September 2018

India Strategy

Oil price shocks

Nifty-50

11,130

11,739

10,301

Currency

weakness

Liquidity

tightening

9,580

Nifty Smallcap-100

7,669

5,756

21,732

Nifty Midcap-100

19,920

16,004

Correction everywhere

Research Team (Gautam.Duggad@MotilalOswal.com)

Investors are advised to refer through important disclosures made at the last page of the Research Report.

Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Contents

India Strategy – Correction everywhere

2QFY19 Highlights & Ready Reckoner

Sectors & Companies

Automobiles

...................................... 54-73

Amara Raja Batt. ............................................. 58

Ashok Leyland ................................................. 59

Bajaj Auto ..................................................... 60

Bharat Forge ................................................... 61

Bosch .............................................................. 62

CEAT ................................................................ 63

Eicher Motors ................................................. 64

Endurance Tech. ............................................. 65

Escorts ............................................................ 66

Exide Inds. ....................................................... 67

Hero Motocorp ............................................... 68

Mahindra & Mahindra .................................. 69

Maruti Suzuki .................................................. 70

Motherson Sumi ............................................. 71

Tata Motors .................................................. 72

TVS Motor ....................................................... 73

Capital Goods.......................................... 74-90

ABB ............................................................... 77

Bharat Electronics ........................................... 78

BHEL ............................................................. 79

Blue Star.......................................................... 80

CG Consumer Elect.......................................... 81

CG Power & Indl. ............................................. 82

Cummins India .............................................. 83

Engineers India................................................ 84

GE T&D India ................................................... 85

Havells India .................................................... 86

Larsen & Toubro ........................................... 87

Siemens........................................................... 88

Thermax ....................................................... 89

Voltas .............................................................. 90

Cement ..................................................91-104

ACC ............................................................... 95

Ambuja Cements............................................. 96

Birla Corporation............................................. 97

Dalmia Bharat ................................................. 98

Grasim Industries ......................................... 99

India Cements ............................................... 100

Ramco Cements ............................................ 101

Sanghi Inds. ................................................... 102

Shree Cement ............................................... 103

Ultratech Cement.......................................... 104

Consumer ............................................ 105-127

Asian Paints ............................................... 109

Britannia ....................................................... 110

Colgate .......................................................... 111

Dabur ............................................................ 112

Emami ........................................................... 113

Future Consumer .......................................... 114

Godrej Consumer .......................................... 115

GSK Consumer .............................................. 116

Hind. Unilever ............................................... 117

ITC ................................................................. 118

Jyothy Labs .................................................... 119

Marico ........................................................... 120

Nestle ............................................................ 121

P&G Hygiene ................................................. 122

Page Industries.............................................. 123

Parag Milk Foods........................................... 124

Pidilite Inds. .................................................. 125

United Breweries .......................................... 126

United Spirits ................................................ 127

Financials-Banks .................................. 128-150

AU Small Finance .......................................... 134

Axis Bank ....................................................... 135

Bank of Baroda ........................................... 136

DCB Bank....................................................... 137

Equitas Holdings............................................ 138

Federal Bank ................................................. 139

HDFC Bank .................................................. 140

ICICI Bank ................................................... 141

Indian Bank ................................................... 142

IndusInd Bank ............................................... 143

Kotak Mahindra Bank .................................... 144

Punjab National Bank .................................. 145

RBL Bank ........................................................ 146

State Bank ................................................... 147

Yes Bank ........................................................ 148

Life Insurance ...................................................

HDFC Stand. Life ............................................ 149

ICICI Pru Life .................................................. 150

............................................................................

Financials-NBFC ................................... 151-167

Bajaj Finance.................................................. 154

Chola. Inv & Fin.............................................. 155

GRUH Finance ................................................ 156

HDFC ........................................................... 157

Indiabulls Housing ......................................... 158

L&T Fin.Holdings ............................................ 159

LIC Housing Fin .............................................. 160

M & M Financial ............................................ 161

MAS Financial ................................................ 162

Muthoot Finance ........................................... 163

PNB Housing .................................................. 164

Repco Home Fin ............................................ 165

Shriram City Union......................................... 166

Shriram Transport Fin. ................................... 167

Healthcare........................................... 168-191

Alembic Pharma ............................................ 171

Alkem Lab ...................................................... 172

Ajanta Pharma ............................................... 173

Aurobindo Pharma ........................................ 174

Biocon............................................................ 175

Cadila Health ................................................. 176

Cipla ........................................................... 177

Divis Labs ....................................................... 178

Dr Reddy’ s Labs ......................................... 179

Glenmark Pharma.......................................... 180

Granules India ............................................... 181

GSK Pharma ............................................... 182

IPCA Labs. ...................................................... 183

Jubilant Life ................................................... 184

Laurus Labs .................................................... 185

Lupin .............................................................. 186

Sanofi India .................................................... 187

Shilpa Medicare ............................................. 188

Strides Pharma .............................................. 189

Sun Pharma ................................................... 190

Torrent Pharma ............................................. 191

Infrastructure ...................................... 192-197

Ashoka Buildcon ............................................ 194

IRB Infra ......................................................... 195

KNR Constructions ......................................... 196

Sadbhav Engineering ..................................... 197

............................................................................

Logistics .............................................. 198-202

Allcargo Logistics ........................................... 201

Concor ........................................................... 202

Media.................................................. 203-215

D B Corp......................................................... 208

Dish TV........................................................... 209

Ent.Network .................................................. 210

Jagran Prakashan ........................................... 211

Music Broadcast ............................................ 212

PVR ................................................................ 213

Sun TV............................................................ 214

Zee Entertainment......................................... 215

Metals ................................................. 216-232

Hindalco ...................................................... 223

Hindustan Zinc ............................................... 224

JSPL ................................................................ 225

JSW Steel ....................................................... 226

Nalco ............................................................. 227

NMDC ............................................................ 228

Rain Industries ............................................... 229

SAIL ................................................................ 230

3-39

40-53

54-320

Tata Steel ...................................................... 231

Vedanta ......................................................... 232

Oil & Gas ..............................................233-252

Aegis Logistics ............................................... 239

BPCL ........................................................... 240

GAIL ........................................................... 241

Gujarat Gas ................................................... 242

Gujarat State Petronet .................................. 243

HPCL .......................................................... 244

IOC ............................................................. 245

Indraprastha Gas ........................................... 246

Mahanagar Gas ............................................. 247

MRPL ............................................................. 248

Oil India ......................................................... 249

ONGC ......................................................... 250

Petronet LNG ................................................ 251

Reliance Inds. ................................................ 252

Retail ...................................................253-257

Jubilant Foodworks ....................................... 256

Titan Company .............................................. 257

Technology ..........................................258-277

Cyient ............................................................ 264

HCL Technologies .......................................... 265

Hexaware Tech.............................................. 266

Infosys ........................................................ 267

KPIT Tech....................................................... 268

Mindtree ....................................................... 269

MphasiS ........................................................ 270

NIIT Tech. ...................................................... 271

Persistent Systems ........................................ 272

Tata Elxsi ....................................................... 273

TCS ................................................................ 274

Tech Mahindra .............................................. 275

Wipro .......................................................... 276

Zensar Tech ................................................... 277

Telecom ...............................................278-288

Bharti Airtel ................................................... 285

Bharti Infratel ................................................ 286

Tata Comm .................................................... 287

Vodafone Idea ............................................... 288

Utilities ................................................289-297

CESC .............................................................. 291

Coal India ...................................................... 292

JSW Energy.................................................... 293

NHPC ............................................................. 294

NTPC ............................................................. 295

Power Grid Corp. ........................................... 296

Tata Power ................................................ 297

Others..................................................298-325

Arvind............................................................ 298

Avenue Supermarts....................................... 299

BSE ................................................................ 300

Castrol India .................................................. 301

Coromandel International ............................. 302

Delta Corp ..................................................... 303

Indo Count Inds. ............................................ 304

Info Edge ....................................................... 305

Interglobe Aviation........................................ 306

Kaveri Seed.................................................... 307

MCX............................................................... 308

Navneet Education ........................................ 309

Oberoi Realty ................................................ 310

P I Industries.................................................. 311

Phoenix Mills ................................................. 312

Quess Corp .................................................... 313

S H Kelkar ...................................................... 314

SRF ................................................................ 315

Tata Chemicals .............................................. 316

Team Lease Serv............................................ 317

Trident .......................................................... 318

UPL ................................................................ 319

India Strategy | Correction everywhere

India Strategy

BSE Sensex: 34,299

S&P CNX: 10,301

Correction everywhere

Recent macro events raise risk to earnings recovery in 2HFY19

INR weakness driving earnings of IT, Global Cyclicals; Domestic businesses

face growth headwinds

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2018 is turning out to be a year of sharp volatility and across-the-board

correction in Indian equities – Nifty-50 is down by 12%, Nifty mid-cap index by

26% and Nifty small-cap index by 40% from their yearly highs. While FIIs have

been net sellers of USD3.6b in CY18YTD, DIIs have remained on buying spree

with net flows of USD13.4b in CY18YTD after an inflow of USD14b in CY17. We,

however, note that DII flows have moderated in recent months.

Rising crude prices and sharp INR depreciation (-16% in CY18YTD – the worst

since 2011) have impacted investor sentiment of late. Recently, the fear of tight

liquidity and higher interest rates is adversely impacting several domestic-

oriented sectors, which were the key to FY19 earnings recovery. NBFCs, in

particular, will see downgrades after many years of strong growth, in our view.

The 2QFY19 earnings-report season is likely to mirror the trend of the previous

quarter, albeit with a reduced impact of a favorable base. Global Cyclicals like

Metals and Oil & Gas will continue leading from the front and contribute three

fourths of incremental profits for the MOSL Universe.

Rural Consumption recovery is expected to continue, with Consumer Staples

(FMCG) likely to post fifth straight quarter of double-digit profit growth. NBFCs

should report strong growth in 2QFY19, as most headwinds emerged only

toward the quarter-end – the impact will be evident in 2HFY19 estimates (NBFCs

now form 6% of MOSL Universe profit pool v/s 1.6% in FY08). IT appears set for

multi-quarter-high profit growth, driven by a strong operational performance

and currency tailwinds. We estimate PAT CAGR (FY18-20) of 13% for our IT

Universe (v/s 5% over FY15-18). Although Corporate Lenders are likely to report

another quarter of subdued earnings, the operational trends are improving.

We expect MOSL Universe PAT to grow 9% YoY. Global Cyclicals are likely to

drive performance for the second straight quarter (with 23% YoY profit growth)

and account for 81% of incremental profits. Defensives are expected to post

muted profit growth of 7%, aided by IT/Consumer but dragged by Healthcare.

Profit growth for MOSL Universe excluding PSU Banks and Private Corporate

Lenders is estimated at 13%. Auto, Telecom, PSU Banks, Healthcare and Cement

are expected to report muted numbers.

We expect Nifty sales, EBITDA and PAT to increase by 24%, 12% and 12% on a

base of 12%, 17% and 15% growth, respectively.

Our Nifty EPS estimates for FY19/20 have been cut by 1.5%/2% to

INR539/INR674. We are building in Nifty EPS growth of 18%/25% for FY19/20.

Recent headwinds pose a significant risk to the 2HFY19 estimates.

Top ideas in this correction



LARGE-CAPS: HDFC, ICICI BANK, AXIS BANK, MARUTI, HINDALCO, ASHOK

LEYLAND, TECH MAHINDRA, L&T, TITAN, BRITANNIA



MID-CAPS: RBL, SHTF, MINDTREE, EXIDE, TEAMLEASE

October 2018

3

India Strategy | Correction everywhere

Key sectoral trends/highlights

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Auto

Universe is expected to report a 28% YoY PAT decline on a strong base

(25% YoY growth in base quarter). Timing difference in the festive season is

expected to have influenced volume growth momentum in 2QFY19. Excluding

Tata Motors, the Auto Universe is expected to post flattish 2% PAT decline – the

highest in nine quarters. We expect EBITDA margin to shrink 220bp YoY to

11.9%, impacted by high commodity costs, a weak INR, and heightened

competitive intensity in 2Ws.

Technology

is expected to report its second consecutive double-digit PAT

growth (18.4%), with Wipro (1.5% PAT growth) expected to post the most tepid

numbers. The usual second-quarter seasonal strength, coupled with the benefits

from a favorable currency, is likely to drive a continued recovery for the

technology sector. Revenue for Tier-I vendors is likely to increase by 9.4% YoY in

constant currency terms (compared to 7.8% in 1QFY19 and 6.8% in 2QFY18),

taking further strides toward entering a double-digit growth trajectory.

Private Banks

are expected to report flat PAT growth (-0.1% YoY), dragged by

ICICI Bank (-76% YoY). Excluding ICICI Bank, Private Banks’ profit growth is

expected to come in at 19.4%.

NBFCs

are expected to continue their strong run and post another quarter of

strong and broad-based growth (30% YoY). All NBFCs, barring Shriram City Union

and Repco Home Finance, are expected to post double-digit growth.

PSU Banks

are expected to report profit of INR3b (base quarter 2QFY18

reported profit of INR29b), with BOB being the only bank amongst our Universe

that is expected to post PAT growth of 2.4%. PNB is expected to post a loss of

INR10b in 2QFY19.

Consumer

Universe is expected to deliver 15% YoY growth in profits – the fifth

consecutive quarter of double-digit PAT growth. The entire Consumer Universe

is expected to report a strong set of numbers, barring Future Consumer

(expected to post a loss), Emami and P&G Hygiene (both expected to post PAT

de-growth). United Spirits, Page and Jyothi Labs are expected to report 30%+

profit growth, while HUL and ITC are estimated to post 22% and 13% growth.

Metals

Universe is likely to post another quarter of strong performance, with

EBITDA and PAT growth of 27% and 41% YoY, respectively. Tata Steel (148%),

JSW Steel (121%) and Nalco (152%) are expected to post strong earnings

growth, while JSPL is expected to report a loss. Earnings growth is expected to

moderate further in FY19 due to a strong base (triple-digit growth).

Oil & Gas

is expected to report 17% YoY PAT growth off a strong base (Sep-17

quarter posted PAT growth of 22%), driven by ONGC. Within our MOSL

Universe, RIL and ONGC account for 80% of the Oil & Gas (Ex OMCs) profit pool.

Utilities

Universe is expected to report 53% PAT growth, led by a strong

performance from Coal India (10.8x PAT from Sep-18). Coal India alone will

contribute roughly 95% of the PAT delta of Utilities Universe. Utilities ex Coal

India are expected to post 3% PAT growth in 2QFY19.

Telecom

Universe is expected to report a loss. Vodafone Idea’s loss is expected

to remain elevated.

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October 2018

4

India Strategy | Correction everywhere

Model portfolio

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The correction in broader markets began in early-CY18, even though the Nifty

hit an all-time high in August 2018. The Nifty has corrected 12% from its recent

highs, and mid-and small-cap indices have corrected between 26-40%. This has

moderated valuations for many high-quality businesses, presenting an

opportunity to add names with strong earnings visibility at more reasonable

valuations. Despite the correction, the Nifty trades at 19x FY19 EPS, off from the

recent highs but still at a premium to its long-period averages. Rising bond yields

continue posing challenges for equity valuations as bond-earnings yield spreads

stay elevated at 2.8%. Against this backdrop, our model portfolio continues

reflecting our bias for earnings visibility and growth. Overall, we continue

favoring Private Financials, Consumer Discretionary, FMCG, IT and select quality

Mid-caps.

BFSI:

We are replacing

Yes Bank

with

Axis Bank,

given the prevailing uncertainty

in the former around management change. In Axis, the recent appointment of

Mr Amitabh Chaudhry as MD & CEO has provided much-needed clarity on top

management. We expect balance sheet clean-up to complete soon and earnings

recovery to pick up by end-FY19. AXSB has already increased the PCR to 69%

(NCLT-1 provisions of 83%), while net stressed assets have declined to 6.7%.

AXSB guided for normalization in credit cost in 2HFY19. Within NBFCs, we are

raising weights on HDFC after the recent correction. It is best placed in the NBFC

space to navigate the rising interest rates environment (best-in-class liability

structure, with 30% funding from public deposits) and now trades at reasonable

valuations adjusted for subsidiaries with 16-17% RoE. We are adding Kotak Bank

(KMB) in our model portfolio, as growth commentary remains strong with

management guiding for 20%+ growth across key business verticals. We expect

KMB to report 21% loan growth over FY18-20. With prudential provisioning

made by the bank in 1QFY19, PCR has improved to ~60%. Subsidiaries have been

performing well (contributing ~35% of total PAT). Promoter ownership remains

a near-term overhang, though. However, the ~25% correction in the stock price

makes KMB attractive from a medium- to long-term perspective.

Consumer:

We are replacing

Emami

and

UNSP

with

HUL

in our model portfolio.

While Emami continues witnessing moderation in demand trends and rising RM

headwinds, UNSP is impacted by rising raw material pressure and elevated

competitive intensity in IMFL in an environment of meagre price hikes. On the

other hand, HUVR offers a relatively more robust rural story and its guidance of

modest margin expansion and continued premiumization provides relatively

good earnings visibility.

Autos:

We are replacing Bajaj Auto with Ashok Leyland in our model portfolio.

Domestic 2W industry volumes and profitability are facing headwinds from an

increase in cost of ownership (led by safety regulations, new insurance norms,

etc.) and intensifying competition.

BJAUT's

profitability would remain under

pressure due to a weak mix and limited benefit of the INR in the near term due

to hedges.

Ashok Leyland's

volumes remain strong with ~35% growth in

1HFY19, despite the noise around higher rated load. After gaining market share

profitably over FY15-18, Ashok Leyland is now shifting its focus toward

expanding and creating new revenue/profit pools. This should likely drive

revenue/EBITDA/PAT CAGR of 12%/15%/16% over FY18-22.

5

October 2018

India Strategy | Correction everywhere

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Information Technology:

We have raised the weight for

Infosys

marginally,

added

Tech Mahindra

and replaced

Persistent

with

Mindtree.

With deals

bagged over the past few quarters, revenues from the Telecom vertical appear

set for revival in Tech Mahindra. Softness in Enterprise expected in 2QFY19 is

transient and that too should recover from 3QFY19. Also, the benefits from

currency seem to be flowing down to TECHM’s profitability, driving expectation

of 290bp EBITDA margin expansion over FY18-20 (to 18.2%). The stock remains

undervalued relative to peers, providing an opportunity for earnings upgrade

and re-rating. Performance for PSYS has been clouded by near-term issues,

while growth has been accelerating for the rest of the pack. The recent

turnaround of MTCL and also momentum visibility (driven by acceleration in top

clients) make its growth highest in our coverage universe. Turnaround of its

acquisitions and benefits of INR depreciation would favor margins, driving high-

double-digit earnings growth.

Capital Goods:

We have raised the weight of L&T further given the attractive

valuations, improved capital allocation and good visibility on orders.

Energy:

HPCL moves out of the portfolio after our recent downgrade.

Mid-caps:

In mid-caps, the significant correction has given us an opportunity to

add some new ideas at relatively more reasonable valuations. We are adding

Mindtree, Crompton Consumer and TeamLease

in our model portfolio. Rising

share of premium fans (~20% in total fan sales vs 7% two years back) will drive

market share gains for

Crompton Consumer

along with margin expansion. It

trades at a 20% discount to Havells, despite RoE being 2x of Havells.

TeamLease

has seen a gradual recovery in volume growth, which should continue through

the rest of the year, resulting in maintenance of ~25% revenue growth historical

trend. After the recent correction, long-term opportunities and high growth

offer a good entry opportunity.

October 2018

6

India Strategy | Correction everywhere

2QFY19 PREVIEW

Global Cyclicals will drive earnings

Metals, O&G and IT to drive entire incremental PAT for 2QFY19

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After a tepid FY18, the 1QFY19 earnings performance was healthy off a low

base, with MOSL universe earnings growing 14% and Nifty earnings increasing

by a respectable 13% (below expectations). Expectations of an earnings

recovery in FY19 hinge on the performance of a few sectors (as earnings

recovery is expected to be narrow, posing a downside risk to estimates). The

downside risks to estimates have gone up, more so in the last few weeks, given

the developments around crude, credit tightening and consequent higher

interest rates in the system.

As we head into the 2QFY19 earnings season, the macro challenge has

worsened with the relentless rise in crude oil prices accompanied by currency

depreciation. This, coupled with the liquidity tightening in the financial system

and concerns around ILFS debt default, has soured market sentiment.

Moreover, bond yields have hovered around 8-8.1%. These developments can

have meaningful repercussions on corporate earnings going forward. The RBI, in

its recent monetary policy, lowered its inflation forecasts for 2QFY19, 2HFY19

and 1QFY20. The government has also reduced the borrowing target for 2HFY19

by INR700b.This may provide some relief to bond yields, in our view. Monsoon

missed the IMD’s prediction (made at the beginning of the season), with the

season ending with 9% deficit. These developments have taken the sheen off

the strong GDP growth posted in 1QFY19 and the improvement in some micro

data points pertaining to consumption. The high frequency data points still

remain patchy and indicate volatile recovery trends.

Overall, we expect the 2QFY19 earnings season to mirror the 1QFY19 trends,

albeit with a reduced impact of base-related favorable comps. Global Cyclicals

will continue driving earnings, even as rising commodity costs and higher

interest rates pose downside risks to earnings estimates.

MOSL Universe is expected to deliver earnings growth of 9% in 2QFY19, led by

Global Cyclicals, even as Domestic Cyclicals are likely to drag the performance

and defensives are likely to post modest growth.

Approximately 31% of MOSL Universe is expected to post a YoY decline in PAT,

while 46% of the MOSL Universe is expected to post >15% growth. Consumer,

NBFC, Metals, Technology and Oil& Gas are expected to drive 2QFY19 earnings.

In 2QFY19, the contribution of Domestic Cyclicals and Defensives to the profit

pool is roughly equal at 32%, whereas Global Cyclicals will contribute 36%.

We expect MOSL Universe revenue to grow 22% YoY in the quarter (revenue

grew 12% YoY in the base quarter).

MOSL Universe EBITDA growth is estimated at 11% YoY, with the operating

margin ex-Financials and OMCs coming in flattish at 20.3%. MOSL Universe PAT

is likely to grow 9% YoY (base quarter earnings grew by 14%), driven by Global

Cyclicals like Metals, Oil & Gas and Coal India.

Global Cyclicals are expected to deliver strong earnings growth of 23% YoY (39%

growth in base quarter), led by Metals, Oil & Gas and Coal India, and account for

81% of YoY delta in MOSL Universe PAT. Coal India alone contributes 36% of YoY

delta in MOSL Universe PAT.

Global Cyclicals to drive earnings in 2QFY19

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October 2018

7

India Strategy | Correction everywhere

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Defensives are expected to post 7% YoY PAT growth (base quarter earnings de-

grew by 6%), buoyed by IT (posting its highest growth since Jun-14) and

Consumer (14% growth), but dragged by Utilities (3% growth ex Coal India) and

Healthcare (4% de-growth). Telecom (competitive intensity to stay elevated) is

expected to post another quarter of loss.

For 2QFY19, Domestic Cyclicals will report 1.4% and (1.5%) YoY growth in

EBITDA and PAT, respectively, dragged by Auto, PSU Banks and Corporate-

focused private banks, while NBFCs are expected to deliver healthy 19% growth.

Earnings breadth to worsen slightly from the previous quarter; Domestic

Cyclicals to disappoint

Earnings breadth is expected to worsen from 1QFY19, with 31% of MOSL Universe

expected to post a YoY decline in PAT. Global Cyclicals like Metals and Oil & Gas are

expected to continue the good run and account for 81% of MOSL Universe earnings

delta for 2QFY19. Apart from these, IT, FMCG and NBFC are also expected to

contribute to incremental earnings in 2QFY19.

Snapshot of sector performance

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Auto Universe is expected to report 28% YoY PAT decline off a strong base. We

expect EBITDA margin to shrink 220bp YoY to 11.9% due to high commodity

costs, a weak INR and heightened competitive intensity in 2Ws. Excluding Tata

Motors, Auto Universe is expected to post a 2% YoY earnings decline. We expect

Maruti, M&M, Bajaj Auto and Hero Motors to post a YoY decline in PAT.

Technology is expected to post the strongest quarter since Sep-14, with

PAT/sales expected to grow at 18.4% (17-quarter high)/16.8 %( 9-quarter high).

Tier II is expected to post another quarter of outperformance v/s Tier I. TCS is

expected to account for 45% of incremental PAT of our Technology Universe

Metals will have another strong quarter (41% YoY PAT growth) off a high base.

However, growth is expected to moderate going forward in FY19.

Oil & Gas is expected to report 17% YoY PAT growth off a strong base (Sep-17

quarter posted PAT growth of 22%), driven by ONGC and IOC. Excluding OMCs,

O&G Universe is expected to deliver 26% YoY PAT growth.

Private Banks are expected to report flat PAT growth (-0.1% YoY), dragged by

ICICI Bank (-76% YoY). Excluding ICICI Bank, Private Banks profit growth is

expected to come in at 19.4%.

NBFCs should report another strong quarter with broad-based 30% profit

growth. However, we have reduced our estimates for FY19 and FY20 given the

underlying rise in cost of funds and potential pressure on spreads.

PSU Banks are expected to report a profit after three consecutive quarters of

loss, while Telecom is expected to report a loss for the fifth straight quarter.

Consumer Universe profits are expected to grow 15% YoY – the 5th straight

quarter of double-digit PAT growth – with a strong performance by HUL/PAG.

Cement (-2.1%) is expected to report a PAT decline, with ACC and Ultratech

expected to report strong numbers. 7 out of 10 companies in our Cement

Universe are expected to post YoY PAT decline.

Utilities are expected to report 53% PAT growth, led by a strong performance

from Coal India (10.8x PAT from Sep-18). Coal India alone will contribute roughly

95% of the PAT delta of Utilities Universe. Utilities ex Coal India are expected to

deliver 3% PAT growth in 2QFY19.

October 2018

8

India Strategy | Correction everywhere

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Healthcare is expected to post 4.3% PAT decline off a low base (19% PAT decline

in 2QFY18). Sun Pharma (20%), Biocon (91%) and Divi’s Lab (35%) are expected

to post a good set of numbers, while Lupin is expected to post 45% YoY PAT

decline. 11/21 of our Healthcare Universe is expected to post a YoY PAT decline.

Defensives and Domestic Cyclicals’ share in MOSL Universe earnings would be

roughly equal at 32%, while Global Cyclicals would account for 36%. The share

of Domestic Cyclicals reduced to 14% in 4QFY18, driven by a huge loss reported

by PSU Banks, and is now expected to return to normalcy.

Nifty sales are estimated to grow 23.7% YoY – a multi-quarter high. PAT is

estimated to grow 11.8% and EBITDA is likely to increase 11.7% YoY.

Nifty EPS cut marginally for FY19/20:

Our FY19/20 Nifty EPS estimates have

been cut by 1.5%/2% to INR539/INR674 (prior: INR547/INR688). We are now

building in earnings growth of 18%/25% for the Nifty for FY19/20. For FY19,

major earnings upgrades are in ONGC (18%), GAIL (13%), Tech Mahindra (11%),

Wipro (+11%), and JSW Steel (10%), while the major earnings downgrades are in

SBI (-39%), Grasim (-36%), Tata Motors (-33%), Axis Bank (-19%) and ICICI Bank (-

18%). For FY20, the major earnings upgrades are in JSW Steel (16%), ONGC

(15%), Bajaj Auto(11%), Tata Steel(10%) and GAIL (8%), while the major

downgrades are in Grasim (-35%), BPCL (-29%), IOC (-26%), Bharti Infratel (-

24%) and Maruti Suzuki (-13%).

NET PROFIT

Var %

Var % Var % PAT

Sep-18

QoQ

YoY QoQ Delta

4

883

25

1

176

1

110

53

6

38

-3

111

41

-11

32

3

80

30

7

19

-10

10

30

-4

2

5

4

27

3

1

15

4

22

15

1

10

193

18

10

30

9

289

17

-4

43

4

82

15

6

10

1

135

1

9

1

5

34

4

5

1

0

101

0

10

0

0

174

-30

60

-76

-18

3

-1

-39

0

6

27

-1

1

0

-17

20

-2

-30

0

11

50

-4

11

-2

-13

6

-5

-5

0

3

80

-28

29

-31

2

3

-88

LP

-26

-7

-15

Loss

Loss

-15

2.8 1,192 9.3

7.8

101

2.1

4.4

3.8

788

704

937

7.1

10.3

11.8

7.8

20.1

10.0

PAT

Sh. %

74

9

9

7

1

0

0

16

24

7

11

3

8

15

0

2

2

4

1

7

0

-1

100

PAT

Delta

Margins

Chg bp

Sh. % Chg bp YoY

YoY

174

-56

-42

38

711

465

32

247

151

18

-23

403

2

34

-3

1

44

43

1

162

95

30

66

25

42

-163

-148

10

57

36

1

103

-174

1

29

-48

0

203

-408

-75

-480

-264

0

-178

-153

0

-232

-190

0

-172

-125

-2

-136

-157

0

-80

-108

-31

-220

-222

-26

-3,209

-947

-15

-467

-454

100

-189

-103

1

-117

-220

-36

-64

-97

EBITDA

Margins

Exhibit 1:

Profit growth led by IT, Metals and O&G

SECTOR

(NO OF COMPANIES)

Sep-18

SALES

EBITDA

Var % Var %

Var %

Sep-18

YoY QoQ

YoY

30

3

1,656

26

11

-6

244

37

12

-2

315

27

19

2

126

19

30

-4

21

32

20

-4

7

25

11

6

5

25

17

6

249

20

47

5

569

29

12

4

121

15

12

1

323

15

12

1

57

15

13

1

266

16

7

2

704

-14

16

-19

9

9

24

6

60

8

15

-10

48

5

9

7

89

2

18

35

6

-2

5

2

195

-12

11

-5

209

-25

-11

-1

88

-24

21.9

2.4 2,684 11.4

2.0

1.5

2.2

1,591

1,643

2,115

10.3

11.5

11.7

High gr. sectors

8,975

Utilities (7)

654

Metals (10)

1,483

NBFC (14)

165

Media (8)

64

Retail (2)

51

Logistics (2)

33

Technology (14)

1,051

Oil & Gas (14)

4,976

Consumer (19)

499

Med/Low gr.sectors

871

Capital Goods (14)

555

Private Banks (11)

316

PAT de-gr. sectors

3,540

Infrastructure (4)

30

Others (22)

369

Cement (10)

273

Healthcare (21)

441

Life Insurance (2)

141

Auto (16)

1,645

PSU Banks (4)

310

Telecom (4)

331

MOSL (198)

13,387

MOSL Ex Metals, Oil &

6,617 10.3

PSU Banks (170)

Sensex (30)

6,031 16.4

Nifty (50)

10,270 23.7

October 2018

9

India Strategy | Correction everywhere

MOSL Universe: Double-digit sales growth trajectory intact, PAT growth to moderate slightly,

defensives’ PAT to grow at 7%

Exhibit 2:

Seventh consecutive quarter of double-digit sales

growth for MOSL Universe

19

16

10

23

2224

19

1515

15

1112

Exhibit 3:

Sales growth of Defensives on upward curve at 9%

17

11 10

8 8 9 8

11

13 13

9

7

9

9

4

1

1 3

-1

5

8 7

1312 14

11

5

0

3

-4 -5 -5

-11

-2

4

8

Source: MOSL

Source: MOSL

Exhibit 4:

Earnings growth to come in at 9% for MOSL

Universe (base quarter earnings grew by 14%)

94

68

33

4

-4

-37

-10

6

0

5

-6

-10

9 2 4

-7

16

1 7

54

15 1417 14

20

9

-6

-7

Exhibit 5:

Earnings to grow at 7% for defensives on a weak

base (decline of 6% in the base quarter)

20

16

13 13

10 10

10 11

11

1

-1 -4

-14

-6

5

13

16

6

7

-6

Exhibit 6:

EBITDA margin to stay flattish in 2QFY19

MOSL Universe EBITDA

Margin LPA: 19.2%

Exhibit 7:

PAT margin to shrink by 30bp in 2QFY19

MOSL Universe PAT

Margin LPA: 9.8%

10.8

10.6

10.3

10.3

10.3

10.3

10.1

10.2

10.2

10.0

10.4

9.9

9.8

9.6

9.6 9.6 9.8

9.4

9.4

9.4

9.9 8.9

9.3

9.2 10.0 9.5 9.9 9.2

Source: MOSL

Source: MOSL

Share of Defensive and Domestic Cyclicals in MOSL Universe earnings

roughly equal in 2QFY19; Global Cyclicals’ share at 36%





2QFY19 earnings are expected to be driven by Global Cyclicals, which are likely

to post 23% growth. The share of Defensives, Domestic Cyclicals and Global

Cyclicals in profit pool stands at 32%, 32% and 36%, respectively.

Technology Universe PAT of INR193b should hit an all-time high.

October 2018

10

India Strategy | Correction everywhere

Exhibit 8:

Sectoral quarterly PAT trend (INR b)

Sector

Auto

Capital Goods

Cement

Consumer

Financials

Private Banks

PSU Banks

NBFC

Healthcare

Infrastructure

Logistics

Media

Metals

Oil & Gas

Oil & Gas Ex OMCs

Retail

Technology

Telecom

Utilities

Others

MOSL Universe

Sector

Jun

95

19

18

53

188

82

70

35

47

2

3

5

88

160

122

2

132

23

85

15

936

FY15

Sep Dec

80 80

20 22

14 10

56 59

178 181

85 95

57 50

35 36

52 36

2

2

3

4

5

8

91 78

131 58

126 82

3

2

137 144

27 28

66 76

14 14

876 800

FY15

Mar

64

46

16

56

204

100

60

44

40

3

3

6

41

242

129

2

141

29

98

5

997

Jun

102

14

14

57

195

91

65

37

55

3

3

7

48

233

136

2

141

23

89

16

1,001

FY16

Sep Dec

72 88

16

7

16 16

58 64

199 127

98 106

59 -23

41 42

56 55

3

3

3

3

8

8

57 -13

119 185

120 132

2

3

152 153

26 26

87 88

13 15

882 824

FY16

Mar

123

46

24

60

61

83

-72

48

55

2

4

10

30

204

149

2

158

28

93

16

915

Jun

82

16

27

65

154

94

14

44

60

3

2

7

34

270

140

2

153

28

87

19

1,008

FY17

Sep Dec

88 57

25 25

22 16

65 64

157 175

94 97

9

27

51 50

61 55

3

3

2

2

8

8

38 54

200 224

148 146

2

3

158 164

24

8

72 81

17 17

938 954

FY17

Mar

109

55

22

67

132

102

-27

54

48

4

3

8

99

236

163

2

157

12

83

22

1,055

Jun

71

21

28

65

187

102

29

52

32

4

3

8

69

198

155

3

153

3

85

19

943

FY18

Sep Dec

110 82

32 31

20 18

72 75

192 155

98 104

29 -18

61 66

49 48

3

4

3

2

8

7

79 113

245 303

167 183

3

3

163 165

0

-2

72 92

18 23

1,065 1,118

FY18

Mar

116

54

27

79

-93

71

-241

74

53

5

2

5

146

283

187

4

171

-3

118

22

985

FY19

Jun Sep Dec Mar

61 78 108 157

31 33 36 64

28 20 27 38

78 82 85 88

116 184 249 287

88 97 131 148

-51

3

38 53

75 80 77 81

44 48 55 61

5

3

5

4

3

4

4

4

10 10 12 11

124 111 139 156

298 287 305 319

189 210 245 259

4

4

4

5

174 193 200 206

-14 -15 -15 -12

103 110 111 111

23 22 23 24

1,085 1,170 1,347 1,517

FY19

Sep Dec

(E) (E)

-29 31

4

18

-2

55

15 14

-4

61

-1

26

-88 LP

30 16

-2

16

-1

8

22 111

30 61

41 23

17

1

26 34

27 28

18 21

Loss Loss

53 20

20

4

10 21

Exhibit 9:

Sectoral quarterly PAT growth trend (%)

Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun

Auto

Capital Goods

Cement

Consumer

Financials

Private Banks

PSU Banks

NBFC

Health Care

Infrastructure

Logistics

Media

Metals

Oil & Gas

Oil & Gas Ex OMCs

Retail

Technology

Telecom

Utilities

Others

MOSL Universe

70

4

19 -10

-6

28

12 14

11 16

18 19

3

20

12

6

37 23

19

5

12

-7

0

-1

30 26

154 -23

14 -10

-5

22

25 13

48 105

1

-15

17 10

33

5

-7

-11

-11

10

13

19

5

12

-57

10

28

32

2

-47

-44

7

11

86

-14

14

-7

-23

-15

-12

12

8

17

-5

10

-13

-6

20

20

-51

-23

-4

1

6

17

6

-54

-11

8

-28

-21

9

4

10

-7

4

17

16

-8

36

-45

46

11

-13

7

2

5

7

7

-10

-19

13

4

12

14

2

16

8

60

12

47

-38

-9

-5

-37

11

-5

31

-6

1

10 92

-70

1

68 49

8

7

-30 -70

12 -16

PL PL

16

8

53 39

27 -14

-31

6

8

75

PL -28

218 -16

61 15

13 -13

7

12

-9

-2

16

-5

11 191

3

-8

-20

20

93

13

-21

3

-78

19

8

10

-17

3

-29

16

3

33

9

20

-2

15

1

22

53

39

13

-21

-3

-84

24

10

-8

-24

3

-33

68

24

13

4

-6

-17

33

6

-35

274

1

1

38

-9

LP

18

2

27

-11

-6

LP

21

10

-1

7

-68

-8

9

16

-12

17

-5

11

114

22

Loss

14

-13

70

-28

-24

237

16

9

-9

-1

-59

-11

35

15

-14 25 45

6

-14

27 28 25

-2

50

3

-8

8

21

1

0

10 16 18 20

21 22 -11 PL -38

9

4

8

-30 -14

107 211 PL Loss PL

20 21 33 36 43

-46 -21 -14 10 35

43 10 33 26

8

27 28 -25 -9

0

6

-4

-6 -29 31

102 108 108 47 81

-27 22 35 20 50

10 12 26 15 22

15 71 38 94 48

0

3

1

9

14

-90 PL PL PL

PL

-3

0

14 42 22

0

8

36

1

25

-6

13 17

-7

15

Mar

(E)

35

18

39

12

LP

109

LP

10

16

-15

80

97

7

13

38

19

20

Loss

-6

11

54

Source: MOSL

Note: Comparable Universe, excludes Alkem Lab, Avenue Supermarts, CG Consumer Elect, Endurance Tech, AU Small Finance Bank, Equitas

Holdings, Gujarat Gas, HDFC Stand. Life, ICICI Pru Life, Interglobe Aviation, Laurus Labs, Mahanagar Gas, MAS Financial, Music Broadcast,

Quess Corp, RBL Bank, S H Kelkar and Team Lease.

October 2018

11

India Strategy | Correction everywhere

Exhibit 10:

Key assumptions

Macro

GDP Growth (%)

IIP Growth (%)

Inflation CPI-RU (%)

Currency: USD/INR

Repo Rate (%)

Interest Rate (%):

1Year CP Rate (Avg)

10Year G Sec (Avg)

Sectoral

Auto:

CV Volume growth (%)

Car Volume growth (%)

Banking: Loan Growth (%)

Cement: Volume growth (%)

Capital Goods: L&T order Intake (INRb)

Capital Goods: L&T order Intake (% YoY)

Metal:

Steel (USD/Tonne)

Aluminum (USD/Tonne)

Zinc (USD/Tonne)

Oil: Brent (US$/bbl)

Oil & Gas:

Under Recoveries (INRb)

Singapore GRM (USD/bbl)

Technology: $Revenue growth (%)

FY18

1QFY19

2QFY19E

3QFY19E

4QFY19E

FY19E

FY20E

6.7

7.7

7.1

6.7

6.3

7.0

7.2

4.4

5.8

5.0

3.8

3.4

4.3

5.2

3.6

4.9

4.1

3.8

4.7

4.3

5.6

64.5

67.1

70.2

72.5

73.0

70.7

73.4

6.00

6.25

6.50

6.50

6.50

6.50

6.50

7.34

8.00

8.26

8.38

8.51

8.29

8.26

6.93

7.73

7.93

8.13

8.22

8.00

7.87

FY18

1QFY19

2QFY19E

3QFY19E

4QFY19E

FY19E

FY20E

17.7

61.8

25.2

7.8

10.5

21.7

18.0

14.5

25.9

2.5

14.9

14.4

13.8

14.5

9.8

12.4

12.1

13.2

12.3

12.3

13.8

7.5

10.0

7.0

7.0

7.0

7.5

7.5

1,529

361

360

430

547

1,698

1,960

6.9

36.7

25.0

-10.6

10.3

11.1

15.4

631

748

700

680

680

699

662

2,045

2,259

2,150

2,150

2,150

2,177

2,150

3,048

3,124

2,800

2,800

2,800

2,881

2,700

57.6

74.6

74.2

75.0

75.0

74.7

70.0

236

71

155

165

167

558

671

7.2

6.1

6.3

6.0

6.0

6.1

6.0

8.2

0.8

3.3

1.3

1.6

8.0

8.0

' * CV volume for Tata Motors and Ashok Leyland; PV Volume for Maruti Suzuki (total volume growth)

Exhibit 11:

Sectoral PAT growth YoY in 2QFY19 (%)

53

41

30 30 27 22

18 17 15 10

Exhibit 12:

Sectoral PAT growth QoQ in 2QFY19 (%)

LP

29

20 15

11 10 10

9

4

0 -1 -2 -4 -5

-28

-88 Loss

8

7 6 6 5 3

-4 -4 -5

-11

-30 -39

Loss

Exhibit 13:

Approximately 31% of the companies are likely to report PAT decline, while 23% of the companies are expected to

post >30% PAT growth

Earnings

Gr.

26

20

>30%

-8

-15

-15

-11 23

42

42 41

32 35

31 27 30

17

26

24

9

13

11

>15-30%

4

18

11

6

9

0

>0-15%

-3

8

12

9

17

<0%

-7

7

26 35

-9

-3

Ex OMCs (%)

3

9

-11

8

-6

-20

18

-13

-3

10

0

10

20

39 37 35 32 34

33 30 31

21

31

22

27

23 26

25 24 31

24 26

18

18

22 18

10 14

9

18 18

14 14 9

13

10 20

24 19

22 10

41

22

21

18 23

43 51

38 32 39 35

34 42 40 31 38 39 42 40 37 38

45

36

38 47 36

46 45

16 13

27 17 16

24 25 18 22 17 17 19 16

21 21 24 25 25 28 26 24

17 22 19 24 16 22

18

18 14

20 22

27

20

25 25

23

18

13

17

35 30

26 27 32

16

36 41

26 24 19 20 26 18 21 22 21 26 26 28 29 29 23 20 25 32

23

19

26 13 19 20 19 15

22 18

17 20 22

20 19

19 23 16

12 16

23

15 17

19

19

24

23

PAT Growth Ex OMCs (%)

46% of the companies would grow at >15% YoY, and 23% of the Universe would report >30% PAT growth. 31% of the Universe would report

PAT de-growth.

October 2018

12

India Strategy | Correction everywhere

Three macro trends on the economy

A. Expect real GDP growth and inflation to remain subdued in 2HFY19





Real GDP had surged by 8.2% YoY in 1QFY18 – the fastest pace in over two

years. However, high growth was supported a favorable base (growth had

bottomed at 5.7% YoY in 1QFY18 post demonetization). We had

highlighted

that this favorable base effect would start fading and growth would come off in

the subsequent quarters. Accordingly, notwithstanding 8.2% growth in 1QFY19,

we continue believing that real GDP growth will be ~7% in FY19, much lower

than the RBI’s projection of 7.4%.

Signs of a sharp deceleration in growth in 2QFY19 are visible. According to our

in-house

economic activity index (EAI)

for India, real GDP growth averaged 7%

in the first two months of 2QFY19, much weaker than 8.5% in 1QFY19 (Exhibit

14). We believe that growth would moderate further toward 6% in September

2018 due to an unfavorable base. Consequently, we expect real GDP to clock in

7%-7.2% YoY growth in 2QFY19 before decelerating further toward 6.5% in

2HFY19 (Exhibit 15).

Exhibit 15:

Real GDP growth expected to decelerate sharply

in 2QFY19 and 2HFY19

(% YoY)

7.7

7.1

8.2

7.3

9.3

8.1

7.6

6.8

6.1

5.6

FORECAST

7.0

6.3

Real GDP

7.7

8.2

7.0

6.6 6.4

Exhibit 14:

Our in-house measure of economic activity (EAI)

indicates deceleration in growth in 2QFY19

12

9

6

3

0

% YoY

3-mma

EAI-GDP

Q4 FY15

Q4 FY16

Q4 FY17

Q4 FY18

Q4 FY19F

Source: Central Statistics Office (CSO), CEIC, MOSL



Further, notwithstanding sharp acceleration in crude oil prices and a weaker

INR, we expect headline inflation to average ~4.1% YoY in FY19. Subdued food

inflation and housing index will help offset higher fuel prices. Core inflation,

however, will remain above 5% until March 2019.

B. Capex cycle, however, showing early signs of recovery





According to the projects data (click

here)

released by the Centre for Monitoring

Indian Economy (CMIE), new project announcements increased 12% YoY to

INR1.5t in 2QFY19 (Exhibit 16), driven primarily by the consumer goods (+886%

YoY, INR25b), metals & mining (+229% YoY, INR361b), information technology

(+226% YoY, INR21b) and electricity (+121% YoY, INR314b) sectors. This was the

first instance of an increase in nine quarters. The increase was driven by the

private sector; government sector project announcements dropped 2% YoY to

INR762b (Exhibit 17).

Stalled projects remain elevated at INR11.5t, accounting for 10.9% of projects

under implementation. This, however, is lower than the peak levels of 12.2% in

13

October 2018

India Strategy | Correction everywhere



March 2018. Projects under implementation increased by a muted 2% YoY to

INR105t in 2QFY19. Around 63% of the projects under implementation are from

the government sector (the highest since June 2006); private sector accounts for

37%. This is reflective of the reluctance of the private sector to invest in new

capacity, given (a) a constrained demand scenario and resultant underutilization

and (b) over-leveraged balance sheets.

The turnaround in project announcements, along with the increase in capacity

utilization levels to a four-year high of 75% in March 2018 (Exhibit 19), is also

reflected in our in-house estimate of investment activity, which posted double-

digit growth for the 10

th

successive month in August 2018 (Exhibit 18). Whether

this is driven by a favorable base is something to watch out for.

Exhibit 17:

Projects under implementation supported by

government projects

80,000

225%

150%

75%

0%

-75%

60,000

40,000

20,000

0

Government(INRb)

Private (INRb)

Exhibit 16:

New project announcements exhibit growth

(+12% YoY in 2QFY19) after declining for two years

10,000

7,500

5,000

2,500

0

New projects (INR b)

YoY %

Source: CMIE, MOSL

Exhibit 18:

According to our in-house measure, investment

activity witnessed double-digit growth over last 10 months

18

13

8

3

-2

% YoY

3mma

MOLI: Investment

Exhibit 19:

Capacity utilization levels at four-year high in

March 2018

78

76

75

73

72

70

(%)

Capacity utilisation levels

Source: RBI, MOSL

C. Fiscal slippages to determine rate actions in FY19





After hiking policy rates by 50bp in 1HFY19, the RBI surprised markets by

maintaining status quo in its

fourth bi-monthly monetary policy

meeting held

on 5

th

October 2018. This, however, was in line with our

anti-consensus view.

The central bank, however, changed its policy stance to ‘tightening’ from

‘neutral’ earlier, which may have diluted the impact of keeping status quo on

interest rates.

Furthermore, the RBI revised its 2QFY18 inflation forecast downward to 4%

from 4.6% on account of lower-than-expected inflation numbers in July and

14

October 2018

India Strategy | Correction everywhere





August 2018. Further, the central bank cut its inflation forecast for 2HFY19

sharply to 3.9%-4.5% from 4.8% and for 1QFY20 to 4.8% from 5%. This implies

that the RBI expects inflation to average at ~4.3% for full-year FY19, as against

4.8% earlier but still slightly higher than

our estimate

of 4.1%.

Moreover, notwithstanding higher-than-projected 1QFY19 growth, the RBI

retained its FY19 GDP growth at 7.4%, implying slower-than-previously forecast

growth in the remaining part of FY19. We expect growth to come in at ~7% in

FY19, well below the RBI’s (and market’s) projections.

Given our forecast of lower-than-expected inflation and growth, we do not

expect the RBI to hike rates in the remaining part of FY19. However, there is a

serious risk of slippages in fiscal deficit targets if the government does not cut its

spending. Accordingly, we believe that fiscal slippage may prompt the RBI to

hike rates.

Exhibit 21:

…which will make it difficult for the RBI to hike

rates in the remaining part of FY19

7.3

6.8

6.3

FORECASTS

Exhibit 20:

Expect CPI headline inflation to stay sub-4% until

December 2018…

7.3

6.0

4.8

3.5

2.3

1.0

Mar-15

Mar-16

Mar-17

Mar-18

(% YoY)

Headline CPI

Core CPI*

Repo

Reverse repo

MSF

5.8

5.3

Mar-19

Source: CSO, RBI, CEIC, MOSL

* All items excluding ‘food & beverages’ and ‘fuel & light’

Global Cyclicals to account for 81% of 2QFY19 earnings delta







Global Cyclicals are expected to post robust earnings growth of 23% YoY on a

strong base (39% growth in base quarter), led by Metals, Oil & Gas and Coal

India, and account for 81% of YoY delta in MOSL Universe PAT. Coal India alone

contributes 36% of YoY delta in MOSL Universe PAT.

Defensives are expected to deliver 7% YoY PAT growth (base quarter earnings

declined 6%), buoyed by IT (posting its highest growth since Jun-14) and

Consumer (15% growth), but partly dragged by Utilities (3% growth ex Coal

India) and Healthcare (4% decline).

For 2QFY19, Domestic Cyclicals are expected to report 1.4% and (1.5%) YoY

growth in EBITDA and PAT, respectively, dragged by Auto, PSU Banks and

corporate-focused private banks, while NBFC Universe is expected to post

healthy 30% growth.

October 2018

15

India Strategy | Correction everywhere

Exhibit 22:

Cyclicals will continue driving earnings in FY19

60

37

Contribution to 1HFY19 PAT growth (%)

24 22 17

45

Contribution to 2HFY19 PAT growth (%)

10 5 4

2 1 0 0

0 0 -1 -6

-13 -17

-45

14

9 9

5 5 3 3 3 2

2 2 1 1 1 0 0

0 -3

Source: MOSL

Source: MOSL

Exhibit 23:

Global Cyclicals growth expected to significantly exceed MOSL Universe in 1HFY19, with Domestic Cyclicals leading

the pack in 2HFY19

60

1HFY19 PAT growth (%)

36 36 36 32 30 22

17 16 12 11 11 5

0 -5 -6 -7

-22

LP

93

76

59

45

37 36

2HFY19 PAT growth (%)

23 21 19 18

14 13 13 13 11

7 6

-4 Loss

-181

PL

Source: MOSL

Source: MOSL

Defensives’ growth to moderate slightly









Defensives solely drove MOSL Universe PAT growth over FY14-16. Cyclicals

(both domestic and global), on the other hand, were under pressure. As a result,

the share of Defensives in aggregate PAT expanded to 37% in FY16 from 23% of

FY12.

Domestic Cyclicals appear to be the key drivers of PAT growth in 2HFY19, with

their share rising to 33% of aggregate PAT in FY19 (v/s 28% of FY18) and

accounting for 50% of incremental PAT growth.

Consequently, we expect the share of Cyclicals to increase to 71% in FY19 from

67% in FY18.

For 2QFY19, Defensives are expected to report EBITDA growth of 6.9% YoY and

PAT growth of 7.1% YoY.

October 2018

16

India Strategy | Correction everywhere

Exhibit 24:

Oil & Gas and Metals contribute 75% of the earnings delta in 2QFY19

43

38

32

30

19

10

2

1

1

1

0

0

0

0

0

-2

-15

-26

-31

Source: MOSL

Share of Defensives, Domestic Cyclicals and Global Cyclicals almost equal in 2QFY19

Exhibit 25:

PAT share of Domestic Cyclicals will be at 34%, up from 31% in 1QFY19 (was impacted by PSBs’ losses)

100%

75%

50%

25%

0%

Excluding OMC's

34

27 25

29

Defensives

36

40

39

4042 39 34 34 35 34 35 34

25 33

25 22

35 36 3633

28 27 33

47

26

33

41

42

38

34

Global cyclicals

34

26

24

3432

40

35

32

32

35

36

Domestic cyclicals

33

38

37

38 38 32

14

31

34

Defensives

includes Consumer, Healthcare, Technology, Telecom and Utilities

Global cyclicals

includes Metals, Oil & Gas and JLR

Domestic cyclicals

includes Automobiles, Banks, Capital Goods, Infrastructure, Cement, Media, NBFCs, Real Estate and Retail

Nifty earnings to grow in double-digits at 12% off a strong base













Nifty PAT is likely to grow in double digits at 12% YoY off a strong base (15%

growth in 2QFY18). Nifty, excluding Corporate Banks, is expected to deliver

profit growth of 15% off a base of 14% growth.

Excluding OMCs, PSU Banks and Metals, Nifty PAT growth remains healthy at

12%.

Sales are expected to grow 24% YoY (12% YoY growth in base quarter), again

aided by Global Cyclicals. Excluding OMCs, Metals and PSU Banks, sales growth

remains healthy at 18% YoY.

Nifty EBITDA is expected to grow 12%. Excluding OMCs, PSU Banks and Metals,

Nifty EBITDA is expected to increase 18% YoY.

13 Nifty companies (4 from Automobiles) are expected to report a YoY decline in

PAT.

Bharti Airtel and Tata Motors are expected to post a loss in 2QFY19.

October 2018

17

India Strategy | Correction everywhere

Exhibit 26:

Nifty sales to grow 24% in 2QFY19

25

30

37 35

33

15

28 26

8

26

26

24 24 27

16 14

8

14 14 14 15

4 4

4

-1

-8

-4 -5 -3

23

22

18

22

21

21

LPA: 13%

4

0

4 5

14

10

15

12 14

20

-4

-12

-8

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

Exhibit 27:

2QFY19 Nifty PAT to increase 12%, led by Metals, Technology and Oil & Gas

36

19

21

13 12

11

19

27

16

4

-8 -5

34

24

10

0

12

29

6

24

5

-2

-15

-20

11

2

8 9

19

5

-6

15 15

6

-6

20

10 12

35

LPA: 8%

0

-1

-12

-7

1

-4 -4

7 7

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

Exhibit 28:

Fifth consecutive quarter of double-digit growth in Nifty EBITDA

25

26

15

18

13

29

37

21

31

20

10

13

6 10

18

3

13 11

14

17

6

20

12

4 5

13

LPA: 11%

2

-5

5 1 5

15

7

11

16

8 8

2

18 20

13

11 14 12

-5

-8 -10

-2

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

Exhibit 29:

Nifty sectoral 2QFY19 PAT change YoY (%)

76

47

29

26

21

18

17

15

15

12

11

4

-1

-2

-7

-39

-57 Loss

Metals, O&G, NBFCs and

Utilities to outperform;

Telecom, PSU Banks and

Auto to underperform

October 2018

18

India Strategy | Correction everywhere

Exhibit 30:

Nifty companies’ 2QFY19 performance (INR b)

Company

Sales

EBITDA

PAT

Var %

Var %

Var % Var %

Var % Var %

Sep-18

Sep-18

Sep-18

YoY

QoQ

YoY

QoQ

YoY

QoQ

High PAT Growth

5,418

34

4

1,204

33

4

604

39

2

Coal India

227

25

-6

63

387

-5

40

976

5

Tata Steel

348

7

-8

73

55

13

25

148

10

JSW Steel

202

19

-1

46

45

-10

19

121

-18

Axis Bank

49

8

-5

42

11

-4

7

56

-4

Bajaj Finance

27

37

3

16

52

1

8

51

0

ONGC

301

59

11

168

61

14

70

37

14

Bajaj Finserv

82

9

-6

82

9

-6

9

35

6

Tech Mahindra

86

13

4

15

35

10

11

34

25

IOC

1,379

52

6

75

5

16

49

34

-28

Hindalco

325

17

4

39

11

-3

13

27

-15

Zee Entertainment

19

18

5

6

22

6

4

26

13

Indiabulls Housing

16

29

2

14

28

2

11

25

2

HCL Technologies

147

18

6

34

24

6

27

24

13

Reliance Inds.

1,364

49

6

212

36

2

101

24

6

HDFC

29

12

1

26

10

9

26

23

18

Hind. Unilever

96

15

1

21

24

-8

15

22

-3

Titan Company

42

20

-6

5

20

5

3

21

3

Ultratech Cement

84

28

-3

15

8

-10

5

21

-13

TCS

364

19

6

100

23

11

78

21

6

IndusInd Bank

22

21

4

19

17

0

11

20

2

Sun Pharma

76

15

6

16

25

8

11

19

11

HDFC Bank

110

13

2

90

16

4

49

18

7

Yes Bank

24

25

6

25

29

0

12

17

-7

Med/Low PAT Growth 1,142

13

1

348

13

5

195

9

5

Kotak Mahindra Bank

26

13

1

21

19

1

11

14

10

ITC

111

8

4

43

15

3

30

13

6

Power Grid Corp.

82

13

-2

75

15

5

24

13

10

GAIL

174

40

1

23

13

4

15

12

17

Eicher Motors

24

10

-7

7

9

-8

6

12

1

Dr Reddy’ s Labs

38

8

3

7

6

-7

3

12

-30

Infosys

204

16

7

54

14

8

42

11

7

UPL

42

12

2

8

16

-2

4

11

-34

Cipla

45

10

14

9

10

21

5

9

37

Asian Paints

47

10

7

9

7

-2

5

4

-4

NTPC

202

2

-12

63

12

2

28

3

-5

Wipro

146

9

4

29

6

21

22

1

21

Negative PAT Growth

3,710

14

1

563

-17

3

138

-39

90

Mahindra & Mahindra

129

7

-4

20

2

-7

14

-1

12

Larsen & Toubro

290

10

3

31

4

6

16

-2

4

Bajaj Auto

80

21

8

13

3

5

11

-4

-4

Bharti Infratel

36

-1

-2

14

-11

-5

6

-4

-4

Grasim Industries

43

5

-11

10

21

-10

6

-7

-9

Adani Ports

26

-5

7

16

-9

34

9

-7

33

Hero MotoCorp

90

8

3

14

-5

1

9

-10

0

Maruti Suzuki

221

1

-2

31

-15

-6

20

-19

2

Vedanta

214

-1

-4

57

1

-9

13

-30

-13

BPCL

740

39

3

25

-13

33

16

-30

-28

HPCL

690

45

2

21

-2

14

11

-34

-34

State Bank

206

11

-6

132

-34

10

7

-57

LP

ICICI Bank

61

7

0

55

11

-5

5

-76

LP

Tata Motors

687

-3

2

60

-33

11

-5

PL

Loss

Bharti Airtel

200

-8

0

63

-20

-6

-2

PL

Loss

Nifty (50)

10,270

24

2

2,115

12

4

937

12

10

Note: For Financials, Sales represents Net Interest Income, and EBITDA represents Operating Profit;

Consensus estimates are used for Adani Ports and Bajaj Finserv

PAT Contbn

Gr.

(%)

(%)

65

172

4

36

3

15

2

11

1

2

1

3

7

19

1

2

1

3

5

13

1

3

0

1

1

2

3

5

11

20

3

5

2

3

0

1

1

1

8

14

1

2

1

2

5

8

1

2

21

17

1

1

3

4

3

3

2

2

1

1

0

0

4

4

0

0

0

0

1

0

3

1

2

0

15

-88

1

0

2

0

1

0

1

0

1

0

1

-1

1

-1

2

-5

1

-6

2

-7

1

-6

1

-9

1

-16

0

-30

0

-7

100

100

EBITDA margin

Var

Sep-18

(bp)

22

-13

28

2052

21

653

23

406

86

300

62

606

56

67

100

0

17

286

5

-247

12

-66

32

91

89

-107

23

121

16

-150

90

-164

22

150

12

0

17

-320

28

81

87

-244

22

174

82

157

104

319

30

-7

79

435

39

250

92

138

13

-331

31

-34

18

-41

26

-50

20

63

20

0

18

-50

31

275

20

-54

15

-576

15

-74

11

-59

17

-292

40

-416

22

294

63

-305

15

-208

14

-269

27

43

3

-202

3

-143

64

-4341

91

398

9

-388

32

-463

21

-220

October 2018

19

India Strategy | Correction everywhere

Exhibit 31:

Intra-sector 2QFY19 earnings divergence (%)

Sector

gr.

HIGH GROWTH SECTORS

Sectors

Utilities

Metals

53

41

+30%

growth

15-30%

growth

0-15%

growth

PWGR: 13,

NTPC: 3,CESC: 2

NMDC: 11

MUTH: 13,

SCUF: 10,

REPCO: 7

SUNTV: 13,

RADIOCIT: 6

-Ve earnings

growth

NHPC: -17,

JSW: -27

HZ: -21,

VEDL: -30,JSP: Loss

Earnings

momentum

COAL: 976

SAIL: LP,NACL: 152,

TATA: 148,JSTL: 121

MMFS: 252,LTFH: 56,

BAF: 51,GRHF: 47

ENIL: 56,

DITV: LP

JUBI: 60

CCRI: 33

MTCL: 120,KPIT: 63

,ZENT: 57,NITEC: 43,TELX:

38,MPHL: 37,TECHM: 34

GUJGA: 54,OINL: 51,

ONGC: 37,IOCL: 34

PAG: 34,

JYL: 31,

UNSP: 30

BHEL: 147,

SIEM: 39,

GETD: 36

EQUITAS: 517,

AXSB: 56,

AUBANK & RBK: 35

TPWR: 23

HNDL: 27,

RINDL: 19

MASFIN &

LICHF: 29,

CIFC & PNBHOUSI:

27,IHFL: 25,

HDFC: 23,SHTF: 22

PVRL: 26,

Z: 26

TTAN: 21

NBFC

30

Media

Retail

Logistics

Technology

Oil & Gas (Ex

OMCs)

Consumer

30

27

23

18

16

DBCL: -1,

JAGP: -6

AGLL: -16

HCLT: 24,TCS:

21,HEXW: 17

RIL: 24,

AGIS: 23,IGL: 21

PARAG, HUVR &

NEST: 22,

BRIT: 21,

SKB: 19,UBBL: 18

TMX: 19,

ABB: 18

DCBB: 24,

IIB: 20,

HDFCB: 18,YES: 17

PSYS: 13,CYL: 12,

INFO: 11,WPRO: 1

IGL: 21,

GAIL: 12,

MAHGL: 4,GUJS: 1

CLGT: 15,GCPL: 14,

ITC: 13,PIDI: 9,

MRCO: 8,

DABUR: 6, APNT: 4

PLNG: -2,MRPL: -

16,BPCL: -30,

HPCL: -34

PG: -3,

HMN: -9,

FCON: Loss

HAVL: -1,CRG,

LT & VOLT:-2,

ENGR: -21,BHE: -27

FB: -23,

ICICIBC: -76

GRASIM & ACEM: -

7,DBEL: -23,SRCM: -

27,TRCL: -43,ICEM:

-51,SNGI: -77

GRAN: -3,SANL: -

7,TRP: -12,ALPM: -

16,CDH: -17,AJP: -

21,ARBP: -26,STR: -

27,LAURUS: -

32,ALKEM: -43,

LPC: -45

MM: -1,CEAT: -

4,BJAUT: -4,HMCL: -

10,AMRJ: -17,

MSIL: -19,TTMT: PL

INBK: -35,

SBIN: -57,PNB: PL

BHARTI: PL,

BHIN: -4,TCOM: -

94, IDEA: Loss

15

MEDIUM/LOW GROWTH SECTORS

Capital Goods

Banks -

Private

4

KKC: 10,

BLSTR: 9,

CROMPTON: 3

KMB: 14

-0.1

PAT DE-GROWTH SECTORS

Cement

-2

BCORP: 643,

ACC: 50

UTCEM: 21

Healthcare

-4

BIOS: 91,

JUBILANT: 75,

DIVI: 35

SUNP: 19,

SLPA: 17

DRRD: 12,

CIPLA: 9,

GLXO: 5,

IPCA & GNP: 3

BOS: 13,EIM: 12,

MSS: 6,ESC: 4,

TVSL: 2

BOB: 2

Auto

-28

AL: 56,

EXID: 38

ENDU: 24,

BHFC: 18

Banks - PSU

-88

Telecom

Loss

October 2018

20