Bulls On The Run
Sanket Dewarkar / 07 Jul 2016
1000 companies, 25 sectors and your hard-earned money—where to invest DSIJ Research Team comes up with this quick analysis while the vitals are illustrated in the pages forward.We bring you the vital financial data of TOP 1000 companies by market capitalisation. We constantly get requests from our valued reader-investors for financial data and keeping our promise, we lay down for you the financial data for Top 1000 companies by 25 sectors in easy readable format. We are sure that financial data by sectors along with the detailed view on sector dynamics will be an interesting read for you!
DSIJ Research Team comes up with this quick analysis while the vitals are illustrated in the pages forward.
We bring you the vital financial data of TOP 1000 companies by market capitalisation. We constantly get requests from our valued reader-investors for financial data and keeping our promise, we lay down for you the financial data for Top 1000 companies by 25 sectors in easy readable format. We are sure that financial data by sectors along with the detailed view on sector dynamics will be an interesting read for you!
The performance of benchmark index BSE Sensex has increased by 20.93 per cent from last two years till July, 2016. Meanwhile, we can see sectoral movement on Indian capital markets which can be illustrated in detail and we make an attempt to do so.
Automobile sector has outperformed benchmark index and posted an increase about 48.68 per cent till date. Automobile is need of an hour for customers in recent past. The consumer driven demand has picked up in the country which further led to better profitability for the industry. The interest rate reduction cycle also boosted demand for the automobiles in India. Going forward, 7th Pay Commission recommendations now have been cleared by the NDA government in the Centre and implementation of the same will also boost demand in near future.
Performance of automobile index against BSE SENSEX is given below:
Banking industry is experiencing issues related to ballooning bad loans from last couple of years. However, Bankex outperformed BSE SENSEX and rose by 43.18 per cent for the period. The Bankex is increased by majority of the backing of private sector players which are facing lower stressed assets situation. Resolving non-performing assets situation, the Reserve Bank of India (RBI) has now set a goal for zero bad loans by FY17. The government is also trying to nullify the effect by financial inclusion in banking system mostly in public sector banks.
The performance of finance sector for past two years has witnessed quite in-line with the benchmark index BSE SENSEX. The industry still does not have stressed assets problem. The sectoral index finance outperformed BSE SENSEX and has been increased by 43.51 per cent during last two years. RBI has introduced a slew of changes in regulations related to NBFCs due to requirement of capital adequacy, NPA recognition and provisioning and tightening rules in a phased manner over the next four years are on the cards.
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Computer software sector remained defensive one during the past couple of years. The IT index too outperformed BSE Sensex and rose by 24.89 per cent. Meanwhile, the fluctuation of currencies impacting sector as global exposure of the industry. In short term, the industry may oversee the BREXIT impact due to depreciation in British pound against the USD.
Iron and steel sector is also remained a matter of focus on the D-Street. The industry tackled lots of hurdles from last couple of years such as breakdown of global commodity prices, dumping of iron and steel from China to the entire world, reduction in demand from infrastructure sector. The metal index underperformed BSE SENSEX and declined by 15.14 per cent.
Oil & gas sectoral index underperformed BSE Sensex and increased just 4.17 per cent. The reason for low performance as fall in crude oil prices globally. Being major importer of oil, Indian exploration companies witnessed fall in top line for couple of years. Meanwhile, oil marketing companies gained as increment in gross refining margin has been significant.
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Power sectoral index underperformed BSE SENSEX and increased by 16.15 per cent during last couple of years. The power sector is witnessing merger and acquisition deals of more than 166 per cent during the year to date. The concerns related to debt trap is a major concern for the power sector and defaulting loans raised bottleneck in the banking system.
Personal care sector is a defensive sector and has witnessed in-line growth with BSE SENSEX. The FMCG sectoral index increased by 23.34 per cent and outperformed the benchmark index. The fierce competition among the listed and private sectoral peers, the growth has slowed down in FY16. The boost in consumption cycle in future will give rise to futuristic demand growth.
Consumer durable industry was honoured with the top performer tag among all 25 sectors. The consumer durable index outperformed BSE SENSEX and was boosted by 81.72 per cent within two years’ time period. The purchasing power of the customer increased which lead to boost top line of companies. The 7th Pay Commission recommendations implementation also will soon increase in consumption demand in near future. The consumer durable sector remained defensive and gave shining returns to the investors.
After observing majority of the sectoral indices, the industries which do not have indices discussed here:
The performance of agriculture is bearing lower financials. The consecutive two years’ drought like situation in the country deteriorated companies’ top line in general basis. Meanwhile, current year IMD’s monsoon forecast and progress of monsoon will decide future of these companies. Above normal monsoon predictions giving headroom to grow in current financial year. The fertiliser sector is also witnessing pressure as agriculture is showing lower performance in past two years. The sector’s net profit showed de-growth in respect of the revenue and EBITDA level.
The auto ancillary industry dependent on automobile industry. The interdependent sector which will grow in-line with increment in automobile sales. Meanwhile, the industry has more exposure in European Union, BREXIT impact which may increase tension going forward.
The cement industry correlated with the construction and infrastructure development in the country. India's cement demand is likely to improve gradually in the medium term in line with recovery in infrastructure, investment cycle and overall economy. Cement production has increased at a CAGR of 6.7 per cent to 270.32 million tonnes over FY07 to FY15. The availability of fly-ash from thermal power plants and use of advance technology has increased production of blended cement.
As India's current per capita consumption of cement stood at around 225 kg which is much lesser than the developed and other developing economies. There is significant opportunity for the sector to improve consumption and rising demand. The demand will be supported by infrastructure development in tier 2 and tier 3 cities. The cement consumption growth rate in the country has decreased to 5.5 per cent in FY15 from 9.56 per cent in FY01.
Engineering sector witnessed de-growth during past couple of years. Majority of the sector comprises companies which fall into servicing capital goods. The stalled projects in the industry stuck up the growth in spite of huge order book in the books of accounts. The slower execution of the projects and increasing debt caused pressure on bottom line of the sector.
The hospitality sector observed turn around in profitability in FY16. The sector has net loss for previous two consecutive fiscal years. The luxurious demand from customers will rise in future as implementation of 7th Pay Commission recommendations. Various schemes for tourism and lowering air fare giving to increase travelling business.
Indian packaging sector is growing market for plastic market. The plastics and polymer consumes about 12.8 million metric tonnes (MMT) annually against global consumption of 285 MMT per year. The packaging industry in India is expected to reach USD 73 billion in 2020 from USD 32 billion in FY15. The Plastics industry is one of the fastest growing industries in India. Upcoming fiscal years plastic pipes and packaging products are expected to be the key revenue drivers. Expectations of a normal monsoon, coupled with higher government spending in water supply, sanitation, and affordable housing, predict well for plastic-pipes demand.
Textile sector is the most prominent sector in India and government’s textile policy will ease industry to grow further. The sector has worries for high cotton prices, global factors influencing demand for prices of yarn. From last fiscal year, the prices demand for yarn was moderate and cotton prices were stable. Expecting good monsoon for current year, the prices for the cotton will remain adequate this year. Meanwhile, international cotton prices are lower than Indian prices as cumulative effect imports will be more in current fiscal year.
The chemical industry accounting for about 2.11 per cent of the gross domestic product (GDP). Meanwhile, sector witnessed subdued performance in last couple of years due to fall of commodity prices globally. Financially, industry’s performance is lower in FY16 as compared to FY15. The companies which belongs with agrochemical sector also had suffered because drought like situation for couple of years in the country.
Within the entertainment sector television is most important vertical where growth is witnessing. The change in demand from consumers will able to drive sector in going forward. The government’s compulsory digitisation III and IV phase will change the face of Indian television industry. Video on demand, satellite movies, internet connectivity with smart televisions is the trending in the sector.
In the service sector the verticals such as Engineering, Procurement and Construction (EPC), trading witnessed de-growth during previous couple of years. However, the logistics and speciality retail observed sound growth.
(Contributed by Yogesh Supekar, Lohit Bharambe, Bhagyashree Vivarekar, Arshad Hippagri and Riju Dalui)
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Automobile
Automobile sector in India has been witnessing a never before change in taste and preference of its customers whereas the customers have clearly shown a linking for high end automobiles leading to increasing demand for luxurious cars. Automobile makers and luxury car makers are not disappointing the consumers and are able to creatively service the increasing demand for high end cars in India. Several factors are leading to growth in the sector including improvement in lifestyle and purchasing power of consumers. Experts believe the lack of proper and efficient public transport system is also one of the reasons contributing to the fortunes of automobile industry
The automobile sector is one of the highest contributors to the Indian GDP with the sector contributing almost 7.1 percent to India’s GDP as of 2015.
The total production of the auto industry was 19.84 million vehicles in April-January 2016 as against 19.64 million a year ago which included commercial, passenger, three and two-wheelers.
The domestic sales of passenger vehicles grew in April-January 2016 over the same period of the last year. The growth in passenger vehicles was 10.18 per cent during FY 2016 as compared to last year. Passenger vehicles production registered CAGR at 14.45 percent over the previous six years i.e. 2010-11 to 2015-16. At the same time commercial vehicles, three-wheelers and two-wheelers registered a CAGR of 2.9 percent, 16.81 percent and 41.05 percent respectively.
The domestic sales of commercial vehicles increased by 9.43 percent in April-January 2016 over the same period of last year. Sales of medium and heavy commercial vehicles increased at 30.19 percent.
From the employment point of view, the automobile sector plays a vital role by providing more than 10 million jobs. In India there are over more than 60 companies in automobile sector, out of them 49 are listed on NSE and BSE.
Commercial vehicles (heavy commercial vehicle and light commercial vehicles) constitute 3 per cent of the Automobile industry, passenger vehicles 14 per cent, three wheeler 3 per cent and two wheelers about 80 per cent.
Taking a set of first 15 companies by market cap we analysed the overall performance of the automobile sector. Being the car segment majors, Tata Motors and Maruti Suzuki form nearly 46 per cent of the total capitalisation of the sector. The performance of the sector has been notable as compared to the previous year growth with recovery in net profits higher than that of revenues. The revenues in FY 2015-16 rose 12 per cent to Rs 235286 crores as compared to Rs 209280 crores in the previous year. The growth in FY 2014-15 stood at 7 per cent from Rs 195996 crores. Unfortunately, Tata and Maruti were not the contributors. M&M revenue growth recovered from -3 per cent to 8 per cent in FY 2015-16 while Eicher Motors grew by 104 per cent as compared to the previous year growth of 78 per cent. Other major contributors were from the midcap segment.
The bottomline net profit witnessed a growth of negative 2 per cent in FY 2014-15 to Rs 13639 to a positive recovery of 32 per cent to Rs 17963 crores in FY 2015-16. Ashok Leyland outperformed others in growth recovery from -182 per cent to 700 per cent. Tata Motors and TVS have been the exception and have bucked the industry trend.Tata lacks in the consumer segment demand across the country. Otherwise the exports especially the Jaguar Land Rover sales data is exuberant. However, In 2015, the Indian luxury car market (Tata is the only major luxury car maker) sold nearly 35,300 units amid new model launches and penetration beyond metros. Sales have been forecasted to touch 87,300 units by 2020. Moreover, the sector may grow at a rate of 15% per annum in the period 2015-2018.
However, the non-listed Indian subsidiaries outperform the listed auto makers in terms of volumes of sales. Leaving apart Maruti Suzuki, mostly the brands like Hyundai, Renault, Ford and Honda are gaining grounds. Renault grew more than 170 per cent YoY while Ford India saw a threefold export in June 2016. Honda and VW saw a slight decline in June as compared to last year same period.
With a slowdown in demand from the traditional exports markets like Algeria and Sri Lanka the Indian Automobile Exporters are likely to explore newer markets to push exports. Some of the potential markets under review include Chile, Peru, Colombia, Nigeria and South Africa.
Government policies are not supportive towards the industry with ban on diesel engine cars and poor monsoon are the two factors that the automobile industry is hoping to get over. As the two-wheeler segment constitutes 80 per cent of automobile industry, good monsoon is paramount for the well being of the industry as majority of the two- wheeler sales happen in rural India which is dependent on farming output and financial well being of farmers linked to rain gods. In last two years the rainfall was below average and hence the industry got impacted negatively with sales dipping by almost 108875 units.
Interestingly,100 per cent FDI is allowed in the automobile Sector. With good amount of growth in the sector, FDI in the sector grew by a whopping 89 per cent to USD 2.42 billion in last fiscal. The investment in infrastructure across India and reduction in interest rates will provide further growth impetus to the industry. The infrastructure spend by the government will help create demand for heavy and medium commercial vehicles and other automobiles as well. With softening interest rates to improve the aggregate demand in economy, automobile sector may benefit the most due to soft interest rate regime as the lower interest rate regime will encourage investments in automobile sector. Exports of two-wheelers and three-wheelers have registered a significant growth from last 3-4 years.
In recent turn of events in the global markets, unexpected BREXIT referendum has created turmoil in global financial and currency markets. Tata Motors was the worst hit due to its exposure via JLR to the UK markets. However, the company is sitting at a premium to other German car makers. Moreover, the normal monsoon in the current year and passing of 7th Pay Commission recommendations have arrived as a boon to the sector.
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Indian Auto Ancillary
The Indian Auto Ancillary industry is one of the nation's fastest growing industries with shining growth prospects. The industry can mainly be classified into the organised and unorganised sectors. The organised sector caters to the original equipment manufacturers (OEMs) and consists of high-value precision instruments, while the unorganised sector comprises low-valued products and caters mostly to the aftermarket category. Further, the industry is divided into various segments, Engine parts form the largest segment with 31 percent share of auto component industry, followed by drive transmission and steering parts with 19 percent share. Suspension & braking parts and Body & Chassis account for 12 percent share each in the entire product range, followed by equipment accounting for 10 percent.
The cumulative foreign direct investment (FDI) inflows into the Indian automobile industry during the period April 2000 – August 2014 were recorded at USD 10,119.9 mn, as per data published by the Department of Industrial Policy and Promotion (DIPP), Government of India. Currently, India is ranked 22nd among global component exporting countries, and the industry is expected to become the fourth largest automobiles producer globally by 2020 after China, US and Japan.
This industry accounts for 22% of the country's manufacturing gross domestic product (GDP); with the country currently being the world's second largest two wheeler manufacturer. Two wheeler sales are projected to rise to 34 million by FY20E, and India is presently the world's third largest exporter of two wheelers after China and Japan.
We have analysed 47 companies’ financials, and as per the data the auto ancillary industry has registered a d-growth of -1.81 per cent in FY16 to Rs 133440 crore as compared with Rs 135906.32 crore in FY15 on a yearly basis, Whereas revenue has grown by 11.03 per cent from Rs 120184 crore in FY14. This is due to poor global demand as well as domestic demand.
Also EBITDA has registered d-growth of -13.54 per cent in FY16 as compared to FY15 i.e. Rs 18263.68 crore and also it registered a d-growth of -5.43 per cent in FY16 from FY14, and PAT registered a significant growth of 21.89 per cent in FY16 from Rs 4744.45 crore in FY15 and it grew by 9.47per cent in FY16 from FY14.
As per the FY16 data the leading Auto ancillary company is Motherson Sumi Systems with Rs 38676 crore revenue, followed by Sundaram Clayton Rs 12600 crore, Bosch Rs 10612 crore, Exide Industries Rs 9528 crore, and Tube Investments of India with Rs 7991 crore revenue respectively.
By revenue Motherson Sumi System is the giant of Indian Auto Ancillary company, which consists of 11.83 per cent growth in FY16 as compared to FY15’s Rs 34585 crore, and grew by 27.11 per cent from FY14’s Rs 30427.9 crore.
Also the company's EBITDA and PAT increased by 17.28 per cent and 47.68 percent respectively, and rose by 39.43 per cent and 66.5 per cent from FY14 respectively. Due to reduction in indirect cost and the raw material cost the margin is so high.
In this industry top three companies are Minda Industries, FIEM Industries and Tube Investments of India as per the Return on net worth (RNOW) and Earning per share (EPS). Their RONW and EPS are 23.73 per cent and 69.97x for Minda Industries; 22.11 per cent and 47.93x for FIEM Industries; and 31.25 per cent and 55.43x for Tube Investments. This signifies that these three companies are most profitable companies and they have properly utilised their stakeholders’ invested money and have generated better returns for shareholders, i.e. high EPS.
India's Auto ancillary industry exports 36.39 per cent in Europe, 25.29 per cent in Asia, 23.25 per cent in North America, 7.28 per cent in Africa, 7.04 per cent in Latin America and Caribbean and 0.75 per cent in Oceania. Due to Brexit this sector might be affected due to loss of export to Europe.
The Government of India’s Automotive Mission Plan (AMP) 2006–2016 has come a long way in ensuring growth for the sector. It is expected that this sector's contribution to the GDP will reach US$ 145 billion in 2016 due to the government’s special focus on exports of small cars, multi-utility vehicles (MUVs), two and three-wheelers and auto components. Also GoI has allowed 100% FDI in this sector, which has helped foreign companies to make large investments in India.
India is emerging as a global hub for auto component sourcing. A cost-effective manufacturing base keeps costs lower by 10-25 per cent relative to operations in Europe and Latin America. Relative to competitors, India is geographically closer to key automotive markets like the Middle East and Europe. Global auto component players are increasingly adopting a dual-shore manufacturing model, using overseas facilities to manufacture few types of components and Indian facilities to manufacture the others.
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Agriculture Industry
Agriculture industry is one of the most vital industry in India in the sense that over 58 per cent of the rural households depend on agriculture as their principal means of livelihood. The share of agriculture and allied sectors stands at 15.35 per cent of the Gross Value Added (GVA) during 2015-16 at 2011-12 prices, as per the estimates of Central Statistics Office (CSO).
India is the second largest fruit producer in the world and in terms of Horticulture output, India has made a new record at 283.5 million tonnes (MT) that includes fruits, vegetables and spices. Agriculture exports at 10 per cent of India's total exports is expected to grow with good monsoon predicted for this season and coming seasons as well. The sub segments within agriculture industry such as food processing, dairy, frozen food to fisheries, meat, poultry and food grains are all reflecting a steady growth in consumer demand.
The various factors that can trigger growth in the agriculture sector are:-
1. Growth in household income and consumption
2. Expansion in food processing industry
3. Increase in Agricultural exports
4. Growing organic farming trend and growing private participation in Indian agriculture
5. Increasing use of information technology
6. Various government initiatives and schemes targeting soil and water
7. Improvement in agricultural infrastructure such as irrigation facilities, warehousing and cold storage.
India is the second largest producer of milk and sugar. India accounts for 18.5 per cent of the total world production of milk and 14 per cent of total world production for sugar. India contributes 2.76 per cent to the global sugar exports. Spices exports is another area that contributes to the exports. The export of spices is expected to reach USD 3 billion by 2016-17 year end. The spice market in India is estimated at Rs 40,000 crore annually.
Creative marketing strategies, strong distribution networks, innovative packaging, quality improvement and organic product launches are all leading to improvement in exports for agri products in India. Agriculture sector has attracted huge investments with Foreign Direct Investments (FDI) flow of about USD 2,261 million between April 2000 to December 2015.
For the purpose of analysing the industry we have considered 14 leading companies in the industry. The sector has delivered 11 per cent growth on YoY basis in sales in FY2014-15 at Rs 17,765 crore . The sales across industry stood at Rs 18,841 crore for FY2015-16, thus growing at 6 per cent on YoY basis. The EBITDA grew by 15 per cent YoY at Rs 2435 crore for FY2014-15 and for FY2015-16 the EBITDA grew by a mere 4 per cent at Rs 2526 crore YoY. The net income increased by 41 per cent at Rs 924 crore for FY2014-15 YoY. The net income grew by 4 per cent YoY at Rs 958 crore for FY2015-16.
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Banking Sector
Indian banking sector plays very important role in the country’s economy as it is one of major mechanisms through which liquidity is infused in the economy. In 2015, the sector was largely in news due to mounting Non Performing Assets and the provisions provided by the Centre. SBI being a major public sector bank recently has been in the news as it called merger of five of its associates with itself. Ministry of Finance has planned to inject Rs 5,000 crore in eight public sector banks in order to boost their capital.
But looking at the broader picture, India’s banking sector is sufficiently capitalised and well-regulated. The financial and economic conditions in the country are far superior than any other country in the world. Indian banking system consists of 26 public sector banks, 20 private sector banks, 43 foreign banks, 56 regional rural banks, 1,589 urban cooperative banks and 93,550 rural cooperative banks, in addition to cooperative credit institutions. (sources Indian Brand Equity Foundation). Total asset size of the banking sector is expected to increase to USD 28.5 trillion by FY25. Deposit growth has been mainly driven by strong growth in savings amid rising disposable income levels. The reforms in the banking sector continues. Now 11 payment banks are expected to be launched in 2016 and 2017.
Indian banks are increasingly focusing on adopting integrated approach to risk management. Banks have already embraced the international banking supervision accord of Basel II. According to RBI, majority of the banks have already meet capital requirements of Basel III, which has a deadline of March 31, 2019. Most of the banks have put in place the framework for asset-liability match, credit and derivatives risk management.
Rising incomes are expected to enhance the need for banking services in rural areas and therefore drive the growth of the sector; programmes launched by government like MNREGA have helped in increasing rural income aided by the recent Jan Dhan Yojana. RBI has relaxed its branch licensing policy, thereby allowing banks (which meet certain financial parameters) to set-up new branches in tier-2 to tier-6 centers, without prior approval from RBI. It has emphasised the need to focus on spreading the reach of banking services to the un-banked population of India.
The recent quarterly results of the banks were not good as the Non-Performing Asset was the major reason which hampered the profitability of the banks. However, major private sector banks managed to post a good result this year. The sector reported a strong top line but its bottom line failed miserably due to mounting NPA which took a toll on the sector. For the year 2015, the aggregate sale and PBIT have increased by 6 per cent and 4 per cent respectively as compared to the 2014. However, the total consolidated net income has fallen by 66 per cent as compared to previous year 2014-15. HDFC bank is the largest in terms of market capitalisation and has managed to post a good number on a YoY basis. The bank’s sale and net income increased by 20 and 25 per cent from the previous year. SBI which has the highest market capitalisation in public failed to impress this year, the bank recorded a decline of 28 per cent in its net income as compared to the previous year. The banks which posted a net loss on YoY include Bank of Baroda, Punjab National Bank, IDBI, Canara Bank, Bank of India, Syndicate Bank, Indian Overseas Bank, UCO Bank, Allahabad Bank, Corporation Bank, SBI Bikaner and Jaipur, Dena Bank and Dhanlakshmi Bank etc. Out these loss making banks, the major loss maker was UCO Bank with a net loss of Rs 2799 crores followed by Indian Overseas Bank, Syndicate Bank, and Bank of India which posted a loss of Rs 2897 crores, Rs 1517 crores, and Rs 6703 crores in the same order respectively. Bank of Baroda also posted a loss of Rs 5068 crores for the year 2015-16. Major profit making banks wore HDFC, SBI, and ICICI Bank. The three Banks consolidated together posted a net profits of Rs 3990 crores. ICICI Bank was the major with a profit of Rs 12247 crores. However, the profits of SBI and ICICI bank on an YoY declined by 28 per cent and 17 per cent respectively. The net interest margins of the Indian Banks are healthy than its global peers. Prominent Chinese banks have Net Interest Margin between 2 to 3 per cent, significantly lower than Indian Peers. Despite virtually zero cost of funds. In India HDFC leads in the Net Income Margin with a NIM of over 4.43 per cent followed by ICICI Bank, SBI and Axis Bank which have NIM’s of 3.52,3.32,3.85 per cent respectively. Gross NPA to Gross Advances in public sector banks grew from 4.46 per cent in FY14 to 5.09 per cent in FY15.However the NPA in private sector Bank has stood at 2.16 per cent which is far better than public sector and Foreign Banks. The net NPA of the foreign banks stood 3.30 per cent. Deposits have grown at a CAGR of 13.6 per cent during FY 2005 to 2015, to an estimated USD 1.48 trillion in FY15.
The Indian economy is growing quite strong and looking at the business sentiments, inflation which is close to 5, and increase consumer confidence it can certainly be concluded that India’s banking sector is poised for robust growth as the rapidly growing business would turn to banks for their credit needs. The sector is also witnessing some major developments for instance many banks, including HDFC, ICICI and Axis are exploring the option to launch contact less credit and debit cards in the market shortly. The cards, which use near field communication (NFC) mechanism, will allow customers to transact without having to insert or swipe.
Government of India is looking to set up a special fund, as a part of National Investment and Infrastructure Fund (NIIF), to deal with stressed assets of banks. The special fund will potentially take over assets which are viable but don’t have additional fresh equity from promoters coming in to complete the project. It could be interesting to see the outcome and utilisation of such a fund.
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Cement Sector
Cement Industry is one of the booming sectors in India. After China, India is second largest producer of cement which is about 7 per cent of world production. Cement industry is the vital part of Indian economy and a golden thread which links other sectors directly or indirectly. History has it that cement industry attracts much foreign as well as Indian investment. India has a lot of potential for evolution in infrastructure and construction sector. So cement sector will be largely earning perks from this development.
The threat of new entrants into the sector is low. Entry into the industry is quite rigid and requires heavy capital investment. In the year 2013, there were approximately 210 companies operating in the cement business. The number became 186 in 2014 and in the year 2015 only 90 companies are operational. From the year 2013 to 2015 the number of companies operating in the industry has reduced by 57 per cent. Bargaining power of the buyers is low as the majority of the buyers are bulk buyers like big construction firms, corporates, etc. The power of the consumer is limited due to lack of a substitute in the market. As on June 14, 2016 the prices of cement are in the range of Rs 275 to Rs 290 per bag of Rs 50 kg. There is an immense rivalry in this sector. Capital invested by the company is used to set up the production plant, as the number of players are limited which makes the industry more competitive. Also, the differentiation in types of cement is marginal, hence the switching cost to customers is not high, so firms compete intensely to gain market share. UltraTech Cement is the market leader in the industry.
India's cement demand is expected to reach 550-600 million tonnes per annum (MTPA) by 2025. The housing sector is the biggest demand driver of cement, accounting for about 67 per cent of the total consumption in India. The other major consumers of cement include infrastructure at 13 per cent, commercial construction at 11 per cent and industrial construction at 9 per cent. In the Union Budget 2016-17, the Finance Minister, Arun Jaitley has introduced a slew of measures to boost infrastructure and investment, which will be positive for the cement sector, as increased spending on infrastructure will increase the demand for cement. 100 per cent deduction for profits to an undertaking in housing project for flats upto 30 square metres in four metro cities and 60 square metres in other cities has been approved during June 2016 to March 2019. The centre has also proposed incremental spending on smart city development; the government has allocated Rs 7,296 crore towards Urban Rejuvenation Mission. Rise in allocation under Pradhan Mantri Gram Sadak Yojana (PMGSY) to Rs 19,000 crore will certainly boost the demand estimates for the sector.
According to rating agency ICRA, demand for cement is likely to rise by 6 per cent in current fiscal and further rise to 7 per cent in 2017-18. To meet the rise in demand, cement companies are expected to add 56 million tonnes (MT) capacity over the next three years.
This rise will be observed due to pick up in Infrastructure segment- (road and housing development) and smart cities projects. Cement demand in India is expected to increase due to government’s push for large infrastructure projects. In the next 3 to 4 years 45 million tonnes of cement will be required to meet the need of various industries apart from construction. Infra and rural push by government has improved the demand by 5.3 per cent at all India level. As per ICRA, it has been noted that cement demand would also be supported by the construction of a new capital for Andhra Pradesh and the focus on irrigation and water grid schemes by Telangana. The companies acquiring the cement units will now have raw material security with the access to limestone mines of their acquisition targets. In cases where the companies have mortgaged these licences, the lenders will be able to transfer it to a potential buyer, which will help creditors recover some of their dues.
The government has cleared the 7th pay commission that has given a hike of around 23 per cent across various segments for government employees. Surplus money in the hands of people would lead to an increase in consumption and expenditure, which will eventually benefit infrastructure and cement sector.
To cater to such huge demand, capacities should be further increased. Meanwhile, India has 390 million ton cement production capacity. Talking about India’s total capacity, India has 188 large cement plants. These 188 plants account for 97 per cent of the total installed capacity in the country, while 365 small plants make up the rest. Of the total 188 large cement plants in India, 77 are located in the states of Andhra Pradesh, Rajasthan and Tamil Nadu.
Cement production in India is a fragmented industry with more than 160 players. However, the sector is rather oligopolistic in nature as the top 10 producers control about 70 per cent of the domestic market.
Out of the 1000 companies 29 companies according to their market capitalisation have been considered while analysing the sector. In FY16, total cement sector revenue has grown by 6 per cent as compared to FY15. Operating profit has also risen by 13 per cent in FY16 as compared to last fiscal. Net income of overall sector has also increased by 11 per cent in FY16 as compared to FY15. Cement sector is incomplete without mentioning sector’s top notch members. There are big names in this sector like Ultra Tech Cement, Shree Cement, The Ramco Cement, Dalmia Bharat, Prism Cement, JK Cement, JK Lakshmi Cement, Orient cement, OCL India, Birla Corporation, and India Cement.As compared to 2014-15, the top three major companies according to their market capitalization; the net profit of Ultra tech Cement, Shree Cements and Ramco Cement have grown by 9, 7, and 127 per cent respectively. Many cement giants are in process of capacity expansion. India’s largest cement producer Ultra Tech Cement is looking forward to acquire Jaiprakash Associates’ 6 cement factories for a total value of Rs 16,500 crore. UltraTech Cement Ltd., has charted out its next phase of Greenfield expansion after a period of aggressive acquisitions over the last two years. UltraTech has plans to set up two Greenfield grinding units in Bihar and West Bengal. Birla Corporation Ltd., a part of the MP Birla Group, has agreed to acquire two cement assets of Lafarge India for an enterprise value of Rs 5,000 crore. Dalmia Cement (Bharat) Ltd., has invested around Rs 2,000 crore in expanding its business in North East over the past two years. KCP, Sagar Cement, India Cement and others are also in the expansion course. Kakatiya Cement Sugar and Industries, NCL Industries, Deccan Cement and Dalmia Bharat have rewarded investors handsomely with returns of over 100 per cent. These cement companies have posted stellar financial numbers for year ended FY16.
In the next 10 years, India could become the main exporter of clinker and gray cement to the Middle East, Africa, and other developing nations of the world. Cement plants near the ports, for instance the plants in Gujarat and Vishakhapatnam, will have an added advantage for exports and will logistically be well armed to face stiff competition from cement plants in the interior of the country.
A large number of foreign players are also expected to enter the cement sector, owing to the profit margins and steady demand. In future, domestic cement companies could go for global listings either through the FCCB route or the GDR route. With help from the government in terms of friendlier laws, lower taxation, and increased infrastructure spending, the sector will grow and take India’s economy forward along with it.[PAGE BREAK]
Chemicals
When we say chemicals, first thing that hits our mind is immense diversification covering more than 70000 products. It is the backbone of agricultural and industrial development. They can be broadly classified into speciality, agro, petro, biotech and pharma. Chemicals serve as raw materials or the catalysts to many other industries. Use of chemicals is synonymous to modernisation. Dependency on chemicals imports has reduced largely in last 5 years. India is now the 3rd largest in Asia and 8th largest in the world. Moreover, it’s the 4th largest producer of agro chemicals globally. Yet, it contributes nearly 2.1 per cent to nation’s GDP. Chemicals report 9.2 per cent of total exports and 7.6 per cent of total imports.
Indian chemical industry is growing with 11 per cent CAGR and it has much growth potential with 2015 market size of 144 billion USD which is estimated to reach 224 billion USD by 2017. Higher contribution is from the agrochemicals followed by dye stuff and dye intermediaries. Organic chemicals are a dominant player in both imports and exports. We could see a consistent but slowing rise in the total chemical imports at 19 billion USD in 2015 as against 18 billion in 2014. Imports in 2013 were reported at 10.1 billion USD.
Government has taken initiatives in terms of 100 per cent FDI, delicensing, R&D support, free trade etc.
Despite consistent growth seen in the industry, Indian chemical industry witnessed a declined growth in terms of revenues and net profits. Even the margin that companies received is on an average 7 per cent of the revenues. Many companies are working with negative profit margins too.
Falling commodity prices worldwide has drastically affected the profitability of chemical companies in India. Moreover, the main reason are the rising R&D cost and product patents leading to competitive disadvantages. Globally Yuan depreciation by China, has hit the competitive edge. Lower demand in China and globe provoked higher dumping to India
Taking the set of 41 companies by market capitalisation the total revenues posted at Rs 67103 crores in FY 2015-16 as against Rs 64053 crores in FY 2014-15, an increase of 5 per cent. The growth in FY 2014-15 was seen at 10 per cent from Rs 57967 crores in FY 2013-14.
The top company by market cap, Bayer Cropscience has a M.cap to revenue of 3 which depicts high inflation in the company. The growth in its revenues has reduced from 15 per cent to 1 per cent in FY 2015-16. Moreover, the net profits saw a negative growth of 21 per cent from the positive growth of 32 per cent in FY 2014-15 amid poor monsoon during the year.
Tata Chemicals drives the highest revenues at Rs 17708 crores contributing nearly 26 per cent of the total. The growth in its revenues dropped from 8 per cent to 3 per cent in FY 2015-16. However, the company saw a tremendous recovery in its net profits from a net loss of Rs 1032 crores in FY 2013-14 to Rs 596 crores profits in FY 2014-15. It has been increased to Rs 780 crores in FY 2015-16. This was due to negative inventory costs and fall in exceptional items. Lower import and higher anti-dumping duty on Soda ash remained as the lead driver.
Considering overall net profits of the 41 companies the FY 2015-16 total net profits came in at Rs 4600 crores as against Rs 4209 crores an increase of 9 per cent. However, the growth in FY 2014-15 was exceptional at 124 per cent from Rs 1878 crores in FY 2013-14.
The newly built speciality chemicals sector has earned a lot to the industry. The speciality chemical stocks have soared more than 300 per cent amid declining input costs with crash in oil prices. The per capita consumption of speciality chemicals in India is low, as compared to the developed nations which can act as the biggest source of offshore revenues for the sector as a whole.
Cabinet allowed 100 per cent FDI in chemicals sector through automatic route. Thereby the FDI to chemical industry has hit 10000 million USD in 2015, contributing to more than 4 per cent of the total FDI inflow in the country. Government has reduced excise duty on chemicals to 10 per cent according to the IBEF report. Recently anti-dumping duty has been raised on imports of pharmaceutical compounds from China and US.
With a view to adopt paradigm shift from consumer to a full-fledged producer, government proposed to set up chemical hubs across the country taking the 22 refineries on board and start Central Institute of Chemical Engineering and Technology. Government also promises adequate infrastructure and skilled human resource. Government is coming out with the National Chemical Policy to endorse research and development in this sector and address the various issues which are hindering the growth.
With the current Brexit event, if rupee depreciation against Dollar continues for some more period, it will help the chemical industry that is turning the major exporter to stay competitive.
Ultimately the relaxation in administrative rules and legal regulations, passing of GST bill without any further delay and the government approval for the National Chemical Policy will address most of the issues of the industry. Then sky is the limit for chemicals to become the next pharma of the country.
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Construction
Construction sector is one of the most important sectors in Indian economy, being the largest employment-generating sector after agriculture. It also supports more than 250 other industries like cement, steel, paint, brick, building materials, consumer durables and so on. This sector has a huge multiplier effect on the economy and therefore is a big driver of economic growth and more than 35 million people are employed in this sector.
In general, there are three sectors of construction i.e. buildings, infrastructure and industrial. Building construction is usually further divided into residential and non-residential (commercial/institutional). Infrastructure is often called heavy/highway, heavy civil or heavy engineering. 50 per cent of the demand for construction activity in India comes from the infrastructure sector, followed by industrial activities, residential and commercial development etc.
We have analysed 70 companies’ financials, and the industries top line has grown by 0.41 per cent in FY16 Y-o-Y wherein it had grown by 2.57 per cent in FY15 Y-o-Y.
The overall industry has registered a d-growth of -5.21 per cent in FY16 Y-o-Y and had registered a significant growth of 7.83 per cent in FY15. The bottom line of the industry has grown by 129.54 per cent in FY16 and -224.93 per cent in FY15 respectively.
The reasons for slow growth in top line are huge ongoing projects; increase in raw material costs leading to suspension of a few projects; and also a lack of demand from last one year.
Among the 70 companies, Jaiprakash Associates Ltd., is the giant of this industry as per the top line i.e. Rs 17321 crore in FY16; followed by NCC Ltd., DLF Ltd., and Hindustan Construction Company Ltd., whose top lines are Rs 9583 crore, Rs 9259 crore, and Rs 8768 crore respectively. Top line of Jaiprakash Associates has grown by -11.92 per cent, NCC’s by 0.74 per cent, DLF’s by 21.06 per cent, and HCC’s by -15.31 per cent in FY16.
Whereas EBITDA and PAT of the above companies has grown by a significant percentage, i.e. EBITDA and PAT have grown by -23.00 per cent and 101.43 per cent, respectively for Jaiprakash Associates Ltd; 4.76 per cent and 105.21 per cent, respectively for NCC Ltd.; 24.91 per cent and 1.60 per cent, respectively for DLF Ltd.; and 0.80 per cent and 99.52 per cent, respectively for Hindustan Construction Company in FY16.
Among the 70 companies we have shortlisted four companies as highly profitable companies from investors’ perspective, as a parametre of high Return of net worth (RONW) and high Earning per share (EPS). The top four companies are: Kajaria Ceramics( EPS and RONW are 28.8x and 24.85 per cent); PNC Infratech (EPS and RONW are 42.11x and 16.49 per cent); Cera Sanitaryware (EPS and RONW are 64.17x and 19.82 per cent); KNR Constructions (EPS and RONW are 44.94x and 18.13 per cent).
Key ratios of these companies are significantly good as compared to the industry such as EV/EBITDA. This ratio measures the companies operating profit with its enterprise value. PBITDA margin measures the companies operating profit margin, and this ratio signifies that how company efficiently managed their operating cost and improved margins.
EV/EBITDA is 23.49x as on June 30. PBITDA margin is 17.45 percent in FY16 as compared to 15.75 per cent in FY15, and debt-equity ratio is 0.05x in FY16 against 0.11x in FY15 for Kajaria Ceramics.
Whereas EV/EBITDA is 11.38x on June 30. PBITDA margin is 13.05 percent in FY16 as compared to 13.02 per cent in FY15, and debt-equity ratio is 0.024x in FY16 against 0.49x in FY15 for PNC Infratech.
EV/EBITDA is 20.27x on June 30. PBITDA margin is 16.39 percent in FY16 as compared to 14.64 per cent in FY15, and debt-equity ratio is N/A in FY16 against 0.08x in FY15 for Cera Sanitaryware.
Whereas EV/EBITDA is 8.88x on June 30. PBITDA margin is 15.26 percent in FY16 as compared to 23.21 per cent in FY15, and debt-equity ratio is 0.15x in FY16 against 0.17x in FY15 for KNR Constructions.
Projects execution on track of Jaiprakash Associates are: Sardar Sarovar project, Gujarat. 900 MW; Baglihar Hydroelectric project, J & K; Alimineti Madhav Reddy (AMPR), Andhra Pradesh, 900 MW; and Punatsangchhu II project, Bhutan.
Projects execution on track of NCC Ltd are: Bangalore Elev. Tollway project cost Rs 9747 crore, invested by NCC Rs 1597 crore on April 2010; OB Infra project, cost Rs 5896 crore invested by NCC Rs 1245.54 crore on June 2009; Pondicherry – Tindivanam project cost Rs 3621 invested by NCC Rs 737 crore on Dec. 2011; NCC power projects, project cost Rs 70470 crore invested by NCC Rs 5015 crore on June 2016.
Projects execution on track of DLF Ltd., are: Aradhya tower project, Mumbai 75190 sq. ft. completed; Atmosphere project, Mumbai 1800000 sq.ft. Expected completion date Dec 2020; Aradhya Nalanda, Mumbai 6800 sq.ft. Expected completion date Dec 2016; Aradhya Residency, Mumbai 47500 sq.ft. Expected completion date Nov 2016; Aradhya Signature, Mumbai 47500 sq.ft. Expected completion date Oct 2017; Mhada project, Mumbai 150000 sq.ft. Expected completion date is March 2022.
Projects execution on track of Hindustan Construction Company: Power project at Jammu of Rs 167 crore; Railway project at Assam cost Rs 785 crore invest by HCC Rs 471 crore; Hydro electric power project Rs 456 crore; Teesta low dam project of Rs 547 crore; Tehri pump project of Rs 1843 crore; Highway project in Jamugurihat and Biswanath of Rs 392 crore; Swarnim Gujarat Saurashtra water grid programme of Rs 289 crore; Construction of fuel processing process plant of Rs 943 crore; and Department of Atomic Energy project worth Rs 153 crore.
Union Budget 2016-17 has highlighted the government’s focus, on the infrastructure sector. Meanwhile last year, there was a substantial increase in outlay for roads and railways (total transport sector outlay at Rs 2.3tn). The government has also taken measures to address issues in irrigation and civil aviation space. To ameliorate the ailing PPP sector, guidelines will be introduced for renegotiation of contracts, a much-awaited move. In our view, the government has continued to build upon the promises made last year and has made significant progress during the year.
To boost this sector, the government has also raised FDI limits for townships and settlements related development projects to 100 per cent. Real estate projects within the Special Economic Zone (SEZ) are also permitted 100 per cent FDI. In Union Budget 2015-16, the government allocated US$ 3.72 billion for housing and urban development, and the key projects like rural electrification, irrigation, and undertaking new highway projects which will boost this sector significantly. The government has also released draft guidelines for investments by Real Estate Investment Trusts (REITs) in non-residential segment.
Some of the major investments in this sector which can change the outlook of this sector are:
1. Edelweiss Alternative Asset Advisors Ltd plans to raise US$ 1 billion for its first residential real estate fund; 2. Omkar Realtors and Developers Private Limited is in discussions to raise US$ 60 million from KKR India; 3. Real estate firm Supertech has planned to invest about US$ 300 million in Gurgaon over the next few years by launching several luxury and affordable projects.
The real estate sector’s most marked change has been the shift from family owned businesses to that of professionally managed businesses. Real estate developers, in meeting the growing need for managing multiple projects across cities, are also investing in centralised processes to source material and organise manpower and are hiring qualified professionals in areas like project management, architecture and engineering.
Flat Inventory pile up in construction in sector installed projects projects 400 debt 200
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Consumer Durable
Indian consumer segment is broadly segregated into urban and rural markets and has been attracting marketers from across the world. Currently India's consumer durable market size stands at USD 12.5 billion which was USD 9.7 billion on FY15 and it is expected to grow to $20.6 billion by 2020 and become the fifth largest in the world by 2025.
Global corporations view India as one of the key markets from where future growth is likely to emerge. The growth in India’s consumer market would be primarily driven by huge population and increasing disposable incomes.
India imports televisions, refrigerators, and air conditioners mainly from China and Southeast Asia. India also imports from Japan, Indonesia, Malaysia, and Taiwan. Top components imports include compressors, evaporator coils, condenser coils, air conditioning and refrigerator, motors, LCD or LED panels, semiconductors, and electronic components.
India’s consumer durable exports include refrigerators and refrigerating equipment compressors, colour TVs, air conditioner parts and compressors and fully automatic washing machines. The UAE is a major export location. The majority of white goods are exported to the South Asian Association for Regional Cooperation (SAARC) nations.
We have analysed 14 companies’ financials of this sector, according to the financial revenue of the industry grew by 5.81 per cent to Rs 34277 crore in FY16 from Rs 32394 crore in FY15 on year on year (YoY) basis and it's rose by 10.78 per cent on FY15 from Rs 29243 crore in FY14. The reason for slow growth in last fiscal are slow growth in real estate sector, these two sector has a direct relation and consumer durable industry is very much depended on real estate sector.
EBITDA of the particular industry grew by 3.23 per cent to Rs 3049 crore in FY16 from Rs 2954 crore in FY15 YoY basis, whereas it rose by 17.56 per cent in FY15 from Rs 2512 crore in FY14. Current year due to low revenue growth, below capacity utilisation leads to increase the fixed cost and other operating cost therefore the EBITDA growth is low as compare to revenue growth.
Meanwhile, PAT grew by 0.93 per cent in FY16 to Rs 1607 crore from Rs 1592 crore in FY15 YoY basis, whereas its grew by 20.64 per cent in FY15 from Rs1320 in FY14.
Above the 14 companies we have shortlisted top 3 companies as per their market capitalisation, as Titan Company with Rs 35183 crore market capitalisation followed whirlpool India Rs 10366 crore, and Symphony Rs 8656 crore.
Revenue of Titan grew by -5.3 per cent to Rs 11278 crore in FY16 from Rs 11913 in FY15 YoY basis, the company contribute 32.9 per cent of total revenue among the 17 companies in FY16. Whereas the EBITDA and PAT grew by -18.3 per cent and -16 per cent to Rs 996 crore and Rs 689 crore respectively in FY16 from Rs 1219 crore and Rs 816 crore.
The Government of India has allowed 100 per cent Foreign Direct Investment (FDI) in the electronics hardware-manufacturing sector, and the government plans to train 500 million people by 2022 and is also encouraging private players and entrepreneurs to invest in the venture. Many government bodies and agencies, corporates and educational institutions are working towards providing training and education to create a skilled workforce, these will attract the foreign investors to invest in India.
Union cabinet reforms like implementation of the Goods and Services Tax (GST) and Seventh Pay Commission implementation are expected to give a boost to consumer durable sector in India during 2016.
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Electricals & Electronics
Electricals and electronics complement each other and is one of the most diversified sectors. The sector is ever growing with higher customer leaning towards electronic goods and services. The sector has witnessed growth both in terms of domestic and export demands mainly for transformers, cables, conductors, MCBs, meters and insulators among others.
Despite growing liquidity infusion that has resulted in releasing new orders, there has been a decline in order book of transformers that calls for newer projects in the transmission industry. The industry is also seeking mergers and acquisitions to stand erect in terms of technology upgradation in the fearful competition within.
India has a huge potential in the electronic products manufacturing and also in terms of demand, thus government has come forward to facilitate home-grown manufacturing of telecom equipment, semiconductor chips, nano-electronics and biometric identity devices. However, India has a long way to go to supersede China in terms of mobile, tablet and computers as China leads in variety at cheaper rates. India still imports 65 per cent of the electronic demand.
To analyse the sector we have a set of 16 companies out of which 13 are electric equipment makers while three are from the electronic sectors. The FY16 witnessed a decline of 20 per cent from Rs 43794 crores in FY15 to Rs 34976 crores. The sector had seen a growth of 7 per cent in the previous year. In electric equipment segment, the largest companies by market capitalisation viz; Havells and Crompton Greaves have shown a decline in growth from 5 to - 10 per cent and from 4 to -62 per cent in FY16. In electronics too, Bharat Electronics and Genus Power saw a decline in growth from 9 to 6 per cent and 20 to -6 per cent in FY16. Only smaller players like Igarshi Motors India and Ujaas Energy could accelerate the growth.
Total net profits saw a rising growth from 7 per cent in FY15 to 9 per cent in FY16. Net profits for FY 16 came in at Rs 2355 crores as against Rs 2152 crores in FY15. Havells gave an energetic recovery in growth where its profits rose 214 per cent to Rs 1209 crores in FY16. On the contrary, its peer Crompton saw a net loss of Rs 867 crores in FY16 as compared to a profit of Rs 209 in the previous year. Crompton outsources most of its production while Havells has everything in-house.
Government has come up with various policy changes and initiatives to rejuvenate the sector. In terms of electronics, 100 FDI in ESDM through automatic route and up to 49 per cent in defence electronics says it all. Government is also mulling to support labour-intensive electronics sector to set up shops in coastal special economic zones (SEZs). Government has initiated schemes like National Knowledge Network, National Optical Fibre Network, E-learning and digitisation in major services.Government has plans for ‘Power for All’ and also adding 88.5 GW and 93 GW of capacity by 2017 and 2022 respectively. Such capacity build-up in power generation is likely to push demand for electrical machinery and thus bringing in wealth for the companies.
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Engineering sector
Being associated with manufacturing and infrastructure sectors, Engineering industry has tactical importance to India’s economy. The capital goods and engineering sector turnover in India is expected to reach USD 125.4 billion by FY17. India exports its engineering goods mostly to the US and Europe, which accounts for over 60 per cent of the total exports. Recently, India's engineering exports to Japan and South Korea have also increased significantly.
The government's increasing focus on attracting foreign investments in manufacturing and infrastructure sector is likely to boost FDI in the sector. The sector has been de-licensed and enjoys 100 per cent FDI. Cumulative foreign direct investment (FDI) inflows in engineering industry stood at USD 25.3 billion in FY15 and further rise in upcoming fiscal years is expected. From export point of view, engineering sector’s exports remained at USD 70.6 billion in FY15. The decline is mainly on the back of sharp erosion in commodity prices amid weak global cues, will reduce exports in near term.
The Indian engineering sector is of strategic importance to the economy owing to its intense integration with other industry segments. With the aim to boost the manufacturing sector, the government has relaxed the excise duties on factory gate tax, capital goods, consumer durables and vehicles. It has also reduced the basic customs duty from 10 per cent to 5 per cent on forged steel rings used in the manufacture of bearings of wind operated electricity generators.
Government of India has provided investment allowance at the rate of 15 per cent to a manufacturing company that invests more than USD 4.17 million in any year in new plant and machinery. It has taken steps to encourage companies to perform and grow better. For instance, Engineering India, was recently conferred the Navratna status after it fulfilled the criteria set by the Department of Public Enterprises, Ministry of Heavy Industries and Public Enterprises. The conferred status would give the state-owned firm more financial and operational autonomy to compete in the global market.Navratna was the title given originally to nine Public Sector Enterprises (PSEs), identified by the government in 1997 as having comparative advantages. Government of India has also taken initiatives to provide a level playing field to domestic and foreign private players bidding for the government contracts in defence sector. The government has withdrawn excise and customs duty exemptions granted to goods manufactured and supplied to the defence ministry by state-owned defence firms. These steps will also encourage participation of foreign equipment manufacturers such as Boeing, Airbus, Lockheed Martin, BAE Systems, etc. The central government has built a strong policy support for the sector, apart from 100 per cent FDI, Foreign technology agreements are allowed under the automatic route. The government has eliminated tariff protection on capital goods, it has reduced custom duties on a range of engineering equipment. Governmental infrastructure projects such as Golden Quadrilateral and the North-South and East-West corridors fuelled growth in the engineering sector. The government approved a significant number of SEZs across the country for the engineering sector Delhi, Mumbai Industrial Corridor (DMIC) is being developed across seven states; which is expected to bolster the sector.
We selected top 1000 companies according to their market capitalisation. Out of this, about 61 companies lies in the Engineering sector bracket, further we have analysed. Overall performance of the industry remained subdued from last couple of years. The top line of the sector declined by 8 per cent to Rs 126220 crore in FY16 as compared to previous fiscal year. The industry also witnessed a de-growth by 1 per cent to Rs 137225 crore in FY15 on yearly basis. The revenue of the sector remained under pressure because of slower clearances of the projects from customer end. The many more order of the industry are slowly moving from planning to execution phase driving them into overall plunge in sales.
The EBITDA of the Engineering sector too reduced in past couple of financial years. Its EBITDA declined by 14 per cent to Rs 12977 crore in FY16 as compared to previous financial year. Previously, the industry’s EBITDA decreased by 5 per cent to Rs 15141 crore in FY15 on yearly basis. The lower operational profits due to lack of execution, lower realisation, higher input costs and higher provisions.
The aggregate bottom line of Engineering sector stood at Rs 3900 crore in FY16 against net loss of Rs 3513 crore in FY15. The industry’s net profit remained at Rs 3610 crore in FY14. Its slower pace performance because of huge interest cost burden by the companies in the sector. The Engineering industry has witnessed low capacity utilisation, capex failed to pick up in FY16. The drastic fall in commodity prices has further led to weakness in demand for capital equipment.
The industry major, Bharat Heavy Electricals’ (BHEL) revenue declined over the past two financial years by almost 14 per cent and 22 per cent in FY16 and FY15 respectively. The company posted negative EBITDA of Rs 470 crore in FY16 while EBITDA of Rs 3372 crore in FY15. It reported net loss of Rs 896 crore in FY16 against net profit of Rs 1452 crore in FY15. Cummins India, Bharat Forge, AIA Engineering and Thermax all of the major companies from the Engineering industry have observed low financial performance in FY16 as compared to previous financial year. Though the financials are weak, government reforms are expected to give a much needed boost for the sector.
The government’s plans such as ‘Smart Cities Initiative’, ‘Make in India’ are positive boosters for the sector going forward. This may lead to increase order book of companies in future term.
In the Union Budget 2016-17, the government has given a big push to 'Make in India' initiative by rationalising customs and excise duties. This will reduce manufacturing costs and improve competitiveness of the domestic industry. The government has increased basic custom duty rates (BCD) in the range of 2.5 per cent to 10 per cent for imported finished products and reduced from about 10 per cent to a lower rate/nil rate for inputs across various sectors.
The cabinet also cleared the national capital goods policy, which has major emphasis to domestic manufacturing of capital goods. The objective of the policy is to achieve total production in excess of Rs 7.5 lakh crore by 2025 from current Rs 2.3 lakh crore. On other hand, rising wind energy capacity will support engineering sector as whole. The auto component industry is also set increase to USD 115 billion in 2020. Lots of government favourable boost will help Engineering sector to perform better in future term.
Heavy electrical segment is an important element of engineering sector and has key segments like boiler, turbines and generator sets, transformers, switch gear and control gear. As per the latest data available, the Indian boiler industry has the capability to manufacture boilers with super critical parameters up to 1,000 MW unit size. The industry’s market size was USD2.2 billion in FY15 and is expected to reach USD 5.8 billion in FY17 and USD11.7 billion in FY22.
As far as turbines and generators are concerned, the industry manufactures various turbines in the range of 800 to 7,000 MW per annum, and generators ranging from 0.5 KVA to (ones even higher than) 25,000 KVA. Total production of turbines and generators stood at USD1.1 billion in FY15 and is estimated to reach USD6.6 billion by FY17 and USD13.4 billion by FY22.A whole range of power and distribution transformers, including special type of transformers required for furnaces, electric tracts and rectifiers, are manufactured in the country, revenues are expected to grow at CAGR of 14 per cent till 2018. The transformers market in India was valued at USD1.7 billion in FY15 and is expected to reach USD 5.9 billion in FY17 and USD11.1 billion in FY22. On the other hand, production of switch gears and control gears witnessed a CAGR of 10 per cent during the period 2012-17. The switchgear market size touched USD2.4 billion in FY15 and is projected to reach USD4.4 billion in FY17 and USD 8.2 billion in FY22. In October 2015, Crompton Greaves sold 50 per cent of its stake to their joint venture partner CG Lucy Switchgear for a deal value of around USD6.58 million.
Heavy engineering segments includes plastic processing machinery, dies, moulds and tools industry, process plant equipment, earth moving, construction and mining equipment, passenger and utility vehicles, auto components, agriculture machinery, casting and forging, medical and surgical equipment, industrial fasteners etc. According to IBEF, total consumption of plastics in India will grow by more than 15MT by the end of 2016 and become the third largest consumer of plastic in the world. India’s demand for plastics in irrigation alone is pegged to cross 2.5MT, while the plastic usage in packaging sector would be expected to increase 9MT by 2020. Total production of dies, moulds and tools was expected to touch USD3.68 billion in FY15. Exports in the industry was expected to touch USD 828.3 million in FY15. Indian engineering exports have seen a robust growth in the recent years. From the year 2008 to 2015, the sector has grown by 11.1 per cent on a CAGR basis.
Global auto majors are rapidly ramping up the value of components they source from India, steered by the country’s advanced engineering skills, established production lines, a thriving domestic automobile industry and competitive costs. Industry sales are expected to increase to USD40 billion by 2016, with about USD20 billion generated from exports Make in India plan to Several companies in the engineering sector have diversified, either geographically (mainly to Middle Eastern countries) or sector-wise for example BHEL plans to foray into Ukraine, Simplex Infra has moved to the Middle East, Larsen & Toubro (L&T) has diversified into power equipment manufacturing, Thermax entered the power utility segment, EIL (Engineering India Limited) is venturing in Nigeria to construct a refinery and polypropylene plant worth USD139 million promote manufacturing.
To conclude this sector’s quick analysis, it has a high potential to grow and is also the major contributor to the GDP and looking at the future estimated earnings and government policies the sector looks well poised to face future challenges. On the other hand, Government of India cleared the 7th Pay Commission recommendations on June 29, 2016 which is likely to boost the demand for auto components, with Indian Metrological Department (IMD) predicting a good monsoon the demand for agricultural machinery is expected to increase.
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Entertainment Sector
Backed by rising advertising revenues and consumer demand entertainment industry in India is on the verge of steady growth. The entertainment industry has been resilient so far to the volatile economic situation.
With internet usage and digitisation all set to dominate the industry trends and fortunes, Indian entertainment industry is all set to embrace the new developments in terms of technology and leverage the same to reach out to maximum consumers in India, thus improving visibility for a large chunk of industry players.
The Indian entertainment industry is expected to grow at a Compounded Annual Growth Rate (CAGR) of 13.9 per cent year on year. This growth rate indicates entertainment industry to be amongst the fastest growing industry in India. With 13.9 per cent CAGR growth, the industry can reach Rs 196,400 crore by 2019.
Indian Television industry is expected to grow steadily due to increase in subscription revenues. The growth is expected to be in the range of 13 to14 per cent for television industry in India. With increasing penetration of smartphones and internet usage utilising 4G services, the usage of entertainment content is expected to increase manifold leading to strong growth for the industry.
India's broadcasting market has approximately 800 satellite television channels, 242 FM channels and over 100 operational community radio networks. The GoI has already initiated privatisation of FM services with an aim to expand to an additional 294 cities.
The trend is similar in Video gaming in India and also in the Indian animation industry with growth expected to be in double digits for both the segments within the entertainment industry.
The animation industry in India and VFX industry is expected to grow at a CAGR of not less than 16.4 per cent and is expected to touch USD 1.6 billion by 2019.
Keeping faith in the entertainment industry in India, several global players are expected to invest in Indian content providers in the Indian entertainment industry. With more than one fifth of India's population already online in India and foreign companies like Netflix already operational in India, the trend is visible, and the importance of digitisation and quality online content providers is expected to be highlighted in coming days. After Cartoon Network and POGO, Toonami will also be launched in India by Turner International India.
Keeping track of growth in entertainment and media industry in India several foreign investments in India have been made in recent years. US based Tiger Global Management LLC invested USD 10 million for its 25 per cent stakes in the "The Viral Fever (TVF)". TVF is an online video content creator. Netflix, a global video streaming service is another US company showing interest in the industry. Balaji Telefilms has raised around Rs 150.08 crore to launch the ALT Digital Media. ALT Digital Media will be a B2C digital content business segment of the Balaji Group. 'Amblin Partners' a digital content creation company has been created to develop and produce films by raising USD 500 million. Amblin Partners is a tie up between Reliance Entertainment, DreamWorks and Participant Media.
Kallari Capital has invested USD 4 million in Scoop Whoop, an Indian digital media and content start up. The start-up will be using the funds to expand its video production unit called Scoop Whoop Talkies.
Twitter Inc., has plans to set up Research & Development (R&D) centre in Bengaluru to target and focus emerging markets. This will be the first facility ever for the US company outside the country.
The whole Entertainment industry is abuzz with several deals; and more competition is expected in the industry with increasing consumer demand for quality online digital content.
The Government of India has provided full support to the industry by liberalising the FDI investments in the sector. The FDI limit has been increased from 74 per cent to 100 per cent in cable and DTH satellite platform. In a new initiative, the film industry has been granted an industry status allowing the industry gain easy access to institutional finance. Exceptional growth in Film industry is forecasted with the Indian film industry to reach USD 3.4 billion by 2019.
The GoI plan to set up a National Centre of Excellence for media will help train and fund movies for participation in foreign film festivals. With several incentives for the print media in the budget 2016 -17 on custom duties etc.; and by issuing go ahead for almost 45 new news and entertainment channels GoI has done justice to support the growth in the entertainment industry. Government initiatives indicate the intention of promoting competition in the entertainment industry thus benefitting consumers. GoI initiatives also include radio industry which is expected to grow at a reasonable rate.
With Audio Visual Co-Production agreement between India and Republic of Korea (RoK) the entertainment industry can expect to benefit in terms of exports of Indian films in Korea and create awareness of Indian culture in Korea. This is just an indicative trend that suggests Indian entertainment industry is set to go global through various joint ventures and agreements.
Television and print advertising, going ahead are expected to contribute most to the entertainment industry growth followed by internet advertising. Growing TV subscriber base will provide the growth impetus for the industry. India’s TV subscriber base of 106 million in 2010 is expected to reach 187 million by 2019. DTH subscriber base of 40 million in 2014, is expected to reach 72 million by 2017 and 76.6 million by 2020.
The GoI's policy support as below has aided the industry growth in a big way:
1. Increasing the FDI limit
2. Digitisation of cable distribution
3. Increasing liberalisation and tariff relaxation
4. The Cable Television Networks (Regulation) Amendment Act 2011 for digitisation of cable television networks by 2015
Financials: -
To analyse the trend in the industry we have taken into consideration the data for 26 media and entertainment companies. The sales for FY2014-15 was Rs 91,772.24 crore reflecting a growth of 16 per cent YoY. For FY2015-16 the sales stood at Rs 74,378.23 crore, reflecting a negative growth of 19 per cent YoY. The EBITDA for FY2104-15 for the industry grew by 22 per cent at Rs 20,445 crore; whereas the EBITDA for FY2015-16 de-grew by 44 per cent at Rs 11,465.16 crore. The Net Income for FY2014-15 stood at Rs 4,106.46 crore, down by 11 per cent. The net income for FY2015-16 grew by 7 per cent at Rs 4,387 crore.
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Fertiliser Sector
Fertilisers’ sector has always been considered to be a key sector for the Indian economy as it is linked to the growth of India's agricultural sector. Fertilisers’ sector accounts for about a seventh of the country's GDP. India remains second largest consumer of fertilisers after China and interestingly India is the third largest producer of fertilisers. In 2014-15 alone, India has produced 3083.6 thousand tons of fertilisers. 2015 was a slow year for the sector and the demand for fertiliser has been soft and shrinking international prices have seen imports rise. The imports rose by 54 per cent from April to august 2015.
Urea prices are expected to remain soft and lot depends on China consumption story. Chinese surplus will continue to dominate global urea markets and the productions costs in China & Chinese currency will continue to be the key determinants for global urea prices.
Fertiliser industry in India faces a unique challenge in its delayed subsidy payments from the government. The delayed subsidy payments are putting a strain on the working capital of fertiliser companies. The health of fertiliser sector is linked to the health of farmers and agriculture in India. A close watch on the developments in the agriculture sector are benefiting the industry and improving the profits in hands of farmers.
Fertiliser companies have been instructed by the government to buy back produce from the farmers, which will help leave out the middle man and make sure that farmers are earning better profits. This will allow the fertiliser companies to be B2C from B2B. The shift will affect the current business model for lot of fertiliser companies. Fertiliser companies will now have to have retail centres across India.
The study done for over 12 fertiliser companies in India across different market capitalisation shows an interesting trend. The Fertiliser sector struggled to grow in terms of profitability even as the sales grew by impressive 7 per cent on YoY basis for FY2015-16. The sales figure for the fertiliser companies put together stood at Rs 70869 crore for FY2015-16. For the industry the sales grew by almost 5 per cent on YoY basis for FY2014-15 with sales at Rs 66026 crore. The EBIDTA for the sector grew by 2 per cent on YoY basis for FY2014-15 and for FY2015-16 the EBITDA grew by 5 percent YoY. EBITDA stood at Rs 4958 for FY2014-15 and for FY2015-16 it is Rs 5219 crores. The net income for FY2015-16 stood at Rs 724 crores for the industry whereas it was Rs 683 crores for FY2014-15. This reflects a decline of almost 6 per cent YoY in Net income. The decline is sober as compared to a decline of 50 per cent in Net income for FY2104-15.[PAGE BREAK]
Finance Sector
India's financial sector is undergoing rapid expansion, both in terms of strong growth of existing financial services firms and new entities entering the market. India's financial sector consists of the capital markets, insurance sector and non-banking financial companies (NBFCs). The financial inclusion world is in flux. For the first time in the last ten years, the sector is receiving special attention from both the national government and the Reserve Bank of India.
The government and Reserve Bank of India (RBI) have introduced several reforms to liberalise, regulate and enhance this industry. Now- a-days finances are easily accessible for Micro, Small and Medium Enterprises (MSMEs) due to various schemes like Credit Guarantee Fund, MUDRA Bank, Jan Dhan Yojana and various insurance programs.
The Union Budget 2016-17 has allowed foreign investment in the insurance and pension sectors in the automatic route up to 49 per cent. The Union Cabinet has approved 100 per cent Foreign Direct Investment (FDI) under the automatic route for non-bank entities that operate White Label Automated Teller Machine (WLA), subject to certain conditions. Service tax exemption on service of life insurance business and capital gain tax exemption on mutual fund scheme benefit the investors which unknowingly aiding finance sector due to increase in customer base.
As per ICRA, NBFC sector will likely to expand by 19-22 per cent in FY2017 and is expected to provide 19 per cent year-on-year (YoY) growth in first nine months of FY2016. Growth is likely to be led by an improvement in commercial vehicles (CVs) and gold loan segments. Growth in microfinance, unsecured loans, loan against property will likely to remain high. However, the segments which saw a muted growth include tractors as lenders remain cautious in view of the weak rainfalls over the past three crop cycles. The June, 2016 data reveals that tractor sales have gone up on the expectation of above normal rainfall which will further boost the sector. Further, credit demand in the construction equipment (CE) segment is also expected to pick up only gradually in FY2017 when the steps initiated by the government to boost infrastructure activity start bearing results.
Housing is one of life’s three most basic needs, alongside food and clothing and is also known to contribute to the social, physical and psychological well-being of a family. Housing shortage has been a major problem over the years. The total housing shortage in India runs into millions. Almost 80 per cent of demand is among the lower income and informal sector households spread across urban, semi-urban and rural areas. The government’s focus on affordable housing and increased penetration by Housing Finance Companies (HFCs) in tier II and tier III towns will likely to fuel the next leg of growth. Small ticket loans will be the new growth driver and HFCs with rural focus will benefit the most. Mortgage finance, housing lending, home improvement loan will be benefited due to housing schemes and infra boom.
Companies like Housing Development Finance Corporation, Indiabulls Housing Finance, Bajaj Finance, LIC Housing Finance, M & M Financial services will capture opportunity in this pool.
Gold finance is also the talk of the sector. As per the reports of World Gold Council, India accounts for 25 per cent of the total world gold demand. For Indians, gold is an auspicious metal bought on various occasions and demand remains inelastic irrespective of prices. The country’s organised gold loan market has witnessed a significant expansion in the last one decade. The large domestic household gold holding of the country enabled the creation of this market. The magnitude of this holding could be more than 18,000 tonnes. Some independent estimates indicate that rural India accounts for about 65 per cent of total gold stock in the country. At times of emergency, gold ensures a loan almost instantaneously for the poor and without any tedious documentation process. Most of the loans are for meeting unforeseen contingencies. The demand for gold has a regional bias with southern Indian states accounting for around 40 per cent of the annual demand, followed by the west (25 per cent), north (20-25 per cent) and east (10-15 per cent). Accordingly, even the gold loan market has also developed on the same lines, where a large portion of market is concentrated in southern India.
With core gold loan products in portfolio, companies like Muthoot Finance, Goldline International Finvest, Manappurram Finance are grabbing the opportunities.
During FY2016, the new government launched several programmes to drive growth, investments and competitiveness, despite internal and external challenges. Initiatives like Make in India, Digital India, Smart Cities and Financial Inclusion would help improve the access and affordability of products, while giving a boost to domestic production. FIIs, DIIs have jumped in the most attractive emerging economy in the World. Nifty, mid cap space and small caps have outperformed during the fiscal year and awarded investors handsomely. Backed by these factors many NBFC like Motilal Oswal Financial Services, Capital First, Religare, Edelweiss securities have benefited in their businesses.
The Indian Asset Management Company continues to witness growth on the back of buoyant equity market. The mutual fund industry in India witnessed a return of retail investors resulting in growth of AUM and AIF (Alternate Investment Fund). As monsoon is performing well on the higher prediction wheels till now, we can expect considerable growth in agree and rural loan portfolio business of NBFC.
While analysing the sector, 78 companies according to the market capitalisation was taken. These 78 companies put together posted a strong top line. The sector sales as compared to previous year 2014 have increased by 7 per cent. PBIT of the sector has grown by 12 per cent as compared to 2014.
Housing Development Finance Corporation has posted good financial numbers in FY16. HDFC’s total revenue increased by 10 per cent to Rs 53223 crore in FY16 as compare to last fiscal year. HDFC’s net profit also rise by 16 per cent in FY16 as compare to FY15. EPS has grown by 13 per cent in FY16. Top line revenue of Bajaj Finance also increased by 36 per cent in FY16 as compare to FY15. Bajaj Finance net income has also risen by 42 per cent in FY16 as compare to previous fiscal. It also rewarded investors with 88 per cent of returns on yearly basis. Indiabulls Housing Finance, Bajaj Finserv, Shriram transport Finance Company, LIC Housing Finance and Power Finance Corporation has posted rise in revenue above 10 per cent in FY16 as compare to FY15.
Many NBFC like Paul Merchants, Meenakshi Enterprises, Capital trust, VB Industries, Stamped Capital have given returns above 100 per cent over last fiscal year. Consolidated net profit ramped up by 7 per cent of the sector in FY16.
RBI has taken much expected steps to reduce interest rates in FY16. Corporate Financial performance still has a couple of quarters to go before a visible turnaround can be seen. Inflation target are holding downside slope as monsoon headed towards robust performance.
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Hospitality sector
Hotel, restaurants are a part and parcel of the tourism sector which thrives largely with the growth in travel and tourism industry. Tourism itself is a fast growing industry which is also the third largest foreign exchange earner for the country. Such a boom in tourism has helped its allies to surge accordingly. Hospitality sector, also termed as hotel sector grows with the growth in Indian and foreign tourists’ numbers in the country specifically used for room and suite bookings.
Hotel is normally cyclical in nature which has the highest demand between November to March. However, now with growing medical tourism and business tours, the demand is almost throughout the year.
India is estimated to have 1.7 lakh hotel rooms and is estimated to grow more by 60000 in next 3-5 years’ horizon which would be still disproportionate to the growing demand. Over 40 international hotel brands are said to enter the country in next 3-5 years.
Earlier mostly the companies were seen setting up hotels in the metro cities. Now they are slowly picking up in tier-2 and tier-3 cities. The hotels in India are facing huge competition with the entrance of foreign hotel chains. Also, there is an increasing competition from the start-ups. Moreover, the online booking through internet has fuelled the competition.
Economic risks, huge capital infusion, competition, land unavailability and poor infrastructure has set the industry in doldrums.
To analyse the performance of the sector, we have selected a set of top 15 companies by market capitalisation numbers. Out of that Indian Hotels Company, Thomas Cook (India) and EIH form nearly 57 per cent share. The revenues of a set of hotels increased by 9 per cent in FY 2015-16 to Rs 14452 from Rs 13310 crores in FY 2014-15. The previous year’s growth stood at 7 per cent on annual basis. Indian Hotels, the highest revenue earner grew from 3 per cent to 10 per cent in FY16 at Rs 4591 crores. Otherwise Mahindra Holidays posted a growth of 97 per cent from a negative growth of 1 per cent in the previous year amid large room inventory, member base and the fees. In terms of profits, the figures the figures saw a recovery. The total net losses in FY 2014-15 had worsened from Rs 281.8 crores to Rs 391.4 crores. However, FY 2015-16 saw a tremendous recovery where it posted a net profit of Rs 228.8 crores. Indian Hotels has been posting net losses, but has seen recovery from Rs 378.1 crores to Rs 60.5 crores in FY16. EIH brand has maintained profits in the current year.
In India, major hotels are either big established brands like Oberoi Group of Hotels belongs to EIH Limited or the arms of big brand conglomerates like Indian Hotels belonging to Tata Group. The tourism trend is highly positive and expected to reach 400 billion USD by 2022 driven by expanding middle class and rising income.
Seeing the potential in the hospitality sector as a whole that has been generating employment and forex, government has taken initiative to boost it more. The expansion of India’s visa-on-arrival and new transport infra in cities other than metros.
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IT
Narendra Modi government’s ‘Make in India’, ‘Digital India’ and ‘Skilled India’ campaigns persuade the Indian information technology sector to stay happening. IT sector played vital role in putting India on the global map wherein India enjoys the position of one of the largest IT outsourcing destinations. IT fetches nearly half of the total service sector exports. All in all the major chunk of Foreign Direct Investment (FDI) comes from the computer software and hardware sectors. The highly talented but cheap IT labour is the feather in the cap for Indian economy that aims at 10 per cent contribution to country’s GDP.
Recently with the advent of BREXIT where Britain chose to move out of European Union was extremely disappointing for the Indian IT sector. IT stocks witnessed a partial drop and going forward the uncertainty is likely to prevail in the near term. Moreover, companies like Mastek that fetches 95 per cent of its offshore revenues from UK saw a massive setback after UK Pounds saw more than 10 per cent drop against Dollar. Most Indian IT companies have their European operations headquartered in Britain. The European Union contributed nearly 28 per cent (17 per cent from UK and 11 per cent from the continental Europe) or 30.8 billion USD revenues from IT exports in FY 16.
Europe is the second largest market for Indian IT and contributes nearly 25-30 per cent of total IT offshore revenues. A possible further decline in the value of Pounds may lose grounds in terms of existing contracts and their plans unless negotiated by the Britain. The IT companies may require to establish separate operations at EU amid a probable liquidation from UK.
Apart from the revenues; the mobility of the labour source, currency volatility and changes in financial systems after separation would impact the working of Indian IT companies. For instance, Wipro has nearly 4000 employees operating from UK. The companies at the moment have no option than to wait for new ties and opportunities with UK to benefit its long term outlook.
In the long term the weakness from the BREXIT will be offset by the Dollar appreciation against Rupee. The US is the largest offshore client of Indian IT sector contributing nearly 50 per cent of its offshore revenues and thereby the consistent strengthening of Dollar may recover the losses. Moreover, the UK which hired a large portion of its labour from the Europe is the biggest opportunity for the Indian companies with highly skilled IT professionals, provided the Visa fee issues are resolved.
On the domestic front, the Trade Union concept which was limited to the manufacturing sector is seen breaching in the IT sector too. Recently, the TN government took decision of allowing trade unions in the sector under Industrial Disputes Act, 1947. The labour force which is the biggest direct cost to the IT sector haunts it badly. It comes as a bottleneck to many software companies that are planning transition to automation. Many companies have set up campus hiring in TN.
Considering the financials, out of all these odds IT companies’ financials talk good about the sector. The set of 46 companies saw an accumulated increase in revenues at 11 per cent and the bottomline net income rose 9 per cent in FY 2015-16. The data gives marginally lower growth in revenues as compared to the FY 2014-15 at 13 per cent but better in terms of the bottomline at 7 per cent. The top five IT companies viz; TCS, Infosys, Wipro, HCL Technologies and Tech Mahindra account for nearly 89 per cent of the total pool by market capitalisation. These companies all together fetched revenues of nearly 75 per cent while 88 per cent to the net profits. The rise in the bottomline was in the wake of reduced hiring rates. Moreover, cloud computing is likely to reduce other expenses in R&D.
Going stock specific, the only underperformer was HCL Technologies after the company acquired Geometric Ltd. On the other hand, TCS saw the highest growth in topline from 6 per cent to 17 per cent while Infosys outshined in terms of its net profits that grew from 4 per cent to 22 per cent in FY 2016.
Frankly we do not see any drastic upside in the IT sector in near term. However, the continued mergers and acquisitions of smaller entities or start-ups would help inorganic growth of increasing clientele. Moreover, the separation of UK and EU can be seen as an opportunity in the long-term with operational initiatives in isolation and higher labour arbitrage by both. Ultimately Modi Government’s dream of Digital India is attainable only with proper spending on the IT infrastructure.
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Iron and Steel Sector
India is the third largest producer of steel in the world and by the end of 2016, the country is expected to win the rank of being the number two. Steel is one of the most common materials in the world. We rely on it for our housing, transport, food and water supply, energy production, tools and healthcare. Nearly everything around us is either made of steel or manufactured by equipment made of steel. Iron and steel segment offers a product mix which includes hot rolled parallel flange beams and columns rails, plates, coils, wire rods, and continuously cast products such as billets, blooms, beam, blank, rounds and slab, and metallics and ferroalloy. The growth in the Indian steel sector has been driven by domestic availability of raw materials such as iron ore and cost-effective labour. Consequently, the steel sector has been a major contributor to India’s manufacturing output.
The clearance of the 7th Pay Commission recommendations by the government will also benefit the real estate industry. Good monsoon is expected to offset inflation, which is at around 5 per cent. Which will therefore boost the demand of real estate as it will increase the consumption capacity. On the other hand, India is witnessing a sustained growth in infrastructure build up. The construction industry has been witness to a strong growth wave powered by large spends on housing, road, ports, water supply, rail transport and airport development. Infrastructure projects continue to provide lucrative business opportunities for steel, zinc and aluminium producers. India’s infrastructure sector is expected to grow at a CAGR of 15.6 per cent over FY08-17. In the Union Budget of 2016, finance minister, Arun Jaitley announced to spend approximately Rs 27000 crores on roadways and Rs 55000 crores on highway projects which should indirectly boost the demand for this sector.
India holds a fair advantage in cost of production and conversion costs in steel and alumina. Its strategic location enables convenient exports to developed as well as the fast developing Asian markets. However, the exports have significantly been reduced. For instance, in 2015, India’s iron and steel exports were valued at USD 5.1 billion. During FY 2009-14, India’s exports of iron and steel declined at a CAGR of 6.15 per cent. India was a net importer of steel till FY13, but turned a net exporter of the same in FY14. In 2015, India imported 9.32 MT of steel while exports declined to 5.59 MT in FY15 from 5.98 MT during 2013-14.
India’s transition into a net exporter of steel despite the strong growth in domestic steel production shows the demand potential of the sector. The impact of strong growth in domestic steel production has been most felt in the iron ore sector; with steel firms’ ever rising demand for the raw material, India’s imports of iron ore has been growing steadily for example, iron and steel imports increased at a CAGR of 2.04 per cent over FY09-15. During FY11-15, import of steel grew at a compounded annual rate of 9.01 per cent.
Out of the 1000 companies, 33 key companies according to their market cap are considered for the analysis of this sector. The sector put together saw a decline in the top line. The sale put together saw a decline of 12 per cent and PBIT declined by 39 per cent. However, the net income has increased by 492 per cent. JSW Steel, Tata Steel, SAIL, Jindal and Power are the major company in terms of market capitalisation. JSW steel has the highest market capitalisation. APL Apollo Tubes posted the best double digit growth in sales, as compared to 2014 the company recorded a growth of 40 per cent. Electrosteel Steels posted a highest PBIT (Profit Before Interest and Tax), the company on a YoY saw an increase of 337 per cent as compared to the financial year 2014-15. As far as net income is concerned, Welspun Corp emerged victorious with 229 per cent increase as compared to 2014-15. However, out of 33 companies only 12 companies posted a negative number. Return On Net Worth, is a good indicator how well the sector has utilized it equity capital. The two major companies which has given a best RONW are Welscorp and Sunflag Iron and Steel. Welscorp RONW as compared to 2014 has given a RONW of 202 per cent and Sunflag Iron and Steel has given RONW of 108 per cent.
Government of India is aiming at scaling up of steel production in the country to 300 MT by 2025 from 81 MT in 2013-14. The Ministry of Steel has announced to invest heavily in modernisation and expansion of steel plants of Steel Authority of India Limited (SAIL) and Rashtriya Ispat Nigam Limited (RINL) in various states to enhance the crude steel production capacity in the current phase from 12.8 MTPA to 21.4 MTPA and from 3.0 MTPA to 6.3 MTPA respectively. The central government is encouraging private ownership for steel operations and other high priority industry. Government also has significantly reduced the duty payable on finished steel products and streamlined the associated approval process.
In the year 2015, India stood as the largest producer of direct reduced iron ore and world’s fourth largest iron ore producer. Iron ore production is estimated to have declined at a CAGR of 2.72 per cent during FY07–15E. Iron ore production was expected to cross 155 million tonnes in FY15. Demand for iron and steel is set to continue, given the strong growth expectations for the residential and commercial building industry. In FY15, the consumption of finished steel grew to 76.99 MT while the CAGR increased to 5.74 per cent during FY08-15.
· Strong long-term demand from the steel industry is expected to further boost the iron ore industry. Increasing power production is likely to catapult demand for coal. Booming construction, automobiles, and packaging industries are expected to lend substantial support to the Iron and steel industry. Chinese buyers demand more industrial metals than the rest of the world combined. When China experiences strong growth and expands its infrastructure, the prices of industrial metals rise to a higher level. The Chinese real estate and industrial sectors are larger than any others in the world. The recent Chinese traction in August 2015 has taken a toll in the prices and demand for this sector, which has affected the demand for this sector worldwide. The world economies also recorded a sluggish growth due to liquidity problems. Chinese economy recorded a single digit growth GDP growth for the first time in 25 years. Total domestic demand for steel is estimated at 113.3 MTPA by 2016-17.[PAGE BREAK]
Oil and Gas sector
Oil & gas is one of the prime sectors of the country. The companies operating in this sector are divided into two segments namely oil exploration companies and oil marketing companies/refineries etc. International oil prices have fallen to significant level in recent times which has taken a toll on the oil exploration companies, but on the other hand, falling prices of crude has benefited the oil marketing companies, therefore any reforms and changes in the prices will directly impact Indian economy and will narrow or widen the Current Account Deficit (CAD). However, as far as India is concerned, low oil prices have benefited the country to narrow the CAD. In the last 3 months, oil and gas prices has increased but has remained low as compared to its historical level.
From Indian context, Government of India has brought in various policies and in fact allowed 100 per cent FDI in the sector to make it more lucrative. According to data released by the Department of Industrial Policy and Promotion (DIPP), the petroleum and natural gas sector attracted FDI worth US 6.64 dollar billion between April 2000 and December 2015. The demand for this sector in India is expected to remain intact.In 1997–98, the New Exploration Licensing Policy (NELP) was brought, to fill the ever-increasing gap between India’s gas demand and supply, therefore, the need for oil and gas is projected to grow more, thereby making the sector quite conducive for investment. The country's gas production is expected to touch 90 Billion Cubic Meters (BCM) in 2040 which was around 35 BCM in 2013. (sources IBEF)
The sector’s review cannot be completed without analysing the financials. Reliance Industries is being excluded in the financials as it has been exhaustively cover under miscellaneous companies. State-owned Oil and Natural Gas Corporation (ONGC) dominates the upstream segment (exploration and production), accounting for approximately 68 per cent of the country’s total oil output. The sector on a (YoY) has depleted. The sector which comprises of 14 companies out of 1000 saw a steep decline in their sales volume as well PBITD (Profit Before Interest Tax Deprecation) and its net income. Sales volume declined by 20 per cent as compared to the financial year 2014-15. Net income also reduced 8 per cent YoY. The plunge in oil prices have taken a toll in the sector. Oil and Natural Gas commonly abbreviated as ONGC saw an increase of 12 per cent in net profits in Q4FY16 however saw a decline on a YoY basis. The sector registered a negative sales growth in the year 2015-16. The sales for 2015-16 dropped and widen by 20 per cent from 9 per cent in the year 2014-15. However, the numbers of PBITD turned positive as in the previous year the PBIT was negative and was down by 18 per cent. For the year 2015-16 the PBIT grew by 19 per cent. The net income although negative for the current period 2015-16 has reduced as compared to the 2014-15. The sector net income decline by 8 per cent, but however in the year 2014-15 the sectors net income declined by almost 36 per cent.
On the contrary RONW, Return On Net worth is a good indicator how well the sector has utilised its equity capital and how well the company has given return to its equity shareholders. The major companies which has utilised equity resourcefully and have cheered the shareholders are Indian Oil Corporation, Bharat Petroleum Corporation Limited, Hindustan Petroleum Corporation Limited. This company have given a RONW of 107,134,163 per cent respectively for 2015-16 as compared to 2014-15. The share prices of HPCL has grown by 39 per cent annually from 2014-15 to 2015-16. The soaring oil prices have benefited these refining companies and improved their margins.
The sector comprises of the companies operating in oil exploration as well as oil marketing companies. International oil explorers saw an excess supply over demand which made the price to shrink to a significant level. The negative financial numbers of this sector put together is generally due to soaring oil prices.
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Packaging Sector
Packaging sector, amongst the high growth sectors in India is growing at a compounded annual growth rate (CAGR) of 22-25 per cent. High export potential sector that it is, packaging sector is currently the 5th largest sector in India's economy.
The Indian packaging industry exports comprise flattened cans, printed sheets and components, crown cork, lug caps, plastic film laminates, craft paper, paper board and packaging machinery. The industry as a whole imports tinplate, coating and lining compounds and others.
Flexible packaging and laminates are fastest growing segments in India. Innovation led growth is the trend in the Indian packaging sector with Uflex leading the pack in the industry in flexible packaging segment.
Packaging industry indeed has been playing an important role in adding value to the various industries like agriculture and FMCG, by adopting latest technology. Fortunes of packaging industry is directly linked to fortunes of growing pharmaceuticals, food processing, manufacturing industry, FMCG and healthcare sector in BRIC nations and few of the East European countries.
With general awareness on rise and advancement in technology , the packaging sector in India is set to witness growth as most of the raw material for packaging is available in India in abundance, which helps keep costs reasonable. The trend of higher per capita spending on packaging augurs well for the industry. The food packaging industry in particular is witnessing traction and the growth in this industry is innovation driven. Consumers are increasingly demanding food products to be hygienic, safe and the presentation of the package needs to be attractive.
Thus increasing usage of flexible packaging and packaging that will discourage counterfeiting is trending in the industry. With growth in organised retail and consumer packaged goods the packaging industry is all set to grow in double digit in coming years. The packaging industry is looking forward to the government for several policy support that will help the industry to compete globally. With focus on international markets the packaging industry has a much larger market to compete in and the challenge is to maintain net margins along with trying to gain market share for individual companies.
For analysing the sector we have considered data of 10 companies representing the packaging sector. The sales for these leading companies, reflective of the sector grew by almost 16 per cent for FY2014-15 whereas the sales reflected a negative growth of 8 per cent for FY2015-16. The EBITDA for the sector improved by 20 per cent YoY in FY2014-15 whereas the EBITDA improved by 8 per cent YoY for FY2015-16. The net income grew by 39 per cent YoY for FY2014-15 whereas the net income grew by 22 per cent for FY2015-16.
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Personal Care
Personal care has become an integral part of our lives, right from Dabur Lal tel for munne ki malish up to HUL’s Ponds cream for googly woogly woosh cheeks or even the Colgate’s Number 1 paste recommended by the dentists. India’s personal care comprises of hair care, oral care, skin care and bath products. The sector is a part and parcel of FMCG and accounts for more than 22 per cent of its share. Apart from transition to rapid urbanisation, the growth in the sector is driven by changing lifestyles and huge advertising. Very high competition is what keeps the sector moving. India accounts for more than 2 per cent of the global personal care market in sales.
In recent years the personal care stocks have received a stimulus from the non-listed players coming up with their Ayurvedic products made of herbal and natural materials. Baba Ramdev’s Patanjali is seen replacing the shelves of the big players in the industry with their similar but cost effective products promising no side effects at all. The company has increased its revenues by 60 per cent to nearly Rs 5000 crores in 2015-16. The follower is Himalaya Drug Company.
However, the companies like Dabur India and Emami are able to withstand the competition as they already have a strong foothold in the Ayurvedic segment too. Moreover, their huge penetration, faith gained products, variety and advertisement have helped them retain their share in the market.
We have taken into consideration a set of 11 companies with highest market capitalisation to analyse the growth of the industry. HUL, Dabur India and Godrej Consumer Products form nearly 74 per cent of the market capitalisation of the sector. Considering the topline revenues, the sector has witnessed a drop in growth from 12 per cent in FY 2014-15 to 8 per cent in FY 2015-16. The revenues stand at Rs 77609 crores in FY 16 from Rs 72155 crores in FY 15. All the stocks have witnessed a drop in their revenues in FY16. Moreover, the net profits too have seen a drop in growth from 14 per cent in FY15 to 3 per cent in FY 16. Total net profits for FY 16 have come in at Rs 9064 crores as against Rs 8791 crores in FY15. The drop was majorly led by HUL, Emami, Zydus Wellness and Kaya that saw a decline in their profits. The major reason was phasing out of excise duty incentives and decline in prices of products; moreover, due to the raw material cost and advertising costs, which form a major chunk of direct costs to the companies. Imports of chemicals used as a raw material for the industry inflated the direct costs, however government has now initiated actions.
Nevertheless, it’s a defensive sector and importantly a fertile ground for companies willing to expand with 2nd highest population and 10th largest economic growth. With growing working women population and upgradation of products every second, the demand will keep accelerating. Moreover, the companies have adopted sales through the e-commerce method which is the need of the hour.
Moreover, India is known for Herbal growth. 97 per cent households use herbal products which forms 33 per cent of personal care.
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Pharmaceuticals
Pharmaceuticals sector is the third largest among the 25-odd sectors in terms of volume and 13th largest in terms of value. According to IBEF, Indian pharmaceutical sector accounts for about 2.4 per cent of the global pharmaceutical industry in value terms and 10 per cent in terms of volume. The branded generics segment dominates the pharmaceuticals sector, constituting nearly 70 to 80 per cent of the market. India is the largest provider of generic drugs globally with the Indian generics accounting for 20 per cent of global exports in terms of volume. India has the largest number USFDA compliant plants. The industry is expected to reach USD 55 million by 2020, out of which USD 30 million will be from exports.
India has a strategic advantage as the cost of productions in India is less than the countries in Europe and the USA. Of them all a good research and development (R&D) is the added advantage. From the recent data, it can be rightly said that India is emerging as a leading healthcare destination for medical tourism too. India exports majorly to the USA, and is the largest provider of generic medicines, the country’s generic drugs account for 20 per cent of global generic drug exports (in terms of volumes). In terms of value, exports of pharmaceutical products increased at a CAGR of 14 per cent during FY 12 to 15. Multinational companies are collaborating with Indian pharma firms to develop new drugs. For example, Cipla formed an exclusive partnership with Serum Institute of India to sell vaccines in South Africa. Cipla, the largest supplier of anti-malarial drugs to Africa, set up a USD32 billion plant in Africa for the production of anti-retroviral and anti-malarial drugs. On the other hand, Sun Pharma, has become world’s fifth largest company worldwide having 48 manufacturing sites for more than 3000 marketed products. The sector entirely is very well poised but Indian pharmaceutical companies will face a stiff competition from the foreign players which have a huge financial muscles. However, entry of the new players in the sector is extremely rigid due to strict government regulation and policies. As of now, the threat of the substitute to the industry is extremely low, however in the years to come Ayurvedic and Homeopathy segments look like distant threats to this sector’s existing players. Players in the sector are trying to differentiate themselves by investing heavily on Research and Development efforts. For example, in 2015, Lupin opened a research and development centre for inhalation products in Florida, USA. Sun Pharma is trying to develop technically complex APIs, (Active Pharmaceutical Ingredients) such as steroids, sex hormones, peptides, carbohydrates and taxanes, which require special skills and technology. Dr Reddy’s is investing in technology platforms. It acquired OctoPlus N.V, a Netherlands-based company, to get access to the Poly Lactic-Co-Glycolic Acid (PLGA) technology for the formulation of complex injectable. Certain players in the sector are focussing on entering new markets with new opportunities. For example, Lupin is making inroads into new markets such as Latin America, Russia and other East European countries.
We have analysed about 62 companies from pharmaceutical sector, which are selected from top 1000 companies. These companies are top 1000 as per market capitalisation The pharmaceutical industry witnessed growth of 12 per cent amounting to Rs 195930 crore in FY16 as compared to previous fiscal year. Meanwhile, the sector’s revenue grew by 20 per cent to Rs 175663 crore in FY15 on yearly basis. Pharmaceutical sector’s EBITDA increased by 18 per cent to Rs 46689 crore in FY16 as compared to previous financial year. The industry’s EBITDA rose by 11 per cent to Rs 39657 crore in FY15 on yearly basis. The net profit increased by 7 per cent to Rs 25498 crore in FY16 as compared to previous fiscal year. Its net profit boosted by 29 per cent to Rs 23834 crore in FY15 on yearly basis.
The industry major, Sun Pharmaceutical Industries’ top line increased by 3 per cent to Rs 28270 crore in FY16 as compared to previous fiscal year. The company’s EBITDA also rose by 6 per cent to Rs 8941 crore in FY16 on yearly basis. Its bottom line increased by 4 per cent to Rs 4716 crore in FY16 on yearly basis. Lupin’s revenue increased by 11 per cent in FY16 against 13 per cent in FY15 on yearly basis. The net profit of Lupin declined by 6 per cent to Rs 2271 crore in FY16 as compared to previous financial year. Lupin’s net profit rose by 31 per cent to Rs 2403 crore in FY15 on yearly basis.
Considering market capitalisation of companies in pharmaceutical space is as follows, Sun Pharmaceutical Industries (Rs 177727 crore), Lupin (Rs 64480 crore), Dr. Reddy’s Laboratories (Rs 53445 crore), Aurobindo Pharma (Rs 45280 crore) and Cipla (Rs 37989 crore). These four company accounts to more than 20 market share of the sector.
The pricing policy set by National Pharmaceutical Pricing Authority (NPPA) in FY14, many MNC pharma companies got impacted. The poor performance being reported by major MNC companies. The margins of these MNC players remained subdued due to increasing expenses and slower topline growth.
Currency depreciation had both positive and negative impact on the Indian pharma companies. Depreciating rupee helped some companies garner better margins. On the other hand, those with forex loans on their books witnessed higher payments.
The industry continued to face bigger challenges on the regulatory front. The companies faced issues from the USFDA, as they lacked good manufacturing practices (GMP). The regulatory hurdle, there were instances of import alerts being issued, drug recalls, warning letters. The many of the regulators have become more stringent now and have also been conducting surprise checks.
The government liberalised pharmaceutical sector. There is up to 74 per cent FDI permitted under automatic route in brownfield projects. As of now, 100 per cent FDI is allowed in pharmaceutical industry under automatic route in greenfield projects and up to 100 per cent under government approval in brownfield projects.
According to Associated Chambers of Commerce and Industry of India (ASSOCHAM), the pharmaceutical sector in India will register higher growth during the course of the next five years (22 per cent) as compared to a CAGR of about 14 per cent clocked by the sector during 2010-14.
The sector has managed to bring in a lot of investments due to 100 per cent FDI, according to data released by the Department of Industrial Policy and Promotion (DIPP). The drugs and pharmaceuticals sector attracted cumulative FDI inflows worth USD 13.45 billion between April 2000 to December 2015. The numbers are expected to increase in the next 2 to 3 years. Apart from FDI, the sector has seen some notable trends set by the Government of India. For instance, Indian Government plans to involve the private sector in Research and Development mainly for sectors such as vaccines, drugs and pharmaceuticals, supercomputing, solar energy and electronic hardware. As on January 2016, the total project cost of healthcare infrastructure project is USD 151.91 million and there are five healthcare projects under PPP. Green Field Super Specialty Hospital (Bathinda), Green Field Super Specialty Hospital (Mohali), Indira Gandhi Government Medical College Complex (Maharashtra), Nephrology and Dialysis unit at Coronation Hospital (Uttarakhand), Nephrology Dialysis unit at Base Hospital (Uttarakhand). Pharma companies have increased spending to tap rural markets and develop better medical infrastructure. In 2015, Indo-UK healthcare agreed to invest USD1.63 billion to set up hospitals and the first hospital will set up in Punjab. Hospitals’ market size is expected to increase by USD200 billion by 2024. India’s generic drugs account for 20 per cent of global exports in terms of volume, making the country the largest provider of generic medicines globally. India’s generics drug market accounts for around 70 per cent of the India pharmaceutical industry and it is expected to reach USD27.9 billion by 2020. India’s cost of production is nearly 60 per cent lower than that of the US and almost half of that of Europe Labour costs are 50–55 per cent cheaper than in Western countries. The cost of setting up a production plant in India is 40 per cent lower than in Western Countries Cost-efficiency continues to create opportunities for Indian companies in emerging markets and Africa. India has a skilled workforce as well as high managerial and technical competence in comparison to its peers in Asia India has the second largest number of USFDA-approved manufacturing plants outside the US India has 2,633 FDA-approved drug products India has over 546 USFDA-approved company sites, the highest number outside the US.
There will be BREXIT impact on pharmaceutical sector. Many of the companies have exposure towards European Union and UK. The European markets account for about 10 per cent to 13 per cent of total revenues. Major companies including Aurobindo, Wockhardt, Sun Pharma, Glenmark, Dr Reddy's and Lupin have operations in the UK, and would be adversely affected with BREXIT. There will be short term impact due to weakening of Pound in Europe.
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Plastic Sector
India, one of the most promising exporters of plastics among developing countries, produces and exports a wide range of raw materials, plastic-moulded extruded goods, polyester films, laminates, moulded/soft luggage items, writing instruments, plastic woven sacks and bags, polyvinyl chloride (PVC), leather cloth and sheeting, packaging, consumer goods, sanitary fittings, electrical accessories, laboratory/medical surgical ware, tarpaulins, laminates, fishnets, travel ware, and others.
Indian plastic industry's major strength is in the availability of raw materials in the country, and hence there is less dependency on any kind of imports. In India the raw material required for plastics is manufactured domestically i.e polypropylene, high-density polyethylene, low-density polyethylene and PVC.
Plastic in India is gaining notable importance in various different segments and the per capita consumption is increasing at a considerable pace. Innovation led continuous advancements and developments in polymer technology along with other factors such as cost effectiveness etc., is helping replace the different segment materials with plastics. USA, UAE, Italy, UK, Belgium, Germany, Singapore, Saudi Arabia, China & Hong Kong are the top trading partners of India for plastics.
Demand from original equipment manufacturers (OEMs); excellent potential in terms of capacity, infrastructure; cheap labour availability; large number of polymer producers, and plastic process machinery and mould manufacturers in India are the key factors aiding the plastic industry in India.
For the purpose of sectoral analysis 15 leading companies in plastic sector were studied. The sector as a whole grew by a good 7 per cent during FY2014-15 in terms of sales whereas the growth was negative 3 per cent in terms of sales for FY2015-16. The sales stood at Rs 14, 878 crore for FY2014-15 and for FY2015-16 sales for the industry was at Rs 14,503 crore. The growth in net income for the sector was 13 per cent at Rs 768 crores for FY2014-15 and the net income growth was 14 per cent at 878.625 crore for FY2015-16. The EBITDA for FY2104-15 grew by 8 per cent YoY industry-wise and stood at Rs 1,829 crore for the industry; whereas the EBITDA grew by 5 per cent YoY in FY2015-16 at Rs 1,929 crore.[PAGE BREAK]
Power
Power sector is more important than any other sector in current times for India as power is one of the most critical components of infrastructure development process which is of paramount importance for economic growth, welfare and development of the nation. If India has to witness sustained growth and development adequate infrastructure is essential and power sector becomes an essential player in the development game.
India's power sector while most diversified in the world as its sources of power generation ranges from conventional sources such as coal, lignite, natural gas, oil, hydro and nuclear power to viable non-conventional sources or alternative energy such as wind, solar, solar and agriculture and domestic waste. India's economic growth, urbanisation trend and increasing industrialisation along with growth in population ensures increasing demand for electricity in the country. This demand for electricity requires massive addition to the installed capacity. Government of India's mission 'Power for All' and its action on ground has accelerated capacity addition in the country even as the competitive intensity is increasing at both market and supply sides i.e fuel, logistics, finance and manpower.
With several companies showing keen interest in investing in the capital starved sector, almost 293 companies including global and domestic companies have together committed to generate 266 GW of solar, wind, mini-hydel and biomass power in India over the next 5-10 years, which is significant. This initiative suggests an investment to the tune of USD 310-350 billion. The power sector in previous 15 years i.e from April 2000 to September 2015 has attracted USD 9.97 billion in Foreign Direct Investment (FDI). Inspite of the huge demand and incentives awarded, the sector is struggling.
Power, the supposedly defensive sector with consistent demand across the country was expected to touch new highs without any disruption. The country is still termed as emerging where most of its activities remain at a standstill with a desperate power shortage. Paradoxically, we have not seen any growth in the power stocks, rather a free fall since the dawn of 2011.
Coal and fuel are the pillars of the power companies in India. Those are the basic raw materials for power generation in the country. The major setback to the sector was the rising coal and fuel prices amid shortage. The Said shortage led to higher costs and thereby rising losses. The heap of losses provoked the companies to incur huge debts leading to higher interest payments. Moreover, outstanding dues from state electricity boards and fall in merchant power tariff have affected the sector badly.
Not just the past, but recently, the coal price hike by Coal India to 19 per cent from 13 per cent that too in low grade coal called for demand imported coal that was much cheaper. Power companies had asked Coal India to stop supply because of lower demand. However, considering a broader view the long term volatility in international coal prices and cheaper domestic fuel availability, power sector specifically renewable stocks gained steadily amid reduction in direct costs.
Today investors remain wary about power sector as it is one of the most debt laden sectors in the markets. The total debt of power generation and transformation companies stands nearly at Rs 4.8 lakh crores in FY 2014-15. Major contributors were NTPC, Power Grid, Adani Power, Tata Power and Reliance Power with total of Rs 3.09 lakh crores. However, in terms of Debt to Networth ratio, GVK Power & Infra, Adani Transmission, Adani Power, Jaiprakash Power and KSK Energy Ventures remained at the forefront ranging from 5.5 to 2.7. By this we could see that leaving apart Adani Group, major other frontliners could manage their debts against the shareholder’s fund.
Nevertheless, India still relies confidently on the power sector as it is the fifth largest producer and consumer in the world. The electric utility sector has an installed capacity of 303083 MW as of May 2016. Thermal installed capacity stands at 69.84 per cent of the total which is majorly Coal based that contributed 61.45 per cent, Gas contributed 8.09 per cent and oil contributed 0.3 per cent. The Hydro installed capacity is 14.12 per cent and Nuclear remains low at 1.91 per cent. The renewable energy sources contributed 14.15 per cent.
Solar power separately contributed nearly 6763 MW installed capacity in March 2016 as against 3744 MW in the last year. In the solar power Recently World Bank group in agreement with International Solar Alliance assures Dollar 1 billion to the domestic solar energy projects.
Power distribution companies (DISCOMS) saw a huge loss amid higher debts. The accumulated debts and thereby losses ballooned since 2009-10 to 2014-15 to more than 3 lakh crores. UDAY scheme was launched with permanent resolution of the DISCOM debt issues. Initially UDAY started off with every state government taking over the debt of the respective state power set ups by the companies. States were required to take over 75 per cent of DISCOM debt over two years out of which 50 per cent in 2015-16 and 25 per cent in 2016-17. For remaining 25 per cent states were to repay lenders by selling Bonds.
The present resolution of UDAY aims at enabling hike in quarterly tariff to curb the cost increase burden through operational efficiency and lower cost of power. The tariff revision is likely to simplify implementation. However, the tariff hike in isolation cannot pass the inefficiency of DISCOMS to the ultimate consumers specifically states with 30-40 per cent losses. The only solution to it is improve performance of DISCOMS and maintain billing and collecting efficiency through smart metering.
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Service Sector
Service sector in India is one of the most if not the most important sectors contributing to Indian Gross Domestic Production (GDP) with at-least 57 per cent contribution to the GDP in 2015-16. Service sector outperformed other sectors in terms of attracting foreign investment inflows, exports and employment generation. Indian service sector is growing at a steady rate due to healthy contribution from various activities in the sector including trade, hotel, restaurant, transport, finance, insurance, real estate, business services and construction services.
Net service exports of India amounted to USD 73 billion in 2103-14 and the software exports accounted for USD 69 billion. India thus shares 3.4 per cent of the total global services trade while China shares almost 4.6 per cent. Service sector being the largest sector contributed almost USD 783 billion to the 2014-15 GDP at constant price. The Compounded Annual Growth Rate (CAGR) for the sector has been 9 per cent thus outperforming the overall GDP growth at 6.2 per cent which is the average GDP CAGR for past four years.
Out of the various sub segments in the service sector, financial services, real estate and professional’s services contributed the most while together contributing to almost 20.5 per cent to the GDP. While trade, repair services, hotels and restaurants contributed to almost 12.5 per cent to the GDP. This particular sub segment within service sector has grown the fastest at 11.7 per cent CAGR for a four-year period ending 2014-15.
Telecom services in India is another segment in the service sector in India witnessing growth and traction aided by the launch of 4G technology. 4G service for telecom users is expected to grow at 26.6 per cent for next 4 years. The Indian telecom services market is expected to reach USD 103.90 billion by 2020 suggesting an annual growth of 10.3 per cent for next 4 years. Indian telecom services market remains the second largest market in the world witnessing exponential growth in last couple of years. What has triggered growth and interest in this segment of service sector is the increasing network coverage and decreasing of tariff rates due to stiff competition.
Service sector, at 17 per cent of the total foreign inflows, has attracted the highest amount of Foreign Direct Investment (FDI) equity inflows in the 15 years’ period ending in 2015. Almost USD 45.38 billion has been invested in the form of FDI in the sector. To highlight few of the bigger transactions in the sector Credit Analysis and Research (CARE Ratings) has signed a Memorandum of Understanding (MoU) with Japanese Credit Rating Agency, Ltd i.e. JCR for various strategic business partnership.
Gurgaon headquartered shuttle raised USD 20 million from light speed, Sequoia and Times Internet Ltd. Rovigo, a technology enabled logistics company in India raised USD 30 million in debt and equity in Series B financing.
The private security services industry, another high growth sub segment in India is expected to deliver 20 per cent CAGR over few years and is expected to double its market size to Rs 80,000 crore by 2020. Companies like Ola, taxi aggregators are flourishing in India and such operators only highlight the untapped opportunities and potential in service sector in India.
Various government initiatives like passage of Goods and Services Tax (GST) which is yet to be constitutionalised should help trigger growth in service sector as the services offered will be taxed at lower rate than it is being taxed today.
In another sector friendly initiative by the GOI, current government is working to significantly liberalise its visa regime also allowing multiple-entry tourist and business visas. This initiative will help increase India's services exports. Other short term business visas, medical travel visas for least developed countries will be eased soon leading to expansion in services exports.
India may also benefit from greater market access in services through the ongoing negotiations for the Regional Comprehensive Economic Partnership agreement. GOI is attempting to build an institutional framework for collecting statistics on trade in services.
Government of India's plan to take mobile network to nearly 10 per cent of Indian villages that are yet unconnected, can only help sector grow as more and more services can be made available due to increasing mobile network.
We have analysed about 38 companies for service sector comprising service verticals logistics, EPC, trading, infrastructure. The overall revenue of the sector declined by 11.39 per cent to Rs 31311 crore in FY16 and de-growth by 8.36 per cent to Rs 35337 crore in FY15. Its EBITDA increased in slow pace in FY16 as compared to previous fiscal year growth. The sector’s EBITDA rose by 8.25 per cent to Rs 2534 crore in FY16. Meanwhile, its EBITDA boosted by 22.03 per cent to Rs 2341 crore in FY15. The service sector’s bottom line has witnessed improvement trend from last three financial years. Its net loss narrowed down from Rs 1408 crore in FY14 to net loss of Rs 476 crore in FY16.
The companies such as Shriram EPC, State Trading Corporation of India and Arshiya witnessed financial loss in past couple of fiscal years. Meanwhile, EPS of the companies which are top by their market capitalisation like Credit Analysis & Research,Navkar Corporation, VRL Logistics and Gati remained intact in previous three financial years.
Road ahead for the sector is bullish with both domestic and global factors affecting the sector. The sector is expected to perform well in coming years. As per National Skill Development Corporation's MD & CEO, Dilip Chenoy the service sector can grow at 7.4 per cent for coming year. The financing, insurance, real estate, and business services sector are expected to do well in coming year and so are the other sub segments within the services sector such as trade, hotel and restaurants and transport. With government adopting expansionary fiscal policy, the government expenditure will increase leading to improvement in performance of the community, special and personal services sector.
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