In February 2013 we released our Equity Theme “2018”. We consrtucted two portfolios based on the 2018 theme, the 12 Stocks Portfolio benchmarked to the BSE Sensex and the 19 Stocks Portfolio benchmarked to the BSE 500 index. The theme is going extremely strong for the portfolios with outperformance of 70% for the 12 Stocks Portfolio and 45% for the 19 Stocks Porfolio since inception. Click here for the “2018” presentation. Click here for the Current Recommended 12 Stock Portfolio and Current Recommended 19 Stock Portfolio.
The theme stays strong for 2015 and our analysis suggest that strong returns on the equity portfolios will accrue over the next three years.
Will 2015 be as good as 2014 for equities?
The year 2014 has seen the return of optimism in the markets about the overall economy. A lot of factors are falling in place for India to return to the growth path. Read our Fixed Income Strategy for 2015 for analysis on Indian Economy.
Will the Equity indices continue to deliver on returns in the year 2015?
The Sensex and Nifty have given a return of 30% and 31% respectively in the last one year. Will the sectors that delivered higher returns than the benchmark indices Sensex and Nifty continue to do so in this year as well? We take a look at the sectors that did well and what to expect from them in the year 2015.
The S&P BSE Healthcare has delivered 193% and 47% returns in the last five years and one year respectively and is the best performing index since 2009. Healthcare is followed by S&P BSE FMCG, Consumer Durables, Auto, Bankex and IT indices with a return of 178%, 156%, 151%, 114% and 104% returns in the last 5 years. In the last one year the S&P BSE Consumer Durables has given a return of 66% followed by Bankex at 65%, Auto at 52% and Capital Goods at 50%. S&P Metal, Power and Oil and Gas have failed to outperform the Sensex and the Nifty.
Some of the key sector performance in the last year and the expected outlook in the next one year is discussed below.
The Indian automotive industry has struggled to show growth in the past few years. High prices of fuel along with a prolonged slowdown in the economy had dampened consumer demand for vehicles. The year 2014 saw a marginal improvement in the sales of companies. Two-wheelers led the industry this year with a 14% growth between April and November 2014. Sales in the other segments like four-wheelers and commercial vehicles fell compared to last year. Despite that, the overall industry witnessed a near 10% growth during the period.
The S&P BSE Auto Index rose 52% and 151% on a 1 and 5 year time period respectively.
The sales of Passenger Vehicles grew by 2.68 % in April-November 2014 over the same period last year. Within the Passenger Vehicles segment, Passenger Cars and Utility Vehicles grew by 3.82 % and 5.24 % respectively while Vans declined by (-) 13.70 % in April-November 2014 over the same period last year. The overall Commercial Vehicles segment registered a de-growth of 7.27% in April-November 2014 as compared to same period last year. Medium & Heavy Commercial Vehicles (M&HCVs) grew by 5.30% and Light Commercial Vehicles declined by (-) 12.90%. Three Wheelers sales grew by 14.20 % in April-November 2014 over the same period last year. Passenger Carriers and Goods Carriers grew by 15.49 % and 8.46 % respectively in April-November 2014 over April-November 2013. Two Wheelers sales registered growth of 11.84 % in April-November 2014 over April-November 2013. Within the Two Wheelers segment, Scooters, Motorcycles and Mopeds grew by 28.19 %, 6.58 % and 9.84 % respectively in April-November 2014 over April-November 2013.
In April-November 2014, overall automobile exports grew by 21.31 % over the same period last year. Passenger Vehicles, Commercial Vehicles, Three Wheelers and Two Wheelers grew by 2.79%, 14.26 %, 21.45 % and 27.04 % respectively during April-November 2014 over the same period last year.
In a scenario of lower diesel and petrol prices coupled with expected rate cuts by the RBI in the year 2015 the Automobile industry would grow at a moderate pace but higher than the growth rate seen in the current scenario. The Auto Ancillary industry that thrives on the growth of the Original Equipment Manufacturers (OEMs) would also grow at a moderate pace but higher than the current scenario. The growth is expected to be moderate because the Commercial Vehicle segment growth depends predominantly on the borrowing costs for the owners and RBI is not expected to drastically cut rates in the year 2015.
Rising incomes coupled with higher disposable income due to expected tax benefits in the budget would channel sales growth particularly for the Passenger Car Segment. Growth in Two Wheelers especially in the Scooter category would continue to remain high in the year 2015 due to ease of use and convenience for drivers along with a relatively lower base compared to motorcycles.
Bharat Forge and Tata Motors gave returns of 94% and 100% respectively to our portfolio.
The year 2014 saw some big banking events like issuing of new licences, the Jan Dhan Yojana to improve the reach of the banking sector and new norms for setting up small banks and payment banks. For the year 2014 loan growth was lower due to slowdown in the economy coupled with the consolidation mode adopted by various banks due to persistent challenges on the asset quality front. It was indicated by the Governor that the total write-off of loans made by the commercial banks in the last five years is Rs.1610.18 billion, which is 1.27% of GDP, which is a concern for the banking sector.
The S&P BSE Bankex rose 65% and 114% on a 1 and 5 year time period respectively.
Banking sector is expected to show strong growth in 2015. There is high probability that RBI will cut rates significantly in 2015, which would benefit the Banks to a significant extent. We expect further improvement in the economic environment and expect bold policy reforms by the Government of India that would bring down NPAs in the banking sector and eventually improve the balance sheet of banks.
India’s Government banks are undercapitalised. RBI financial stability report mentions Indian banks will require an additional capital of Rs.5 trillion to implement the Basel III norms, including Rs.3.25 trillion as non-equity capital and Rs.1.75 trillion in the form of equity capital in the next five years. Plans have been approved to raise about Rs 1.6 trillion (USD 25.76 billion) by selling some stake in state-run banks by 2019.This move would give sound corporate governance and make the PSU Banks efficient giving a positive outlook.
Our portfolios are overweight on the banking sector with Bank of India, ICICI Bank, State Bank of India and Kotak Mahindra Bank as our top picks in the Banking space.
Oil and Gas Industry
The oil and gas industry is one of the six core industries in India. It is of strategic importance and plays a pivotal role in influencing decisions across other important spheres of the economy. According to data released by the Department of Industrial Policy and Promotion (DIPP), the petroleum and natural gas sector attracted FDI worth USD 4.97 billion between April 2000 and September 2014.
The S&P BSE Oil and Gas Index rose 12% and -6% on a 1 and 5 year time period respectively.
Three key developments marked the oil and gas space in the year 2014. The Indian government deregulated diesel prices and the oil marketing companies would be able to fix the price of diesel without any government interference. This helps in reduction of the government’s expenditure on oil subsidy and eases financial pressure on the oil companies.
Crude Oil prices in the international markets fell 50% from USD 116 per barrel to USD 57 per barrel in the year 2014.
The third development benefits gas companies. The government increased the price of gas to USD 5.61 per million metric British thermal units (mmbtu) with a promise to increase the prices further in a gradual method on a yearly basis. This makes selling of gas more profitable for companies.
The Gross Refining Margins and the Net Refining Margins for the oil industry tend to decline with the decline in the price of Crude Oil. Volumes are expected to show strong growth on the basis of decline in the prices of petroleum products viz. Petrol, Diesel, Aviation Turbine Fuel and other distillates.
The downstream companies are expected to show rise in profitability coupled with improvement in margins due to deregulation of Petrol and Diesel. Refiners have already started to show improvement in profitability and margins in Q2FY15. Deregulation of Gas prices would improve the profitability and margins further for the industry in the year 2015. Overall it is a golden period ahead for the oil marketing companies that have been reeling under the pressure of the Government and bearing losses for a long time.
Hindustan Petroleum Corporation Ltd., Bharat Petroleum Corporation Ltd. And Indraprastha Gas Ltd. are our top picks in the Oil and Gas space.
India is one of the fastest-growing IT services markets in the world. It is also the world’s largest sourcing destination accounting for approximately 52% of the USD 124-130 billion market. The country’s cost competitiveness in providing IT services continues to be its USP in the global sourcing market.
The S&P BSE IT Index rose 17% and 104% on a 1 and 5 year time period respectively.
The Indian IT industry grew by around 15% in the year 2014. This is because it continues to attract more projects as foreign companies in the US and Europe outsource their IT needs to Indian companies. Companies continue to remain optimistic about the near future. This is because of the recovery in the US economy. The Indian IT industry is expected to add revenues of USD 13-14 billion to the existing revenues by FY15 according to National Association of Software and Services Companies (NASSCOM).
According to data released by the Department of Industrial Policy and Promotion (DIPP), the computer software and hardware sector attracted FDI worth USD 13,238 million between April 2000 and September 2014.
Margins would continue to remain under pressure for the IT companies as competition is expected to remain tough in the industry in the year 2015. Management of foreign exchange losses was a worry for most of the companies in the past but profitability has improved due to depreciation of the INR against the USD.
Given positive developments in the political scenario in Indian the INR is expected to remain stable in the face of broad strength in the USD as the US economy continues to show improvement on the macroeconomic front. Read our Currency Strategy Note for Analysis on USD.
Enterprise Digital Transformation presents a good opportunity for the IT industry in the near future. Our study reveals that enterprises will need to spend USD 70 Billion in 2015 in order to stay competitive against new emerging digital native organizations. This spend is expected to grow at a CAGR of 26% to reach USD 230 billion by 2020. Of this, enterprises in North America are expected to take a lead with a spend of USD 26 billion, which is expected to reach USD 73 billion by 2020.
Increase in spending from the BFSI and Healthcare segments is expected to continue as the US economy shows further recovery in growth of its GDP. Europe would continue to struggle in terms of GDP growth in the year 2015 due to which revenue contribution from the continent for the IT companies would show only moderate growth.
Cyient Ltd and NIIT Technologies are our top picks in the Information Technology space.
Healthcare has become one of India’s largest sectors – both in terms of revenue and employment. The industry comprises hospitals, medical devices, clinical trials, outsourcing, telemedicine, medical tourism, health insurance and medical equipment. The Indian healthcare industry is growing at a tremendous pace due to its strengthening coverage, services and increasing expenditure by public as well private players.
The S&P BSE Healthcare Index rose 47% and 193% in a 1 and 5 year time period respectively.
The Indian healthcare delivery system is categorised into two major components – public and private. The Government i.e. public healthcare system comprises limited secondary and tertiary care institutions in key cities and focuses on providing basic healthcare facilities in the form of primary healthcare centers (PHCs) in rural areas. The private sector provides majority of secondary, tertiary and quaternary care institutions with a major concentration in metros, tier I and tier II cities.
Indian pharma companies would continue to experience strong growth in the U.S. as the overall growth prospects remain strong despite challenges in form of increased scrutiny by US FDA. The industry is expected to take advantage of the patent expiration wave in the US, steady demand from emerging markets and favourable foreign exchange scenario. Most of the leading players are now generating a sizeable proportion of their revenues from international markets, especially U.S.
According to data released by the Department of Industrial Policy and Promotion (DIPP), Healthcare attracted foreign direct investment (FDI) worth USD 2,494 million between April 2000 and September 2014.
The Indian healthcare industry is projected to continue its rapid expansion, with an estimated market value of USD 280 billion by 2020. The sector is poised to grow to USD 100 billion by the year 2015.
Cadila Healthcare and Biocon are our top pics in the pharma space.
In an expected scenario of declining interest rates in the year 2015 followed by further improvement on the macroeconomic front and with a newly elected stable Government at the Centre, most of the sectors in our 2018 theme would do well. There are some sectors that are expected to outperform the others in this scenario. Banks, FMCG and Consumer Durables are expected to deliver better than the other sectors while IT and Healthcare would deliver higher growth than the current scenario due to positive economic developments in the US economy. Automobile sector has shown some recovery in the last one year but has struggled to sustain growth on a consistent basis and would deliver higher growth if interest rates are reduced drastically in the next one year. Fall in crude oil prices and increase in the gas prices would have a mixed effect in terms of volume and Sales growth for the Oil and Gas sector. A fall in the crude oil price would improve the volume of products sold and rise in the gas prices would have an adverse effect. Rise in prices of gas would lead to rise in the sales figures and decline in price of crude oil would decrease the sales figures. Oil Marketing companies would continue to show improved profitability on the basis of deregulation of petrol and diesel prices.