Agriculture

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Employing over 119 million farmers and 144 million agricultural labourers directly, the Indian agriculture sector is rightly known as the backbone of the Indian economy. The sector is the principal means of livelihood for over 58 per cent of the total rural households. It contributes over 20 per cent to the country’s gross value added and is poised to be the growth driver of the economy in FY19. Serving the world’s sixth largest food and grocery market in the domestic segment, the sector is also consistently growing its contribution to the global food trade. With the arrival of normal monsoons and the influx of government spending for energising the rural economy, the sector is riding on new hopes of prosperity. 

Dogged by the water shortages, inconsistent monsoons and increasing pricing pressure, the Indian agriculture sector has managed to emerge successfully as the top producer of several agricultural commodities. The sector has witnessed an exponential increase in the production of cereal foodgrains, pulses, sugarcane and cotton in recent years. India has been the largest producer of milk for over two decades and is a hub of coffee and tea production. It is also one of the largest exporters of shrimp in the world and the second largest fruit producer. The country’s shrimp sector is expected to expand to USD 7 billion by 2022, while the dairy sector is expected to grow at a CAGR of 15 per cent by 2020.

Agriculture sector constitutes nearly 10 per cent of the country’s total exports. However, despite India’s coveted position in the world agricultural market, the sector is constantly tormented by the plagues of pest outbreaks, storage and transportation difficulties, debt failures, market volatility and mounting price pressure on the farmers. Mostly sidelined at the fringe of issues, the agriculture sector is witness to a sea of agonised farmers and has recorded around 6,867 farmers’ suicides in 2016, from just five states of India including Madhya Pradesh, Maharashtra, Karnataka, Telangana and Tamil Nadu. The sector is struck by global and local market volatility and the global explosion in foodgrain production is constantly increasing the pricing pressure on the farmers. 

Analysing the sector with top 22 companies in terms of market cap, we observe that the overall sales of the companies have increased by 7 per cent in FY18 to Rs 86,676.11 crore as against Rs 81,331.23 crore in FY17. The highest contributor to sales came from EID Parry for the second consecutive year, which contributed more than 17 per cent to the total sales of FY18. Marico and Bombay Burmah Trading Corporation were the top companies in terms of profit after tax, with PAT of Rs 827.45 crore and Rs 772.65 crore, respectively, in FY18. However, Bombay Burmah Trading Corporation recorded a reduction of 10 per cent in its PAT. McLeod Russel (India) witnessed the highest PAT growth in FY18, up by 274 per cent on a year-on-year basis. Agriculture budgets have increased from Rs 16,646 crore to Rs 41,855 crore in the past three years, with the launch of several agriculture-centric initiatives, including soil health cards, Pradhan Mantri Krishi Sinchayee Yojana and National Agriculture Market. In addition, the Minimum Support Price (MSP) for different crops are also being increased regularly. These initiatives by the government are likely to ease the pricing pressure in the sector and give it a boost. 

The government is further seeking to expand agricultural exports of India, which stand at USD 30 billion currently. The government is also planning to liberalise the exports of agricultural commodities to reach the full potential of USD 10 billion. The government’s inclination towards infrastructure development even in the rural regions, the price support for crops, diversification of crops and the promise of bringing in the use of technology in the sector is likely to increase the agriculture GDP and result in rapid growth of agriculture markets and the contribution of rural India in the larger demand growth as well. These policies will most likely reduce the risks for the farmers and result in value-addition through processing and diversification of income.

In recent years, the sector has also attracted significant investments from domestic as well as foreign investors. The Indian agricultural services and agricultural machinery sectors attracted foreign direct investments (FDIs) in the form of equity inflows worth USD 1.99 billion and USD 466.31 million, between April 2000 and September 2017, while the food processing industry recorded FDI of USD 8 billion during the same period. During 2013 to 2016, the agriculture sector recorded FDI inflow of USD 250.48 million and it has been on a consistent rise.

Auto

India has become the fourth largest automobile market in the world. Passenger vehicles accounted for 13 per cent, commercial vehicles 3 per cent, threewheelers 3 per cent and two-wheelers 81 per cent of the market share in FY18. The auto industry in India has shifted focus towards the BS-VI norms from the earlier BS-IV norms. Slowly and steadily, it is moving towards development of electric vehicles, which is expected to be one of the biggest transformations of the automobile industry in India. However, this phase has long way to go and, in the meanwhile, in FY18, the auto industry recorded some milestones. In FY18, the highest ever production was witnessed in the passenger and utility cars segment. Also, the highest ever sales in passenger vehicles was recorded in FY18, despite the GST implementation. The two-wheeler production rose by 16.1 per cent in FY18 and highest ever sales and exports was recorded in scooters and motorcycles segment. The three-wheelers’ production and sales too were the highest ever recorded in FY18.

We have taken first 13 companies from this sector by market cap and analysed the overall performance of the sector. Overall, the growth in the sector has been decent with average growth of 17.4 per cent in the topline of these companies, whereas the PAT has grown at an average of 25.5 per cent YoY in FY18. Except Tata Motors and SML Isuzu, all other 11 companies have grown in double digits. The twowheeler and three-wheeler companies like Eicher Motors and TVS Motors have grown by 31.4 per cent and 31.9 per cent, respectively. Ashok Leyland, the manufacturer of trucks and light vehicles, grew by 31.1 per cent in FY18. 

However, SML Isuzu’s revenue de-grew by 16.9 per cent YoY in FY18. The operating profit of TVS Motors and Eicher Motors increased exceptionally by 103.5 per cent and 95.2 per cent YoY, respectively. Mahindra & Mahindra’s PAT jumped by 96.5 per cent for FY18 on a YoY basis, while Escorts’ PAT jumped exceptionally by 164 per cent YoY. However, the PAT of Force Motors and SML Isuzu was down by 18.3 per cent and 86.5 per cent YoY, respectively. Hero Motocorp, Eicher Motors, Ashok Leyland and TVS Motors have delivered strong ROE of 30.6 per cent, 24.2 per cent, 24.3 per cent and 24.8 per cent, respectively, in FY18. 

The year 2018 also marked a recovery in commercial vehicles, a segment which has been witnessing lacklustre demand over the last couple of years. Within commercial vehicles, the demand for higher tonnage trucks has augmented the earnings of Ashok Leyland and Eicher Motors. This has been triggered due to higher replacement demand and restriction of government on overloading. Also, the replacement demand has kicked in due to higher impetus on infrastructure growth. We see this trend to continue for about next 9 months. 

Also, post-demonetisation, the 2-wheeler segment was worst hit but it started witnessing better demand during the fag end of the year. This was seen in the earnings of TVS Motors and Bajaj Auto, which saw recovery as the year progressed. In the farm equipment segment, the demand for tractors was also buoyant, which benefitted M&M. The two years of normal monsoon, farm loan waiver and good agricultural produce gave a fillip to the demand, which led to double digit growth in tractors for most players. We also see that in the last quarter, Bajaj Auto reported good traction in 3-wheeler sales, which was another laggard segment. Overall, for auto sector, all engines started firing in FY18. 

The sector has attracted foreign direct investment (FDI) worth $18.41 billion during the period April 2000 to December 2017. The long-term outlook for the sector seems to be positive, led by high GDP growth, rising financing availability, increasing disposable incomes, rising consumer expectations, etc. Over the next decade, the sector is expected to deliver robust growth with volumes growing by 6-8 per cent per year. In the short run, for FY19, the demand from rural areas would drive volumes in 2-wheelers and 3-wheelers because of better agricultural production on account of good monsoons. 

Also, through the Automotive Mission Plan 2016-26 (AMP 2026) the auto and auto ancillary industry will attain a different level. The Indian automotive industry has the potential to scale up exports to the extent of 30-40 per cent over the next 10 years and would become one of the major export hubs of the world through AMP 2026. 

Auto Ancillary

The auto ancillary sector is closely linked to the automobile sector. Any change in demand for the auto sector has an immediate effect on the demand for auto ancillary sector. For the auto ancillary sector, the demand is mainly derived from the OEMs (original equipment manufacturers) and the replacement market. The sector’s 74 per cent of the domestic sales come from the OEMs and 26 per cent from the replacement market. The auto components industry accounts for 2.3 per cent of India’s Gross Domestic Product (GDP). 

We have taken first 85 companies in the auto ancillary segment, the revenues of which have grown on an average of ~18.3 per cent in FY18. Majority of the companies have reported decent growth in top-line, except a few which have de-grown in FY18. During FY18, companies such as Hi-Tech Gears, Ramkrishna Forgings and Maharashtra Scooters have shown a growth of ~63 per cent, ~68 per cent and ~45 per cent, respectively. On the other hand, railway wagon companies like Texmaco Rail & Engineering and Titagarh Wagons witnessed a de-growth of ~10 per cent and ~24 per cent in sales. Also, Minda Corporation, which grew exceptionally in FY17 de-grew by ~12 per cent in FY18. 

At the operating profit levels, companies such as Shivam Autotech, Bharat Seats, Man Industries and Welspun Corp. have shown an exceptional growth of ~147 per cent, ~137 per cent, ~934 per cent and ~141 per cent, respectively. However, operating profit of companies like Kirloskar Ferrous and Precision Camshafts have de-grown by ~54 per cent and ~51 percent, respectively, on a YoY basis in FY18. This was largely due to inflated metal prices impacting margins. 

The sector reported an overall increase in bottom-line by ~48.2 per cent in FY18. The PAT of some companies such as Maharashtra Scooters, Subros, Rane Madras, Welspun Corp rose exceptionally by more than 300 per cent YoY led by significant increase in revenues. However, the PAT of Setco Automotive de-grew by ~148 per cent, respectively. 

India is the world’s third largest steel producer. Steel is a key raw material in the production of auto components, which keeps costs down. The demand from global OEMs for the auto components from India has grown tremendously over the years. The overall demand in this industry is expected to grow by 12-14 per cent in FY19E led by strong demand from OEMs and rising exports. Together, the USA and EU markets have accounted for 60 per cent of total exports of auto components from India. The exports are expected to grow by 8-10 per cent to the countries like the US, European nations and SAARC countries. 

Some of the auto components companies have planned investments in the near term which would bring growth in the sector. Incremental investments by auto ancillaries are primarily towards new orders or platform-related requirement or debottlenecking of existing capacity. 

Some of the companies such as Schaeffler India is planning to invest Rs 300 crore in FY19 while Setco Automotive plans to invest Rs 250 crore over the next 2-3 years towards capacity expansion and modernisation. Some have started investing looking at the requirements for BS VI norms and electric vehicles in 2030. 

The tyre industry, which is an integral part of the auto ancillary industry, was under pressure in H1FY18 due to steep rise in raw material prices and the troubles related to the GST. The raw material prices were up by 30 per cent in the June quarter of FY18, which led to the decline in margins. With the GST roll-out, the pressure on margins continued in the September quarter too. 

However, the new policy initiatives like increase in customs duty on TBR tyres and imposition of anti-dumping duty on Chinese tyres proved to be a boon for the industry. With the pick-up in demand from the OEMs and the replacement market and heavy capex planned over FY18-22, the tyre industry is expected to stabilise and grow over the years. 

Some of the demand drivers like high GDP growth, rising financing availability, increasing disposable incomes, rising consumer expectations, favourable interest rates will lead to higher demand for automobiles in the future. 

Robust growth in auto sector, especially in the vehicles segment, is expected over the next decade, which would be one of the biggest triggers for the auto ancillary sector. As per ICRA, the industry’s topline is expected to grow by 11-13 per cent in FY19E and over the next 5 years, it can grow at CAGR of 10-12 per cent. 

Bank

Banking sector continues to remain under dark clouds with concerns mounting day-by-day. The stress in banking sector continues to hold back credit growth, thereby impacting the economic growth. In particular, the public sector banks (PSBs) have been weakened further due to the increased provisions that have impacted their bottom-lines. The PSBs continue to face the heat of shortage of capital adequacy. The recapitalisation plan by the government seems to fall short for the PSBs due to rising GNPAs. The recent FY18 earnings portray a gloomy picture about the PSBs, whereas the private sector banks remain better off as compared to their public sector peers. The frauds unearthed in recent times in the banking sector have added worries to the PSBs’ health. Further, these frauds have also caused a rift between the bank managements and investors in public and private banks too. Here, we take a look at how the banking sector fared in FY18 earnings. 

Steady interest income 

The interest income scenario for the banks was steady across the board. The PSBs, which witnessed heavy deterioration in their bottom-lines, saw steady increase in their net interest income. Among the PSBs, State Bank of India, Bank of Baroda, Canara Bank posted firm growth of 21 per cent, 15 per cent and 23 per cent YoY, respectively, while Allahabad Bank, Bank of India, Punjab National Bank posted subdued figures over the previous year of 10 per cent and negative 11 per cent and unchanged for Punjab National Bank. In totality, the net interest income of the PSBs grew by 10 per cent YoY. The private sector banks posted strong growth in net interest income across the board. Yes Bank and RBL Bank were among the top performers in net interest income, with growth of 45 per cent and 33 per cent YoY, respectively. This was followed by DCB Bank, Karnataka Bank, IndusInd Bank, HDFC Bank, which posted net interest income growth in the range of 20 per cent to 25 per cent YoY. Some of the other major private sector banks posted single digit growth, including Axis Bank, ICICI Bank, Laxmi Vilas Bank and Dhanlaxmi Bank. The total net interest income of private sector banks grew by 14.6 per cent YoY. Going forward, the rising interest rates will aid strong net interest income across the board, while incremental uptick in the credit growth will also improve the interest income. 

Bottomline remains subdued for PSBs and firm for private banks. The rising stressed asset quality of the banks have increased the provisioning for the banks across the board. The subdued net interest income of the PSBs and the consequent steep rise in provisions has impacted the PSBs severely. Out of the total 21 PSBs, only two banks have posted net profit for the year FY18, that too with a de-growth. Major PSBs such as Punjab National Bank (PNB), State Bank of India (SBI), Bank of Baroda and Canara Bank have all posted major losses. PNB, the leading the PSB, posted net loss of Rs 12282 crore in FY18 as against the net profit of Rs 1324 crore in FY 17. The country’s largest bank SBI also posted net loss of Rs 6547 crore in FY17 as compared with the net profit of Rs 10484 crore previous fiscal. For the first time, the net loss of the PSBs crossed the Rs 50,000 crore mark. Going forward, improvement in the bottom-line of the PSBs is expected. As for the private sector, the bottom-line of the private banks also looks stretched with similar provisioning pressure. The provisions in private sector banks also doubled during the year, thereby impeding profit growth. A total of 17 private sector banks posted flat growth in the past 3 years. Here also, RBL Bank and Yes Bank were top performers with net profit growth of 42 per cent and 27 per cent YoY, respectively. The other major private banks such as HDFC Bank, Kotak Mahindra Bank and Indusind Bank posted growth of 21 per cent, 17 per cent and 24 per cent YoY, respectively, while Axis Bank and ICICI Bank faced major setbacks among private sector banks, with decline in net profit of 93 per cent and 31 per cent YoY, respectively. Going forward, the bottom-line of private banks is expected to improve, considering their robust income growth and financial stability. 

Advances remain robust

The growth in advances at 10 per cent over the previous year was maintained across the banking sector. This was strongly aided by 18 per cent growth in advances by the private sector banks, whereas the PSBs clocked 8 per cent YoY growth. Among the PSBs, SBI, Indian Bank, Vijaya Bank posted stellar growth in advances of 23 per cent, 22 per cent, 23 per centYoY, respectively. Other PSBs posted subdued growth in advances, with PNB posting a meagre growth of 2 per cent. In private sector banks, Bandhan Bank, RBL and Yes bank posted highest growth in advances at 76 per cent,39 per cent and 54 per cent YoY, respectively. This was followed by Indusind Bank, HDFC Bank, Kotak Mahindra Bank, Karnataka Bank, which posted growth in the range of 26 to 28 per cent YoY. The banks have shifted their focus to retail lending, which has lower delinquency. Further, the strong prospects of economic growth gives good potential for future growth. Presently, corporate lending has taken a back seat due to large slippages, which led to more deterioration in the growth in advances. 

Asset quality in spotlight

The deteriorating asset quality of the banks has held back the growth of the banking sector. Further, the unearthing of frauds in the recent past has made banks cautious about asset quality. The GNPAs have risen substantially across the board,with the PSBs being at the forefront in the deterioration. IDBI Bank, Dena Bank and Central Bank and Punjab National Bank were the worst performers with GNPAs of 27.9 per cent, 22 per cent, 21 per cent and 18.3 per cent, respectively, while SBI, Allahabad Bank and Oriental Bank of Commerce also posted severe deterioration in their asset quality. All these PSBs have huge exposure to the two lists of major defaulters provided by the RBI. The private banks gave some surprises in these times of turbulence, with Yes Bank becoming the only bank to show improvement in asset quality, while other major banks like Axis Bank, HDFC Bank, ICICI Bank, Indusind bank also showed deterioration in asset quality with GNPAs at 6.7 per cent, 1.3 per cent, 8.8 per cent and 1.17 per cent, respectively, in FY18 as against 5.04 per cent, 1.05 per cent,7.89 per cent and 0.93 per cent, respectively, in FY17. Going forward, the asset quality performance of the banks is expected to remain negative with major defaulter accounts getting resolved. 

Outlook
The Indian banking industry is expected to remain volatile going forward with stressed asset quality and slower credit growth in the non-food segment. The profitability of the public sector banks declined due to the increased provisioning. This has also impacted capital ratios of the banks, despite high capitalisation in the previous year. The GNPAs are expected to rise further to 12.2 per cent from 11.6 per cent previously, according to the RBI’s latest financial stability report. The 11 major PSBs under the PCA (prompt corrective action) will witness severe deterioration in asset quality. Overall, the capital provisioning remains a big concern for the PSBs. The IBC resolution of Bhushan Steel through its acquisition by Tata Steel gives a ray of hope for stressed assets resolution. Further, more vigilance by the RBI on frauds is expected to arrest the deterioration in the banking sector. However, a drastic change in the health of banking industry is nowhere near, so it will take some time for the sector to rise from the recent bottom.

Cement

Cement industry is one of the pivotal industry for any economy on which the country builds its physical infrastructure. The demand for cement is heavily dependent on the construction activities such as housing, roads, bridges, tunnels, etc. All these construction activities are directly related with the country’s overall growth. After China, the Indian cement industry is the second largest market in the world with total production capacity of around 450 million tonnes per annum (MTPA).

Financial Performance

To know how cement companies have performed in the recent fiscal, we have taken financial performance of 24 companies under consideration. 

The total aggregate revenue of 24 cement companies rose almost by 9 per cent YoY in FY18 to Rs 1,28,453 crore. The company that outperformed in terms of revenue is JK Lakshmi Cement, which recorded almost 31 per cent growth in FY18 over the previous fiscal year. Also, other companies such as Sagar Cement and Ultratech Cement registered 29 per cent and 26 per cent YoY growth, respectively, in FY18. 

The aggregate EBITD of all 24 companies increased by 12 per cent YoY to Rs 15,573 in FY18. The company that outperformed in terms EBITD is Orient Cement, which recorded 216 per cent YoY growth in FY18. Further, Sagar Cement, Star Cement and Heidelberg Cement India surged almost 56 per cent 50 per cent 46 per cent YoY, respectively. 

In terms of net profit, the companies that outperformed are Star Cement and Heidelberg Cement, which registered significant PAT growth of 93 per cent and 75 per cent YoY, respectively in FY18. 

Recently, the cement prices in North and central region have increased by almost 5 to 12 per cent. Further, the prices in the South, East and West have largely remained steady. The major cement players that operate in the North and central regions are Ambuja, ACC, JK Cement, Shree Cement, Prism Cement, etc. 

The demand for cement is likely to surge to 550 to 600 million tonnes per annum (MTPA) by 2025. Hence, to capitalise on this opportunity, large cement companies are ramping up their capacities and are estimated to add capacity of 56 million tonnes in the coming fiscal. 

However, looking at the present scenario, the overall capacity in the country stands at around 450 million tonnes per annum, while the domestic consumption is around 293 million tonnes. This clearly means that there is excess supply from the cement players. Due to this excess supply, the utilisation levels stand below 70 per cent. 

Moreover, the rising raw material prices are also adding pain to the cement players. The key raw materials that cement companies use in their production process are pet coke, coal and diesel, which form almost 60 per cent of the total operating expenses. The sharp surge in crude oil prices is resulting in higher diesel prices. 

Recently, many companies have announced capacity expansion despite supply glut and lower capacity utilisation. 

Going forward, it would be interesting to see how cement players perform in the coming fiscal amid upsurge in capacity. But the increasing demand from the affordable housing segment and other infrastructure projects are likely to act as cushion for cement players.

Chemicals

The Indian chemical industry continues to drive growth as the third largest producer in Asia and seventh in terms of the total output in the world. The Indian chemicals sector market is valued at USD 160 billion approx. This industry has major connections with many other related industries, including automotive, consumer durables, engineering, food processing, among others. 

We can classify the chemical industry mainly into three segments, i.e., basic, specialties and knowledge chemicals. The basic chemicals include petrochemicals, fertilizers, inorganic chemicals, alkalies, chloralkalies, aromatics, thermoplastics, thermosets and other industrial chemicals. The specialty chemicals include adhesives, sealants, catalysts, industrial gases, paints and coating, pharma additives, lubricants, water treatment chemicals and plastic additives. The knowledge chemicals include agrochemicals, pharmaceuticals and biotechnology. We can further classify the industry product-wise, comprising of alkali chemicals (soda ash, caustic soda, liquid, etc.), inorganic chemicals (aluminium fluoride , calcium carbide, carbon black, etc.), organic chemicals (acetic acid, acetone, phenol, methanol, etc.), pesticides and insecticides and dyes and dyestuffs. 

The chemical industry in India is a key constituent of the Indian economy, contributing about 2.11 per cent to the GDP. The industry encompasses both small and large scale units, and presently, there are about 70,000 chemical manufacturing units situated across the country and a majority of these are in the small scale sector. 

On the production front of dyestuff and dye intermediates, India accounts for around 16 per cent of the world production, mainly of reactive acid and direct dyes. Under specialty chemicals, India is currently ranked third largest consumer of polymers and third largest producer of agrochemicals in the world. As per IBEF, the Indian specialty chemical market is likely to reach USD70 billion by 2020. Coming to the export front of inorganic and organic chemicals, exports grew to USD 10.66 billion in FY17-18 as against USD 7.71 billion in FY16-17. In percentage terms, exports grew by 38.29 per cent in 2017-18 as against 3.48 per cent in FY16-17.

For the purpose of sector analysis, we have analysed 68 companies from the chemical sector according to their market cap. The overall revenue of the sector increased by 17.2 per cent and PBIT also increased significantly by 44.4 per cent during FY18. Also, the net profit of the overall industry jumped significantly by 43.3 per cent in FY18. 

Asian Paints, the top company by market cap, posted mixed set of numbers with moderate rise in revenue by 2.4 per cent to Rs 17262 crore. However, the operating profit declined by 26.3 per cent to Rs 3275 crore mainly due to the rise in the cost of raw materials. Its bottomline has improved moderately by 4 per cent to Rs 2098 crore. Further, Pidilite Industries, a dominant player in India’s adhesive market with a market share of around 70 per cent, has reported stable numbers for FY18, with rise in revenue and operating profit by 10.9 per cent and 6.7 per cent to Rs 6227 crore and Rs 1221 crore, respectively, led by improving demand. Also, the net profit rose by 12.3 per cent to Rs 966 crore In FY18. 

The agrochemicals maker UPL Limited has posted stable numbers with rise in income and operating profit by 9.1 per cent and 22.4 per cent to Rs 17792 crore and Rs 2830, respectively. Also, the net profit grew by 17.5 per cent to Rs 2030 crore in FY18. India’s second largest decorative paints company, Berger Paints, has registered jump in revenue and operating profit by 14.5 per cent and 11.8 per cent to Rs 5212 crore and Rs 683 crore, respectively during FY18 due to double digit volume growth in domestic decorative business. However, its net profit has declined by 2.7 per cent to Rs 461 crore in FY18. Kansai Nerolac Paints, the third largest listed paint company in India, has disappointed with moderate rise in revenue of 4.9 per cent to Rs 4809 crore. Also, its operating profit deteriorated by 27.7 per cent to Rs 866 crore and its net profit has remained muted at Rs 514 crore during FY18. 

One of the main challenges to the industry is to adapt to the needs of the evolving markets. With the shift in the global demand to the emerging markets, the companies are required to modify their operations in accordance with the changing streams of revenue from supply to royalty, contract manufacturing and technology transfers. Indian chemical players have now started focusing on sustainable development. However, water, environmental impact, raw materials, safety over life-cycle and energy use are some of the issues the industry is grappling with. Indian chemical companies are largely investing in innovative solutions to find appropriate answers to these challenges. 

The chemical industry is also delivering new and innovative products according to the changing requirements of the market. The industry has developed microbial de-colorisation and degradation procedures for textiles and begun exploring bio-diversity for natural dyes and developing eco-friendly methodology for synthetic dyes.

Moreover, going ahead, China’s decision to close several chemical manufacturing units to rein in air pollution and protect the environment has helped Indian chemical exports grow 31.94 per cent to USD15.91 billion in 2017-18. Indian companies are likely to benefit from the possible shutdown of chemical units in China. 

Indian chemical industry is likely to register a growth of around 8-9 per cent in the next decade and is expected to double its share in the global chemical industry to almost 5-6 per cent by 2021. 

The industry has the potential to grow significantly, provided some of the key growth imperatives are taken care of. Currently, some of the key imperatives for chemical industry in India include securing feedstock, right product mix and M&A opportunities.

The companies’ market shares are getting diluted with the entry of new players in the emerging markets. These new players are introducing new products to meet the specific needs of the customers, thereby intensifying competition in the market. Going ahead, the chemical industry would be driven by automation coupled with information technology on account of the intense competition.

Construction

To enter into modern world, country like India needs to have strong physical infrastructure. To achieve this goal, India is speeding up its construction activity, which consists of infrastructure, building and construction and the industrial segment. Looking at the current situation, it clearly shows that the Union government is serious about building strong infrastructure network across country. Consequently, the government has taken various initiatives such as the Bharatmala project to build robust road network across the country, and the Sagaramala project, which would lead to development of port infrastructure in the country which, in turn, will improve transportation of goods from ports quickly and efficiently. 

In the recently concluded fiscal, around 9829 KM of highways were built, which was almost 19 per cent higher than previous fiscal. During same period, the government awarded nearly 17000 KM of highway projects. In the last few months, India has witnessed stupendous growth in construction awards, with awards of Rs 3,00,000 crore till May 2018. The contracts awarded almost doubled on a YoY basis in May 2018, while the announcement of tender rose almost 23 per cent YoY to Rs 58,100 crore.

The National Highway Authority of India’s order pipeline remained strong and, till last week, the order under pipeline stood at Rs 57,700 crore for construction of 3110 KM of roads. 

To analyse the construction industry, we have taken financial performance of 73 companies into consideration. Looking at financial performance of these 73 companies, we found that the aggregate performance was quite impressive. The total sales of 73 companies rose almost 11 per cent in the fiscal year to Rs 2,97,328 crore as compared with the previous fiscal. There were few companies that performed exceptionally well in the recently concluded fiscal. Welspun Enterprises registered impressive growth of 276 per cent in FY18 to reach sales of Rs 1182 crore as against Rs 314 crore in preceding fiscal. Indiabulls Real Estate and DB Realty also registered stupendous sales performance with growth of 165 per cent and 104 per cent YoY, respectively. 

The engineering and construction major Larsen and Toubro registered double digit YoY growth of 11 per cent in its revenue to Rs 1,21,095 crore. Another large-cap stock, Godrej Properties, which is known for its asset-light model, registered 51 per cent YoY growth in its revenue to reach Rs 2391 crore. 

In terms of operating profit (EBITD), the aggregate performance of 73 companies was significant and registered 34 per cent YoY growth in FY18. On the operating front also, Welspun Enterprises put up stellar performance and managed to turn around its operating loss of Rs 51 crore to operating profit of Rs 57 crore in the recently concluded fiscal year. Indiabulls Real Estate also concluded FY18 with stellar growth of 383 per cent YoY in its operating profit. Some of the large companies also performed better in terms operating profit, viz; engineering conglomerate Larsen and Toubro recorded 103 per cent YoY growth to Rs 17,662 crore. Also, NCC registered 52 per cent YoY growth in EBITD to Rs 708 crore and Dilip Buildcon’s operating profit (EBITD) rose 29 per cent YoY in FY18. Besides, Mumbai-based real estate company Oberoi Realty registered almost 20 per cent YoY growth to Rs 626 crore. On the bottomline front, the aggregate performance of 73 companies registered significant performance with 68 per cent YoY growth in net profit. There were few companies which witnessed turnaround in their net profit, viz; Ramky Infrastructure, BL Kashyap & Sons, JMC Project and Patel Engineering. Notably, Welspun Enterprises registered terrific year-on-year growth of 1300 per cent to Rs 69.4 crore from a mere Rs 5 crore in FY17. DLF, one of India’s largest real estate players, recorded almost 526 per cent YoY growth in its net profit. However, this was mainly led by one-time exceptional gain. Moreover, other players such as Indiabulls Real Estate, NCC, Vascon Engineering, PNC Infratech and KNR Construction recorded more than 100 per cent growth over the preceding fiscal. 

In a base case scenario of the Bharatmala Pariyojana, the government would allocate 60 per cent of projects under Hybrid Annuity Mode (HAM) and 10 per cent under BOT (Toll) and the remaining on Engineering, Procurement, Construction (EPC) mode. The Government of India has approved Toll, Operate and Transfer (TOT) model under which the public-funded projects will be monetised, which will help the government to generate cash and utilise the same to fund new projects. The projects to be undertaken in the TOT model are to be treated as Public-Private Partnership (PPP) projects. 

The heightened supervision from the government is likely to result in less participation of the unorganised players in real estate sector. Going forward, the organised players who execute their projects and utilise capital in a professional manner, can hold their position in the real estate market for the long term. The heightened regulatory environment would affect procurement of capital and developers will have to deliver their projects within the stipulated time. The construction industry would be key beneficiary of various government initiatives such as Bhartmala project, Sagarmala project, Make in India, affordable housing, Smart Cities, etc. The new government projects emphasize on the development of highways, schools, colleges, hospitals and airports. Earlier, only major cities were selected for infrastructure growth, but now second-tier and third-tier cities are also being considered. 

Owing to all these factors, the construction industry is likely to benefit from lucrative opportunities in the coming years.

In the real estate sector, the government’s various reforms, such as RERA, have led to increase in transparency, which in turn, increases the confidence among end-customers.

MoRTH (Ministry of Road Transport and Highways) and NHAI (National Highway Authority of India) are combinedly targeting to award 20,000 KM and construct 16,400 KM of highway projects in fiscal year 2019. 

Before the general election in 2019, the Union government is likely to spend heavily on infrastructure, mainly in the form of highways, renewable energy plants and urban transport projects, thereby benefiting the infra sector.

Consumer Durable

The consumer durable goods nowadays are becoming necessity for the middle class, which is driving the growth of the industry. The consumer durable goods include a range of household and industrial electronics – air-conditioners, televisions, washing machines, refrigerators, air coolers, laptops and personal computers and a wide range of other household/domestic appliances and conveniences. The increasing urbanisation is contributing majorly to the growth of the consumer durable sector. Last fiscal, the Union government rolled-out GST, which is likely to result in a shift in the demand from unorganised players to organised players due to the elimination of cost benefit. Due to the rising income levels of the middle class, there is a shift in the taste of consumers from unbranded products to branded products, which is driving growth for this sector. 

Financial performance 

To analyse the consumer durable industry, we took 17 companies under consideration. The aggregate sales of these 17 companies rose 8 per cent in FY18 over the preceding year to reach Rs 40,682 crore. There were few companies which outperformed the industry viz; Butterfly Gandhimathi Appliance registered 35 per cent YoY growth in sales, while IFB Industries and Whirlpool of India’s sales surged almost 27 per cent and 25 per cent YoY, respectively.The combined operating profit (EBITD) of 17 companies rose almost 11 per cent in FY18 over the previous fiscal. The Butterfly Gandhimathi Appliance witnessed a noteworthy turnaround at the operating level with operating profit of Rs 22.3 crore as against loss of Rs 38.5 crore in the previous year. The other players such as KDDL and IFB Industries almost doubled their operating profit to Rs 32.1 crore and Rs 102 crore, respectively. 

In terms of bottomline, the aggregate net profit of 17 companies surged substantially by almost 49 per cent YoY to Rs 3113 crore in FY18. Some of the companies such as Butterfly Gandhimathi Appliance, Mirc Electronics and KDDL managed to turn around their bottomlines to profit. Also, LEEL Electrical and TTK Prestige recorded significant growth of 630 per cent and 75 per cent YoY in their net profit, respectively. 

The nuclear families in India are increasing rapidly, which would directly benefit consumer durable industry. In addition to this, increasing disposable incomes of large section of the population, especially the youth, will also aid in the growth of consumer durable segment. Also, the rapid urbanisation and government’s effort to double farmers' income will contribute to the growth of the consumer durable sector. The easy availability of credit facility for the consumers is also contributing to the growth of the consumer durable industry. However, the recent increase in interest rates might have some adverse impact on the growth of this industry. 

Notably, electrification in rural India has been moving at a rapid pace and this will lead to a surge in demand for electronic goods. Even though the penetration of consumer durables across several categories has been growing gradually, it is still less as compared to other developing countries.

Electrical Equipment

The electrical and electronics industry is fragmented in nature and has to offer an enormous number and variety of products to its huge customer base. Some of these products include electrical pumps, welding equipment , electrical power equipments and industrial electricals and telecommunications, among many others. This particular industry has always had a huge demand for its goods and the growth of this sector has been increasing year-on-year. 

The government has increased its spending on rural and household electrification schemes and also the other reforms such as Make in India and the ease of doing business has all resulted in electrical equipment industry to post a double-digit growth of 12.8 per cent in 2017-2018. As the government is preparing to meet the requirements of power to every household in the country, the investment in power generation is bound to increase. 

Taking into consideration this year’s top 33 companies according to the market cap, the total sales of the companies for FY18 is Rs 88,201.59 crore as against Rs 83,392.61 crore in the FY17, posting a 5.45 per cent growth in the sales in a year. The greatest contributors to the total sales in 2018 are Siemens Ltd.,ABB India Ltd, and Havels India Ltd. in the descending order of contribution. These top three companies contributed a total of 31.5 per cent of sales in FY18. Graphite India Ltd., a large-cap company, has posted the highest growth in PAT of 1364.7 per cent out of the lot. WPIL, a mid-cap company, posted the second highest PAT growth of 385.4 per cent in the year 2018. As for PBIDT, HEG’s and Graphite India’s PBIDT stand at Rs 1649 crore and Rs 1392 crore, respectively, making them the highest gainers in FY18. Meanwhile, the company that lies at the bottom in terms of PBIDT during the year was Inox Wind Ltd., accounting for a loss of Rs 133.60 crore, in 2018 as against Rs 497.83 crore in 2017. 

The electrical industry accounts for high imports, but due to many of the government initiatives, there have been signs of revival for this sector. There has been a substantial increase in growth and a sharp rise in its performance this year. The industry’s record performance for this year is attributed to government schemes such as DDUJGY, IPDS and Subhagaya as the country is focusing on getting electricity to all the households in the villages. This particular sector is expected to grow further as the mission of the government is yet to be fulfilled, thereby resulting in further growth in sales and profits of the companies in this sector in years to come. 

As India is going through a phase of rapid transformation to become digital, there is no sector that has remained untouched by this digital revolution and one of the biggest contribution in this change is made by the electrical and its allied industries. As the times are changing, we have and will witness many cost saving and more efficient clean energy options on a bigger level. Therefore, to cater to this change, the electrical equipment industry has a major part to play.

Engineering

The engineering industry produces a wide range of light and heavy machines. It is a diverse industry comprising of various segments. A company from this sector can be a power equipment manufacturer like transformers and boilers or procurement and construction player or it can be a company manufacturing electrical or non-electrical machinery or static equipment. The classification of engineering industry can be done in terms of shapes and size of products, the amount of capital being invested, number of labour engaged or the use of raw materials. The industry has witnessed tremendous growth throughout the years. It is hard to imagine a country grow without the support of this sector and its sister sectors of manufacturing and infrastructure. In India, there are three major engineering industries, namely, heavy mechanical engineering, light mechanical engineering and electrical engineering industry. 

The sector employs both skilled and semi-skilled labour in huge numbers. There have been major developments in this sector, especially in the power projects and infrastructure development. In 2016-17, the share of engineering exports in India's total merchandise exports was recorded at 23.75 per cent.

The growth of India's mining and construction equipment sector has also been improving at an incredible rate due to the increase in infrastructure spending. The power sector contributes almost 70-75 per cent of the engineering companies' revenues. 

The sector attracts a good amount of interest from foreign investors since it enjoys a comparative advantage in terms of manufacturing costs, technology and innovation. The government policies and the growth in the sector has also attracted and enabled many foreign players to invest in India. 

The sector is of strategic importance to the economy because of its integration with other industry segments. The sector has been de-licensed and hence enjoys 100 per cent FDI. The government has relaxed the excise duties on factory gate tax, capital goods, consumer durables and vehicles to give a boost to the sector. Also, in the Union Budget 2018-19, the government allocated US $92.22 billion for the infrastructure sector. Also, the 'Make In India' policy is expected to achieve the desired growth of the economy. 

To gauge the performance of the companies in the sector, we have selected 28 companies according to their market capitalisation. In terms of overall sales of the companies in FY18, the companies have posted a 8.9 per cent growth, jumping from Rs 76,077.77 crore in FY17 to Rs 82,852.36 crore in FY18. Bharat Heavy Electricals posted the highest sales of Rs 29,753.47 crore in FY18, while Bharat Electronics stood at Rs 10,596.53 crore in FY18. But the highest sales growth was seen for Kirloskar Industries, which is in the business of windmill generation. In terms of net income for FY18, most companies recorded positive numbers. Both ISGEC Heavy Engineering and Elecon Engineering Company posted a drop of almost 30 per cent in PAT, the lowest among the selected companies.

Looking at the financials, we can say that some companies have done significantly better than the others. The government has observed this and has come up with reforms to uplift this sector. Some specific initiatives by the government which have a positive impact on the engineering sector are: SEZ policy and industrial corridor development across centres of development; removal of tariff protection on capital goods; delicensing of heavy electrical industry and allowance of 100 per cent FDI; reduction of custom duties on various equipments; incentives for R&D activities; initiatives focused on infrastructure development and construction, initiatives to increase power generation and improve quality of the power supply. 

As the engineering sector is a growing market, spending on engineering services is projected to increase to US $1.1 trillion by 2020. The government, in consultation with semiconductor industry, has increased focus on the Electronic System Design Manufacturing (ESDM) sector in last few years. Some of the initiatives outlined in the National Electronics Policy and National Telecom Policy are already in the process of implementation.

We would expect the next financial year to be better than the current year as the government and the new policies will come into play. 

The engineering goods were the biggest exporting items from India, followed by gems and jewellery in the second position for the period of 2017-18. The United States, UAE, Singapore, UK and Mexico are the top five importers of Indian engineering goods. India mostly exports over 60 per cent of these goods to the US and Europe.

The foreign direct investment inflows into India's mechanical and engineering industries during April 2000 to December 2017 stood at around US$ 3.39 billion.

Entertainment

The Indian Media and Entertainment (M&E) industry is a sunrise sector for the economy and is making big strides in growth. It is one of the fastest growing industries in a strong growth phase on the back of rising consumer demand and improving advertising revenues. It has grown at 12.25 per cent CAGR over FY11-17. The industry mainly comprises of television, radio, print, films, digital advertising, music, OOH (Out Of Home), Animation & VFX, gaming and theme parks. The entertainment industry in India has registered an explosive growth in the last two decades, making it one of the fastest growing industries in India.

Coming to the Indian television industry, it is four times larger than the Indian film industry. Today, India is the second largest television market in the world. The number of household televisions increased to 183 million in 2017 from 181 million in 2016 with 780 million TV viewing individuals. The Indian television industry segment is into admirable phase supported by growing digitisation. Digitisation has been completed in three phases, due to which the industry is booming, while the phase IV digitisation is in progress, which will generate enormous opportunities for the industry. Also, the DTH subscription is growing rapidly, driven by content innovation and product offerings. The print industry is also in a growth phase, led by rising income levels and improving lifestyles, which has resulted in significant growth in the niche magazines segment.

The Indian film industry, which produces largest number of films globally, is the most important form of entertainment in India. The Indian film industry is on the growth path on account of the rising share of Hollywood content and digital screens in India. Also, with increasing penetration of internet and digital media, the digital segment (USD 526.72 million) is expected to outperform other segments of the M&E industry. As per IBEF, the revenues earned by the Indian film industry in 2018 would reach Rs 165.7 billion (US$ 2.56 billion) and are expected to further grow at a CAGR of 4.98 per cent during 2018-2020.

Further, the print industry accounted for the second largest share in the M&E industry to reach Rs 303 billion (US$ 4.66 billion) in 2017 with a CAGR of 7 per cent till 2020. The print market is expected to reach US$6.69 billion by 2021, backed by rising income levels and evolving lifestyles, which would lead to robust growth in the niche magazines segment. The television, print and films together accounted for 75.97 per cent of the market share in 2017.

Moreover, the rising focus on the ‘kids genre’ and rise in dedicated TV channels for them is driving the growth in animation industry. Also, as the advertising industry grows, the share of animation driven advertisements is also expected to grow. Moreover, there is surge in 3D/HD animated movies in theatres and use of animation and VFX in TV advertising and gaming. The growing trend of outsourcing of VFX and gaming to India is due to the cost-effectiveness of the Indian players. Further, the music industry, which comprises of 142 music companies, is extending its reach with increasing international associations. The digital revenues contribute 55 per cent of the music industry and is expected to contribute around 62 per cent by 2018.

For the purpose of sector analysis, we have analysed 32 companies in the M&E sector according to their market caps. The overall revenue of the sector increased by 17.6 per cent to Rs 46,812 crore during FY18 and PBIT also increased significantly by 39.8 per cent to Rs 6,995 crore. Also, the net profit jumped significantly by 77 per cent to Rs 4,239 crore in FY18. The entertainment major, Zee Entertainment Enterprises’ revenue jumped by 10.8 per cent to Rs 7126 crore and PBIT also increased by 18.6 per cent to Rs 1887 crore. However, its profit declined by 33.5 per cent to Rs 1448 crore during FY18. Sun TV Network reported healthy set of numbers as revenue and PBIT jumped by 17.4 per cent and 13.5 per cent to Rs 3105 crore and Rs 1554 crore, respectively. Also, the net profit increased by 10.2 per cent to Rs 1135 crore during FY18.

Direct-to-home (DTH) service provider Dish TV India reported jump in revenue by 55.5 per cent to Rs 4688 crore. However, its PBIT deteriorated by 22.6 per cent to Rs 244 crore. Also, its bottomline turned negative with a net loss of Rs 84.90 crore in FY18, as against net profit of Rs 109 crore in FY17. Further, TV18 Broadcast, a part of the Reliance Industries-owned Network18 Group, has reported significant jump in revenue by 53.6 per cent to Rs 1504 crore. Also, the operating loss narrowed down to Rs 11.32 crore, as against Rs 25 crore in FY17. But the net profit declined drastically by 58.8 per cent to Rs 7.85 crore during FY18. Multiplex operator PVR Ltd reported healthy numbers with rise in revenue by 11.6 per cent to Rs 2365 crore. Also, PBIT and net profit jumped significantly by 41.6 per cent and 30.2 per cent to Rs 248 crore and Rs 125 crore, respectively, during FY18. 

We expect the M&E industry to grow at a healthy pace, supported by government initiatives like Make in India, Skill India and Digital India. Further, growing digitisation and expanding usage of internet would augur well for the industry. Furthermore, the increased spending on advertising is likely to lead to significant growth in overall advertising revenue in the coming years. Also, the rapidly growing demand for HD and easy availability of 4G data would further aid growth of the industry. As per IBEF, the Indian media and entertainment industry is expected to grow at ~11.6 per cent CAGR over FY16-20E. Overall, we see the M&E industry remaining optimistic on its long term growth.

 

Fertilizers

Fertilisers are the most vital plant nutrients essential for getting optimal yield and quality of the cultivated crop. The Indian fertiliser industry has shown fabulous growth in the last five decades and presently holds the third position globally. 

Also, India is the second largest user of fertilisers after China. On the production front, India stands second in the nitrogenous fertilisers segment and third in the phosphatic fertilisers segment. Yet, the necessity of potash is met through the imports on account of limited reserves of potash in the country.

The fertilisers are primarily classified into urea, di-ammonium phosphate (DAP), single super phosphate (SSP), muriate of potash (MOP) and other complex fertilisers like calcium ammonium nitrate (CAN) and various grades of NPK fertilisers (fertilisers having different grades of nitrogen (N), phosphorus (P), and potassium (K) ). In India, the most largely used fertiliser in the nitrogenous category is urea, DAP and MOP for phosphorus and potassium.

India is the world’s second largest consumer of urea and the government is working towards increasing the production of urea to stop its imports by 2022 and achieve self-sufficiency in urea production. Out of the total fertiliser production, India produces only 10-12 per cent of DAP. With current fall in raw material prices globally, phosphates have become discounted and it is cost-effective to produce the fertiliser rather than importing the end-product. The government is promoting the production of DAP, which is the second most widely used fertiliser after urea.

For the purpose of sectorial analysis, we have studied 11 leading companies. The overall revenue of the sector jumped by 13.6 per cent during FY18. The PBIT for FY18 grew by 25.1 per cent and net profit also jumped by 45.4 per cent during FY18. The industry major, Tata Chemicals’ revenue declined by 19.4 per cent but its net profit jumped massively by 119 per cent during FY18. Coromandel International registered moderate rise in revenue by 9.7 per cent. 

However, it has posted significant jump in PBIT and net profit by 28 per cent and 39 per cent, respectively, during FY18.

In FY18, the primary fertilisers sales saw a modest growth of around 2 per cent on account of low systemic inventory preserved by the fertiliser companies in view of pan-India implementation of Direct Benefit Transfer (DBT). 

The sales volume of non-urea fertiliser also grew at a fair rate of 2 per cent during FY18 driven by strong sales of DAP, MOP and complexes. The fertiliser sales growth is back on track, post the 7 per cent decline observed in FY17. 

The Cabinet Committee on Economic Affairs (CCEA) has approved an increase in the nutrient-based subsidy (NBS) rates for phosphate and sulphur for FY19 while reducing the same for potash and keeping it unchanged for nitrogen in a meeting held on March 28, 2018. 

As per ICRA, the demand for fertilisers in H1FY19 is expected to remain stable, assuming a normal monsoon outlook through the kharif season and expected higher farm realisation for crops supported by the assurance from the government that the MSP will be 150 per cent of the cost incurred by farmers.

Finance 

The finance sector showed an improvement over the previous year, shrugging off the impact of demonetisation and the GST. The vehicle financiers were the frontrunners in terms of growth in the finance segment. The housing finance segment witnessed stable asset quality improvement during the quarter, while the corporate financiers witnessed strong gains in the business as banks were reluctant to finance, citing asset quality issues. Major NBFCs went for small and retail finance due to the lower delinquency and assured returns in that segment. However, the asset quality issues remained in many companies. The higher G-Sec yields have made smaller financiers shift to short-term borrowings to mitigate the risk of rising costs. The rising consumption expenditure by the consumers and the higher farmers' incomes aided the demand for vehicle finance. 

In terms of revenue growth for the FY18, major financing companies recorded strong income growth in the range of 30 per cent to 40 per cent YoY. Major finance companies such as Indibull Ventures, HDFC, Motilal Ostwal Financial Services, L&T Finance Holdings and Bajaj Finserv have posted strong revenue growth over the previous year. Vehicle finance companies have posted good yields as compared to other financing companies. The small finance companies such as GIC Housing Finance, Geojit Financial Services Ltd, Repco Home Finance and SREI Infrastructure Finance Ltd reported growth of 12.8 per cent, 34.4 per cent, 6.1 per cent ,13.2 per cent YoY, respectively. However, leading gold financing company Mannapuram Finance Ltd posted decline of 14 per cent YoY. The asset management companies like JM Financial, ICICI Securities, Motilal Ostwal Financial Services posted strong revenue on account of rising domestic investor participation in the capital markets. Shriram Transport Finance Company Ltd, Bajaj Finserv Ltd and Bajaj Finance Ltd, the big guns of finance, reported growth of 13.2 per cent, 24.8 per cent, 32.1 per cent YoY. 

The growth in AUMs across the finance segment was strong as major banks faced asset quality issues, thereby resulting in lower growth in advances. Further, the NBFCs are scaling up in such a scenario with branch expansions. Also, NBFCs have significant advantage of reaching out to the retail segment with their wide reach across geographies. The companies have also seen increase in advances due to their wider reach in under-penetrated area. Mahindra Finance has garnered good advances due to strong rural recovery. It also expects collection efficiency to aid strong asset quality. Its focus on the SME segment has helped incremental growth in its AUMs. L&T Finance has gained due to branch expansion. Its focus on rural area has aided significant market share gains to the tune of 14.5 per cent in tractors, while in two-wheelers, it has a share of 9.5 per cent. Some NBFCs have strong relationship with realty developers, which has strongly aided their growth. These companies finance housing developers and use this as a direct channel to finance retail home buyers. The companies having large share of advances to the salaried class benefit on account of better asset quality. 

The vehicle finance companies were the best performing among the other finance companies. Their growth was rebounding and asset quality improving materially. The major vehicle financing companies such as Shriram Transport Finance and Cholamandalam Investment Finance posted significant growth in their AUMs. The GST implementation and overloading ban led to strong demand for heavy commercial vehicles. The vehicle finance segment has the potential of Rs 6.5 bn going forward, backed by various factors like expansion in tonnage and change in emissions norms, price escalations and addition of new vehicles. However, the rising fuel costs will be a cause of worry for the companies as fuel costs account for 30-35 per cent of their total operational costs. 

The housing finance business has seen significant gain due to increased focus on the retail segment with more home buyers from the salaried class going for loans for affordable housing. The delinquency in loans of up to Rs 5 lakh also declined from 4.38 per cent in 2016-17 to 4.13 per cent in 2017-1. Out of the total home loans in FY18, 70 per cent had an average ticket size of Rs 25 lakh. The affordable housing finance segment provides great potential with increasing government initiatives for more affordable housing. The current market size of affordable housing is Rs 450 crore, which is expected to grow by more than 50 per cent in the next 5-10 years. 

The cost of borrowing will be a major concern due to rising interest costs and the impact of G-Sec yields on the margins of major financing companies. The increase in the cost of funds is inevitable now, given that the G-Sec yield is at 7.8 per cent. The magnitude of the increase depends on the incremental borrowing mix, maturity pattern of borrowings and the growth in balance sheet. While the first two reasons are evident, the third reason is often overlooked. The highgrowth companies will have incremental borrowings (which are now higher-cost) comprising a larger share of total borrowings, pushing weighted average cost of funds higher. In terms of profitability, top companies such as HDFC, Bajaj Finance, Bajaj Finserv, Indiabull Housing Finance, L&T Finance, Shriram Transport Finance Company and Bajaj Holdings and Investment Ltd have reported strong bottomline growth in the range of 30 per cent to 45 per cent YoY due to significant growth in AUMs and branch expansions across the country. However, companies like Power Finance Corporation, ICICI Securities, Motilal Ostwal Financial and SREI Infrastructure Finance reported bottomline growth of more than 50 per cent YoY, which is higher than the big names in the industry. Other small companies such as GIC Housing Finance, Satin Creditcare, Muthoot Capital Services and PTC India Financial Services posted bottomline growth in the range 10 per cent to 20 per cent YoY. 

Going forward, finance companies are expected to garner bigger market share due to their strong network in the rural areas. The housing finance companies will benefit from rising demand for home loans with fierce competition from corporate banks as they shift focus to the retail segment. The rising G-Sec yields and interest rates will pinch NBFCs harder. The HFCs and vehicle finance companies will bear the burden of high cost of borrowing, while the small finance companies will pass on the high cost to the customers. A steady improvement will be seen in the asset quality of vehicle finance and housing finance companies.

FMCG

FMCG is one sector that holds an enormous amount of potential and can have huge impact on the country’s economy. 

The sector has three major segments - 

1. Food and beverages segment, which contributes 19 per cent of the sector
2. Healthcare accounts for 31 per cent and
3. Household and personal care accounts for 50 percent of the sector

FMCG market has grown at a faster pace in rural India, as compared with urban India. The semi-urban and rural segments are also growing at a rapid pace. At present, urban India accounts for 66 per cent of total FMCG consumption, with rural India accounting for the remaining 34 per cent. However, rural India accounts for more than 40 per cent consumption in major FMCG categories such as personal care, fabric care, and hot beverages.
The GST roll-out has already reduced the cascading effect by replacing a multitude of indirect taxes with a single tax. Moreover, the FMCG companies are now able to optimize the logistics and distribution costs in the GST era. The resulting cost savings by the companies is seen to be passed on to the final consumers, thereby boosting demand. 

The government has also taken various initiatives to promote FMCG sector in India by reducing the income tax rate targeting mainly the small taxpayers, while the focus on affordable housing and infrastructure development will provide multiple growth drivers for the consumer market industry. 

For the purpose of sectorial analysis, we have taken into consideration a set of 43 companies with highest market capitalisation to analyse the growth of the industry. We have seen that the overall sectorial revenue increased by 10.8 per cent to Rs 2,06,897 crore and the PBIT also jumped by 38.5 per cent to Rs 40871 crore during FY18. In terms of net profit, the sector has registered significant jump of around 55.5 per cent to Rs 29392 crore during FY18. The FMCG major, Hindustan Unilever Ltd. posted mixed set of numbers with muted increase in revenue by 1.3 per cent to Rs 36,238 crore. However, its PBITD declined by 9.8 per cent to Rs 7,672 crore. The company has somehow managed to post a jump in net profit by 16.4 per cent to Rs 5,227 crore during FY18. 

ITC Limited registered moderate set of numbers during FY18. Its revenue and PBITD rose marginally by 5.8 per cent and 6.7 per cent to Rs 45,281 crore and Rs 15,247 crore, respectively. Also, it has registered an increase of 9.7 per cent YoY in net profit to Rs 11,493 crore in FY18. 

Further, Godrej Consumer Product Limited (GCPL) reported healthy numbers for FY18. Its revenue and PBITD rose by 7.4 per cent and 8.8 per cent to Rs 9,951 crore and Rs 1,911 crore, respectively. Also, its bottomline has jumped significantly by 25.3 per cent to Rs 1634 crore in FY18. Further, Britannia Industries Ltd. has posted stable numbers with rise in revenue, PBITD and net profit by 11.3 per cent, 17.3 per cent and 13.5 per cent to Rs 10,080 crore, Rs 1,360 crore and Rs 1,004 crore, respectively, during FY18. It shows that the revenue from large-cap stocks was less than the industry average, but it was very well backed up by the small-cap and mid-cap stocks . 

Overall, the seven stocks have witnessed three-digit rise in PAT with Parag Milk Foods Ltd contributing 408.3 per cent rise in FY18 as compared to the corresponding year, with Varun Beverages contributing 365.8 per cent, Prataap Snacks 346.6 per cent, KSE Ltd 345 per cent, Jubilant Food Works 239.6 per cent, Waterbase Ltd 158.3 per cent and lastly Avanti Feeds 117.6 per cent. 

The return on net worth is an important parameter to analyse how well the companies have utilised their capital and have given returns to the shareholders. Parag Milk Food Ltd, Jubilant Food Works Ltd ,Waterbase Ltd have given highest return, recording growth of 350 per cent,183 per cent and115 per cent, respectively, in 2017-18 as compared to 2016-17. The increase in the revenue of the top FMCG companies was due to the various strategies followed by the giants, such as:

1 .Promotions and Offers:
FMCG companies are trying to influence consumers with intelligent deals. Firms such as ITC offer combo deals to the consumers. For example, the ‘Buy 2, Get One Free’ offer to sell wide range of deodorants at cheap rates.
2 Digitisation:
Nowadays, consumers before buying any products can do a research of that product online as one in three FMCG shopper goes online first and then to the store.
3. New launches:
Taking into consideration the changing taste of the crowd, the FMCG companies are introducing new products to gain market identity among its peers.
4. Capacity expansion:
Capex plays an important role in fulfilling the huge demand of the consumers. 

The growth on the other hand has been driven by the shift of the companies to the organised market, increase in penetration, growth in rural consumption and easy access. 

India’s consumer spending could go up to US$ 3.6 trillion by 2020 and India’s contribution to global consumption is expected to more than double to 5.8 per cent by 2020. Factors such as a comfort, convenience, rising trust factor, modern store experience, access to a wide variety of categories and brands under a single roof and compelling value-for-money deals are attracting consumers to the newer channels in a big way. On the other hand, as the proportion of working age population in the total population increases, the per capita income and GDP are expected to surge. 

In the recent quarters, many of the foreign firms have increased their exposure in the FMCG companies such as Hindustan Unilever, Godrej Consumer Products, Britannia Industries, etc, attracted by their robust financial performance and attractive valuations. The reason is quite simple. Irrespective of how the economy is performing, the demand for consumer goods, daily necessities like food and toothpastes, remains stable. During difficult times, people will reduce spending on discretionary items such as cars and air-conditioners but they continue to buy basic essentials. 

This year, the early arrival of monsoon has brought liveliness to the Indian FMCG companies as it has increased the expectations of growth in the uptake in the rural market. Despite the current slowdown, the demand for premium products across the FMCG space is rising, encouraging companies to launch more premium products. Hence, we present a positive outlook for FMCG companies for 2019 following strong consumption demand in the economy. 

Hospitality

The hospitality and tourism industry is one of the key drivers of growth among the services sector in India. The sector has significant potential in India considering India’s rich cultural and historical and the topography of the country. It is a major source of foreign exchange earner and also a large employment generator. The tourism and hospitality sector is among the top 10 sectors in India to attract the highest foreign direct investment (FDI). According to the data released by Department of Industrial Policy and Promotion (DIPP), the hotel and tourism sector attracted around US $10.90 billion of FDI between April 2000 and December 2017. During January-April 2018, the foreign exchange earnings from tourism increased 17.4 per cent year-on-year to US$ 10.62 billion. The hospitality sector and the tourism sector go hand-inhand. The tourism sector has seen over 15 per cent growth in foreign tourist arrivals, which augurs well for the future of the hospitality sector in the coming years. With the disposable incomes of the citizens on a consistent rise, the hospitality sector, along with the tourism sector, is also gaining in value. They currently account for 7.5 per cent of our GDP. The hospitality sector is expected to grow at 16.1 per cent to Rs 2,796.9 crore by 2022.

The hospitality sector also has a reciprocal relationship with other sectors of our economy, such as transportation, aviation, entertainment, etc which heavily rely on the hospitality sector. As these sectors grow, the demand for hospitality services increases as a consequence.

The Indian government has realised the country’s potential in the tourism industry and has taken several steps to make India a global tourism hub. Further, international hotel chains are increasing their presence in the country, as it will account for around 47 per cent share in the tourism and hospitality sector of India by 2020 and 50 per cent by 2022. Moreover, the start-up culture is providing the much-needed innovative push to the sector, which was missing for many years. Start-ups like OYO Rooms, Zomato, Swiggy, etc. have shown that there is still potential for innovation in the sector. The successes of these start-ups have increased the growth and demand for the services of the hospitality sector. The innovative services being offered by the new start-ups can be seen as the key reason for the extensive investment scenario in India. 

Financial Performance
 
To understand the trend and performance of the hospitality sector, we analysed the financial data of 16 companies. The sector’s topline increased by 11 per cent to Rs 32,987 crore in FY18 as compared to Rs 29,601 crore in FY17. The industry’s PBIDT rose about 32 per cent to Rs 2,722 crore in FY18 from Rs 2,065 crore in FY17. Its net profit soared to a whopping Rs 7,238 crore in FY18 as compared to Rs 417 crore in FY17. This was due to Thomas Cook, whose net income increased from Rs 38 crore to Rs 6,131 crore on a YoY basis due to other income of Rs 5988 crore. Cox & Kings Ltd, reported a 202 per cent increase in profit, whereas EIH reported a PAT growth of over 84 per cent. Most companies reported a double digit EPS growth during the period under consideration. The asset-light business model, operational efficiency, healthy debt-to-equity ratio and higher interest coverage ratio led to a higher PAT and eventually higher EPS for the companies in this sector. 

Future prospects
  
The tourism industry is looking forward to the expansion of e-visa scheme, which is expected to double the tourist inflow into India. India’s travel and tourism industry can potentially expand by 2.5 per cent on the back of higher budgetary allocations and low cost healthcare facility. 

After quiet years in the past, the hospitality sector is seeing many big acquisitions. For instance, one of India’s largest hotel management company, Sarovar Hotels, was acquired by The Louvre Hotel Group. Also, with a boom in the start-up culture, the potential for big investments and acquisitions looks promising. A confluence of these factors is expected to drive the growth of the sector going forward. 

IT 

The IT Industry contributes around 7.7 per cent to India’s GDP. The industry employs nearly 3.97 million people in India, of which around 1,05,000 jobs were added in FY18 and is expected to add over 100,000 jobs in FY19. India has become the digital capabilities hub of the world with around 75 per cent of the global digital talent present in the country. The industry has been fuelling the growth of start-ups in India, with presence of more than 5,200 start-ups in India. The sector has been a major employer and one of the biggest foreign exchange earners for the economy. The industry is expected to grow to about US $300 billion by 2025. 

India is the topmost offshoring destination for IT companies across the world. Having proven its capabilities in delivering both onshore and offshore services to global clients, emerging technologies now offer a new array of opportunities for top IT companies in the country. The share of Indian players in global IT sourcing market stood at 67 per cent in 2017, increasing from 60 per cent in 2012. 

According to rating agency ICRA, large Indian IT companies are expected to clinch a higher share of the digital services space in the coming three years. It further said that Indian IT services companies are expected to register compounded annual growth rate in the midto-high single digits between FY18-FY21. 

The IT industry seems to be coming of age. For example, the largest software services company in India, TCS, became the first IT firm to achieve a market capitalisation of $100 billion. One of the reasons for TCS’s success has been its ability to adapt better to the changing requirements for IT service providers in the global marketplace. The need of the hour for the companies in the sector is now digital services, where the demand is likely to grow twice as fast as that of the overall industry. Technologies such as cloud computing, artificial intelligence and machine learning are becoming the basis for new services. 

The IT companies’ growth is impacted by lower demand due to uncertain macroeconomic factors, lower deal sizes in digital technologies and high competitive intensity. In the next few years, the growth will be supported by higher spend on digital technologies with larger deals spanning enterprise-wise digital transformation, improving discretionary spends, continued cost benefit offered through outsourcing model and market share gains. 

Financial Performance 

We analysed financial data of 48 companies from the sector to understand the trend and performance of the sector in FY18. The IT sector’s topline increased 5.96 per cent to Rs 4,16,289 crore in FY18 as compared to Rs 3,92,859 crore in FY17. The industry’s PBIDT too rose 1.89 per cent to Rs 80,478 crore in FY18 as compared to Rs 78,987 crore in FY17. Its net profit improved by 5.30 per cent to Rs 71,443.99 crore in FY18 as compared to Rs 67,848 crore in FY17. The industry witnessed an average EPS growth of about 25 per cent to Rs 30.62 in FY18 on a yearly basis. 

Industry bellwether TCS reported a 4.4 per cent increase in its revenue to Rs 1,23,104 crore in FY18 on a yearly basis. However, the company’s net profit declined 1.8 per cent to Rs 25,880 crore in the corresponding period. Infosys registered 3 per cent growth in sales and 11.7 per cent growth in profit in FY18 on a YoY basis. Among the top 10 companies in the sector in terms of market cap, only Wipro and TCS reported marginal de-growth in profits. 

Indian IT services companies are in the middle of reorganising their business models to focus more on higher end services like IT consulting and emerging technologies. The companies are diversifying their offerings and showcasing leading ideas in blockchain, artificial intelligence to clients using innovation hubs, research and development centres, in order to create differentiated offerings. The large Indian IT companies can be expected to grab higher share of the digital services space in the next few years. 

Also, the Q4 FY18 numbers and management commentaries of most Indian IT companies have indicated demand revival on the back of global recovery and digital adoption. The scarcity of talent in key markets is expected to keep immigration risks under check and impart pricing power. Also, with demand revival in one of the largest verticals, BFSI, and digital contributing about 30 per cent to the revenue, the growth of Indian IT companies is expected to accelerate to double digits over the next two to three years.

Metals

The metal sector plays a crucial role in the growth of the economy, being major raw materials for all products. The global metal prices have remained volatile due to change in the dynamics of demand and supply. The prices of iron ore and coking coal have increased substantially due to the cut in supply from China due to environmental concerns. Indian metal industry was the biggest beneficiary of the supply shutdown in China as India has rich resources of metals and minerals to cater to the incremental demand. Secondly, India’s robust infrastructure investment has spurred demand for metals as construction works in the country provide huge potential for metals. Metals and mining companies posted steady results across the board. Further, the recent resolution of some major metal companies like Bhushan Steel and Essar Steel will ease some pressure on the sector and will lead to increase in production. 

In terms of revenue, the top companies like Coal India, Hindustan Zinc, Vedanta, Tata Steel, Hindalco, NMDC and JSW Steel reported strong growth in revenues, ranging from 15 per cent to 30 per cent. This growth was on the back of firming up of demand for metals across the globe. The steel prices have increased 36 per cent YoY from $440/tonne to $600/tonne, while the prices had remained flat during the previous year. The iron ore prices also remained flat for the year across the grades, while zinc prices have soared 24 per cent YoY to $3100 per tonne. This has aided strong revenue growth for companies like Hindustan Zinc and Vedanta Ltd, which grew at 26 per cent and 32 per cent YoY, respectively, for the year, while Steel Authority of India reported subdued growth over the period. On the other hand, companies like Tata Sponge, MOIL, Tata Metaliks have also recorded significant gains of 51 per cent, 40 per cent, 39 per cent YoY, respectively, in FY18. 

All the metal companies posted strong operational performance, except Coal India. The government companies faced the heat of increased employee benefit expenses due to the implementation of Seventh Pay Commission. Other companies like Tata Steel, Hindustan Zinc, Vedanta, JSW Steel and Hindalco reported operating profit growth in the range of 15 per cent to 40 per cent, while Steel Authority of India continued to post operational losses for FY18. Other small companies like MOIL and Tata Sponge Iron posted substantial increase in their operational performance. 

The strong operational performance was largely aided by high capacity utilisation levels across the companies due to the strong demand. Further, the higher economies of scale were gained due to closeness to the mines. For the steel players, the raw material prices like iron ore and coking coal are easing off and steel prices are expected to rise on protectionist measures, which will aid in posting strong margins going forward.

In Terms Of Bottomline, the steel companies have faced the heat from the rising finance costs. Major companies like Tata Steel posted turnaround in profits, while Coal India posted decline in net profit by 25 per cent. JSW Steel, Hindalco Industries and NMDC posted significant upside in their bottom-lines, while other companies like MOIL, Jindal Stainless Steel and Hindustan Copper posted bottom-line growth of 38 per cent, 316 per cent and 28.5 per cent YoY, respectively, in FY18. Except for few companies, other players have given strong results in FY18. Rising metal prices and strong operational performance aided significant bottom-line growth for the metal companies.

Going forward, the protectionist measures across the globe will keep the metal prices in check. The sudden surge in aluminium prices due to major sanctions on Russia’s aluminium producer aided strong demand for companies like Hindalco, which is also one of the major aluminium manufacturers. Further, India’s rising infrastructure spend will aid the demand for metals, as well as supply disruptions from China are expected to continue in FY19, which will lead to firming of prices. 

Further, we see major companies like Tata Steel, JSW Steel and Vedanta continuing to gain significant market share. Further, the ongoing NCLT resolution and expected planned capex will add to the domestic capacity further, making the regional players more competitive. The domestic steel market will remain tight over the next two-three years as the demand for steel will outstrip the incremental supply added in the market every year. Steel imports will be curbed as protectionism gains momentum across the globe. In the mining segment, iron ore and coal prices are expected to remain range-bound due to adequate supply across the country.

PETROLEUM 

The development of petroleum industry in India is central to the overall economic development of the country. The Indian petroleum industry started developing mainly in Assam in the north-eastern part of India. The production of petroleum and the exploration of new locations for extraction of petroleum were mainly restricted to this north-eastern state in India.
The passage of Industrial Policy Resolution in 1956 and the discovery of Bombay High changed the scenario of the Indian petroleum industry forever.

The foreign investors are particularly interested in investing in petroleum sector as the industry boasts technology of international standards and easy availability of infrastructure at reasonable costs. The demand for petroleum products is soaring in India and is supported by the increased spending habits of the new Indian middle class.

There is a visible growth in the petroleum products in the recent past. Petroleum gases, propane, gas oil, kerosene, ethane, naphtha and distilled crude oil are some of the main products of the petroleum industry.

Petroleum industry is one of the major contributors to the manufacturing industry in India. The increasing globalisation has put the Indian petroleum industry on the global map and has created vistas of growth opportunities for the sector. Indian petroleum industry has now spread its wings in different countries and it is competing at the global level with global corporations.

India is the fastest growing economy in the world and with rapid increase in economic growth, the consumption has increased manifold for various products, including petroleum products. The prospects for the petroleum industry are bright and hence the industry is the right candidate to show path to other industries when it comes to exports.

Market Size With the growth of the Indian economy, the oil imports rose sharply by 27.89 per cent YoY to US$9.29 billion in October 2017. The oil consumption grew by 8.3 per cent YoY to 212.7 million tonnes in 2016. The global growth was seen at 1.5 per cent during the same time. India also stands as the fourth-largest Liquefied Natural Gas (LNG) importer after Japan, South Korea and China.

Financials The petroleum companies reflected mixed performance on a YoY basis. Out of the 13 companies considered for the purpose of study, three companies reported negative growth in sales, viz., Oricon Entreprises Ltd, Aban Offshore Ltd and Indian Oil Corporation.

The average growth in sales for the petroleum companies under consideration has been 21.5 per cent on a YoY basis. The return on net worth (RoNW) for a majority of the petroleum companies ranged between 10 on the lower side and 23.3 on the higher side. The RoNW was seen increasing in FY18 for Reliance Industries Ltd. and Multibase India Ltd.

The RoNW was seen decreasing for ONGC, BPCL, HPCL, MRPL, Chennai Petroleum and Oricon Entreprises Ltd. Rain Industries saw the maximum increase in PAT growth in FY18, while MRPL saw the steepest increase in losses. Multibase India Ltd was among the companies showing decent growth in reported profits in the petroleum sector. 

 

PHARMA 

We analysed pharma and healthcare sectors with a set of 52 companies and we see that the growth has slowed for the sectors from double digit to single digit. On a median basis, the sales grew by 9.5 per cent, while operating profit and net profit grew by 6.0 per cent and 4.1 per cent, respectively, which were lower than the double digit growth seen in the previous year. Also, the revenues of companies were not comparable as the GST was ex-excise duty for most of FY18. The companies that did exceptionally well and saw +40 per cent increase in profits were Medicamen Biotech, Caplin Point laboratories, Abbottt India, Natco Pharma, Suven Life Sciences, Cipla and Gufic Bio Sciences. These companies witnessed sales growth in high double digits and also their RoNWs were in high double digits. We see that IOL Chemicals and Pharmaceuticals achieved a turnaround and the company is PAT positive now.

Considering the pharma sector, we see that sales increased by an average of 7.6 per cent, with companies having exposure to US geography like Lupin, Sun Pharma, Dr. Reddy's seeing tepid growth. The companies having domestic exposure like Cipla fared better. Also, looking deeper, we see that the large caps' operational profit erosion was much steeper and companies reported higher net profits on the back of other income or income from discontinued operations. According to ICRA, companies with exposure to the US markets are expected to see lower sales growth of single digit considering the lower opportunities in generic drugs as the number of drugs going off-patent are lower in FY18-FY20. Natco Pharma's management too commented that only niche products will make money in the US market. Pharma companies are also facing pressure of rebasing manufacturing facility in the US and increased pressure of inspection by the USFDA.

The domestic industry is also facing short term pressure due to continued regulatory interventions which might depress profits on life-saving drugs. Also, the threat of change in government policy to generic name-based prescription instead of brand name-based prescription can lead to margin erosion. However, with increased penetration and higher spend on healthcare schemes, we expect volumes in generics to be higher. Also, in May 2018, the Indian government approved financial outlay of Rs.14,832 crore (US$ 2.30 billion) for healthcare for FY2017-18 to FY2019-20. Also, government aims to increase total healthcare expenditure to 2.5 per cent of GDP by 2025 from the current 1.5 per cent.

Within this sector, looking at pathological laboratories such as Dr.Lal Pathlabs and Thyrocare Technologies, we see that the revenue growth was in double digits and the operating profits too showed an increasing trend. The PAT growth was in line with the growth in operating profits, implying that the sector faced no surprises on taxation and GST changeover.

However, looking at hospitals like Narayana Hrudyalaya, Apollo Hospitals, Shalby and Kovai Medical Center, all these hospitals saw growth in their revenues, but a decline in their operating profits. This was largely due to higher operational costs and the capping of prices for stents and other medical consumables by the government. As per the study of National Pharmaceutical Pricing Authority, profit margins on various medicines and consumables were between 350-1740 per cent. However, this also provides for the high cost of operations for the private hospitals. Looking at the net profit number by these hospitals, it definitely goes without saying that the hospital charges on these consumables provide for their high operational costs and any capping can seriously hamper the profit of these hospitals going forward.

Overall, as a sector, we see pathological labs and domestic pharma companies with niche offerings to see sustained growth. However, uncertain regulatory environment might weigh on the margins of the companies. The stocks of companies having good pipeline of drugs and offerings in niche segment are most sought after.

We see hospital sector to remain under pressure due to new capacity additions, pricing erosion and longer time for capex recovery. Having said that, the positives of higher government spending on healthcare, expected increase in penetration of medical facilities and ‘Modicare' is expected to lead to volume growth.

PLASTIC PRODUCT

The Indian plastic Industry has expanded momentum in the early 1990s. The plastic industry has been one of the of the fastest growing industries in the Indian economy. The whole plastic industry can be divided into (A) Upstream sector: Manufacturing of polymers and (B) Downstream sector: Making plastic articles from polymers. There are over 30,000 registered plastic processing units, out of which about 75 per cent are in the small-scale sector. The small-scale sector, however, accounts for only about 25 per cent of polymer consumption.

The industry also consumes recycled plastic, which constitutes about 30 per cent of total consumption. The products from the plastic industry are exported to around 150 countries globally. The top ten trading partners of the Indian plastic industry are the US, UAE, Italy, UK, Belgium, Germany, Singapore, Saudi Arabia, China and Hong Kong. The sector has enormous unrealised potential, as shown by the current very low per capita consumption levels of polymers in India, which is 11 kg as against 38 kg in China, 65 kg in Europe and the global average of 28 kg.

Today, the plastic processing sector comprises of over 30,000 units involved in the manufacture of variety of items, gaining prominence in different spheres of activity due to the increasing per capita consumption. The industry has grown at a CAGR of 10 per cent in volume terms from 8.3 MMTPA in FY10 to 13.4 MMTPA in FY15 and is further likely to grow at a CAGR of 10.5 per cent from FY15 to FY20 to reach 22 MMTPA. However, in spite of having a good growth potential, the industry faces many challenges in terms of environmental hazards, lack of advanced technology, limited infrastructure, etc.

The Plastics Export Promotion Council (popularly known as PLEXCONCIL) represents the exporting community in the Indian plastic industry. The exports from the Indian plastic industry has reached over USD 8.8 billion in 2017-2018 and has targeted to reach USD 10.6 billion by 2018-2019.

For the purpose of sector analysis, we have analysed 22 companies in the plastic sector according to their market cap. The overall revenue of the sector increased by 9 per cent to Rs.63,780 crore during FY18 and PBIT also increased by 16.1 per cent to Rs.6,213 crore. However, the bottomline remains muted with marginal rise of 2.9 per cent to Rs.3,293 crore in FY18. The plastic major Supreme Industries' revenue increased by 11 per cent to Rs.4966 crore, whereas its bottomline remained muted at Rs.432 crore during FY18.

Astral Poly Technik reported healthy numbers with rise in revenue and profit by 12 per cent and 21.5 per cent to Rs.2119 crore and Rs.175 crore, respectively, during FY18.

Finolex Industries disappointed with the numbers, with a decline in revenue and PBIT by 7.5 per cent and 16.7 per cent to Rs.2762 crore and Rs.423 crore, respectively, during FY18. The net profit also slipped by 13.7 per cent to Rs.306 crore in FY18. Jain Irrigation Systems posted healthy numbers with a rise in revenue and PBIT by 18 per cent and 12 per cent to Rs.8004 crore and Rs.717 crore, respectively, and with a jump in profit by 31 per cent to Rs.221 crore during FY18. Essel Propack reported mixed set of numbers with rise in revenue and PBIT by 6.3 per cent and 14.4 per cent to Rs.2446 crore and Rs.320 crore, respectively. However, its bottomline declined by 9.8 per cent to Rs.172 crore during FY18.

The Indian plastics industry has massive unrealised growth potential indicated by very low usage of plasctic as compared to the global standards. At the same time, in the coming decades, the industry has to encourage reasonable development by investing in technologies that protects the environment and inspires growth, while balancing economic needs and financial constraints. Also, the growing interest in green products, healthier lifestyles and rising concerns on environment is leading to a shift towards bio-plastics, which would be a game-changer for the industry.

Going ahead, the linkage of plastic waste business with recycling business could create various opportunities for the recycling companies. Moreover, the current low level of per capita consumption (11 kg), increased growth in the end-user industries, higher penetration of plastics in various existing applications and the ever-growing range of new applications could further propel the growth of plastics in India.

POWER 

Power sector as a key resource sector is both a critical provider and driver for the Indian economy. With the onus of both industrial and social development, the sector is an essential infrastructure element for the sustained growth of India. Being one of the most diversified sectors, the sector includes power generation sources such as coal, lignite, oil, natural gas, hydro and nuclear power to non-conventional, eco-friendly sources such as solar, wind and agricultural waste. Moving towards 100 per cent village electrification, the sector is rife with opportunities and has a broad market to serve. Battling the power deficit in the sector, the country has an installed capacity of power stations in India at 334,146.91 megawatt as on February 2018.

With further plans to increase power generation, the annual growth rate in renewable energy generation is expected to be at 27 per cent, moving towards more sustainable and environment-friendly sources, whereas the annual growth rate in conventional energy generation is likely to be 18 per cent. In the sphere of non-conventional power generation, the Indian solar industry has also recorded an installation of 2,247 megawatts in the third quarter of 2017 as compared to 1,947 megawatts in the second quarter of 2017. With an installed capacity of 7,149 MW in the first nine months of 2017, the solar industry covered over one-third of the total new power capacity addition in 2017. Further, India is also looking forward to the establishment of more hydro-projects, with the power production expected to increase to 4,458.69 million units in 2018.

Analysing the sector with top 22 companies in terms of market cap, we observe that the overall sales increased by 11 per cent to Rs.3,09,696.1 crore in FY18 as against Rs.2,79,398.1 crore in FY17. The aggregate net income of the sector increased by Rs.5,129.6 crore to Rs.27,978 crore in FY18 as compared to Rs.22,848.4 crore in the previous fiscal year.

NTPC posted the highest net income among the top players in the sector. However, its net income stood at Rs.10,501.5 crore for FY18, down marginally from Rs.10,719.6 crore in FY17. BF Utilities witnessed the highest PAT growth of 343.6 per cent on a year-on-year basis. Its net income stood at Rs.36 crore for FY18, up by Rs.8.1 crore in the previous fiscal. With India's development picking up momentum, the sector is rapidly moving towards humongous opportunities and sustainable avenues of growth.

SERVICE 

The services sector, also known as the tertiary sector, is composed of a broad spectrum of services, including education, health, computer services, media, communications, banks, hotels, real estate, electricity, among others. The Government of India recognised the importance of promoting growth in services sectors and is providing several incentives in wide variety of sectors such as healthcare, tourism, education, engineering, communications, transportation, information technology, banking, finance, management, among others. Owing to the huge size of the population, the services sector has an enormous potential in India. The huge population can be used as an asset by its proper utilisation and, thereby, increase the productivity of the nation and further develop the services sector.

Currently, the sector remains the backbone of the Indian economy and contributes around 53.66 per cent to India's GDP. Trade, hotels, transport, communication and services related to broadcasting have the highest share of about 18 per cent. The financial services and real estate services account for about 21 per cent and public administration, defence and other services contribute about 14 per cent to the GDP.

The services sector companies reflected mixed performance in FY18. We have taken 29 companies based on market capitalisation and observed that the sales have increased by 12.34 per cent in FY18. In FY17, the sales stood at Rs.175,602.9 crore and increased to Rs.197,271.6 crore in FY18. From the list of the companies, Redington (India) Ltd has been maintaining its position as the top company to attain the highest sales in both FY17 and FY18, posting sales of Rs.41,114.7 crore in FY17 and Rs.43,498.5 in FY18, marking an increase of 6 per cent. Not far behind lies Adani Enterprises Ltd., a large-cap company which has stood in the second position for the last two years. Its sales in FY18 posted a surge of 1.8 per cent on a YoY basis. But the company that has shown the highest improvement in terms of sales is TVS Electronics, which reported a 59 per cent growth in FY18 on a YoY basis.

The industry's PBIDT increased by 19.98 per cent from Rs.6,147 crore in FY17 to Rs.7,375 crore in FY18. Its net profit increased marginally by 1.64 per cent to Rs.3,227.3 crore in FY18 as compared to Rs.3175 crore in FY17. Shoppers Stop posted strong PBIDT growth of 315 per cent, whereas Future Lifestyle Fashions Ltd posted 180 per cent increase in PAT in FY18 on a YoY basis.

The services industry has been growing consistently and this is because there will always be a demand for human intelligence.The sector has increased rapidly in its contribution to GDP owing to an increase in the number of skilled labour and educated manpower. The foreign companies are outsourcing their work to India, especially in business services. This has pumped up the serviced sector in India.

The Economic Survey 2017-18 has specified various policy reforms by the government that will lead to high growth rate in the services sector. The government has taken many initiatives in different services, including digitisation, e-visas, giving infrastructure status to logistics, Start-up India, schemes for the housing sector, etc. that could give a further push to the services sector.

TEXTILE 

Indian textile industry contributes 4 per cent to the GDP and provides employment to 45 million people. It also contributes about 26 per cent to our manufacturing production in India and 13 per cent to the export earnings. The sector is largely unorganised and is cyclical in nature, with cotton being one of the major raw materials. India is also the largest producer of man-made fibres and filaments globally, with production of ~211 mn kg in FY17.

India competes with China, Vietnam and Turkey for export of fibres and yarns. China contributes the highest in terms of apparel and yarn exports, contributing 33.6 per cent and 22.8 per cent of its total global share of exports. India's share of apparel export is 4.2 per cent only, while it accounts for 10.5 per cent in yarns. Though we are the one of the largest producer of cotton, due to the lack of technology upgradation, economies of scale and inability of government to agree on bilateral arrangements, the industry is still a laggard as compared to its global peers. '

Also, with shift towards synthetic yarn, China has been spearheading faster in this area. Also, we have seen Bangladesh has been able to gain market share in Europe due to higher capacities, better lead time and better initiatives by the government.

Looking at our set of 36 companies in the textile sector, we see that the sales increased by 9.5 per cent YoY and PAT increased 7.9 per cent YoY on a median basis in FY18. The FY18 was better than FY17 in terms of sales growth, while it was lower on average basis for the industry.

Some of the outperformers in the sector in FY18 were Vishal Fabrics, Ashapura Inmates, Dollar Industries, Filatex and Monte Carlo Fashion. Vishal Fabrics saw a revenue jump of 1.5x, while its PAT grew at a lesser rate of 48.3 per cent due to higher interest cost . On the other hand, Dollar Industries saw 10.9 per cent revenue growth, but better margins and slightly lower interest pulled up the PAT growth by 47.2 per cent. Filatex reported over 25 per cent growth in revenue and operating profit, which pulled PAT up by 45 per cent.

Raymond also reported good growth numbers. While revenue growth was 9 per cent, the growth in EBITDA due to operational efficiencies was 40 per cent. With land bank monetisation and other operating segments (tools and hardware and auto components) also showing growth, performance across the board improved.

What's ailing the mills? Mills are largely dependent on the raw material cotton for spinning the same into yarn. The cotton harvest season is September-October period. Cotton requires water and normal rains increases the yield. India had two seasons of normal monsoons over FY17 and FY18. However, the good production was not supported by better prices as higher production in the US and restrictions of imports by China led to a decline in prices. Also, many belts of cotton production have reported ball worm attack, however the prices are still down on a YoY basis.

Mills are however facing the issue of declining margins. The cotton prices over the years have been firming, but the yarn prices have slightly declined or stood at the same levels, thereby shrinking the margins from 102.9 to 84.8. This has led to lower performance on the earnings front from KPR Mills, Arvind, Ruby Mills and Nitin Spinners.

As per ICRA, due to the the ball worm disease and higher variation in climatic conditions impacting cotton acreage, the prices are expected to firm up. Also, the minimum support price (MSP) for cotton for 2018-19 is expected to be higher than the previous season.

Apparel sector showing growth Apparel sector is the highest in value chain and has seen robust domestic demand. The higher disposal incomes, changing lifestyles, social media and rise in brand consciousness are leading to higher demand for apparels. As per IBEF, the domestic market is expected to remain buoyant for apparel and lifestyle products. Currently, the market is estimated at US$ 85 billion, which is expected to reach US$ 160 billion by 2025. This has helped companies like Monte Carlo, which is also rejigging its product mix to reduce exposure to woollen segment and diversifying into non-seasonal garments. Raymond, with the last mile approach, is seeing traction and increasing rural penetration.

Also, with apparel brands doing forward integration and venturing into online sale of products, their reach has increased. The Indian fashion retailers online market is poised to grow to US$ 30 billion by the 2020 from US$ 7-9 billion currently.

New trends to drive future growth MAN-MADE FIBRES – China has moved faster than India in manufacturing and exporting man-made fibres. These include polyester, viscose, nylon and acrylic. The production of man-made fibres has seen steady increase and has jumped to 1.123 million tonnes from Apr to Jan FY18. However, India is still at a disadvantage on this compared to Vietnam and Bangladesh, which have captured a larger share. Also, the GST led to short term hurdles due to the unorganised nature of the industry dealing largely in cash. However, we see that any shift in China's policy on this can leave a gap to be filled by India.

TECHNICAL TEXTILES

:Technical textiles are gaining importance and are finding higher applications in various industries such as automotive, medical and agriculture. It was estimated to be worth Rs.1,043 billion in 2017. As per IBEF, technical textiles has been growing at around twice the rate of textiles for clothing applications over the past few years, and it is now estimated to post a CAGR of 20 per cent over next few years. Considering this as a growth area, the government has also been investing in the same.

New government policies and the impact 1. US$ 70.83 million has been allocated to promote the use of geotechnical textiles in the North-East states. 2. Government of Maharashtra proposed to set up 9 textile parks in the northern cotton producing parts of the state to focus on value-added products 3. Increase in Technology Upgradation Fund (TUF) by 14 per cent in budget 2018 by the government to help the garment sector.

We see that the textile industry has lot of legacy issues of being fragmented, unorganised and saddled with old technology. The government policies of GST, cluster formation and Khadi drive was to bring the age-old traditions into the mainstream and boost revenue. We believe the fully integrated players will be able to see higher growth due to value addition and ability in pricing. The exporters are expected to make a windfall gain on account of better exchange rate .