5_0_01042011sector outlook report 310311
Post on 07-Apr-2018
221 Views
Preview:
TRANSCRIPT
-
8/4/2019 5_0_01042011Sector Outlook Report 310311
1/17
31st March, 2011
SECTOR OUTLOO
Indian Auto sector grew at 32
2010
2-wheelers grew 29% and CV
35%
Raw material prices & Int
rates are key risks
UTOMOBILE: OVERWEIGHT
ndia continues to consolidate its position on the global front, being one of the worlds top 10
uto-producing countries. India, the seventh largest vehicle producing nation in the world,ow accounts for 5% of global auto production, up from 1.4% at the beginning of 2000. The
nvestment in the industry is expected to be up to USD 17bn in fresh capacity over the next
our years and the investment in automotive components is expected to be USD 12bn over
he next six years.
ociety of Indian Automobile Manufacturers (SIAM) has laid out its Automotive Mission Plan
ision of automobile output of USD 145bn accounting for more than 10% of the GDP and
roviding employment to 25 million people by 2016. This would be driven by rising per capita
ncome and increased economic activity.
ndias auto market grew at 32.69% in 2010, marginally better than Chinas 32.44%. According
o the annual forecast of the SIAM, passenger vehicle sales in the country will be 2.2mn units in
Y11 as compared to 1.9mn units in FY10. While two-wheeler sales are expected to be up 9-
0% at 10.3mn units from 9.3mn units in FY10, commercial vehicle sales in India will grow 17-
8 per cent at 0.62mn units vis--vis 0.53mn units last financial year. Sales of three-wheelers
re expected to go up 7-8% at 0.47mn units in the current financial year as against 0.44mn
nits in 2009-10.
The two-wheeler industry has seen robust growth throughout the year with a 29% YTD
rowth. Commercial vehicles grew by 35% YTD and a budgetary push in infrastructure
ctivities will help volume growth in the future. For Q3FY11, Bajaj recorded flat sequential
olume growth, 1.7% average realization increase while the management has guided 20%
olume growth for FY12. Hero Honda reported its highest ever quarterly volume; 11%equential growth and 2.1% average realization growth and management expects to retain its
market share in the coming quarters. In the four-wheeler space, Maruti recorded its highest
uarterly sales volume; M&M reported strong 12% Q-o-Q volume growth and Tata Motors
eported strong set of numbers helped by JLR numbers.
he key risks for the sector include spike in raw material prices as raw material to sales ratio is
n the range of 60-75%. Further increase in input price such as steel, aluminum, rubber will
ffect the margins. On the demand side, any steep increase in interest rates will affect the
emand and defer sales thereby reducing the volume growth.
tandard rate of excise duty remained unchanged at 10%. Removal of concessional excise
uty was expected by the industry. However, in an effort to fortify the sector in terms of
olume growth, the budget did not increase excise duty. Also Exemption of customs duty and
pecial CVD for the critical parts imported by domestic hybrid vehicles were proposed in the
udget.
p Picks: Tata Motors (CMP-Rs 1247, TP-Rs1434), M&M (CMP- Rs 710, TP- Rs 809), Hero HondaMP-Rs1552, TP: Rs - 1910)
990
1,2101,309
1,545
1,778
275354 391
520 549
0
500
1,000
1,500
2,000
2,500
FY04 FY05 FY06 FY07 FY08 FY0
('000)
Automobile production
Passenger Vehicles Commercial Ve
5,6236,530
7,609
8,4678,027
0
2,000
4,000
6,000
8,000
10,000
12,000
FY04 FY05 FY06 FY07 FY08 FY0
('000)
Two-Wheelers sales
45.2%
14.5%
13.9%
6.8%
4.3% 15.3%M
H
Ta
M
G
ot
Passenger vehicle marketshare (Jan'11)
-
8/4/2019 5_0_01042011Sector Outlook Report 310311
2/17
31st March, 2011
SECTOR OUTLOO
T SECTOR: OVERWEIGHT
T sector saw strong recovery in FY10 and increased its share substantially in FY11 and the growth
was primarily led by IT services. IT-BPO service is estimated to aggregate revenue of USD 88bn for
FY11 with the IT software and services accounting for USD 76bn of the revenue. IT export revenues
are expected to gross USD 59.4bn, a growth of 18.6% over the previous year and contribute 67.3%
of the total IT revenue. The potential growth drivers include a thrust on platform BPO, Analytics,
Remote Infrastructure Management, ADM and Cloud services.
According to NASSCOMs report Perspective 2020: Transform Business, Transform India the export
component of the industry is expected to reach USD 175bn in revenue by 2020 while the domestic
component is expected to contribute USD 50bn in revenue by 2020 which translates to a CAGR of
2.8% for IT exports. India is likely to see its internet users triple to 237mn by 2015 from 81mn as on
September 2010 while moving the penetration level to 19%. PC market sales touched 2.79mn units
during July-Sept quarter 27% Y-o-Y increase while desktop contributed two-third of total PC sales.
Tier-1 IT companies have widened the gap with other players in the industry growing at two and a
half times higher growth rate than the other players while increasing its market share to 47% driven
by vendor consolidation by clients, end-to-end service offered by tier-1 players and higher process
excellence along with scalability. Client mining has helped in revenue growth in the absence of
winning multiple mega deals. Top-tier Indian IT vendors have largest exposure to BFSI which has
been the primary growth driver. New industry verticals such as energy utilities and healthcare have
strong growth potential.
On the supply side, FY11 saw hiring of approx 240,000 people in the IT industry and considering the
growth expected in FY12, manpower addition is expected to be on the higher side. The employee
expense to sales ratio is in 40-53% range and wage inflation is a key risk to the margins. Currencyluctuation is also a key risk for the industry as the USD-INR range has been volatile between 44.2-47.2
n the last one year. The utilization levels for large IT firms are in the range of 70-80%. NASSCOM has
projected exports to grow at 16-18% while domestic IT to grow at 15-17% for FY12.
op Picks: TCS (CMP Rs -1151, TP: Rs - 1484), Infosys (CMP - Rs 3170, TP - Rs 3562), Wipro (CMP - Rs
72.9, TP - Rs 482)
Potential growth driinclude Cloud services, R
ADM services
NASSCOM expects IT secto
touch USD 225bn by 2
from current USD 88bn
Q3FY11 pricing growth
top IT companies has bee
the range of 1-2% Q-o-Q
Client mining, BFSI, end
end service & new indu
verticals drive revenue
31.740.9
47.5 50.159.4
16.2
22.0
21.9 23.8
28.8
0
10
20
30
40
50
60
70
80
90
100
FY07 FY08 FY09 FY10 FY11e
USDb
illion
IT-BPO sector growth Infosys TCS Wipro
Q3 FY11 Q-o-Q
USD Revenue growth 5.9% 7.0% 5.6%
Volume growth 3.1% 5.7% 1.5%
Rupee revenue growth 2.3% 4.1% 1.3%
Q4 FY11 Q-o-QRupee revenue growth est. 3.4% 6.9% 3.0%
USD revenue growth
management guidance
1-2% NA 3-5%
Rupee revenue consensus 4% 5% 2.70%
FY12
Revenue growth est. 19% 22% 17%
Revenue growth consensus 23% 24% 19%
14%
50%
19%
17%
Hard
IT ser
BPO
softw
ITsector Revenue
-
8/4/2019 5_0_01042011Sector Outlook Report 310311
3/17
31st March, 2011
SECTOR OUTLOO
L & GAS: OVERWEIGHT
ndian oil and gas industry plays an important role in fuelling the rapid growth of the domestic economy. The
ector meets over 45% of the demand for primary commercial energy in the country and also contributes nearly% to the gross domestic product. However the industry in recent years has been characterized by risingonsumption of oil products, declining crude production and low reserve accretion. The availability of limitedomestic resources led the country to import more than 75% of its oil consumption and to exploit new resourcesuch as coal bed methane, shale gas and gasification of underground coal.
During the year, Indias production of oil is expected to grow at a robust rate of about 12.5%, from 34.8MMTproduced in FY10. This is supported by increase in crude oil production mainly from Rajasthan, the KG-D6 block
nd enhanced oil recovery techniques by national oil companies. Even gas production is anticipated to grow athe same level in the current year from 47.5BCM produced in FY10 due to increase in production from KG-D6
blocks. This move will significantly reduce our dependence on high price imported LNG and increase thevailability of gas to industries of strategic importance such as fertilizer and power.
n oil and gas transportation sector, there is a planned addition of over 8,000km of pipelines by 2013-14 and LNGerminals being planned to come up along Indias coastline. These investment plans are expected to bringignificant opportunities for both public and private players present across the value chain. In the downstreamector, India is well on its way to becoming a refining hub with substantial export capacity. Indias annual crudeefining capacity is expected to rise to 240mmt by the end of 2011-12 and to 260mmt by 2016. The PNGRB is
pursuing city gas distribution bidding aggressively with an aim to cover 200 cities by 2015. Even the Governments offering 34 E&P blocks under the NELP IX to boost oil production in the coming years. This augurs well for theeneral public as it will enhance the availability of natural gas & oil and reduce costs for consumption.
However the sector faces major obstacles due to volatility in international oil prices, high subsidy burden, highax rates on petrol and diesel, low rate of exploration success, limited pipeline infrastructure etc. The ongoing
political unrest has led global crude oil prices to touch a two year high of USD 110 per barrel. Higher crude oilprices will increase subsidy burden for oil companies. But the oil firms had withheld raising petrol prices in
nticipation of a cut in customs and excise duty in the recent Budget.
However, the FinMin in the recent budget has provisioned only Rs 23,640crore in 2011-12 as oil subsidy, lowerhan Rs 38,386crore of current fiscal and even has not clarified on the Government's contribution to the subsidy.ven he has not addressed the point of reducing customs and excise duty to tackle the impact of spurt in globalrude oil prices. Due to this, we expect a hike in fuel price in the near term which will help the companies to
essen the impact of higher subsidy burden and unchanged customs and excise duty.
n spite of all these negatives, fuelled by the insatiable domestic demand for energy, dynamic activities by bothpublic sector and private players and venturing of international companies with technical expertise, the oil and
as sector has significant growth prospects in the years to come. During Q3FY11, most of the upstreamompanies recorded decent revenue and margin growth due to increase in oil and gas production. Even theecent deregulation in oil prices helped the companies to witness a gradual increase in net oil realization.
Moreover, gas price realization also improved as a result of increase in APM gas prices in June 2010
op Picks: Reliance Industries (CMP-Rs1033, TP-Rs 1098), GAIL (CMP- Rs 461.2, TP-Rs 545), OIL (CMP-Rs 1297.4,
-Rs 1429), Petronet LNG (CMP-Rs 118, TP-Rs126), ONGC (CMP- Rs 282.3, TP-Rs 351)
Oil production
expected to gro
12.5%
Annual cr
refining capacit
expected to ris
260mmt in FY12
Volatility
international cr
prices and bur
of oil subsidies
remain cru
factors
Lower subsidies
compel
companies to rprices
Deregulation
petrol prices he
companies mitig
losses
-
8/4/2019 5_0_01042011Sector Outlook Report 310311
4/17
31st March, 2011
SECTOR OUTLOO
ELECOM: NEUTRAL
The Indian telecommunications industry is the fastest growing in the world. Industry added an average 18mn
ubscriber per month over the Oct 2009-Oct 2010 period. Total subscriber base is over 771mn by January 2011nd total industry revenue stood at Rs. 1,580bn in FY10. The sectors operational key indicators have changed
dramatically due to increased competition, falling tariffs and uncertain regulatory environment. Thus, revenuegrowth and profitability of the sector is under pressure and investor interest in the sector is low with the sectorunderperforming the broader market in the last three years.
The sector is currently plagued by regulatory uncertainty due to the alleged scam in the 2008 spectrumllocation. CBI is investigating the case and specifically looking for four issues: 1) Allotment of universal accesservices (UAS) licenses to new entrants in 2008 at 2001 prices; 2) Alleged irregularities in the allotment process;) Award of incremental 2G spectrums beyond the limit of 6.2MHz; and 4) Allowing dual technology services.
These issues have led to a change in the top rung of the Union Telecom Ministry (DoT) with Mr. Kapil Sibalaking over from Mr. A. Raja. So far DoT has already issued show cause notices to 85 licensees for not meeting
he eligibility criteria for the UAS licenses. It has also issued notices to 119 licenses for not meeting the rolloutobligations. A committee made up of a former judge of the Supreme Court of India has also been set up tounderstand the procedures that the DoT followed while allocating spectrum over the years.
or Q3FY11, all the telecom operators reported decline in key operating metrics, except Idea Cellular, whoseoperating performance was above its peers. In the current fiscal, there was successful auction of 3G spectrum,which has given around Rs. 650bn to the GoI and MNP implementation. According to a TRAI, at the end of
ebruary, only 3.8 million subscribers, or less than 1% of the total reported user base, had opted for MNP. As thenumber increases, telcos' expenditure may escalate as they try to retain postpaid customers. The initial positive
esponse to the 3G services has been encouraging with Bharti Airtel reporting a net addition of 5-6lakh 3Gubscribers since its initial launch in January. It is, however, unlikely to have a significant impact on the ARPUs.
Besides this the impact of Budget 2011-12 is negative for the sector. There was no clarification on the treatment
of spectrum fees despite marginal increase in MAT and no incentive for rolling out services in rural areas.
n next few quarters, DoT is expected to formulate new telecom policy. It is expected that, there will be 1) One-ime fees for excess spectrum held by operators beyond 6.2MHz; 2) Cancellation of ineligible licenses; 3) Re-
pricing of UAS licenses given in 2008; and 4) Repricing of spectrum given to dual technology service providers.Thus if there is re-pricing of licenses, then it will be beneficial for the GoI, as it will increase the Governmentsbility to charge a market determined rate for all future transactions. Taking this in consideration, it is estimatedhat, the financial impact on account of excess spectrum held by operators; Bharti Airtel (Rs. 43.4bn), Idea
Cellular (Rs. 13.5bn) and RCom (Rs. 256mn). The re-pricing of UAS licenses given in 2008 will have the followingmpact: (1) Bharti Airtel (Nil), Idea Cellular (Rs43.9bn) and RCom (Rs74bn).
Going forward, the share of VAS in wireless revenue is likely to increase to 12-13 per cent by FY11, against 10%n FY10, on the back of increased operator focus on VAS due to continuous fall in voice tariffs, increasing
penetration of feature rich handsets, availability of vernacular content and increased user adoption of VASpplications. Currently, India is the world's second largest wireless market after China in terms of mobileonnections and is expected to have a subscriber base of more than 770mn by 2013.
op Picks: Bharti Airtel (CMP-Rs 359, TP-Rs 383), Idea (CMP-Rs 65.9, TP-Rs 75), Reliance Communications (CMP-
109.9, TP-Rs 123)
Increased
competition, fa
tariffs put the se
under pressure
Clouds of scams
hanging around
sector
Uncertainty a
spectrum alloca
price remains m
negatives
Budget 2011 fa
to clarify treatm
of spectrum fee
telecom compan
Repricing spectrum fees
result in m
outflows for tele
firms
Share of value ad
services in wire
revenue is likel
increase to 13%
FY11
-
8/4/2019 5_0_01042011Sector Outlook Report 310311
5/17
31st March, 2011
SECTOR OUTLOO
TALS: OVERWEIGHT
dia became the fourth largest producer of crude steel in the world in 2010 as against the eighth position in 2003
d is expected to become the second largest producer of crude steel in the world by 2015. India also maintainedlead position as the worlds largest producer of direct reduced iron (DRI) or sponge iron. Led by strong demand
om robust growth in infrastructure, auto, construction and engineering services, the domestic steel demand in
dia remains robust. As India is net importer of steel, the outlook for the domestic operating environment is
ositive. India produced 50.1 million tons (mt) crude steel for 9 months ended FY11. Capacity for crude steel
oduction expanded from 51mtpa in FY06 to 73mtpa in FY10. Crude steel production grew at 8% annually from
6mt in FY06 to 65mt in FY10. As per the latest estimates, the crude steel capacity in the country is likely to reach
0 MT by FY12 from 73mt in the FY10.
non ferrous segment, the outlook for Zinc and Aluminum is bullish which is driven by 1) higher infrastructure
ending and automobile demand led by economic recovery in North America/Europe and continued demand in
merging economies and 2) expected decline in inventory/surplus levels backed by a rising consumption trend.
opper prices are expected to remain firm on account of a) lower availability of refined metal b) higher demand
d c) declining inventory levels. Zinc consumption is expected to grow by 7% in FY11E and FY12E, due to rising
emand by robust infrastructure spending. In our view, rising metal-consumption along with lower availability of
nc concentrate could result in higher zinc prices and may even lead to a deficit in the supply-demand balance
ver the near-term. We expect zinc prices to increase over the next 23 years to US$ 2,2002,400/ton.
uminum fundamentals are improving with declining inventory levels and rising consumption trends. With most
onomies, especially Europe and North America bouncing back from their lows, aluminum consumption is likely
grow 7% in FY11E and FY12E, leading to strengthening of prices. While prices may be volatile in the near term,
e expect a bullish trend over the medium term with prices likely to stay above US$ 2,300/ton.
opper mining production is expected to decline in FY11E on account of mining shut-downs and lower quality ofe at some mines. Custom smelters are likely to push for higher TcRcs on rising demand for copper. Also, in the
ng term, availability of copper concentrate is likely to remain subdued on account of depleting resources of
pper and prolonged execution of mining projects. We expect TcRc margins to increase by 2030% in FY11E.
uring Q3FY11, the sector reported declining margins, due to increased cost of production, which was mainly
ntributed by the rise in cost of coal. Coal prices are expected to remain high till Q1FY12. Only fully integrated
ayers reported improved margins. In coming years, capacity addition is expected in all the segments, taking into
count the future requirement, which will help in revenue growth. Besides this the impact of Budget 2011-12 is
egative for those companies which are involved in iron ore export. Government has increased the export duty for
on ore export, but provided full exemption of export duty for iron ore pellets in order to encourage the value
ddition process for fines. Besides this, there is no imposition of mining tax (26% at PBT) on mining companies,us it is a positive for mining companies as well as metal companies with captive mines.
p Picks: Tata Steel (CMP- Rs 616.4, TP-Rs 790), Hindalco Industries (CMP-Rs 205.4, TP-Rs 262), Sterlite Industries
MP-Rs 171.8, TP-Rs 208), Sesa Goa (CMP-Rs 288, TP-Rs 312), Jindal Steel & Power (CMP-Rs 688, TP-Rs 796)
India became
fourth la
producer of c
steel in the wor
2010
The outlook on
prices is positiv
potential g
shortages & r
demand in Chi
India
Margins dec
during Q3FY11
the back of r
coal prices
-
8/4/2019 5_0_01042011Sector Outlook Report 310311
6/17
31st March, 2011
SECTOR OUTLOO
POWER NEUTRAL
Outlook for the Indian power sector for 2011 is Neutral, in spite of the demand-supply imbalance and policyupport from the Government. The negative factors, including difficulties in passing power purchase costs on
o end-customers, the slow progress of the State power utilities (SPUs) in reducing commercial and technical
osses and the delays faced by the power sector companies in implementing capex programme. The delays are
ue to bottlenecks relating to fuel supply, water allocation, land availability, environmental approval and
apital equipment shortages.
hort-term power prices are expected to face upward pressure during the peak summer season. The
evelopment of the short-term power market, involving contracts spanning less than a year, has proved to be
ery useful by providing alternative to over drawing from the grid and reducing peaking shortages.
uel is becoming another limitation in the wake of a severe domestic coal shortage. Most generation utilities,
ed by power major NTPC Ltd, are said to be better placed in 2011 in terms of having a coal import strategy inplace. This includes tying-up supplies through firm contracts abroad or picking up stakes in mines in countries
uch as Indonesia, Australia, and South Africa. Besides, increased gas availability is expected to boost
eneration from projects using gas as feedstock.
With progress picking up on solar power schemes, the coming year could see greater inroads being made by
green' electrification projects. The Government has already selected 37 companies to develop new solar
projects late this year, as the country moves forward with an ambitious plan that seeks to significantly scale up
production from near zero to 20 GW by 2022.
t is likely to be a tough road ahead for future hydro projects, especially in the wake of some high-profile
projects being scrapped due to environmental concerns. These include NTPC's 600-MW Loharinag Pala hydro-power project in Uttarakhand, where work was in advanced stages.
he transition to a new regime, under which power projects will be awarded to prospective developers offering
he most competitive tariffs, is the most anticipated change in the power sector as we move into the year 2011.
The step is expected to usher in greater competition and eventually translate into lower electricity bills for the
nd-consumer. The year could also see some progress on the awarding of at least a couple of new Ultra Mega
ower Projects (UMPPs) proposed in Orissa and Chhattisgarh, especially those which have been stuck through
he current year for want of clearance.
Q3FY11 earnings remained under pressure due to lower realization in merchant power rates. Merchant power
ates declined by more than 25% for the same period. Also higher cost of raw materials such as coal resulted in
ower than expected margins of the companies. Going forward, however we think revenues will improve due toxpected rise in merchant power rates.
op Picks: Tata Power (CMP- Rs1325.8, TP - Rs1441), Adani Power (CMP-Rs 112, TP- Rs 136), NTPC (CMP-Rs 188.9,
- Rs 194) and Reliance Power (CMP Rs 124.6, TP- Rs 128).
Difficulties in
passing, execu
delays of po
projects are cru
factors
Slack progress
distribution refo
Earnings du
Q3FY11 rema
under pressure
to lower realiza
in merchant po
rates
Power projects
be awarded thro
competitive bidd
process
-
8/4/2019 5_0_01042011Sector Outlook Report 310311
7/17
31st March, 2011
SECTOR OUTLOO
FMCG - NEUTRAL
The 201112 Union Budget was largely positive for most companies in FMCG sector with peak excise dutyremaining unchanged, despite a marginal hike in MAT rate (from 18% to 18.5%). Excise on most consumer
products has been left unchanged, at 10%. Excise duty on cigarettes, too, has been unchanged. However,
excise has been increased, by 1%, on some categories such as soups, ketchups, margarine, ready-to-eat
products, toothpowders, etc. We believe the increase in allocation for the rural sector and on infrastructure
spending would bring medium-term benefits to the consumer sector.
The Indian FMCG sector is the fourth-largest sector of the economy accounting for 5% of the total factory
employment in the country. A combination of changing lifestyles, higher disposable income, greater product
awareness and affordable pricing have been instrumental in changing the pattern and amount of consumer
expenditure leading to robust growth of the consumer durables industry. Penetration level of consumer
goods in rural areas comprising 70% of Indias population is still low indicating the untapped market
potential.
During Q3FY11, the strong sales volume led to reasonably strong revenue growth for most FMCG companies.
HUL reported highest Domestic consumer segment volumes in past four quarters at 14% Y-o-Y and an overall
volume growth of 13% Y-o-Y.ITC reported better than expected results for Q3FY11.Its core cigarettes business
reported a 2% volume growth despite of the shutdown of its cigarettes factory for about three weeks due to
lack of clarity on the new pictorial warning.
Input cost inflation continues to remain the key concerns for the FMCG sector in the near term, with most
commodities seeing a sharp uptick in prices, with very little respite seen M-o-M. Commodities like Safflower
oil, copra, coffee, vanaspati and other edible oils have seen sharp inflation off late, and will hurt gross margins
of FMCG companies.
Revenue growth in the next few quarters can expect a boost from the price hikes implemented in select
categories by FMCG companies. Furthermore, a good monsoon could boost rural demand, while urban
demand has already shown signs of improvement. The input costs would be a key factor to watch,
considering the recent spike in food inflation. We however, retain our Neutral stance on the sector on rich
valuations.
p Picks: Godrej Consumer Products (CMP Rs 360, TP Rs 424), ITC (CMP -Rs 177.7, TP Rs 197), HUL (CMP -
277.7, TP Rs 288).
Peak Excise dremained
unchanged for
year 2011-12
Lower penetra
within rural mar
leaves m
opportunities FMCG firms
Q3FY11 witnes
strong growth
revenue
volumes
Going forw
Inflation and incost increase
put pressure
margin
-
8/4/2019 5_0_01042011Sector Outlook Report 310311
8/17
31st March, 2011
SECTOR OUTLOO
EDIA NEUTRAL
Indian M&E (Media & Entertainment) industry can be classified under the following segments Television,
Films, Radio, Print, Online, OOH, Music and Animation & Gaming. The Indian M&E Industry continues to be
dominated by TV, Print & Filmed Entertainment and stood at USD 12.9 billion in 2009 registering a 1.4 per
cent growth over last year, according to a report by KPMG. Over the next five years, the industry is projected
to grow at a CAGR of 13 per cent to reach the size of USD 24.04 billion by 2014. A snapshot of the size and
the revenue contribution of the industry segments is given below:
Media spend in India as a percent of GDP is 0.41 percent. This ratio is almost half of the worlds average of
0.80 percent and is much lower compared to developed countries like US and Japan indicating the potential
for growth in media spends. This is largely due to some of the media platforms being in a relatively nascent
stage. Going forward, as penetration increases and more audiences come in the fold of M&E industry, it is
expected to see higher growth. Indian M&E industry went through a tough phase in the last two years due
to the economic slowdown which impacted businesses in the country.
Rising digitalization (as content creation and as a distribution platform), increase in penetration of media
segments, narrowcasting (niche segmentation of target audience), regionalization (strategy to capture
untapped potential of tier 2 and tier 3 cities), consolidation, expanding international markets for Indian
content and entry of foreign players, organized funding and deregulation would be the key growth drivers
for the industry. Further increasing competition is likely to positively impact the M&E industry leading to
expansion of the overall market size.
Companies like UTV Software, Dish TV, DB Corp posted better Q3FY11 results, thanks to the increase in Ad
spending by FMCG, BFSI, Auto etc. The Ad market in FY12 will see a busy cricket calendar, and the largest
advertiser on televisionthe FMCG industrywill face margin pressures. This will have varied impact across
sub segments of the media industry. DTH players are set to benefit, as sporting events accelerate migration
from cable to DTH. Print media remains largely insulated, on account of the large revenue contribution from
local advertisements. Broadcasters, on the other hand, face a likely moderation in ad revenues, though the
impact will be cushioned by an increase in the share of subscription revenues.
In the recent Budget, the extension of concessional basic customs duty of 5% and a CVD of 5%, to mailroom
equipment used to bundle newspapers at the completion stage will benefit all print media companies. In
addition, full exemption from excise duty provided to colour, unexposed cinematographic film in jumborolls of 400 feet and 1,000 feet will benefit film-processing companies like Reliance Media Works. There can be
some pass on of the benefit to film production houses like UTV and Eros.
op Picks. UTV Software Communications (CMP- Rs 580, TP- Rs 662)
Revenue (Rs. bn) Composition of Total (%)
Industry 2006 2007 2008 2009 2009
Television 183 211 241 257 43.78
Print 139 160 172 175 29.81
Film 78 93 104 89 15.16
Radio 6 7 8 8 1.36
Music 8 7 7 8 1.36
Animation 12 14 17 20 3.41
Gaming 3 4 7 8 1.36
Internet Advertising 2 4 6 8 1.36
Outdoor 12 14 16 14 2.39
Total 443 514 578 587 100
Indian media indust
expected to grow
CAGR of 13% to
24bn by 2014
Rising digitalizat
increase in penetra
of media segme
organized funding
deregulation would
some of the key grodrivers for the indust
Higher ad spend
during Q3FY11 led
higher than expec
results
Union budget exten
concessional cus
duty to mailro
equipments
-
8/4/2019 5_0_01042011Sector Outlook Report 310311
9/17
31st March, 2011
SECTOR OUTLOO
FSI: NEUTRAL
We continue to remain bullish on banking sector considering healthy outlook on GDP at close to 9% growth,
nder penetrated financial system and strong credit off take targeted at 20% by RBI.
uidity crunch and higher cost of funds remained major headwinds for CY ending 2010
cute liquidity crunch and consequently higher cost of funds remained crucial factors for banks during Q2 and
3FY11. Excess provisions for loan losses to adhere to provision coverage norms resulted in lower than
xpected margins for most of the banks. State owned banks like SBI, UCO Bank were the worst hit in terms of
rofit growth due to PCR norms. Liquidity in particular, remained tight during the quarter ended December
010 as the daily borrowings under LAF window remained high at around Rs 900bn. 3 month CD rates also rose
o 10% reflecting liquidity imbalance. We believe that liquidity will remain tight for Q4FY11 due to seasonally
rong credit demand in the fourth quarter of the financial year. Liquidity imbalance will keep cost of funds on
gher side and NIM will remain under pressure despite increase in yields on advances.
nducive union budget 2011
he union budget 2011 supported strong policy initiatives to boost banking sector. The Govt. reiterated to
fuse Rs 60bn in the form of tier I equity capital in public sector banks. The move is expected to make banks
ore resilient and allow banks to augment credit portfolio. Financial institutions especially focused towards
ousing and infrastructure lending such as HDFC, IDFC are expected to perform well on the back of 1% interest
ubvention for small home loans up to Rs 15lac.
rgins are expected to improve post H1FY12
he Govt. addressed liquidity issue in an impressive manner during its monetary policy review. While tackling
flation which led to 7 consecutive rate hikes, reduction in SLR by 1% and buyback of Govt. bonds worth Rs
80bn helped to resolve liquidity position to large extent. The banks like Axis bank, PNB, have raised deposittes to reduce liquidity gap. As a result, the real interest rates have entered into positive territory which would
rive deposit growth. Liquidity has improved as evident from falling Govt. cash balance with RBI and increase in
ovt. spending. We expect credit growth will remain buoyant in FY12. Most of the major banks like SBI, PNB,
nd private banks like ICICI Bank, HDFC bank, have maintained guidance to achieve credit growth of more than
0% for FY12. We believe most of the banks will be in a position to achieve their guidance. Gains from treasury
perations may be impacted due to higher yields, although that will be insignificant. Most banks have
ecuritized their 2G exposure and hence not likely to be impacted.
y catalyst for the sector in FY12
asing liquidity pressure will lower cost of funds. Hike in lending rates will allay an impact of higher cost of
nds during FY11 and help maintain NIM. Improvement in fresh slippages and growth in bad loan recoveriesill ensure better asset quality.
p Picks. Axis bank (CMP-Rs 1424.7, TP -Rs 1582), HDFC (CMP Rs 697.8, TP -Rs730), SBI (CMP- Rs 2859, TP -Rs
29), PNB (CMP- Rs 1217, TP- Rs1375), Shriram Transport Finance (CMP- Rs 772, TP- Rs - 878), BOB (CMP- Rs 961,
- Rs1087), Yes bank (CMP- Rs 320, TP- Rs 363).
Credit g
remained stron
22.4% as agains
target by RBI
Liquidity imba
higher cost of
and loan
provisions
pressure on NIM
Loan loss prov
hurt performan
banks like SBI,
Bank.
Govt. will ann
Rs 60bn tier I e
capital infusio
public sector ban
Easing liq
pressure and inc
in yield on adv
will maintain N
FY12
-
8/4/2019 5_0_01042011Sector Outlook Report 310311
10/17
31st March, 2011
SECTOR OUTLOO
HARMACEUTICALS & HEALTHCARE: NEUTRAL
India's pharmaceutical industry is the third largest in the world in terms of volume and stands fourteenth in
terms of value. The industry is highly fragmented with about 24,000 players, where the top ten companiesmake up for more than a third of the market. It grew by a robust 17% Y-o-Y in 2009 to USD 8.5bn and has
nearly doubled since 2005. The industry accounts for about 1% of the world's pharma industry in value terms
and 8% in volume terms. In addition to the domestic market, the sector earns a large chunk of revenue from
exports. While some are focusing on the generics market in the US, Europe and semi-regulated markets,
others are focusing on custom manufacturing for innovator companies. India has more than 120 US FDA
approved plants along with 84 UK MHRA approved plants, most of which have multiple approvals from
regulatory authorities in Canada, Australia, Germany and South Africa. It is expected that the industry is about
to grow manifold in the coming years supported by cheaper pricing, growth in overseas demand, etc.
In the third quarter of the year, the sector witnessed a strong sales growth supported by inorganic growth
and growth in US exports. However, high costs related to acquisitions, adverse currency fluctuation as well as
a rise in staff and R&D costs hampered profitability. The small players were severely affected due to the cost
pressure. Companies having presence in Germany were affected on account of the 16% rebate proposed by
the government for three years. Even in the recent Union budget, key tax rates edged up for the companies
and no major positive news has been announced in for the sector. Although maintenance in R&D deduction
will encourage Pharma companies to increase R&D spending, but this has been offset by increase in MAT rates
especially in SEZs.
During the last quarter, Indian companies earned eight final approvals and four tentative approvals from the
USFDA. Aurobindo and Dr Reddys Laboratories have received tentative approvals for two drugs each,
whereas Alembic, Glenmark Pharma, Lupin, Natco, Torrent, Cadilla and Dr Reddys received final approval for
their drugs. On the R&D front, Biocon reported discouraging results for its diabetic drug in phase III trials.
Cadila formed a new JV with Bayer Healthcare to market its products from niche categories. Glenmarkreceived an unfavourable verdict from a US jury regarding anti-hypertensive drug Tarka, which asked the
company to stop sales of Tarka and also slapped a Rs 70cr penalty to be payable to Abbott. Recently,
Aurobindo Pharma has received an alert warning from the US drug regulator for not meeting the compliance
at one of its units in Hyderabad, which is about to cost the company USD 26mn.
In spite of all the negatives, Indian pharmaceuticals remains robust and thus we maintain our positive view on
the sector. We believe that the opportunities from the US are very lucrative. Strategic tie-ups, out licensing
deals and exclusive product launches could result in a significant incremental profitability for the pharma
companies and could surprise positively going into FY13-14. Further, the Indian players are stepping up
efforts in the domestic market in view of steady revenue growth opportunities and relatively high margins, as
they scale up operations in emerging generic markets. Domestic demand has also been robust due to
increase in healthcare spending by the Government and should continue to do well due to further increase in
allocation this year. We believe domestic pharma companies will continue to penetrate into lower tier cities
which will help domestic market to grow at higher rates in the coming years.
op Picks CIPLA (CMP-Rs 327.7, TP- Rs 350), Glenmark (CMPRs 281.6, TP- Rs 368), Lupin (CMP-Rs 415, TP- Rs
6)
Indian pharmaceu
industry is the t
largest in the world
Large chunk
revenue is der
from export marke
Growth du
Q3FY11 was ma
driven by growth i
exports
Govt rolled back
service tax on h
end hospitals
diagnostic services
-
8/4/2019 5_0_01042011Sector Outlook Report 310311
11/17
31st March, 2011
SECTOR OUTLOO
EXTILES: NEUTRAL
During 2009-10, the Indian textiles industry is pegged at US$ 55 billion, 64% of which caters to domesticdemand. The textiles industry accounts for 14% of industrial production, employs 35 million people and
accounts for nearly 12% share of the country's total exports basket.
Fiscal FY10 saw the industry revive after facing unprecedented challenges in FY09 due to global
economic slowdown, especially in the major export markets for India. The revival was supported by
recovery in domestic demand followed by pick up in export demand since Q3FY10.
Under the Technology Upgradation Fund Scheme (TUFS), projects worth Rs.276 billion were sanctioned
in FY10 which was significantly lower as compared to Rs.557 billion in FY09. Though companies opted
for more loans in FY11 with improving demand scenario, the Government has suspended the subsidy
scheme in June 2010 as the total subsidy of Rs.8, 000crore earmarked under the 11th Plan has already
been disbursed.
The Government has fixed the export target at US$25.48 billion for the year 2010-11. During the six
months ended September 2010, the actual textile exports from the country stood at US$11 billion.
Budget Proposals
Ready-made garments and made-ups of textiles are brought under mandatory excise duty at a unified
rate of 10% from an optional excise duty regime. Credit of tax paid on inputs, capital goods and services
would be available to manufacturers.
Provision of Rs.3, 000cr to NABARD which would in turn benefit 15,000 co-operative societies and 3,00,
000 handloom weavers.
Reduction of basic customs duty from 5% to 2.5% on certain textile intermediates.
Reduction of basic customs duty on certain specified inputs for manufacture of certain technical fibre
and yarn from 7.5% to 5%.
Marginal increase in budgetary allocation under TUFS from Rs.2785cr in 2010-11 to Rs.2980cr in 2011-12.
Impact on the industry
Apparel manufacturers are already facing heat from rising yarn prices. Bid to reduce the cotton yarn
prices by imposing export restrictions have not helped much. Under these circumstances, imposing
mandatory excise duty of 10% on branded garments and made-ups from being an optional levy till now
could put further pressure on their margins unless manufacturers are able to pass on the cost to end
users. Proposal of Rs.3000cr to NABARD is expected to ease the financial burden of handloom weavers
though details of the scheme are awaited.
p Picks: S Kumar Nationwide Ltd (CMP -Rs 56, TP Rs 89)
Recovery in dome
demand and pick u
export demand he
the sector
The govt. pegged export target
USD24bn for FY11
Excise duty rema
unchanged at 10%
Basic custom d
reduced from 5%
2.5% on certain tex
intermediaries
-
8/4/2019 5_0_01042011Sector Outlook Report 310311
12/17
31st March, 2011
SECTOR OUTLOO
CEMENT: NEUTRAL
The Indian cement sector is the world's second largest with a current capacity of about 280 milliontonnes (mt). The industry has seen strong capacity addition of nearly 70mt since FY09 and is expected to
add another 30mt by the end of FY 2012 to cross the 300mt mark.
The cement dispatch growth is expected to slow down at 5-7% Y-o-Y for FY11E impacted by sluggish
infrastructure off-take and erratic climatic conditions. The outlook is stronger for FY12 on the back of
elections in several states, when speedy completion of infrastructure projects leads to higher cement
demand. Additionally higher real estate launches and increased government focus on project spending,
as indicated in the increased Budgetary allocation also improves the demand outlook.
Cement prices have increased by Rs 30-50 per bag across regions in the last two months on account of
pricing discipline maintained by players after taking production cuts. Prices are further expected to
remain firm in Q4FY11E and Q1FY12E on the back of a pick-up in demand during the period, which is one
of the best for construction activities.
On the input costs front, fuel cost has surged by ~30% over the last three months after the floods in
Australia in December 2010 disrupted coal exports from the country. Indian cement manufacturers are
highly dependent on imported coal due to the relatively low availability of coal linkages within India and
from the e-auction markets. The larger manufacturers import 30-50% of their energy requirement. The
recent civil unrest in the Middle East has pushed oil prices upward; coal prices too have risen as coal is a
substitute for oil in many cases. The coal cost increase; post CILs 30% price hike, is also clearly negative
for cement companies.
The Union Budgets proposal to change the excise duty structure from 10% of MRP (retail prices overRs190/bag) to 10% ad valorem + Rs160/MT would be neutral as the increase required would be nominal
at Rs1-2/bag (as the basis for calculating ad-valorem is lower than MRP). The budget also reduced
customs duty on certain raw materials (like gypsum, pet coke) to 2.5% from 5% previously.
While the price outlook is strong till Q1FY12, the price discipline is likely to wane from June 2011 onwards
due to the monsoons and higher supply pressures. We expect the stabilizing capacities, producer focus
to capture market share and rising input costs to keep the operating margins of companies under
pressure for FY12.
Higher budgetary allocation of Rs 2,140bn, up 23%YoY, for investments in infrastructure sector / schemes
and considering that the large players in the industry continue to trade near their replacement costs, we
rate the sector as Neutral.
Top Sell. ACC (CMP -Rs 1079, TP Rs 937), Ambuja Cements (CMP -Rs 150, TP Rs 122), Ultratech Cement
CMP -Rs 1126, TP Rs 985)
Cement Industry
cross 300mt of capa
by 2012
February 2011 disp
growth stronger at 5
after 3 months
sluggish demand
South India compa
reported sharp reco
in realizations in
sequentially, after
very weak Q2
Operating mar
would remain un
pressure till FY12
widening dema
supply gap & ri
input costs
-
8/4/2019 5_0_01042011Sector Outlook Report 310311
13/17
31st March, 2011
SECTOR OUTLOO
NFRASTRUCTURE: OVERWEIGHT
The Union Budget 2011-12 has provided nearly half of the proposed plan expenditure for 2011-12 to theinfrastructure sector at Rs2.14 lakh crore, representing a significant 23% growth over the current year.Tax-free infrastructure bonds of Rs300bn to be issued by Railway Finance Corporation (Rs100bn), NHAI(Rs100bn), HUDCO (Rs50bn), Ports (Rs50bn) would further increase debt availability for infra projects.Progress on a new funding avenue was also announced in the form of takeout financing. The budget alsoannounced capacity-building efforts to enable public-private partnerships, an important model forinfrastructure investment.
According to the Economic Survey for 2010-11, 293 projects or over 52 per cent of the ongoing 559infrastructure projects are running behind schedule as on October, 2010 and added that the investment inthe key infrastructure segments like power, roads, ports, airports among others, is expected to increase to8.37 per cent of the GDP or over Rs 4 lakh crore in 2011-12. Moreover, the Government proposes to raiseinvestment in infrastructure sector to USD 1tn in the Twelfth Five Year Plan (2012-17) from USD 500bn inthe current plan.
As many as 268 road projects, including 122 being implemented by the National Highways Authority ofIndia (NHAI), have been delayed as on January 31 this year. Road Minister CP Joshi has attributed the sameto delays in land acquisition, obtaining environment and forest clearances etc. With the liquidity supportprovided in the recent Budget to the NHAI, we expect the awarding activity to accelerate. Indian Railwaysalso has increased the annual plan to Rs 576bn, up 43% Y-o-Y in the Railway Budget. In the road space,some companies that will benefit include Gammon Infrastructure Projects, Reliance Infrastructure, JPAssociates and Madhucon Projects.
The port traffic in India has roughly doubled in the last decade and currently stands at 530mt. As per astudy, overall traffic is expected to grow to 1,008mt and container traffic, to grow at 20% CAGR to 15mnTEUs by FY12. NMDP, an ambitious programme conceived by the Shipping Ministry, had fixed a budget ofRs 55,803 crore for creating the additional capacity of 434 million tonnes (MT) in five years, over-and-above
the existing 574.77mt. On the airport sector, the Ministry of Civil Aviation has envisaged creatinginfrastructure to handle 280 million passengers by 2020 with investment opportunities of USD 80-110bn innew aircraft and USD 30bn in development of airport infrastructure. Over the next five years, AAI hasplanned a massive investment of USD 3.07 billion for upgrading non-metro airports and modernizing theexisting aeronautical facilities. In the airport sector, some companies that will benefit include GVK Power &Infrastructure, Reliance Infrastructure and GMR Infrastructure.
A large number of Indian cities and towns need adequate quality infrastructure facilities, specifically, in theareas of water management, roads, transportation, housing, sanitation, sewage etc. Keeping this in mind,the government is targeting an investment of USD 20.38 billion over the next two years in this segment.
Due to the recent concerns on macro issues such as rising inflation and an unfavorable interest-ratescenario, infrastructure stocks have corrected significantly. Sectoral headwinds like concerns on slow award
activity by NHAI and regulatory overhang on airports have also impacted the sector. We believe that theorder books of construction companies remain strong and the recent correction has made the valuationsattractive. The acceleration in execution would also ease the working capital situation from here on.
op Picks: Reliance Infrastructure (CMP -Rs 676, TP Rs 968), IVRCL Infrastructure(CMP -Rs 83.8, TP Rs 139),atibha Industries(CMP -Rs 65.45, TP Rs 80), JP Associates(CMP -Rs 92, TP Rs 120), Gammon Infrastructureojects(CMP -Rs 17.6, TP Rs 29.7)
Tax-free infrastru
bonds of Rs300b
increase
availability for
projects.
Power and Tran
sectors are expecte
witness the hig
allocation
With the liqu
support provided i
recent Budget to
NHAI, we expectawarding activity
accelerate
Order Books
construction comp
remain strong
-
8/4/2019 5_0_01042011Sector Outlook Report 310311
14/17
31st March, 2011
SECTOR OUTLOO
GINEERING & CAPITAL GOODS: OVERWEIGHT
The macro environment remains favorable for the capital goods players as the outlook on capacity
expansion across sectors is robust given that the capital availability has been encouraging, with
strong equity issuances this year and a credit growth of 18-20%. The recent increase in budgetary
allocations towards various social and infrastructure schemes augurs well for capital goods
companies.
The Q3FY11 results was better than expected as Larsen & Toubro & BHEL witnessed healthy revenue
growth on improved revenue booking on current order backlog. BHEL also surprised positively on the
margin front, where the EBITDA margins improved 38bps to 24.7% despite rising commodity costs.
Post a 6.7% Y-o-Y growth in 3QFY11, Crompton Greaves management lowered its FY11 revenue
guidance, and expects traction to improve by 2HFY12. Smooth execution of the current order book
and traction in the short cycle business helped Siemens deliver 36% Y-o-Y revenue growth during the
quarter. On the order inflow front, Larsen & Toubro & BHEL witnessed 24- 25% Y-o-Y decline innflows, respectively although the inflows was strong for players like KEC International, Kalpataru,
Siemens and Crompton. Greaves.
The Union Budget 2011-12 was positive for the sector as the exemption of excise duty on equipments
for UMPP projects is positive for power project developers and domestic equipment manufactures.
This was a significant provision considering that Indian power equipment manufacturers have been
demanding imposition of customs duty to ensure a level-playing field vis--vis foreign manufacturers,
while power project developers have been lobbying against it on fears the move will dry up supply of
cheaper equipment in the market.
The Budget has also provided for full exemption from basic Customs Duty to bio-asphalt and
specified machinery used in the construction of national highways. Tunnel-boring machines required
for the construction of highways are also being included in this exemption. Increase in infrastructure
spending would benefit large companies like L&T & BHEL. Further, increased focus on sectors like
agricultural equipments and cold storage sector also augurs well for capital goods companies.
n the last 5-6 months, the MoEF has awarded clearances the Rs 1.2tn Jaitapur nuclear power project
9,990MW in six phases), Rs 422bn of thermal power projects, Rs 345bn of road projects, the Rs 150bn
Posco integrated steel project, and Rs 111bn of airport projects. The expected increase in road project
awards as well as pick-up in construction activity would benefit road equipment providers,
construction contractors and other engineering firms. Power Grid Corp, after tendering about Rs
25,400crore orders during first 3 years, plans to tender around Rs 12000crore and Rs 17000crore
during 4th and 5th year respectively. The company has guided ordering to the tune of around Rs4000crore before Mar'11.
p Picks: Larsen & Toubro(CMP -Rs 1656.7, TP Rs 2023), BHEL(CMP -Rs 2058, TP Rs 2720), Crompton
aves(CMP -Rs 275, TP Rs 328), Elecon Engineering(CMP -Rs 69, TP Rs 100)
The macro environmremains favorable in
medium to long term
Q3FY11 results witne
healthy revenue gro
although slower order in
growth
MoEF cleared more tha
2tn of projects in the la
months
Robust project awards
Power Grid Corporation
India Ltd to be
companies in the power
space
-
8/4/2019 5_0_01042011Sector Outlook Report 310311
15/17
31st March, 2011
SECTOR OUTLOO
AL ESTATE: NEUTRAL
According to the report of the Technical Group on Estimation of Housing Shortage, an estimated
shortage of 26.53 million houses during the Eleventh Five Year Plan (2007-12) provides a bignvestment opportunity. Increasing population, urbanization, rising income levels and demographic
changes translates into strong demand of residential space. According to the Confederation of Real
Estate Developers' Associations of India (CREDAI), the affordable housing segment is set to play an
mportant role in India's real estate sector in 2011 on the back of substantial demand ignited by
economic recovery.
n the near term, with liquidity concerns, higher interest rates and tighter LTV norms, we expect
sanction and disbursal ratio to fall further. Home loan disbursals have tapered off and have shown a
marginal downtrend in the past quarter. On the commercial segment, the growing service sector with
T/ITES industry expected to grow in double digit will result in strong demand of office space
specifically SEZ areas. CRISIL Research has said that developers are planning to add 242 malls by 2013
to the 255 malls currently prevalent in top 10 cities which will add about 96 million sq ft of retail area to
the existing 72 million sq ft. The excess supply coupled with the higher capex announcements by the
retailers (the Future Group, Spencers Retail, Shoppers Stop, etc) will keep rentals stagnant in the retail
segment.
The Q3FY11 results were fairly decent with Mumbai-based developers (IBREL, Oberoi and HDIL)
delivering a strong set of numbers. Approval delays were highlighted as a key challenge by all
companies thereby impacting the new launch plans. DLF, the countrys largest developer launched a
single project (1.8msf Alameda plots in Gurgaon) during the quarter. However, most companies expect
the launches to gain momentum in FY12 (with approvals being in advanced stages) and have outlined
an aggressive launch plan for next one year. Debt levels across all companies with the exception of
Unitech remained largely stable or increased marginally during the quarter.
We believe that affordable housing has huge market potential with 70% of the current population
being rural & the wider acceptance of the nuclear family concept. In the recent Budget, the existing
scheme of 1% interest subvention has now been extended to Rs 15lakhs for house costing up to Rs
25lakhs. Currently, the limit is Rs 10lakhs for house worth up to Rs 20lakhs. On account of increase in
prices of residential properties in urban areas, the budget also proposed to increase the existing
housing loan limit from Rs 20lakhs to Rs 25lakhs for dwelling units under priority sector lending. Focus
on these affordable housing projects in general is a positive for mid cap real estate developers ( Ansal
Properties, Parsvanath Developers) which have a higher focus on this segment.
The proposal to bring Special Economic Zone developers under the purview of Minimum Alternate Tax
was as a setback. This would affect companies having exposure to SEZ projects like Anant Raj
ndustries. The Budget also did not accord the long-pending demand for industry status to the realty
ndustry, a move which would have made bank financing easier and cheaper for companies.
p Picks: India Bulls Real Estate (CMP -Rs 123, TP Rs 197), DLF (CMP -Rs 263, TP Rs 332)
The Outlook on residen
real estate segmremains strong with
estimated shortage of 26
million houses during
Eleventh Five Year Plan
Broader macro econo
factors such as h
inflation, high asset pr
and liquidity conc
makes the near tenvironment challengin
Outlook for commer
segment good
continued busin
recovery and strong hi
targets in the IT space
Higher store addittargets by retailers and m
space addition will k
rentals stagnant
The proposal to b
Special Economic Z
developers under
purview of Minim
Alternate Tax was as
setback
-
8/4/2019 5_0_01042011Sector Outlook Report 310311
16/17
31st March, 2011
SECTOR OUTLOO
OSPITALITY: NEUTRAL
The current count of hotel rooms is 130,000, and the country is expected to require an additional50,000 rooms over the next two to three years, according to World Travel and Tourism Committee
(WTCC) estimates. The contribution of travel and tourism to Gross Domestic Product (GDP) is
expected to increase from 8.6 per cent (USD 117.9bn) in 2010 to 9 per cent (USD 330bn) by 2020.
Since the slowdown in the hotel industry was aggravated after the 26 November 2008 terrorist
attacks, we believe that the sequential improvement in performance is significant, giving clear
signals of an ongoing recovery in the industry. Foreign tourist arrivals (FTAs) in India went up by 15.1
per cent to 6.92lakh in February 2011 from 6.01lakh in the same month of last year. The FTAs in the
first two months of this year added up to 12.30lakh, which was 12.7 per cent higher than the
number of 10.92lakh in the January-February 2010.
Indias hotel pipeline is the second largest in the Asia-Pacific region according to Jan Smits, RegionalManaging Director, InterContinental Hotels Group (IHG) Asia Australasia. He added that the Indian
hospitality industry is projected to grow at a rate of 8.8 per cent during 2007-16, placing India as the
second-fastest growing tourism market in the world.
The outlook for the sector remains strong going forward as economic growth gathers momentum
and companies increase spending on travel. The industry has said that the bookings for the winter
season have been better than expected to make it their best October-February season in three years
and that the industry is on an upward cycle that will peak in 2012. Signs of improving demand are
visible with occupancy rates improving, which would consequently be followed by higher ARRs in
the coming quarters. We maintain our positive stance on the hotel industry, on the back of the
improving dynamics.
In the recent Budget, the Government has proposed a service tax of 5% on all the hotels with an ARR
of over Rs1,000 per night, which is likely to be passed on.
Various domestic and international hotel chains have announced significant hotel additions to
address the expected demand. Roots Corporation, a subsidiary of Indian Hotels Company (IHC),
plans to open 60 to 70 budget hotels, known as Ginger Hotel, in 23 locations across the country. ITC,
the Kolkata-based cigarette major, also projected its plan to open 25 new hotels under the Fortune
brand over the course of next 12-18 months. The US-based Marriott International Inc. plans to have
100 hotels under its portfolio in India by 2015.
op Picks. Taj GVK Hotels (CMP -Rs 93.4, TP Rs144)
India is expected to requ
an additional 50,0
rooms over the next two
three years
FTAs during the per
January-October were 4.32 million, a grow
rate of 9.9 per cent
The outlook for the sec
remains strong with twinter season bookin
better than expected
A service tax of 5% on
the hotels with an ARR
over Rs1,000 per night
-
8/4/2019 5_0_01042011Sector Outlook Report 310311
17/17
31st March, 2011
SECTOR OUTLOO
RETAIL: OVERWEIGHT
The BMI India Retail Report estimates that the total retail sales will grow from USD 353 billion in2010 to USD 543.2 billion by 2014. Moreover, for the 4th time in five years, India has been ranked
as the most attractive nation for retail investment among 30 emerging markets by the US-based
global management consulting firm, A T Kearney in its 8th annual Global Retail Development
Index (GRDI) 2009.
Retailing has played a major role the world over in increasing productivity across a wide range of
consumer goods and services. In the developed countries, the organized retail industry accounts
for almost 80% of the total retail trade. In contrast, in India, organized retail trade accounts for
merely 5% of the total retail trade.
Fast tracking of augmentation of storage capacity and cold chains and continued emphasis onthe food processing sector in the recent Budget will enable bulk manufacturing and reduce
costs, which is important for the supply chain of retailers.
For Q3FY2011 retailers saw a robust revenue and earnings growth, largely driven by festivities
and positive consumer environment. The rising commodity prices resulted in margin contraction
for a majority of the players which was the highest for Pantaloon Retail (core business). Apart
from the general inflationary pressure, the product mix deterioration in favour of low margin
food and electronics business also played its role in denting the gross margin. Further, in an
exception to the general trend, strong branded players like Titan and Provogue maintained their
margins. In fact Titan showed a 70 basis point improvement in the gross margin levels. Going
forward, key monitorables would include the demand resilience and the commodity prices.
On the policy front, foreign investment in multi-brand retail is not allowed at present, but
multinationals can invest up to 51% in single-brand retail. Foreign retailers such as Wal-Mart and
Germanys Metro that operate in the wholesale segment have been lobbying hard to open up
multi-brand retail.
Although the Finance Minister cited the need to remove bottlenecks in distribution, which
contribute the waste of an estimated 40% of Indias agricultural food production, he made no
mention of FDI liberalization in the multi-brand retail, which would enable entry of global
retailers would transform retail trade. The service tax on lease rentals introduced last year was
also retained.
Top Picks. Pantaloon Retail (India) Ltd. (CMP -Rs 268, TP Rs 379)
Retail sales to grow from 353 billion in 2010 to
543.2 billion by 2014
Organized retail tr
accounts for merely 5% of
total retail trade
Nearly 100 shopping malls
likely to come up by 201seven major cities of India
expectation of increa
demand from retailers
No commentary on FD
multi brand retail in the rec
Budget
Service tax on lease renta
retained for the year 2011-
The Budget also propose
mandatory levy of 10 per
on branded apparel.
top related