COVER STORY

Red is the colour of the market in the new financial year 2015-16. Since March 3, 2015, when the domestic equity market barometer touched its all-time high, the domestic market’s NSE Nifty corrected almost 16 per cent as on September 9, 2015, which is the most recent low for Nifty. The primary reasons behind this market fall were global market cues such as the Chinese currency devaluation and economy slowdown; expected US Fed’s interest rate hike; worsening situation in the European market after the resignation of Greece’s prime minister; degrading of Brazil to ‘junk’ by the global rating agency S&P; and domestic market worries such as logjams over the monsoon parliamentary session creating hurdles for the reform process; weak corporate earnings season; worsening of monsoon across the country; etc. However, India, despite being an emerging market, has corrected less compared to other emerging markets across the globe.

Global Worries

The crisis across European markets continued in a rather exaggerated form after Greece’s prime minister declared his resignation and called for fresh election. This is in the wake of potential voters thumbing down austerity measures and the PM’s acceptance of the terms dictated by the country’s international creditors. Earlier, Greece declined to repay its debt commitment to International Monetary Fund (IMF), one of its creditors. The repercussion was that IMF declared Greece a “bankrupt” country.

On the US’ market front too, the sword of Damocles about US Fed’s interest rate hike continues to hang over the global equity markets. The US Fed has consistently expressed its willingness to hike the interest rate after a decade if supported by the US macro economical data. With the current economic data being as per expectations, the possibility of rate hike has increased over the last couple of US’ FOMC meetings. Meanwhile, the global credit rating agency Standard & Poor’s cut Brazil’s sovereign rating to ‘junk’ after the unsuccessful efforts of its president, Dilma Rousseff, to regain investors’ confidence and push economical revival.

The troublesome Chinese government suddenly devaluated its currency over the last one month. The devaluation move came with the expectation of increasing competitive advantage for the country’s exports. The Chinese government too wants to push reforms as it aims to become one of the reserve currencies in the International Monetary Fund’s SDR (Special Drawing Rights) group. Following the devaluation, the Asian shares and Asia-Pacific currencies experienced the biggest two-day sell-off since 1998. The Indian rupee too depreciated and crossed the psychological level of Rs 65 against the USD. The increasing competitive advantage for China will become a problem for other emerging economies like India as Chinese exporters will try to maximise dumping in these countries, creating a price fall.

Domestic Cues

The global bearish sentiments were also exaggerated in domestic markets with the parliament’s logjam continuing till the last day of the monsoon session. The session was completely washed out due to the disruption caused by Congress-led opposition. This very event has raised concerns over the reform process and delayed the passing of key bills including Goods and Service Tax (GST). The market mood further worsened as the face-off continued despite prominent Indian industrialists signing an online petition expressing concern over this locking of horns.

Meaningful recovery in the earnings of corporate India seems to be still a couple of quarters away, and so the wait continues. The one single factor that dominated the performance of corporate India in the first quarter of FY16 was commodity prices. The slump in commodity prices in general impacted the performance of most of corporate India directly or indirectly. While this drop has benefitted many companies that use commodity as raw material, it has adversely affected companies that are into the commodity business. However, telecom, IT and pharmaceutical companies continued with their improved performance.

The monsoon season too disappointed the Indian economy with rainfall below average this year. Deficit rainfall will definitely impact the rural economy, decreasing rural India’s consumption during the year. Almost 70 per cent population of India depend on the rural economy and therefore the gross domestic product (GDP) growth is expected to slow down. Coupled with the global economies’ dim scenario, various global research agencies have already started revising their estimates for the Indian GPD growth. Most of the research agencies have downgraded the domestic economy and lowered their estimate by almost 50 basis points for the current financial year. The revision in GDP growth estimates was predominantly due to poor weather affecting agricultural output and rural consumption in the near term.

A Poor Show

After generating fabulous returns in 2014, the Indian stock market has displayed subdued returns so far in the current year. As of September 9, 2015, the benchmark Nifty slumped down by almost 5.5 per cent since the start of the calendar year compared to the 30 per cent return it generated in 2014. Further, the index is down by almost 13 per cent from its pick on March 3, 2015. Since the start of the financial year 2015-16, the Nifty has corrected by almost 8 per cent over market concerns.

However, considering the free fall in emerging markets, the Indian equity market has shown lesser correction in the market. The global worries created a huge amount of foreign institutional investors’ (FIIs) money outflow, thus causing market correction. However, the domestic institutional investors (DIIs) supported the Indian markets during this bad phase of the market, causing outperformance across the emerging markets’ pack. At the time when FIIs sold Indian equities worth of almost Rs 59000 crore, the DIIs kept full faith in the economy and bought domestic equities worth almost Rs 49500 crore since the start of the current financial year.

The outperformance within the emerging markets and the imposition of huge faith by DIIs across the Indian equity market shows that the recent market fall was not due to the Bear market but rather on account of market correction. The last time the Indian stock market entered into such a correction mode was in 2011, but the market’s downturn had started in November 2010.

Fed Rate Hike Impact

With expectation about the Fed interest rate hike being around for quite a long time, the market discounted the 25 basis points’ rate hike. Further, the Fed rate cut will remove volatility in the market that has been created due to this expectation. Further, the Reserve Bank of India (RBI) will get a definite direction in order to further reduce policy rates in its forthcoming bimonthly review meeting on September 29. Also, the Fed’s rate hike will increase possibilities of the RBI’s rate cut as the country is experiencing a deflationary situation since the past few months.

Investors’ Sweet Spot

India remained investors’ sweet spot for the last few months across the emerging markets’ pack. As mentioned earlier, the emerging economy, Brazil, has recently been downgraded to ‘junk’ by the global rating agency S&P and this will have a considerable impact on its economy, sliding it further downwards on the investors’ ranking list. Further, the world’s second-largest economy is already facing a considerable slump in demand. And being a commodity exporter, the Russian economy may also see some pressure on its financial standing.

Commodity Price Factor

India being a net importer of commodities and crude oil, it will stand to benefit considerably from the lower commodity prices. Further, the lower commodity prices are expected to continue to remain subdued over the next few quarters considering the global economic situation. Rather, crude may touch a new low of USD 20 per dollar in the near future, as per Citigroup’s prediction. Hence, this very fact will definitely lower the raw material and fuel & energy costs for the Indian corporate, thereby improving their profitability in the days ahead.

Rupee Stability

The devaluation of Chinese currency has caused considerable depreciation across the emerging economies’ currencies and the Indian rupee too was no exception. Though the depreciation of rupee is beneficial to export-oriented sectors such as information technology, pharmaceuticals, textile and many more, companies which are importing the raw material or have taken foreign currency loans will be impacted due to high-value repayment. However, when the global volatility and concerns vanish, the rupee will stabilize and is expected to trade in a narrow zone. Further, considering the current situation of trade deficit and balance of payment, the rupee is not expected to further depreciate from its current levels as per currency market experts.

Corporate Earning Revival

Several external factors have led to de-growth in the revenue of corporate India; however, the internal factors are improving, thus leading to an increase in the quantum of new and revived projects. Even the import of engineering and project goods is recovering; this contrasts with the general trend of decline in overall imports. Therefore, we believe that recovery is in sight and we may see the impact of various factors in the next couple of quarters. All this eases worries about inflation as is demonstrated in the latest WPI (-4.95 per cent) and CPI (3.66 per cent) numbers for the month of August. As such, we may see a rate cut sooner than expected. This will definitely help to improve the overall sentiment in the economy. With recovery in corporate earnings coupled with increasing investment, we believe that the domestic markets are at an attractive juncture for investments.

Attractive Risk Reward

After yielding 30 per cent return in 2014, the market touched a further high, making the stock prices and consequently the valuations considerably higher in 2015. Some of the FMCG and pharmaceutical stocks became increasingly expensive and did not justify their rich valuation prior to the recent correction. These stocks have run up on higher earnings’ expectations with considerable safety and certainty over other businesses. Thus, the recent correction has made these stocks considerably cheaper in valuations. However, the companies that have strong business models are definitely bargain buyers in the current market situation. We are bullish on businesses with strong earnings’ potential even if India’s economic recovery has yet to accelerate.

While selecting the companies, we suggest you look at fundamental parameters such as consistent growth in profits, lower debt-equity, high return on equity, and stable cash flows with good amount of cash equivalent. Further, our advice is that investors who have already parked their funds in such good businesses should use this opportunity to accumulate more shares on every dip. Most companies in sectors such as telecom, pharmaceutical and FMCG provide clear earnings’ visibility during the slowdown period.
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Bharti Infratel

There are multiple factors that are currently working against the Indian equity market. And what is important to note here is that most of them are global in nature such as the Chinese slowdown, fall in commodity prices, and expectation of interest rate hike by the US Fed. Under these conditions, it pays to invest in companies whose businesses are domestically focused and are generating a lot of free cash.

Bharti Infratel is a subsidiary of Bharti Airtel that holds 42 per cent stake in Indus Towers - a joint venture between the top three GSM incumbents – Bharti Airtel (42 per cent), Vodafone (42 per cent) and Idea (16 per cent). On a consolidated basis, it has a tower portfolio of 86,397 towers. Bharti Infratel and Indus Towers together account for around 41 per cent of the Indian wireless tower base and 50 per cent tenancy market share in India. The company has a pan-India footprint with strong operator tenants and long-term tenancy contracts (5-15 years) which give it a strong leadership position with predictable earnings and cash flow. At the end of June 2015, on a consolidated basis, the average residual service contract period of its towers is 5.87 years and the minimum lease payment receivable is to the tune of Rs 47,497.4 crore.

Going forward, the next wave of growth for the telecom companies will come from increase in internet and data-related services. The focus on rural expansion and some of the initiatives taken by the government such as Digital India and the Smart Cities campaign will drive the expansion of telecom players. Moreover, incumbent telecom operators are looking to strengthen their position with data presence across major markets and have announced plans to cover 60-70 per cent of the network with 3G/4G over the next two years. There is urgency among the incumbent players due to the upcoming launch of Reliance Jio. Bharti Infratel is looking to play a partnering role by building and sharing vital infrastructure to the telecom players as all operators prefer to lease towers from tower companies rather than build them for captive use.

This will help the company to exceed the annual growth in revenue of 6.6 per cent that it has recorded in the last three years ending FY15. The EBITDA of the company in the same period has been increasing at a faster pace of 14.7 per cent, primarily due to improvement in margins. The EBITDA margin of the company has improved from 37.1 per cent at the end of FY13 to 42.9 per cent at the end of FY15. It has further improved to 43.2 per cent for Q1FY16 due to decline in energy cost. The net profit in the same period (FY13-15) has increased by 41 per cent annually.

The company has a strong balance-sheet with net cash and cash equivalent of more than Rs 4,000 crore at the end of June 2015. Its current share price of Rs 398 discounts its trailing 12-month earnings by 35.8 times. This might look expensive but looking at the better growth rate going ahead along with a strong balance-sheet we advise you to take exposure in the counter with a target of Rs 510 in the next 12 months.

Container Corporation Of India

Container Corporation of India (CCIL) provides inland transport by rail for containers, ports, air cargo complexes and cold chain. The company has a network of over 60 inland container depots/container freight stations (ICDs/CFSs) in India. CCIL operates in two divisions viz. EXIM and domestic. Both EXIM and domestic divisions of the company are engaged in handling, transportation and warehousing activities. CCIL is a leader in the rail transport service with a market share of 75 per cent. The company has a wide network of 63 container depots to handle domestic and export-import cargo and a fleet of over 11,000 wagons.

CCIL has a cash equivalent of Rs 2,951 crore as of FY15. The company’s cash equivalent to sales ratio stood at 47.99 per cent which clearly overrules the working capital crunch in the near future. Its debt to equity ratio was only 0.03 as of FY15. CCIL’s share is available at adjusted PE multiple of 29.23x. The company’s ROE witnessed 14.7 per cent. Financially, CCIL is performing at a very good pace. Its revenue has increased by 9.54 per cent CAGR from the last five years. The company’s EBITDA and net profit witnessed CAGR of 6.67 per cent and CAGR of 3.77 per cent respectively during the previous five years. CCIL’s revenue increased by 20.37 per cent to Rs 6,149 crore as of FY15 compared to the previous fiscal year. The company’s EBITDA also rose by 30.05 per cent to Rs 1,402 crore in FY15 on a yearly basis. Its net profit increased by 11.02 per cent to Rs 1,055 crore in FY15 as compared to the previous financial year.

The transportation of bulk cargo by rail is cheaper and nearly twice energy-efficient than road transport. There has been significant drop in load transportation by railway from about 90 per cent in 1950 to under 36 per cent now. The percentage is quite low compared to the US and China which has 50 per cent share. The scenario of rail cargo transport will change in the future as implementation of GST could make it more efficient to operate large centralised warehouses. Secondly, the dedicated freight corridor (DFC) projects will increase the capacity and transport speed of cargo by rail. Lastly, freight volumes for core commodities such as coal could pick up with the growing economy.

CCIL is going through an expansion drive and hoping to increase its cargo capacity from 3 million TEU (20 feet equivalent units) to over 5 million TEU by 2017. It is also diversifying its operations and growing its cold storage, air cargo and port operations. The company has also made an investment to grow its non-containerised cargo segment business by developing 6 to 8 terminals along rail tracks over two-three years. CCIL is also setting up five logistics parks in Andhra Pradesh and Telengana. Considering its strong financial position and expansion plans, we recommend buying this stock.

Emami

Emami is the fourth-largest among FMCG companies and the fastest growing personal and healthcare business in India with an enviable portfolio of over 250 products based on ayurvedic formulations. Its current operations comprise more than 60 countries, including the GCC, Europe, Africa, CIS countries and the SAARC. Over the last five years Emami has outperformed the Indian FMCG industry’s growth. Its revenue grew 16.8 per cent to Rs 2,217 crore; EBITDA at Rs 540 crore grew 17.2 per cent at five-year CAGR; and net profit augmented 23.4 per cent to Rs 485.6 crore in FY15.

Emami is one of the most aggressive brand builders in India. In 2014-15, the company invested Rs 392 crore in brand building, accounting for nearly 18 per cent of its revenues. Considering the huge spend on advertising, the company’s EBITDA margin jumped by 36 bps at five-year CAGR to 24.36 per cent in FY15. Recently, the company acquired the ‘Kesh King’ brand of hair and scalp care products from SBS Biotech for Rs 1,651 crore, which had revenue of Rs 300 crore in 2014-15 and has been growing at an average of 68 per cent a year for the last three years. For FY15, its cooling oil, balm, Boroplus cream and F&H grew by 18, 16, 11 and 15 per cent respectively. Zandu’sethical products grew by 20 per cent. Its international business grew by 43 per cent while rural growth improved significantly, led by Navratna and Boroplus.
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The management expects the overall FY16 topline to grow by 17-18 per cent with similar margin profile. The international market is expected to grow by 20-22 per cent for the next 1-2 years. A price hike is likely to be in the range of 4-5 per cent in FY16. Advertising spend to sales ratio for FY16 would be around 16-18 per cent. For FY16, the contribution from new launches will be around 5 per cent of sales. Emami is setting up its third manufacturing unit in NorthEast India i.e. in a tax exempt zone and is expected to commence operations in FY16.

ITC

In recent times the global market has slumped due to the sudden Chinese currency devaluation which has affected the Indian market too. Many good stocks have failed to sustain in the falling market. Now, however, the market seems to be slowly bouncing back even though the volatility continues to remain because the attention is now on the forthcoming US Fed meeting. Fortunately though, there are many stocks which will sustain themselves during this volatile period and ITC is one of them. ITC has a market presence in cigarettes, hotels, paperboard and specialty papers, packaging, agri-business, packaged foods and confectionery, information technology, branded apparel, personal care, stationery, safety matches and other FMCG products.

ITC is fundamentally a very strong company with cash and cash equivalent of Rs 14,031.31 crore on its balance-sheet as of end of financial year 2015. Further, the company has continued posting outstanding year-on-year financial results. The revenue of ITC increased in FY15 by 9.96 per cent to Rs 38,835 crore. The EBITDA grew by 8.8 per cent to Rs 14,202 crore during the same period. The company’s other income increased by 29 per cent in FY15. The net profit after interest and taxes rose by 8.68 per cent to Rs 9,663 crore as against Rs 8,891 crore on a yearly basis. The company’s return on equity stood at 33.21 per cent in FY15. The cash equivalent to sales ratio stood at 36.51 per cent and the EV/EBITDA was 16.36 per cent. The debt to equity ratio of the company is 0.01 which virtually makes it a debt-free company.

Recently ITC announced that it is keen on making investments of about Rs 2,500 crore in Tamil Nadu as part of tapping the food processing and hotel businesses. ITC already has a food processing unit in Tiruchirapalli. The company has planned Rs 25,000 crore worth of investments across the country and plans to offer its distribution network covering all parts of the country through some 4.3 million shops to start-ups and smaller FMCG companies that want to go national for a fee to create a new revenue stream. The tobacco-FMCG-hospitality major is even open to the idea of acquiring stake in some of these smaller companies.

ITC is also looking to set up three plants - one each in Punjab, West Bengal and Karnataka - to cater to its non-cigarette business by end FY16. The plants will be built in the cluster format with the focus first being on food and then on personal care. ITC, which is targeting revenue of Rs 1 lakh crore by 2030 from its FMCG business, is looking to increase its in-house manufacturing and planning to improve its margins by about 200 basis points over the medium term. Considering the current market fall, we feel ITC will be in safe haven considering its FMCG business revenue. Hence we recommend this stock.

P&G

P&G is one of the largest and amongst the fastest growing consumer goods’ companies in India. Its presence pans across the beauty and grooming segment, the household care segment as well as the health andwell-being segment. Its brand portfolio includes Vicks, Ariel, Tide, Whisper, Olay, Gillette, Ambipur, Pampers, Pantene, Oral-B, Head & Shoulders, Wella and Duracell. The company achieved strong double-digit sales growth during the financial year 2014-15 despite challenging economic conditions and inflationary market conditions. For the full fiscal year ended June 2015, the company reported an increase of 20.56 per cent in net profit to Rs 346.14 crore from Rs 302.02 crore a year ago, driven by continuous focus on productivity and cost efficiency.

The net sales increased by 13.92 per cent to Rs 2,332.27 crore from Rs 2,047.20 crore a year ago due to strong volume growth and focus on improving the product mix. Both the feminine and healthcare businesses continued to deliver strong double-digit sales growth in a competitive market environment behind superior value propositions and strength of product portfolio. One of its brands, Old Spice, also delivered in line with expectations. The EBITDA margin has inclined marginally by 20 bps to 20.8 per cent. The operating profit increased by 15 per cent to Rs 484.42 crore. Advertising and promotion spending to sales ratio was 14.25 per cent compared to 14.77 per cent in the previous year.

Its cash balance increased sharply by 130 per cent YoY to Rs 618.6 crore. Its revenues grew at a CAGR of 23.49 per cent and earnings grew at 23.1 per cent CAGR over FY11-15.We remain a strong believer in the structural revenue growth story of P&Gled by low penetration in the feminine hygiene segment (accounting for two-thirds of its sales) at around 15 per cent and barriers to entry in the form of distribution reach, which will benefit both key segments - feminine hygiene and healthcare.

Sun Pharmaceutical Industries

Sun Pharmaceutical Industries (SPIL) manufactures and markets a range of pharmaceutical formulations as branded generics, as well as generics, in the United States, India and other markets. It offers products across five continents in over 150 nations with a presence in the United States, India, Asia, Europe, South Africa, Commonwealth of Independent States and Russia and Latin America. SPIL also offers specialty and generic products across a range of chronic and acute prescription drugs.

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Considering the latest quarter’s results, the revenue of SIPL got boosted by 71.7 per cent to Rs 6,758 crore in Q1 FY16 as compared to the same period in the previous fiscal year. The company’s EBITDA also increased by 6.76 per cent to Rs 1,850 crore in Q1 FY16 on a yearly basis. Its net profit declined by 65.56 per cent to Rs 479 crore in Q1 FY16 compared to the same period in the previous financial year. SPIL had a foreign exchange loss of Rs 685 crore for integration and optimization of fixed assets during Q1 FY16. Over the last five years, the revenue of SPIL increased with CAGR of 36.82 per cent. The company’s EBITDA also witnessed 32.6 per cent CAGR growth. Its net profit increased by CAGR of 20.11 per cent during the last five years.

SPIL is the country’s largest drug maker by sales and at present has a cash equivalent of Rs 13,116 crore as of FY15. The company’s cash equivalent to sales ratio stood at 48.07 per cent. Its EV/EBITDA multiple stood at 15.05x. Further, the company’s debt to equity ratio was a mere 0.14 as of FY15. Its return on equity stood at 23.16 per cent as of FY15. SPIL’s shareholding pattern indicates that institutional shareholdings expanded by 345 basis to 31.51 per cent during the last 12 months.

SPIL’s Taro Pharmaceuticals has got US FDA approval for Keveyis 50 mg tablets for the treatment of periodic paralysis which is estimated to affect approximately 5,000 people in the United States. SPIL successfully completed opiates’ business acquisition in Australia. The acquisition will significantly expand its narcotics raw material (NRM) market share, enhance opiate alkaloids’ portfolio and depth in global opiates’ market, and strengthen its strategic position in the global opiates business. Considering the good financial performance and its expansion strategy, we recommend this stock at the current market price.

Zee Entertainment Enterprises

Zee Entertainment Enterprises (ZEEL) is another company on our recommendation list which is not going to be adversely impacted by the current global factors, though 13 per cent of its revenue is derived from international markets. On the other hand it will be a beneficiary, though indirectly, due to a fall in the commodity prices. As FMCG companies reap the benefit of the fall in commodity prices, they spend part on increasing the advertising expenses. In the first quarter of FY16, major FMCG companies increased their spending on advertising by more than 15 per cent on a yearly basis.

Regardless, as the Indian economy starts to pick up, the advertising expenses too are likely to increase. Historically, TV advertising has increased by an average 1.7 times the increase in GDP. This means that we may expect TV advertisement expenses to increase around 14 per cent annually, assuming the economy grows between 7-8 per cent. As ZEEL’s major revenue- almost 60 per cent at the end of Q1FY16 - comes from advertising, any increase in the overall advertisement expenses will directly benefit the company. What will also help the company to garner more revenue is the recent launch of Hindi language general entertainment channels.

The next major revenue trigger for the company will come from increase in subscription revenue. India’s cable andsatellite (C&S) subscriber base is estimated to be around 15 crore out of which 10 crore are cable, four crore DTH and the rest one crore are other digital subscribers. While the average pan-India pay TV average revenue per user (ARPU) is around Rs 200 per month, it is estimated that the ARPU of DTH is around Rs 270 while that of analog is Rs 160 per month. With phase III/IV digitization likely to be completed by December 2016, the analog subscribers’ base of DTH will increase accordingly.

This will give a huge boost to the company’s subscription revenue. Currently, approximately 40 per cent of the pay TV subscription revenue for the industry comes from analog cable where broadcasters’ revenue share is typically around 10 per cent compared with nearly 31 per cent for digital platforms (DTH and digital cable). With bulk of the subscriber base expected to migrate to addressable platforms, the broadcasters’ share of pay TV subscription revenue is set to increase.

The combination of both the above factors will help the company to exhibit faster growth in its revenue and profitability going ahead. For the first quarter of FY16, ZEEL’s revenue on a consolidated basis increased by 23.4 per cent on a yearly basis to Rs 1,339 crore, while the net profit in the same period increased by 15.7 per cent to Rs 242.3 crore. The lower growth in profit was due to increase in total expenses, which forms around 38 per cent of the total revenue by 31 per cent. In term of valuation, the current share price of ZEEL discounts its trailing 12-month earnings by 43 times, which looks stretched. However, looking at the expected growth rate in the next couple of years, one can enter the stock at its CMP and expect 20 per cent appreciation in the next one year.