Healthcare:
Cipla was down 5.9% last month, underperforming the health care sector. The company is aggressively pursuing geographical expansion and establishing a direct presence in all its key overseas markets. Furthermore, to strengthen its domestic business, the company is looking at product licensing agreements and joint ventures with global companies. The stock has underperformed the sector and at current levels we feel it’s a good entry point and would advocate investors consider adding exposure.
| India Top10 | Rationale |
| CIPLA LTD | Focus on geographical expansion through direct presence, is growth and margin positive. |
| LARSEN & TOUBRO | Strong sales growth, resilient order book and margin expansion are the key drivers. |
| TECH MAHINDRA | Healthy deal pipeline and improved demand outlook are long term positive. Recent up move warrants caution. |
| MARUTI SUZUKI | Strong new product pipeline, export growth and margin expansion are key triggers. |
| RELIANCE INDS | Large gas finds and increase in gas pricing are key positives. |
| ICICI BANK LTD | High capital adequacy, stable asset quality and traction in retail loan growth are drivers. |
| ACC LTD | Demand outlook remains muted, price recovery key to improvement in stock price. |
| BHARTI AIRTEL | India business continues to gain traction, global business metrics improving. |
| ITC LTD | Muted volume growth and likely margin pressure are near term worry. |
| INDRAPRASTHA GAS | Volume growth remains strong but costly imported gas can impact margins. |
| Total Returns | 1M Performance | |||||
| Name | Price | Stock | Sector | Relative | ||
| CIPLA | 390.6 | -5.9% | -0.4% | -5.4% | ||
| LARSEN & TOUBRO | 1054.7 | 8.9% | 9.3% | -0.3% | ||
| TECH MAHINDRA | 1690.9 | 10.7% | -0.4% | 11.1% | ||
| MARUTI SUZUKI IN | 1663.3 | 1.5% | -0.2% | 1.7% | ||
| RELIANCE INDUSTRIES | 861.9 | -5.8% | -4.2% | -1.7% | ||
| ICICI BANK | 1085.4 | -4.0% | -2.5% | -1.5% | ||
| ACC | 1100.5 | -4.3% | 0.3% | -4.6% | ||
| BHARTI AIRTEL | 331.0 | -9.4% | -5.1% | -4.4% | ||
| ITC | 319.2 | -2.0% | -2.4% | 0.4% | ||
| INDRAPRASTHA GAS | 280.4 | 0.2% | -2.8% | 3.0% | ||
| Average | -1.0% | -0.8% | -0.2% | |||
| MSCI INDIA Index | 801.7 | -1.4% | ||||
Risks: Setting up overseas business infrastructure could take time.
We continue to also like Lupin (LPC IN) as the company is looking at high-margin branded drugs in the US to drive growth. Furthermore, the company intends to expand into Latin America, Eastern Europe and China, and has allocated USD 1bn for inorganic growth. The stock has outperformed Cipla significantly, so we feel the upside opportunity is now skewed to Cipla.
Risks: Margins could come under pressure going forward, led by price cuts and increased competition.
Industrials:
Larsen & Toubro was up 8.9% for the month, performing in-line with the industrials sector. Management has reiterated its guidance of 15% y/y sales growth, 20% y/y order inflow growth and margin expansion target. We believe LT continues to be an excellent play in the India industrial space, powered by strong execution capabilities and a large order book.
Risks: Moderating investment cycle continues to be an overhang.
We continue to also like Adani Ports & SEZ (ADSEZ IN) for its best in class asset base, visibility on cargo traffic and sustained cash flows. Furthermore, its strategic position, diversified mix of cargo and superior realizations makes it a preferred port company.
Risks: Rise in consolidated loans and advances.
Information Technology:
Tech Mahindra was up 10.7% for the month, outperforming the IT sector. We continue to be constructive on the company on the back of improving demand and a healthy pipeline of large deals. However, post the recent sharp run up, c.82% ytd, we expect the stock price to consolidate in the near term.
Risks: Rising wage cost could impact the margins.
We continue to also like HCL Technologies, as revenue visibility remains high, driven by robust deal signings and improved reliability on margin expansion.
Risks: HCL Technologies had the highest quarterly annualized attrition among peers.
Consumer Discretionary:
Maruti Suzuki was up 1.5% over the month, outperforming the consumer discretionary sector. We exercise caution on the sector due to slowing demand, but continue to like MSIL on the back of its rich line-up of new product launches, increase in exports volumes and margin expansion led by rising localization.
Risks: If industry volumes remain weak, the company’s performance may be impacted. The continuance of large discounts may lead to margin erosion.
We are cautious on Titan Industries, as the demand scenario remains challenging and consumer sentiments remain subdued.
Risks: Jewellery demand remains weak due to moderating discretionary spending.
Energy:
Reliance Industries (RIL IN) was down 5.8% over the month, underperforming the energy sector. A positive government stance on RIL’s exploration and production efforts, in terms of project approvals and gas pricing, augurs well for the company. In addition, revised gas pricing will be key trigger.
Risks: New capacity additions and weakening demand on account of slowdown in the global economy.
ONGC offers an investment opportunity on the back of its relatively attractive valuation which factors in negatives such as high subsidies and no hike in gas prices.
Risks: Subsidy burden and regulatory concerns.
Financials:
ICICI Bank fell 4.0% for the month, under-performing the financial sector. The growing proportion of retail loans, low exposure to SMEs, high capital adequacy and stable asset quality are key positives, in our view.
Risks: ICICI bank’s exposure to the large overleveraged corporate groups remains a concern.
We maintain our conviction in HDFC Bank, as we believe retail banks will continue to have better earnings visibility. Growth rates are expected to be higher than average and asset quality is considered the best of the local banks, so valuations may remain at elevated levels.
Risks: Uncertain macro environment and high valuations are key concerns.
Bank of Baroda is our preferred stock amongst the state owned banks, although we would exercise caution given the stock has run up considerably since its lows in August and uncertainty remains over asset quality.
Risks: Increased concern over asset quality, declining NIMs and pressure on fee income could weigh on the sentiment in the medium term.
Materials:
ACC Ltd was down 4.3% for the month, underperforming the materials index. While cement demand continues to remain weak, after some signs of growth in September 2013, cement prices have witnessed recovery since the end of monsoon.
We are cautious in this space and maintain that the sustainability of price recovery and improvement in operating performance are critically dependent on a sustained recovery in demand.
Risks: On the back of challenging macro-economic conditions, realisations may not improve materially in the medium term.
We are positive on Hindustan Zinc, driven by higher sales volume, good operating metrics and strong cash flows. Corporate action is likely to be a near term catalyst for the stock.
Risks: Volatility in commodity prices.
Telecommunication Services:
Bharti Airtel was down 9.4% for the month, underperforming the telecom sector. India business fundamentals are improving and we believe things should incrementally look better in African markets as well. Furthermore, the sale of the Africa tower business will be positive. Given the stock’s weak performance and improving fundamentals we are becoming a little more optimistic. We would though like to wait for confirmation of this improving trend before advocating investors consider adding to the name.
Risks: Regulatory concerns and profitability of African business.
We like IDEA Cellular because of strong growth in data volumes and expected pick up in revenues per minute.
Risks: Aggressive bidding in upcoming spectrum auction.
Consumer Staples:
ITC fell 2.0% for the month, marginally outperforming the consumer staples sector. We believe the recent stock correction is because of muted outlook for the sector.
In our opinion, the expectation of a fall in cigarette volume growth is priced in and the earnings forecasts are fairly modest. Hence we see this weakness as a buying opportunity.
Risks: Sustained weakness in cigarette volume growth, regulatory impact and a slowdown in FMCG demand.
Britannia Industries is also a preferred pick, given the fact that it has witnessed strong volume growth at a time when most of its peers witnessed muted growth. Superior product mix, higher price realizations and new launch of value added products is expected to drive revenue growth in the long term.
Risks: Rise in input costs and slowdown in FMCG demand.
Utilities:
Indraprastha Gas Ltd was flat over the month, outperforming the utilities sector. The company’s margins face pressure as the proportion of costly imported gas is expected to increase. Further, the regulator’s proposal to cap gas marketing margin remains an overhang on the stock.
Risks: Regulatory risk continues to be a major concern.
We continue to also like NTPC on the back of improved visibility on the capacity-addition program and emergence of clarity on coal-availability issues.
Risks: Rise in imported fuel cost may impact margins.
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