Indian equity market at P/E of under 14x FY14E EPS is attractive, says Motilal Oswal Securities in its India strategy report. Markets remained flat for the last five years, with record outflow by domestic investors
The Indian economy is expected to register GDP (gross domestic product) growth of 5% in FY13, the lowest in a decade. Inflation has remained consistently above the comfort level and currency problems have compounded in the last 18 months, with all-time high current account deficit levels. Indian equities have reflected all these concerns as markets remained flat for the last five years, with record outflow by domestic investors. The last couple of quarters provided some ray of hope with the finance minister pushing for several reforms, controlling FY13 fiscal deficit to 5.2% of GDP, and targeting to lower it further to 4.8% for FY14. These observations were made by Motilal Oswal Securities (MOSL), a leading brokerage, in its preview of corporate earnings for the March quarter of the current fiscal.
The brokerage, which tracks 144 companies (excluding RMs i.e. three major oil refining
& marketing companies—IOC, BPCL, HPCL), states that corporates are expected to report zero growth in aggregate profit after tax (PAT) for the fourth quarter of 2012-13(4QFY13). This is the lowest growth in the last 28 quarters, excluding the four quarters of PAT de-growth during the global financial crisis (FY09/FY10). Aggregate PAT growth for full year FY13 works out to only 6%, the lowest since FY07, again excluding the global crisis year of FY09. Both in 4QFY13 and FY13, secular sectors like consumer, technology, and healthcare are expected to perform much better than cyclical plays like metals, capital goods, auto, and cement. MOSL expects Sensex 4QFY13 PAT to be down 2% year-on-year.
According to the brokerage, the Indian market has been very volatile for the last couple of quarters. Post a strong 2012 (26% returns), the BSE Sensex is down marginally in 1QCY13 by 3%. However, the broader markets are down even further with the BSE Mid-cap index dropping by 14%. Domestic investors were net sellers throughout the last 12 months, whereas FIIs were big buyers. The Sensex return in FY13 at 8% has very closely tracked the EPS growth of 5%, keeping the valuation multiples unchanged.
MOSL expects growth in FY14 to recover over FY13 levels as its bottom-up estimates indicate an EPS growth of 16%. This is partly driven by a recovery in earnings of few beaten down companies. It further states, “The current uncertainty does make us cautious and these estimates are prone to some downgrade in 1HFY14. Even with the possibility of some downgrades in FY14 earnings, we believe that Indian market at P/E of under 14x FY14E EPS is attractive.”
Even in terms of 4Q growth alone, this quarter’s growth is likely to be the lowest since
FY06, excluding the global crisis quarter of FY09, according to MOSL. In effect, during FY13, y-o-y PAT growth for the four quarters presents a steady decline—12%, 8%, 5% and now 0%. As a result, Aggregate PAT growth for full year FY13 works out to only 6%, the lowest since FY07, again excluding the global crisis year of FY09.
Of the 16 major sector classifications of companies tracked by MOSL four sectors are expected to report PAT growth of 15% or higher (NBFC, private banks, media and consumer), five sectors are likely to clock medium/low PAT growth of 0-15% (technology, retail, healthcare, oil & gas, utilities) while seven sectors are expected to report PAT de-growth (telecom, auto, capital goods, PSU banks, real estate, metals and cement). The only two sectors to have all companies clocking positive y-o-y growth are both secular in nature—consumer and NBFCs.
The 4QFY13 performance of the more secular private sector banks is expected to be much better than that of the more cyclical PSU banks, according to MOSL. In aggregate, private banks are likely to report 23% y-o-y growth in 4QFY13 PAT, whereas PSU banks’ PAT is expected to de-grow 16% y-o-y. Interestingly, only one private bank out of its list of eight is expected to report y-o-y PAT de-growth. On the other hand, only one PSU bank out of nine is expected to report y-o-y PAT growth.
MOSL states that demand has weakened across auto segments on the back of economic slowdown and consequently weak consumer and business sentiments:
Two-wheelers: For most players, weak retail demand has led to higher inventory to 4-5 weeks.
Passenger vehicles: The petrol segment remains weak for over a year now due to sharp rise in petrol prices. Now, even diesel segment demand has also moderated over the last 4-5 months (with y-o-y drop in volumes).
MHCVs: The segment continues to fall sharply reflecting tough macroeconomic conditions. This coupled with higher competitive intensity has resulted in high level of discounting.
Tractors continue to struggle due to weak demand from southern and western regions.
Expected softening in interest rates, and reform-led revival in business and consumer sentiment are key medium-term drivers for auto volumes.
EBITDA margins for the auto sector is expected to improve by 70 basis points (bps) quarter-on-quarter (-110 y-o-y) on favourable currency (Japanese yen/Indian rupee) together with stable RM cost. Discount levels remain high across segments particularly for CVs and PVs. In two-wheelers, there is no widespread cash discount, but OEMs are aggressively pushing finance schemes to spur demand. The brokerage expects EBITDA margin to rise for Maruti Suzuki 140bp q-o-q (+210bp y-o-y), and for Hero MotoCorp 80bp q-o-q (-140bp y-o-y).
Motilal Oswal expects the moderating trend in revenue growth to continue in 4QFY13E, up 4.8% y-o-y (versus 8% y-o-y in the nine month period of FY13), impacted by depleting order book and execution constraints due to overall economic slowdown. Ordering activity continues to show a sluggish trend, particularly in the industrial/power generation segment.
Ordering by Power Grid Corporation has also been showing a moderating trend, however ordering from SEBs is likely to show an improvement. Business-to-business has been showing a declining trend, after peaking out in 2QFY11, and stands at 2.3x, the lowest since past 20 quarters. In 4QFY13E, it expects the EBITDA margin at 14.6%, down 290bp y-o-y, impacted by poor fixed cost absorption. While commodity prices have corrected meaningfully, a large part of the decline in negated by currency movements. Companies with high local manufacturing content, higher product sales v/s project sales and high export content will be a beneficiary of the initial round of increase in public sector capex.
Cement demand growth is expected to be unusually sluggish in 4QFY13, given continued weakness in housing and infrastructure verticals. The brokerage estimates industry volumes to grow by around 3.7% y-o-y (+15% q-o-q) resulting in FY13 demand growth estimate of 5.3% y-o-y. Capacity utilization is expected to decline 3pp y-o-y to 81% (+9pp q-o-q). MOSL’s interaction with dealers across regions highlights limited visibility of near-term demand recovery. However, multiple states elections and general elections in 2013-14 are likely to favour demand recovery from 2HFY14 resulting in 7%-8% volume growth. The brokerage is bullish on UltraTech/Grasim and Shree Cement in large-caps, in mid-caps it prefers Madras Cement, JK Cement and Dalmia Bharat.
Steel prices recovered in 4QFY13 from their three-year lows in 3QFY13. Average 4QFY13 HRC prices improved in CIS, North America, Europe and China by 10%, 1%, 6% and 6%
q-o-q respectively. However, prices in China again started to weaken as restocking demands seem to be fading away amid high levels of inventories. Steel inventories (traders) in China are already at yearly high levels. Any further push in demand can now come from actual consumption for which outlook remains subdued. Bao Steel, one of the largest Chinese steel producers is forecasting demand growth of only 3% in 2013. Pertinently, the new Chinese leadership appears to be focusing away from property construction to rural development and social welfare as its strategy for the next 10 years. There is only a moderate increase in 2013 budget for infrastructure, with greater focus on building dams, rural grid and social welfare projects. This is likely to moderate steel consumption growth further.
Average 4QFY13 non-ferrous metal prices showed a q-o-q improvement. Aluminium,
copper, lead and zinc prices increased 1%, 1%, 5% and 5% q-o-q respectively. Alumina prices also increased 5% q-o-q. Spot premiums for aluminium continue to remain high and increased 4% q-o-q. MOSL has factored aluminium, zinc and lead prices of $2,100 per tonne, $2,000/t and $2,100/t in FY14E.
In the second part of this quarterly preview, to be carried tomorrow, we will take a look at the earning prospects from the remaining six sectors.
Mutual fund investments through the direct route witnessed a huge growth in inflows across all categories; however, this was more prominent in non-equity schemes where corporates make huge investments
The direct category of mutual funds drew in significant inflows for the month of January 2013, according to a recent report from Karvy Computershare. In January 2013, the direct route bought in Rs114 crore to equity schemes, contributing as much as 9% to the total equity inflows. In the month of December 2012 just 3% of the contributions came from the direct route, which was a total of Rs32.88 crore. National distributors and regional distributors witnessed a significant drop in equity inflows. From Rs466 crore in December 2012, the contribution of national and regional distributors fell to Rs353.21 crore in January 2013.
Debt and liquid schemes which witness the highest inflows from corporate bodies, saw a huge jump in inflows from the direct route. Against a mere Rs416 crore worth of inflows during December 2012, the inflows witnessed approx 400% growth and received over Rs1,500 crore worth of inflows during January 2013. In liquid schemes the growth has been to the tune of approx Rs1,12,900 crore, more than three times the inflow received in December 2012.
Direct plans were introduced effective 1 January 2013. These schemes would charge lesser expense ratio and pass on the NAV benefit to the investors who choose not to route their investments through a distributor. According to the Karvy report, “In the first month of its launch, these plans performed in line with the market expectations.”
“Against inflows in the range of Rs40,000 crore to Rs50,000 crore (through the direct route), a whopping Rs1.63 lakh crore worth of inflows were witnessed in a single month of January 2013 in all categories of mutual fund schemes. This is almost four times of the normal inflows during any month. Not only this, during the month, due to introduction of ‘Direct plans’ the count of folios under ‘Direct’, that has been continuously on the decline, has suddenly gone up during Jan 2013,” says the report.
Inflows in to equity schemes had increased significantly in the month of January 2013. The inflows of Rs5,599 was the highest since September 2011, according to data from the Association of Mutual Funds in India (AMFI). Fund flow data of the asset management companies serviced by Karvy showed that retail investors had contributed 47.72% of the inflows for January 2013. HNI clients contributed 37.92% to the total inflows. Inflows from the top 15 cities continued to be the highest contributors, contributing 65% to the total inflows.
However, as we had pointed out in an earlier article (Despite good sales, equity schemes witness another month of net outflows in January) that despite good inflow in January, heavy redemptions led to a net outflow in equity schemes for the industry. Even though the assets under management (AUM) rose as the markets registered positive gains, the number of folios too in equity schemes continued to decline. “This drop (in number of folios) was primarily dominated by ‘Equity’ and ‘MIP’ asset class”, mentioned the Karvy report.
Ajit Pawar, in a shocking statement asked if he was expected to fill empty dams by urinating in them. While party workers laughed and applauded, the junior Pawar seems to have forgotten that his government spent over Rs70,000 crore for increasing the irrigation potential in Maharashtra by a mere 0.1% in one of the biggest scandals in the state
Ajit Pawar, nephew of Nationalist Congress Party (NCP) chief Sharad Pawar and deputy chief minister of Maharashtra has provoked national outrage with his insane humour regarding the lack of water for drought-hit farmers. While Ajit Pawar has issued an apology, it does not mitigate the damage already done. The question is, how can the deputy CM make such a thoughtless remark when he himself was at the helm of affairs in the irrigation department for over 10 years while the government spent over Rs70,000 crore to increase the state’s irrigation potential by mere 0.1%?
The insane remark has even forced the NCP chief to tender an apology on behalf of his deputy CM—strangely enough on social media, which allows only 149 characters to express regret. Sharad Pawar, on twitter, said, “I duly apologise on the behalf of Deputy CM of Maharashtra for the unwanted comment that he had made.” However, this is not the first time, the NCP chief has to apologise for his nephew. But more about it later.
On Saturday, while speaking at a public function at Nimboli near Indapur, the junior Pawar, had said, “There is this person, Deshmukh from Solapur, who is on hunger strike for 55 days demanding to release water from Ujani dam. When there is no water in the dam, from where we are going to release (the water)? Should we urinate?”
The person, Ajit Pawar referred in his speech is Bhaisaheb Deshmukh from Solapur who is sitting on protest for over 55 days at Azad Maidan in Mumbai demanding release of water from Ujani dam for the nearby villages.
Aam Aadmi Party (AAP) has alleged that while villagers are denied water from the Ujani dam, the same is being provided to Dynamix Dairy, a company owned by a family considered close to Sharad Pawar, and to sugar mills controlled by leaders from the NCP and Congress.
Ujani dam, created by the 185 ft high earth-cum-concrete gravity dam on the Bhima river in Solapur district has an annual utilisation capacity of 580 cubic metre (cu mi) with a catchment area of 14,850 sq km. Water supplied from the reservoir for irrigation in agricultural areas was primarily aimed at reducing incidence of famines and scarcity during drought conditions. However, due to political interference and increased water supply to sugar mills, the conditions have become adverse leaving lakhs of people without drinking water.
The primary reason for acute water shortage is increased cultivation of sugar cane, especially in drought-affected areas. On an average, sugar cane requires 1.8 lakh litres of water per acre for one crop cycle. Similarly, sugar mills need 354.34 cu mi of water from crushing 1,000 metric tonnes of sugar cane.
The catchment area of Ujani dam witnesses an average rainfall of 700 mm per year, which is more suitable for crops like jowar (millet) and groundnut. The storage created by the Ujani Dam has resulted in the irrigation of 500 sq km, particularly in Solapur district, resulting in doubling the yield of jowar and tripling the yield of groundnut.
However, due to the increase in number of sugar mills in the region, especially those set up by politicians, this picture has now changed. Out of the total 160 sugar mills in Maharashtra, there are 16 mills in Pune district and 18 in Solapur district and almost all of them are related with or controlled by politicians, especially from the NCP and Congress, both ruling parties in the state.
Coming back to Ajit Pawar's crass speech, it did not stop with urinating for water—he also linked the growing population to increased copulation due to power shortages and load shedding. He said, “I have also come to know that since there is load shedding (power cuts) in the state, the population is increasing. Due to lack of electricity, people have nothing else to do.”
However, after nationwide horror and outrage at the insensitivity of the remarks and strident calls for his resignation, Ajit Pawar tendered an apology. In a statement issued on Sunday evening, he said, “The statement… was not about the drought-affected people, but if I have hurt the feelings of people, I apologise with humility.”
Opposition parties criticised Ajit Pawar’s comments. While the Bharatiya Janata Party (BJP) demanded his resignation, Uddhav Thackeray, chief of the Shiv Sena, asked Sharad Pawar and Maharashtra chief minister Prithviraj Chavan to remove the junior Pawar from the state Cabinet.
Maharashtra Navnirman Sena chief Raj Thackeray, while speaking in a public meeting at Jalgaon, said, “How can the deputy chief minister use such dirty language about the people of this state? When people are suffering in drought, he had no shame in showing any responsibility and instead is using such a foul language.”
In a statement, AAP, said, “His (Ajit Pawar’s) statements show his true face…a corrupt politician who has no empathy for the citizens and to have such a man at a leadership role in disaster for the state. What is even more shocking is that his statements were met with laughter from the NCP spectators. After holding the irrigation portfolio and spending Rs77,000 crore, he dares to ask where should he get the water from?”
The irrigation scam
Last September, the Economic Survey made an observation stating that though Rs70,000 crore had been spent on various projects during the last decade, Maharashtra's irrigation potential had increased by just 0.1%. Interestingly, the irrigation portfolio (now known as water resources ministry) has been held by the NCP since 1999, by Ajit Pawar till 2009 and after that by Sunil Tatkare, a close associate of the junior Pawar.
The Comptroller and Auditor General (CAG) had already begun a probe into the decisions taken by the irrigation ministry during that period.
Earlier in February 2012, Vijay Pandhare, chief engineer from the irrigation department and a member of the state level technical advisory committee, wrote a letter to authorities pointing out the gross irregularities. In an explanatory letter in May, Pandhare pointed out that Rs12,000 crore spent on lift irrigation projects in the state are a total waste as around 99% of the total 227 projects in Maharashtra are not working and 90% never began functioning.
In 2009, 32 irrigation projects worth Rs20,000 to Rs25,000 crore were cleared by Ajit Pawar, the then irrigation minister of Maharashtra allegedly without following the procedures. Clearances to projects include Krishna Valley Development Corp in Western Maharashtra with seven dams. The cost of 38 projects in Vidarbha were increased by 300% between June and August.
In Vidarbha, where much of the exposed irregularities lie, the Vidarbha Irrigation Development Corporation undertook some 320 projects since 1997. However, actual increase in irrigated area till March 2011 has been just 26,000 hectares (ha) against the targeted 1.58 million ha, according to the state water resources department.
In Vidarbha, the cost of the Gosekhurd project, the largest in Maharashtra, increased at the rate of Rs1.19 crore per day. It shot up 36.52 times in 29 years to Rs13,596 crore. The cost of the Lower Painganga project in Yavatmal district also escalated at a rate of Rs1.9 crore per day. In Washim district, also the cost of 11 barrages went up to Rs40-Rs50 crore each in 2009 from an estimated cost of Rs7-Rs8 crore a year ago.
AAP founder Arvind Kejriwal has alleged that business interests of Nitin Gadkari, former president of BJP, were hurting interests of farmers in Vidarbha region. Alleging a nexus between Ajit Pawar and Gadkari, the AAP founder said, the then BJP president sought and secured 37 ha land that was acquired by Maharashtra government for a dam but not used. The land was allotted by Ajit Pawar, who was the irrigation minister then, Kejriwal said.
The controversy raised by communications send by Pandhare caused Ajit Pawar to resign as deputy chief minister in September 2012. However, within few months, he was back in the cabinet as deputy chief minister.
Apologies from Sharad Pawar
Earlier also NCP chief Sharad Pawar had tendered an apology over Ajit Pawar’s allegedly use of abusive language about journalists. “As party chief, I won’t have qualms about offering a public apology. Here, if language of force has been used, I have no problem in (tendering) apology,” he had said.
In February 2011, while speaking at a function in Nanded district, Ajit Pawar had accused journalist of fabricating stories and criticised media for allegedly indulging in untruths and half-truths and suggested a gag on those indulging in such methods, which led to the controversy. This led to media boycotting coverage of functions including Ajit Pawar and Maharashtra CM Chavan.