040 - 3321 6296 Vivek Ranjan Misra [email protected] Karvy Stock Broking Research is available on Thomson Reuters & Bloomberg (Code: KRVY<GO>) KARVY INVESTMENT STRATEGY 3 Index Market Outlook . 9 Key Developments in the Indian Economy . 12 Is information technology on the verge of A Turnaround? . 14 Prospects for Banking . 15 Prospects for Pharma . 15 Benefit from demographic dividend in India . 16 Roller-Coaster one year ride of GST . 18 Trade War - Recent Developments . 19 Wealth-maximizer stocks HCL Technologies Ltd . 24 ICICI Bank Ltd . 26 Indiabulls Housing Finance Ltd . 28 Larsen & Toubro Ltd . 30 Oil & Natural Gas Corp Ltd . 32 State Bank of India . 34 Tata Motors Ltd . 36 Titan Company Ltd . 38 UPL Ltd . 40 Yes Bank Ltd . 42 Value Invest Stocks ABB India Ltd . 46 Apar Industries Ltd . 48 Bajaj Electricals Ltd . 50 Bharat Electronics Ltd . 52 4 KARVY INVESTMENT STRATEGY Gujarat Mineral Development Corp . Ltd . 54 Jain Irrigation Systems Ltd . 56 LT Foods Ltd . 58 Menon Bearings Ltd . 60 Talbros Automotive Components Ltd . 62 Tata Sponge Iron Ltd . 64 Dividend Maximizer Bajaj Auto Ltd . 68 Bajaj Corp Ltd . 69 Cummins India Ltd . 70 Divi’s Laboratories Ltd . 71 Housing Development Finance Corp Ltd . 72 LIC Housing Finance Ltd . 73 Oil India Ltd . 74 PTC India Ltd . 75 Reliance Nippon Life Asset Management Ltd . 76 Tata Consultancy Services Ltd . 77 KARVY INVESTMENT STRATEGY 5 Wealth Maximizer & Value Invest Wealth Maximizer - July 2018 Market Cap CMP* Target Upside Company Name NSE Symbol Sector (Rs. Bn.) (Rs.) Price (Rs.) (%) HCL Technologies Ltd HCLTECH Information Technology 1289 .7 926 1176 27 ICICI Bank Ltd ICICIBANK Financials 1771 .2 275 405 47 Indiabulls Housing Finance Ltd IBULHSGFIN Financials 487 .4 1143 1519 33 Larsen & Toubro Ltd LT Industrials 1787 .0 1275 1631 28 Oil & Natural Gas Corp Ltd ONGC Energy 2032 .8 158 192 22 State Bank of India SBIN Financials 2314 .6 259 334 29 Tata Motors Ltd TATAMOTORS Consumer Discretionary 858 .2 269 405 50 Titan Company Ltd TITAN Consumer Discretionary 779 .9 879 1058 20 UPL Ltd UPL Materials 315 .1 619 934 51 Yes Bank Ltd YESBANK Financials 783 .1 340 472 39 *As on Jun 29, 2018, Please CLICK HERE for previous Wealth Maximizer report Value Invest - July 2018 Market Cap CMP* Target Upside Company Name NSE Symbol Sector (Rs. Bn.) (Rs.) Price (Rs.) (%) ABB India Ltd ABB Industrials 249 .7 1179 1575 34 Apar Industries Ltd APARINDS Industrials 25 .8 675 860 27 Bajaj Electricals Ltd BAJAJELEC Consumer Discretionary 55 .5 544 670 23 Bharat Electronics Ltd BEL Industrials 264 .7 109 141 30 Gujarat Mineral Development GMDCLTD Energy 33 .9 107 170 59 Corporation Ltd Jain Irrigation Systems Ltd JISLJALEQS Industrials 39 .1 77 128 67 LT Foods Ltd DAAWAT Consumer Staples 19 .2 60 81 35 Menon Bearings Ltd MENONBE Consumer Discretionary 5 .2 92 135 47 Talbros Automotive TALBROAUTO Consumer Discretionary 3 .36 272 361 33 Components Ltd Tata Sponge Iron Ltd TATASPONGE Materials 14 .7 955 1318 38 *As on Jun 29, 2018, Please CLICK HERE for previous Value Invest report 6 KARVY INVESTMENT STRATEGY Dividend Maximizer Dividend Maximizer - July 2018 Market Cap CMP* Dividend Per Dividend Company Name NSE Symbol GICS Sector (Rs. Bn) (Rs.) Share (Rs.)** Payout (%)** Bajaj Auto Ltd BAJAJ-AUTO Consumer Discretionary 813 .2 2810 73 .7 40 .0 Bajaj Corp Ltd BAJAJCORP Consumer Staples 59 .8 405 13 .7 75 .2 Cummins India Ltd CUMMINSIND Industrials 179 .5 648 18 .3 62 .8 Divi's Laboratories Ltd DIVISLAB Health Care 275 .7 1039 17 .6 35 .3 Housing Development Fin HDFC Financials 3209 .4 1908 24 .2 17 .0 Corp Ltd LIC Housing Finance Ltd LICHSGFIN Financials 236 .5 469 9 .2 16 .6 Oil India Ltd OIL Energy 238 .2 210 12 .2 39 .6 PTC India Ltd PTC Utilities 22 .4 76 5 .3 26 .3 Reliance Nippon Life Asset RNAM Financials 140 .3 229 8 .4 69 .8 Mgmt . Ltd Tata Consultancy Services Ltd TCS Information Technology 7074 .2 1848 35 .4 42 .0 *As on Jun 29, 2018, **Bloomberg Estimates, Please CLICK HERE for previous Dividend Maximizer report ` ` ` ` ` KARVY INVESTMENT STRATEGY 7 8 KARVY INVESTMENT STRATEGY Market Outlook We expect the Indian markets will grind higher, though The missing puzzle for Indian equities has been a lack of we believe volatility will remain high which may induce robust earnings growth . Since 2014, earnings growth has swings in either direction . averaged at 4% vs . historical average of 11% . However, with capex likely to pick up, corporate earnings are likely Foreigners have been sellers, and this is part of to pick up strongly . the broader trend . Despite this, India is among the better-performing markets halfway through 2018, largely Nifty Trailing EPS (Rs.) as domestic investors have stepped in during the sell-off . 500 There are reasons why we remain optimistic: 400 After a slowdown since the middle of 2016, there are 300 clear signs of an economic recovery, where the last two quarters signal a turnaround in the economy . GDP 200 growth has improved over the last three quarters, 100 after a bottom during April-June quarter of 2017 . 07 09 11 13 15 17 06 08 10 12 14 16 18 06 08 10 12 14 16 - - - - - - - - - - - - - - - - - - - High-frequency indicators like commercial vehicle sales Jul Jul Jul Jul Jul Jul Mar Mar Mar Mar Mar Mar Mar growth at 57 .4% YoY during YTD FY18 (April-May) Nov Nov Nov Nov Nov Nov Source: Bloomberg, Karvy Research bodes well for the manufacturing sector and the broader economy . The index has de-rated significantly since the peak of 22x in January 2018 . While by no standards cheap, valuations GDP Consensus Estimates of Indian markets are more reasonable now (compared 7.6% to January 2018) with Nifty trading at a 12 month forward 7.6% PER 18x, Nifty’s average has been 16 .2x since 2005 . 7.5% 7.5% At current levels, valuations are not a constraint for the 7.4% markets to move higher . 7.3% Nifty Valuation - 12 month forward PE Ratio 7.3% 25 7.2% 20 7.1% 15 Q1FY19E Q2FY19E Q3FY19E Source: Bloomberg, Karvy Research 10 5 What has been more encouraging is that the growth in fixed 05 06 07 08 09 10 11 12 13 14 15 16 17 18 - - - - - - - - - - - - - - capital formation has picked up; in the last quarter it grew Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun at 14 .4% YoY . The economic data signal a turnaround in 12 month fwd. PER Average the capex cycle . This is important as investment demand + 1 SD - 1 SD will lead to higher earnings growth, especially in cyclical Source: Bloomberg, Karvy Research sectors . It takes time to add capacity; in the meantime, US rate increase is not a headwind in our view . On the higher capacity utilization can help firms improve margins contrary, equities tend to rally when US rates are rising and ROE . This also opens the door for possible higher as shown in the table below . This is largely because an earnings growth . increase in US rates is typically associated with a pick KARVY INVESTMENT STRATEGY 9 up in the business cycle . The table below shows the Real Effective Exchange Rate performance of Indian equities in a period when US 105 rate (specifically US 10-yr bond yield) was rising . We 100 believe that pre-emptive rate hikes by the RBI is a vote of confidence in the economy, indicating that the economy 95 is on a strong growth trajectory . 90 85 US Bond Yield & Indian Market Performance Indian market 80 95 00 05 10 15 98 03 08 13 18 97 02 07 12 17 94 99 04 09 14 - - - - - - - - - - Date Trough Date Peak - - - - - performance (%) - - - - - Feb Feb Feb Feb Feb Nov Nov Nov Nov Nov Aug Aug Aug Aug Aug Oct-93 5 .17 Nov-94 8 .03 52 May May May May May Source: BIS, Karvy Research Oct-98 4 .16 Jan-01 6 .77 75 Jun-03 3 .19 Jun-07 5 .29 314 contributes to the same, though marginally . This increases the probability of more than anticipated rate Dec-08 2 .05 Jun-09 3 .94 65 increase by the RBI . Jul-12 1 .44 Dec-13 3 .03 27 yyThe ongoing process of resolution of NPAs in the Jul-16 1 .36 Now 22 banking sector . Source: Bloomberg, Karvy Research yyState elections in 4 states (Mizoram, Rajasthan, The following makes us a bit cautious: Chhattisgarh and Madhya Pradesh) in the run-up to the general elections, to be held during May 2019 . yyCurrency depreciation: Indian markets (like other emerging markets) do well when the currency Outlook: strengthens; the current phase of weakness in the Overall, we believe that the markets will grind higher, Rupee is a headwind . though with increased volatility . Our target for Sensex for yyProspects of a more serious trade war coupled with December 2018 is 37,500 which is 6% higher than the geopolitical tensions can impact the price of oil . current levels . For December 2020, we believe Sensex will reach 40,500, representing an upside of 14% from yyIn addition to the increase in the price of oil posing the current levels . inflationary risks, the recent hike in MSPs also Equity Indices Performance - CY18 YTD Change (%) 10 5 8.7 7.0 2.6 1.6 1.5 1.1 0 3.6 3.7 4.3 - - - 0.2 0.7 4.7 4.8 0.9 - - - - 5.7 5.9 - 6.1 - - - -5 3.2 - 9.8 10.0 - - -10 13.8 - -15 DAX NIFTY TAIEX TOPIX KOSPI BOLSA CAC 40 CAC NZX 50 ASX 200 S&P 500 NASDAQ FTSE100 JAKARTA BOVESPA STOXX 600 STOXX HANGSENG MSCI China China MSCI CSI 300 Index CANADA TSX STRAITS TIMESSTRAITS SWISS MARKET Index Source: Bloomberg, Karvy Research 10 KARVY INVESTMENT STRATEGY - Source: Bloomberg,KarvyResearch 10 YearCAGRPriceChange Source: Bloomberg,KarvyResearch 5 YearCAGRPriceChange Source: Bloomberg,KarvyResearch 1 Year%Change 10 15 20 14 10 10 15 20 25 - 0 5 0 5 0 5 9 5 NASDAQ 12.6 NASDAQ 17.2 NASDAQ 22.1 NZX 50 10.8 NZX 50 15.0 NZX 50 17.1 NIFTY