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India Top Picks equity strategy This reflects the views of the Wealth Management Group equities | 07 March 2014 Sensex consolidating in a narrow range Contents No changes to our Top Picks this month Sensex consolidating in a narrow range 1 On Watch: India Top Picks 2 – Maruti Suzuki (MSIL IN) to Cut (waiting for a rebound) India Top Picks Review 2 – Tata Power (TPWR IN) and HPCL (HPCL IN) or Oil India Range-bound till elections 7 (OINL IN) under consideration to Add Technical Commentary 8 Indian markets were up last month because of better-than- India Top Picks – Results Update 18 expected inflation data and pre-election opinion polls suggesting Sector – Performance & Valuations 19 that the BJP-led coalition is the frontrunner for forming the next List of Equity Market Commentary Publication 21 government at the Centre. Important Information 22 Of the stocks we highlight, we believe those with the most favourable technicals are Cipla (CIPLA IN), Lupin (LPC IN) and Tech Mahindra (TECHM IN). We would advocate investors consider adding to these names at current levels. In the Interim Union Budget, the Finance Minister surprised the market by announcing that the FY14 fiscal deficit would be 4.8%, 20bps lower than previously forecast. Other highlights include the lack of populist measures ahead of the budget and excise duty Rob Aspin, CFA reduction in automobiles, capital goods and non-consumer Head, Equity Investment Strategy durables. Audrey Goh, CFA We expect Indian equities to trade in a narrow range until the Investment Strategist general elections and remain Neutral on the markets; we expect a rally on a favourable outcome in the general elections. Victor Teo, CFA Investment Strategist India Top Picks (Refer to appendix for a summary of the rationale behind each stock’s selection) Stock Consensus 12m 12m Div Ticker Name Sector Price Rating Fwd P/E Fwd P/B Div Yield Payout% TR 1M% TR YTD% YTD% USD TR ITD% LPC IN Lupin Ltd Healthcare 982.8 4.6 21.9 5.4 0.3 13.6 13.3% 10.0% 8.0% 7.6% CIPLA IN Cipla Ltd Healthcare 376.6 3.4 18.8 2.6 0.5 10.4 -6.4% -4.1% -6.5% 24.8% LT IN Larsen & Toubro Industrials 1097.6 4.1 17.9 2.4 1.1 21.9 12.6% 3.7% 2.0% 29.1% TECHM IN Tech Mahindra Technology 1906.5 4.4 13.4 3.5 0.3 5.0 4.5% 1.6% 3.2% 92.5% HCLT IN HCL Technologies Technology 1504.7 4.4 15.8 4.6 0.9 20.7 7.8% 25.1% 18.9% 19.9% MSIL IN Maruti Suzuki Discretionary 1582.2 3.9 14.3 2.0 0.5 9.8 -2.9% -9.9% -10.7% 13.8% TTMT IN Tata Motors Ltd Discretionary 410.7 4.7 7.8 1.9 0.5 6.5 19.3% 10.8% 8.6% 14.8% RIL IN Reliance Industries Energy 803.4 4.2 9.8 1.1 1.1 14.7 -3.8% -10.6% -10.7% 9.5% ICICIBC IN ICICI Bank Financials 1029.8 4.6 - - 1.9 24.0 5.7% -5.0% -6.7% 20.1% AXSB IN Axis Bank Financials 1255.5 4.1 - - 1.4 18.9 12.8% -2.5% -3.9% -2.8% BHARTI IN Bharti Airtel Telecom Svs 286.7 4.4 21.4 1.8 0.3 16.7 -8.7% -12.9% -13.6% -14.6% ITC IN ITC Ltd Staples 329.2 4.6 25.4 8.9 1.6 54.5 0.8% 1.8% 1.8% 50.1% Source: Bloomberg, Standard Chartered, data as of 03 March 2014 This commentary reflects the views of the Wealth Management Group of Standard Chartered Bank. This is not a research 1 report and has not been produced by a research unit. Important disclosures can be found in the Disclosures Appendix. equity strategy – India Top Picks | 07 March 2014 India Top Picks Here, we highlight our Top Picks in India on a sector-agnostic basis. For a brief view on each individual stock, refer to page 17. The technicals section on pages 8-15 highlights selected stocks with favourable technical views on a 1-3 months basis. Our key sector calls over the next 12 months Healthcare (OW) Q3 FY14 revenues continued to beat expectations because of greater penetration in key markets, new product launches and a better product mix. Industrials (OW) The sector is expected to be a key beneficiary of any revival in economic growth. Focus on infrastructure development is on the economic agenda of most major political parties, which augurs well for the sector. Furthermore, attractive valuations are supportive in face of market volatility. Technology (OW) The business outlook for the sector remains strong; however, we need to be cautious as profit-booking in the near term cannot be ruled out, because of the recent sharp outperformance. The sector is a good hedge against any volatility arising from an unfavourable election verdict, given its more internationalised earnings profile, which would benefit from a weaker rupee. Utilities (N) The sector is returning to normalcy following the recent regulatory order on a tariff hike, which is positive as it reduces fuel price concerns (the availability of coal remains a worry). Furthermore, the focus on reviving ailing State Electricity Boards (SEB) is expected to improve realisation for power generating companies. A favourable election outcome is likely to raise hopes of further power sector reforms. In addition, valuations in the sector being at historical lows provides added comfort. India Top Picks Review Stock Ticker View Tata Power TPWR IN Watch (Add) We are not making any changes to the India Top Picks this month. We Hind Petroleum Co HPCL IN Watch (Add) have, however, put a number of stocks on our watch list. Oil India OINL IN Watch (Add) Maruti Suzuki MSIL IN Watch (Cut) On Watch: – To ADD: Tata Power (TPWR IN), HPCL (HPCL IN), Oil India (OINL IN) – To CUT: Maruti Suzuki (MSIL IN) - awaiting a technical rebound Tata Power trading at c.-1SD below its median On Watch to Add: Tata Power (TPWR IN) EV/EBITDA Profile: Tata Power generates and supplies electricity in Mumbai and EV/EBITDA its suburbs. The company also constructs and operates independent and captive power plants for industrial concerns. In addition, it provides various services related to electricity distribution, erects and commissions transmission lines and is diversifying into the telecommunications market. Key Drivers: TPWR’s portfolio comprises low-risk businesses because c.98% of its projects are tied up under long-term power purchase agreements (PPA) and c.94% of operational and under- construction projects have long-term tie-ups for fuel supply. This provides the company medium-term revenue visibility. The recent regulatory order on the pass-through of fuel costs is structurally positive and enhances the viability of its ultra mega power project (UMPP) in Mundra, albeit with a cap on RoE. This reflects the views of the Wealth Management Group 2 equity strategy – India Top Picks | 07 March 2014 Valuations: The stock is attractively valued at 7.3x EV/EBIDTA and trades at 1.7x P/B versus its historical 10-year average of 2.3x. Technicals: The stock is trading within a broad range of INR 70-90. The downside is very limited at the current level. Risks: The recent tariff hike is likely to be challenged by State Electricity Boards (SEBs). On Watch to Add: Hindustan Petroleum Corp (HPCL IN) HPCL trading at c.1SD below its median P/Bk We are considering adding HPCL to the Top Picks list. The stock 12-month forward P/Bx has run up in recent weeks, and we would look to add it on weakness. Profile: Hindustan Petroleum Corporation Ltd refines crude oil and manufactures petroleum and petroleum products. The company’s products, sold via outlets throughout India, include lube products, lubricating oil, aviation fuel, hydraulic brake fluid, greases, liquefied petroleum gas and insecticides. The Government of India is the company’s majority shareholder. Key drivers: We expect the re-rating of oil marketing companies (OMC) to continue given the improving RoE. The attractive risk-reward makes OMCs well positioned for an outperformance in case Source: Bloomberg, data as on 03 March 2014 of a favourable election outcome. We expect fuel subsidies to contract further, led by regular diesel price hikes and declining crude oil prices. However, an INR depreciation could hurt our assumptions. Timely government subsidy payouts are likely to progressively reduce finance charges and improve working capital. This would also help deleverage the balance sheet. We expect RoEs to improve on the back of (1) stable gross refining margins (GRM), (2) falling finance charges, and (3) full compensation in addition to the absence of forex losses in FY14. Valuations: The c.8x 12-month forward P/E is below the Energy sector’s historical mean of 13.5x. The stock offers an attractive dividend yield of 3.2%. Technicals: The stock pulled back sharply after hitting a low of INR 160 in September 2013. We expect the stock to touch INR 350 in the medium term. However, a price correction cannot be ruled out in the near term, as momentum indicators are trading in the overbought zone. Oil India trading at c.1SD below its median P/Bk Risks: Lower compensation by the government in FY14E, rising crude 12-month forward P/Bx prices on account of geo-political concerns and the INR depreciating against the USD.