poorest show in a decade in 2010-11, at sales growth of less than fiveper cent, India’s cement industry put up a better performance in financial year 2011-12,thanks to the robust demand revival in the second half of the year.The 330-million-tonne industry grew 6.4 per cent against less than five per cent in FY11.This was better than the cement makers’ earlier estimates of six per cent. However, laterin the year when demand revived, industry officials and sector analysts turned positive,with growth projections of 6.5-7 per cent. The industry sold 223.02 million tonnes of thebuilding material, compared with 209.5 million tonnes in FY11. Production, too, rose to223.6 million tonnes against 210.5 million tonnes, up 6.2 per cent.During the first half of the year (April-September), the industry managed to grow a mere3.23 per cent. However, the strong revival in demand from the third quarter of FY12helped cement makers raise prices, which improved their profitability. In November, theindustry notched up sales growth of 19.5 per cent (one of the highest in many years in amonth). Though, the demand growth later tapered, it remained in double digits tillFebruary. It was during this time that prices hit an all-time high of Rs 300 for a 50-kgbag. This level prevails even now.“The industry witnessed demand rise across the country. In particular, western, centraland northern regions were the main contributors for strong demand revival,” says theresearch head of a Mumbai-based brokerage.
  27. 27. However, the ending month of FY12 could not remain in line with the earlier fewmonths, as sales dipped to single-digit. In March, the industry sold 22.5 million tonnes, arise of 7.5 per cent against the corresponding month last year.Going forward, industry officials are optimistic and project growth at eight to nine percent. The Holcim group of companies — ACC and Ambuja Cements — have chalkedout expansion plans worth Rs 5,000 crore, while Aditya Birla Group’s UltraTechCement has plans to add 25 million tonnes of capacity in the next few years.According to the latest report from the working group on the industry for the 12th five-year Plan (2012-17), India would require overall cement capacity of around 480 milliontonnes. This would mean the industry will have to add another 150 million tonnes ofcapacity during the period.Currently, the top players — UltraTech, ACC, Ambuja Cements, Jaiprakash Associates,India Cements — and Shree Cement, collectively control more than half of the cementmarket in the country. There are 40 players in the industry across the country.OutlookAccording to Ultratech, the cement industry is likely to grow over 8 per cent linked tothe Government focus on infrastructure development. The surplus scenario is likely to scontinue for the next three years. Moreover, continuing rise in input costs will adverselyimpact margins.The current quarter is set to remain better for cement sector due to decent growth indemand, elevated cement prices and effective reduction in excise duties. Part of thesegains will be lost due to higher cost of fuel and power, though off late the global coalprices are also easing. With massively expanded capacities, better growth in demand will
  28. 28. be the only panacea for the Indian cement industry, which battles low capacityutilization, elevated costs and allegations of cartelization.Pharma: Growth momentum would sustainIn Global Pharmaceutical market, generics segment growth continues to outpace brandeddrugs, with several blockbuster drugs like Lipitor, Zyprexa, Geodon, Seroquel, Plavix,Combovir and Actos recently lost patent. The patent expiries are expected to peak out in2012 and expected to steadily decline by the 2015.Notably, the Indian Pharmaceutical market is on the path of becoming a major globalmarket and is one of the major growth drivers in the Asian subcontinent apart fromchina. The year 2011 was another year of robust growth for the Indian Pharmaceuticalindustry as it grew by 15%, reaching a market size of more than Rs 60000 crores. Thishigh growth rate is attributable to the increase in investment by the market players, highpenetration into the rural areas, increasing purchasing power of the consumers andimproving availability of healthcare facilities. The anti-infective were the highestcontributor to the Indian Pharmaceutical market (in terms sales) but the chronicstherapies steadily picking its share. The chronic therapies like Cardiology, GI, Derma,Diabetes continue to outgrow the market.On the CRAMS front, The Indian players are focusing on providing services across thevalue chain spanning from development stage to commercial scale production. Also,with the several drugs going off patent and big Pharma increasing their exposure to costefficient sourcing locations, opportunities remain favorable for Indian CRAMS players.The Aggregate sales of 153 Pharmaceuticals companies grew by 17% YoY in Q1 13 FYto Rs 22094 crore driven by 17% sales growth in domestic players to Rs 20532 crore.Notably, the growth was on the back of continued upside from First-to-File productssuch as Lipitor, Caduet, Geodon and Plavix etc in US market for the Indian frontlineplayers coupled with strong growth from domestic market. Generally, The first genericapplicant to file a paragraph IV certification is awarded 180-day market exclusivityperiod by the USFDA is also called First-to-Files. Also, the depreciation (YoY) of INRagainst major currencies such as USD (26%), GBP (22%), EURO (9%) and JPY (28%)helped the top line growth.The Pharma sector operating profit margins fell by sharp 440 bps YoY to 17.7% on the sback of increased staff costs coupled with higher R&D spends. Eventually, Operatingprofit declined by 7% YoY to Rs 3914 crore. After the 8% growth in other income to Rs540 crore, Profit before interest depreciation and tax was down by 5% YoY to Rs 4454crore. With the sharp 103% rise in interest cost to Rs 1171 crore (factors forex losses)and 14% increase in depreciation to Rs 832 crore, Profit before Tax was down by 28%YoY to Rs 2451 crore. Further, after the steep rise in effective tax rate by 780 bps YoYto 24.2% net profit was down by 34% YoY to Rs 1858 crore.During the quarter, The 147 domestic Pharma companies grew by robust 17% YoY toRs 20532 crore. However, operating profit margins fell by 420 bps YoY to 17.6% on theback higher staff cost coupled with the elevated R&D expenditure. Accordingly,operating profit declined by 6% to Rs 3609 crore. After 7% growth in other income to
  29. 29. Rs 459 crore, PBIDT was lower by 5% YoY to Rs 4069 crore. With the sharp 103% risein interest cost to Rs 1170 crore and 13% increase in depreciation to Rs 804 crore, PBTfell by 30% YoY to Rs 2094 crore. Further, after the sharp rise in effective tax rate by880 bps YoY to 23% net profit of the domestic players was down by 37% to Rs 1613crore.Among the frontline players Cipla come up with standout performance on the back ofexcellent growth from domestic business coupled with robust growth in export business(upside from Lexapro and Vancocin opportunities) during the quarter. Also, SunPharmaceuticals posted another excellent quarter on the back of continued upsides fromthe Lipodox sales, robust growth from Taro Pharma coupled with currency tailwinds.Ranbaxy laboratories posted excellent growth in top line driven by strong sales fromexclusive products (Lipitor and Caduet) coupled with continued good growth from thebase business. However, the bottom-line has turned to deep red on account of higherforex losses during the quarter. The generic Lipitor touched peak market share of 50%and generic caduet 55% during the exclusivity period, which ended on May 29th 2012.Further, It expects to maintain the leadership Atorvastatin market with 40% market shareagainst the Indian and International competitors going forward. Also, The US basebusiness further strengthened to around USD 80-85 million during the quarter andexpected to grow to US 100 million by the Q1 CY13.Lupin has come up with robust growth in the top line and the bottom-line despite highereffective tax rate during the quarter. The healthy growth in sales driven by the sharpgrowth from US, Japan coupled with good growth from domestic market. Also,Glenmark Pharmaceuticals started the fiscal with moderate performance. However, Theelevated R&D expenditure at Biocon continues to hit margins. Notably, The India sleading CRAMS major Divis Laboratories has come up with another robustperformance.However, revenues from 6 MNC players grew by moderate 11% YoY to Rs 1562 crorefor the quarter ended June 2012. Also, margins fell by sharp 550 bps YoY to 19.5% andaccordingly there was 14% decline in operating profit to Rs 305 crore. After the 13%growth in other income to Rs 81 crore, Profit before interest depreciation and tax wasdown by 9% YoY to Rs 385 crore. With no interest cost and after the 100% rise indepreciation to Rs 28 crore, PBT was lowered by 13% YoY to Rs 357 crore. But afterthe decline in effective tax rate by 100 bps YoY to 31.4%, the net profit for the 6 MNCplayers was lower by 12% YoY to Rs 245 crore.In the quarter ended June 2012, the Indian pharma benefited from continued upside fromFTFs (Lipitor, Caduet, Geodon, Plavix etc) in the US market, coupled with currencytailwinds and as well good growth in domestic formulation market. Further, the largenumber of patent expiries continues to offer strong growth prospects for generic playersin the developed markets going forward. Notably, The patent expiries are expected topeak out in 2012 and the growth momentum would sustain as most of Indian companieshave fairly well spread product pipeline till 2014.The Indian front line players have healthy pipeline of First-to-File (FTF) opportunitiesand few other are likely to benefit from the launch of niche, limited competitionproducts. Over the years, the quality of filings by the major Indian companies
  30. 30. significantly improved with complex molecules, non-orals (i.e. inhalers, injectables, oral contraceptive, ophthalmic etc) and Para IV/FTFs forming the increased share of the pipeline. Outlook The large number of patent expiries continues to offer strong growth prospects for the Indian frontline players in the developed markets. The growth momentum would sustain going forward as patent expiries are expected to peak out in 2012 with fairly well spread product pipeline. Also, The September 2012 quarter would witness upside from recent launches such as generic Actos and Singulair. Going forward the major generic launches to look for are Diovan, Tricor and Propecia during the current fiscal. Further, the Key challenges to the Indian Pharmaceutical Industry are increasing competitive pressure in the chronic segments, aggressive approach such as authorized generic by the innovators in the US, healthcare reforms in the European markets and possible implementation of the new pricing policy in India. Also, The US FDA (Food and Drug Administration) is expected to implement Generic Drug User Fee Act (GDUFA) program will from October 1st 2012. This would increase the costs for the generic players but will speed up the approval process for Abbreviated New Drug Application (ANDA by the US FDA. s) Textile: Textiles: Effective excise duty on branded garments eased slightly, but excise duty on MMF rose Union Budget has given mixed bag of response for the recommendations of Textile Industry. Some of the provisions in the budget that could have a direct and indirect bearing on the Textile and Clothing Industry are as follows. Budget Provisions:• The central plan outlay for the Textile Ministry was increased by 27% to Rs 7000 crore for FY2012-13 against revised plan expenditure of Rs 5503.30 crore in FY2011-12. The Total Plan and Non-plan expenditure for the Textile Ministry increased 23% to Rs 7836.41 crore for FY2012-13 against Rs 6445.57 crore in the revised estimates of FY2011-12.• The revised estimates for allocation of TUFS stood at Rs 3529.67 crore for FY2011-12 against budgeted estimates of Rs 2980 crore. Government has extended Technology Up gradation Fund Scheme (TUFS) for 12 th five-year plan. In this context, it has allocated plan outlay of Rs 2775.80 crore under TUFS for FY 2012-13, down by 21% on y-o-y basis. This scheme provides for reimbursement of 5% out of interest actually charged by the lending agencies for facilitating investments in modernization of Textile Jute Industries.• Government has announced a financial package of Rs 3884 crore for waiver of loans of handloom weavers and their co-operative societies. Of this Rs 2205 crore has been allocated for revival reforms and restructuring package for Handloom sector. Under this scheme fund is being provided for repayment of 100% of principal and 25% of interest as on date of loan becoming NPA and which is overdue as on 31 March 2010 in respect
  31. 31. of viable and potentially viable weavers with an overall ceiling of Rs 50,000 per individual beneficiary.• Further, to provide technical support for poor handloom weavers, it has proposed to set up Three Weavers Service Centers – one each in Mizoram, Nagaland and Jharkhand. It has also proposed to set up two more mega handloom clusters one to cover Prakasam and Guntur districts in Andhra Pradesh and another for Godda and neighboring districts in Jharkhand.• One power loom mega cluster to be set up in Ichalkaranji in Maharashtra; with budget allocation of Rs 70 crore.• A pilot scheme for promotion and application of Geo Textiles in the Northeastern region is proposed for 12th five-year plan with an outlay of Rs 500 crore.• Proposal to provide weighted deduction at 150 per cent of expenditure incurred on skill development in manufacturing sector Excise Duty:• Government in the Union budget FY2012/13 has increased Standard rate of excise duty from 10% to 12%. Thus the excise duty on the manmade fiber products would be increased from 10% to 12%. Consequently, merit rate of 5% is being enhanced to 6% while 1% excise duty applicable on 130 items is also being enhanced to 2% with a few exceptions.• The excise duty on readymade garments bearing a brand name or sold under a brand name is being enhanced to 12%. The rate of abatement on such readymade garments is being increased from 55 % to 70%. Hence, the tariff value for purposes of charging duty would be @ 30% of the retail sale price. Customs Duty:• Basic customs duty on Wool Waste (CTH 5103) is being reduced from 10% to 5% and that of Wool Tops (CTH 5105) is being reduced from 15% to 5%.• Basic Customs duty Aramid thread/ Yarn/ fabric (Speciality Threads) for manufacture of Bullet proof helmets for Defence and Police personnel is being reduced from 10% to Nil with Nil CVD and Nil SAD.• Full exemption from basic customs duty exemption is being provided to shuttle less looms, parts/components of shuttle less looms by actual users for manufacture, specified silk machinery viz. Automatic reeling silk reeling and processing machinery and their accessories including cocoon assorting machines, cocoon peeling machines, vacuum permeation machine, cocoon cooking machine, reeled silk humidifier, bale press and raw silk testing equipments.• The concessional 5% duty available to specified textile machinery under erstwhile Notification No. 21/2002-Customs dated 1.3.2002, superseded by Notification no.12/12- Customs dated 17th March, 2012 is being restricted only to the new textile machinery. Consequently second hand machinery would attract 7.5% basic customs duty. Budget Impact Extension of TUFS for the 12th five-year plan is welcoming for the Textile Industry. However, the allocation has been reduced by 21% in FY13. Cheer on allowing the concessional 5% duty on only new machines is offset by the 7.5% customs duty on the second hand machinery. Mostly, textile industry imports second hand machines for their
  32. 32. capacity building at lower capex. This may have a negative impact on weaving andprocessing industry in the midst of / or planning expansion. Further, the industryrecommendation of bringing in neutral fiber policy is kept aside with increase in theexcise duty on MMF. The Industry expectation on cut of excise duty on the brandedapparel was half met. While the excise duty has increased, the government has increasedabatement there by cutting the effective tax from 4.5% earlier to 3.6%.Companies to watch:Aditya Birla Nuvo, Raymond, Page Industries, S Kumar Nation Wide, Provogue, KewalKiran, Arvind Mills, JBF Industries, Century Enka, Garden Silk Mill, ESI, HimatsingikaSeide etcOutlookUnion Budget has been mixed bag for the textile industry. While the government hasextended its helping hand for unorganized handloom industry by financial package andloan waiver scheme; the concerns of spinning, weaving and processing industry leftunanswered. On the other hand, extension of TUFS scheme is a breather to the industry.However, the effective marginal reduction in the excise duty on branded apparel wasway short of industry expectations. Increase in excise duty on MMF products willfurther squeeze the already wafer thin margins of the MMF industry, which is hit byspike in crude oil based derivatives and sluggish demand.
  33. 33. COMPANY ANALYSISTorrent PowerTorrent Power Ltd. is an India-based company engaged in the electricity generation, transmissionand distribution. Torrent Power is one of the leading brands in the Indian power sector, promoted bythe Rs. 9592 crore Torrent Group. The Torrent Group is a multifaceted and dynamic group,dedicated to transforming life by serving two of its most critical needs - pharma and power. TorrentPower is the most experienced private sector player in Gujarat. Torrent Power foresaw the prospectsin the power sector much before the liberalization, when it took-over an ailing power cablecompany in 1989 (now known as Torrent Cables Limited) and successfully turned it around. Thehigh points of Torrents foray into power by the acquisitions of two of the India’s oldest utilities.The Surat Electricity Company Ltd and The Ahmedabad Electricity Company Ltd. Torrent turnedthem into first rate power utilities in terms of operational efficiencies and reliability of powersupply.Torrent Power Ltd. has reported net profit of Rs 2127.60 million for the quarter ended on December31, 2011 as against Rs. 1975.40 million in the same quarter last year, an increase of 7.70%. It hasreported net sales of Rs 18944.50 million for the quarter ended on December 31, 2011 as against Rs15587.30 million in the same quarter last year, a rise of 21.54%. Total income grew by 21.21% toRs.19150.10 million from Rs.15799.20 million in the same quarter last year. During the quarter, itreported earnings of Rs 4.50 a share.During the quarter, net sales increase by 21.54% to Rs. 18944.50 million from Rs.15587.30 millionin the previous quarter and Total Profit for the quarter ended December 2011 was Rs. 2127.60million grew by 7.70% from Rs. 1975.40 million compared to quarter ended December 2010. TheBasic EPS of the company is stood at Rs. 4.50 for the quarter ended December 2011 from Rs. 4.18for the quarter ended December 2010.At the current market price of Rs.219.00, the stock is trading at 8.59 x FY12E and 7.35 x FY13Erespectively. Earning per share (EPS) of the company for the earnings for FY12E and FY13E isseen at Rs.25.51 and Rs.29.78 respectively. Net Sales and PAT of the company are expected togrow at a CAGR of 16% and 19% over 2010 to 2013E respectively. On the basis of EV/EBITDA,the stock trades at 4.27 x for FY12E and 3.75 x for FY13E. Price to Book Value of the stock isexpected to be at 1.73 x and 1.40 x respectively for FY12E and FY13E. We expect that thecompany will keep its growth story in the coming quarters also. We recommend BUY in thisparticular scrip with a target price of Rs 247 for medium to long term investment.
  34. 34. Torrent Power EPS 201303(E) ! " # $ ! Year Stock Price Sensex Stock Ret. Market Ret. % ! % ! ! ! % ! ! % ! % ! ! !Beta 2.84341Rf !Em !Er !
  35. 35. & ()* Current Market Price 155Since the intrinsic value of Share is more than the market value, therefore the share is undervalued andworth buying.+ )* )* &- ,& %
  36. 36. IFL is bullish on Aditya Birla Nuvo and has recommended buy rating on the stock with a target ofRs 940 in its March 1, 2012 research report. Aditya Birla Nuvo has confirmed trend reversal afterprices closed above 200 DMA with spurt in volumes. This breakout has happened after long sconsolidation which formed like a rounding saucer pattern. The amplitude of breakout indicatesnear term target beyond 1000 levels corroborated with positive crossover in daily RSI. The MACDhas been also sustaining above the reference line thus supporting buying momentum in the counter.We recommend buying Aditya Birla Nuvo above Rs890 with stop loss of Rs865 for Target ofRs940. (Duration 7 days), says IIFL research report. . +/ $ " &0 1 * ")* ) 2 * 3 45 0 6 ) 7 8 ! &7 9 ) # 8 ! 2 + " $ : ) # 173 78 #;<1 6 % #3 78 ; 1 % 3 78 ! & ()* 8 " 8 ! 45 0 8 =& 0) 0 *8 $ >?%@ 7 )7 ) # ) 5 7 2 &4 # &4 ! ! ! ! !
  37. 37. % % % ! ! % % ! % % % ! ! 45 0 6 ) 7 () 8 8 ! 6 ) 8+ )* )* &- ,& %
  38. 38. Madras CementsCompany Analysis :- Madras Cements (MCL), a flagship company of the Ramco group, is a majorplayer in the blended cement category in south India. The company was incorporated in the year1957. MCL is the sixth largest cement producer, fifth largest in Market Capitalization in the countryand the second largest in South India.The Company undertook to replace the 4 cement mills at its Ramasamyraja Nagar Works, whichwere 20 years old, by a single new Combidan Cement Mill. The mill was commissioned at end ofthe year 1985. A 132 KVA sub-station and the limestone crushing plant were installed during thesame year. The project was commissioned during December of the year 1986. Two D.G. sets wereinstalled in the middle of the year 1988 to meet 60% of the unit power requirement at sJayanthipuram. The Company had set up the 4 MW windmill farm in the year 1992 at Muppandal,Kanyakumari district, Tamil Nadu. Asia largest one to be commissioned in the Private sector was sset up. All the 16 wind turbines of the company were commissioned in March of the year 1993. Inthe same year 1993, an additional capacity was created by adding 8 Nos. wind turbines of 250 KWeach at Muppandal wind mill farm taking the generation capacity to 6 MW. During the year 1994,MCL had upgraded the capacity of its Jayanthipuram Unit to 1.1 million tonnes and also upgraded
  39. 39. the cement mills capacity in R. R. Nagar. The Company substantially increased the capacity ofwindmills by installation of 70 more windmills. In the year 1995, the company enhanced powergeneration capacity at Jayanthipuram unit to 15.3 MW by commissioning an additional dieselgenerator set to maintain normal production in view of frequent power-cut and power tripping.During the year 1997, MCL had commissioned its third cement plant in Alathiyur; it was the secondin Tamil Nadu. The clinker plant of the Alathiyur unit was commissioned in March while thegrinding unit was commissioned in May of the same year 1997. The Company had embarked intoReady Mix Concrete business in the year 1998. Also in the same year, MCL made tie-up withVisakhapatnam Steel Plant (VSP) for procuring slag, a blast furnance residue and a crucial input forslag cement.MCL tied up with Gas Authority of India Ltd (GAIL) for supply of gas and the fuel supplyagreement was inked in 15th April of the year 1999. Also tied up with Oil and Natural GasCorporation (ONGC) for supply of 25,000 cu mtrs of gas per day from its Nallore well, nearMannargudi in Tamil Nadu. In the same year 1999, another one tie-up was made with Vizag SteelPlant for supply of slag. During the year 1999-00, the company slag grinding project at sJayanthipuram for manufacture of blended cement was commissioned and also the capacity of theAlathiyur unit was expanded by 0.2 million TPA. During the year 2000, the company had launchedthe Ramco Super Steel cement in Tamil Nadu. The Company second unit at Alathiyur with a scapacity of 15 lac tonnes was commissioned in January of the year 2001. The second klin at R.RNagar was upgraded in May of the year 2001 with the installation of fixed inlet segment to thecooler, new calciner and modifying pre heater cyclone, thereby increasing the capacity of the unit to11 lac TPA of blended cement. With the help of M.Tec, Germany, the company started new projectDry Motor Plant for manufacture of high technology construction products such as render, skimcoatand dry concrete and its production commenced from January of the year 2003 at Sriperumbudur.During 2004-05, The Company commissioned a 36 MW Thermal Power Plant at Alathiyur. TheCompany decided to establish grinding units in the states of Tamil Nadu, Andhra Pradesh and WestBengal in May of the year 2007. During October of the year 2007, MCL earmarked Rs 1.05 billioninvestments for set up the grinding mill at Kolaghat in Midnapore, West Bengal. With an eye ondiversification, MCL is planning to enter into industries such as sugar, pharmaceuticals, power &power equipments and textiles. As at March 2008, Madras Cements lines up Rs 15 billionexpansion. It will invest Rs 15.24 billion to increase its capacity.
  40. 40. Peer ComparisonFinancials ) ) ) ) ) ) ) A ) 1 3 1 3 1 3 1 3 1 3 1 3 1 3 * , ) & B" )C 7 )")& ) B)D* & + B B)D* & " * * $ 0 B ,+ B B ," B & $ 0$),)D* & + B$),)D* & $),6 $ 0")& ",* 5 ) @ # # , ) &+ )* && & + B 9 4 0 && + B : ,+ B
  41. 41. 5 ) @ $ # )D * , ) & && $ # ) @ 5 ) @$ # ) @ $ # )@ B & 0 ")5 )* : , &7 )* & ,& @ # 5 ) @ B )@ % @ #9 ) )* B )@ %+ )* B )@ % % D% : , ) @%+ 6 D % + )*")5 )*+ )*0 D %+ )*")5 )* ) @& E " B )@ ) & " B )@")& 9* " B )@")& 9* % @ + 6 D")& 9* %+ )* DValuation Techniques ) ) ) ) ) ) )A ) 9 )& 0 B0 0 $) 0 # ) & B0 0 5 ) ) ) @& $ ) 1$ 3$> ) 1@3. # : ,1 2)* )& ) 3 )7 1 5 )&2 3 &7%9 %A+%2 *& *" 6 5) , &7 1 )3 2" & # : ,1 )& 7()* 3. # D 1 2)* )& ) 3" & # D1 )& 7()* 3
  42. 42. . "" $ +" ) @ B &69 ")& 9*Since our Growth Rate (g) is greater than Required Rate of Return. Hence Assuming a two period model for DDMas in one period the growth rate will continuously decline till 8% that is less than ROR and in second period it will be constant on 8%. ! $( A ) ) B0 0 9) $( 6 " &) $ 0 & ()* # 7 9"9 $>" )7 $ & ()* &* 2 , 2 , **If we see the result from Discounted Cash Flow Method both its techniques i.e. DDM and FCF says that thestock is undervalued and intrinsic value is higher than the current market Price. But if we calculate theintrinsic value as per Relative Value Technique the stock price is overvalued which is giving an indicationthat stock should be sold. But still we take the average of all intrinsic Values it will come as Rs. 240/share.Hence we should buy the stock.Technical Analysis
  43. 43. Dr Reddy LabsDr Reddy labs is an integrated pharmaceutical conglomerate registered in both the Bombay stockexchange and the new york stock exchange. To find out whether the stock of dr reddy labs isundervalued or overvalued , dcf valuation has been performed. In dcf valuation the free cash flowsof the company and are discounted by using its wacc. After the calculation of the wacc it isobserved that the intrinsic value of a stock of dr redy labs is Rs. 2262.5 but at the same time thestock traded in both bse and nse is going at a price of Rs.1965 so it can be safely assumed that thestock is undervalued.Forecasting of fcff:-FCF 2010 2011 2012 2013Sales revenue 70277 74693 96737 114051 6.28% 29.51% 17.9%Operating Cost 34332 27634 35053 74133 37% 36.24% 65%Taxes -985 -1403 -4204 -11405 1.88% 4.35% 10%Net Investment -31 4918 1644 5000Change in WC 9245 6397 6065 6975 15%FCFF 25746 34341 49771 16538 -66.77%Avg Fcff Growth 31.57%In this historical growth rates of sales growth is taken and operating costs are taken as a percentage of the salesrevenue.FCFF = sales revenue – operating costs – taxes – net investment – change in working capitalNext the value of the enterprise is being calculated. Its wacc value is 11% by analysing its capital structure.Terminal value is calculated by Gordon growth model. + 6 )*()* 8 9 )*5 F 0 , ) )& # G1 ;* @ 6 )& # * * @ ) 3 > 1 & ) % * @ 6 )& # * ) 3. "" !+ 6 )*()*9 )*$ F 0 H")& 9* @ + 6 ")& !#* ) & ) !+ 6 )* ) H 5 & ()* A ) A ) A ) A ) A )9"99 H H H H H & ) ! ! ! ! !
  44. 44. + 6 )*B)* H$ & ()* H+ )* 5 &()* & #) B)* # : , & )* * 0 )& & ) 4 *& D * - ) $ 8 9) B)* >+ )*& ) &) 0 @ 9) ()* # : , 8 + )* 5 & B)* % D 9) B)* # : , ) $ + )* * 0 ) 9) 5 & B)* H ) B)*The share price calculated here is 2262.41 which is higher than the market price. So this stock is undervalue.Technical Analysis:-
  45. 45. + + $ .“Tata Power management has guided for 70:30 blending of coal at Mundra against 60:40 currently.Steam blow-out is completed for Unit-3 and boiler light-up done for Unit-4 and Unit-5. ForMaithon, coal transportation facility has now been stabilized with capacity of transporting10000tons/day of coal by trucks. Construction work on railway link is expected to start by Augustend. TPWR will declare 85% PAF only for 75% of Maithon capacity (PPA with Punjab not yetapproved) while the remaining capacity will be sold on merchant.”“We cut our earnings estimates for FY13E/FY14E by 4.7%/4.6% respectively, factoring in highercash cost at Bumi (assuming $42/ton now vs. earlier assumption of $39/ton) and fine tuning of ourassumptions for other businesses. Consequently our revised EPS for FY13E/FY14E stands atRs4.7/4.6 respectively. Considering that most of its other businesses (Mumbai, Delhi, Captive,others) are steady state and would be little variations in valuing these businesses, stock performancewill be driven by (1) global coal prices and (2) Mundra tariff escalation (if any).”“We do not expect positive surprises from both the factors. However, in our view, valuations arealready factoring in the negatives, thus limiting the downside. Maintain Hold rating with revisedtarget price of Rs95/Share vs earlier PT of Rs98/share,” says Emkay Global Financial Servicesresearch report.A ) I$ "+ ! ! ! $ & ()* $ *D * I$ "+ #2 +" $
  46. 46. Risk free rate is assumed on basis of current lending rates of the banksExpected market return is considered same as last year’s return The current market price of Reliance power is 85.50 According to earnings model the market price of the share should be 8.609 This shows that the stock is highly over valued+ )* )* &- ,& %