IDirect MarketStrategy 2014

Market Strategy 2014
December 26, 2013

December 27, 2013
Market
Strategy
Deal Team
At2014
Your Service
1
Where are the markets headed in 2014?
How would general elections influence the markets?
Would the economy recover progressively?
How would the FM bridge the fiscal gap?
Has inflation peaked out to warrant a rate cut?
Is the worst over for the rupee?
What next as tapering begins?
What are the potential speed breakers for the markets?
Are cyclicals a good bet this year?
10
Which sectors and stocks will find favour?
Where
are the
markets
Deal Team
At
Your headed
Servicein 2014?
The market performance has been in line with Sensex earnings in the past
year. After declining 9% in the middle of the year led by a slew of
negative news flows on both the global and domestic front, markets are
up 8% this year. After two subdued years with negligible growth, Sensex
earnings are expected to grow 1718% in FY14 and FY15 primarily due to
the low base effect and earnings upgrades in select stocks
On the global front, India could face stiff competition from China for global
funds. Chinese markets are down 8% YTD, as there were apprehensions
over leadership change. With a smooth transition in leadership, relatively
higher economic growth and inexpensive valuations, China is better
placed than India, which faces challenges on all three parameters in FY15
We expect the Sensex to trade at 15x one year forward EPS of 1543 (25%
of FY14E EPS | 1361 and 75% FY15E EPS of | 1603) at 23000 by
December 2014. Correspondingly, we expect the Nifty to reach 6900.
However, if corporate earnings and economic recovery do not pan out as
expected, we will continue to see volatility ridden markets next year
Though sentiments have already rebounded, an economic recovery and

broad based earnings improvement will take time. Though some of the
economic data points have shown signs of bottoming out, an all-round
improvement in the macro situation still seems distant
With limited number of potential alliance partners, a Modi-led NDA may
find it difficult to corner a majority to form a government. We would
witness an increasing dominance of regional parties, which may render
the eventual alliance weaker, and puncture positive sentiments.
Nonetheless, the market reaction to election results may be a short-term
phenomena. Sentiments would pick up with implementation of positive
and growth oriented reforms, along with improvement in other
macroeconomic factors
Strategy 2014 - Sensex & Nifty Target

Sensex EPS
Weightage
Target Multiple
Sensex / Nifty Target
FY14E
1361
25%
15x
23000 / 6900
FY15E
1603
75%
Since we do not expect the economy to rebound meaningfully in the near

future, we continue to favour defensive & quasi defensive sectors, which
have healthy balance sheets. We like FMCG (growth to inch up, valuation
modest in select pockets); auto (attractive valuation, good earnings delta
in case of recovery). Also, we like private banks (sustained growth, better
asset quality), telecom (higher regulatory clarity, de-leveraging) & cement
(positive operating leverage, limited capacity addition)
The government may be able to restrict the fiscal deficit to the 4.8% of
GDP target by cutting plan expenditure by around 19% (| 1.04 lakh crore,
~ 1% of GDP) in FY14. However, even as non-plan expenditure continues
to rise on the back of various social benefit schemes & subsidies and a
challenging economic environment weighs on receipts, fiscal deficit
challenges may resurface in FY15
We are neutral on IT (demand intact, rich valuation), pharma (rich

valuation, tepid domestic growth), oil & gas (earnings dependent on
deregulation, limited volume growth) & media (earnings visibility intact,
rich valuation)
We expect WPI to come off by around 100 bps and CPI by 200 bps from
current levels to 6.5% and 8-9%, respectively, for FY15. However, the
pullback in inflation may not be enough to bring it within RBIs comfort
zone. Hence, we do not expect rate cuts during majority of the next
calendar year. We believe interest rates are nearing their peak, and we
may witness one more rate hike of 25 bps if inflation does not soften as
expected
We remain negative on capital intensive sectors like PSU banks (asset

quality concerns, earnings volatility), capital goods & infra (capex yet to
revive, policy challenges to remain), power (regulatory overhang,
uncertain demand), metals (low domestic growth, price volatility), real
estate (muted earning cycle, leverage remains high), shipping (earnings
stressed, increased tonnage capacity)
Domestic equity markets had reacted vigorously to initial talks of QE

tapering. However, with a slew of measures from the RBI and government
and receding current account deficit, India looks better prepared for
eventual liquidity tapering. We believe QE tapering would eventually turn
out to be a non-event
Our top picks for the year are ITC, Bajaj Auto, Idea Cellular IndusInd Bank
& Titan Industries in the large cap space and Marico, Shree Cement and
Oberoi Realty in the midcap space.
Sensex
weightage
rebalancing:
Deal Team
At Your
ServiceSectoral earnings leaders and laggards
Sensex EPS Breakup
1,600
1,400
EPS CAGR (FY09-13): 12.6%
1,200
(|)
724
800
400
11
200
0
1,165
1,090
923
1,000
600
166
88
56
152
96
155
174
66
88
80
217
107
191
FY09
FY10
278
FY12
Oil and Gas
Auto
50%
47.1
51.8
60%
40%
20%
0%
14.1
21.4
7.7
FY09
12.0
12.6
40.7
13.8
33.1
40%
17.9
30%
20.8
23.9
29.0
14.9
20.1
21.6
19.9
FY10
FY11
FY12
FY13
20.7
Defensives
Financials
Export oriented
225
338
374
438
FY14E
FY15E
Others*
Total
Sectoral EPS CAGR over FY09-13 (%)
100%
56.8
281
201
Metals and Mining
Sectoral Contribution to Sensex EPS
229
73
168
FY13
Capital Goods
130
179
94
193
69
252
164
38
153
79
225
139
FY11
IT
1,165
127
124
182
79
235
157
157
161
76
189
123
227
Banking and NBFC
80%
1,603
226
1,361
42.7%
21.6%
20%
19.7%
10%
-1.6%
0%
-10%
Defensives
Financials
Export oriented
Industrials
Industrials
Source: Bloomberg, ICICIdirect.com Research

(Top) Others represents FMCG, Power, Pharma, Telecom Real Estate; (Bottom) Defensives represents FMCG and Auto, Financial represents Banks and NBFCs, Export oriented represents IT and Pharma, Industrials
represents Oil and Gas, Capital Goods, Metals, Power, Telecom and Real Estate
Market
Strategy
Deal Team
At2014
Your Service
1
Is the worst over for Rupee?
10
How
elections
influence the markets?
Dealwould
Teamgeneral
At Your
Service
election results as these states contribute 72 seats (13% of the total
number of Lok Sabha seats) and historically BJP had been strong in two
out of the four states (MP and Chhattisgarh)
Political Landscape Is NDAs resurgence enough for 2014

elections?
A series of opinion polls conducted by different media houses in JanuaryOctober 2013 suggest a sharp increase in the number of seats for the BJP
led NDA, with most gains coming from the anti-incumbency facing
Congress led UPA losing seats. While we do believe the NDA will gain
from the anti-incumbency factor and projection of a popular primeministerial candidate, it may be difficult to achieve the majority number of
272 post elections, given the limited number of potential alliance partners.
Opinion Polls - Historically way of the mark

2004 results
AC Nielsen
Outlook
Actual
Outcome of various opinion polls

Year 2013
Jan-Mar
Apr-May
May
UPA NDA UPA NDA UPA NDA

Times Now-C Voter
Headlines Today-C Voter
ABP News-Nielsen
128
184
Jul
UPA
134
132
156
UPA
117
Chhattisgarh (90) Chg
NDA
186
179
CNN-IBN/The Hindu-CSDS
CNN-IBN/The Week-CSDS
INC
39 +1
BJP
49
2
Others
136 206
The Week-Hansa Research
184
Congress
100
101
145
2009 results
Star Nielsen survey
CNN-IBN
The Week
Business Standard
TOI
Actual
BJP
153
135-150
140
137
135
115
Congress
155
145-160
144
119
154
204
State Election: BJP sweeps 3 states; emerges largest party in Delhi
Oct
NDA
BJP
200
197
138
197
Delhi (70) Chg

8
-35
-1
32
+9
30 +26
MP (230) Chg Rajasthan (200) Chg

58
-13
165 +22
7
-9
21
-75
162 +84
16
-10
Non-NDA parties dominating in larger constituency
149-157 172-180
The six major states, which constitute ~54% of the total Lok Sabha seats
are largely dominated by either UPA or regional parties. NDA has only 58
seats out of 291 Lok Sabha seats from these regions with no major allies
from Andhra Pradesh (AP), Uttar Pradesh (UP) and West Bengal (WB).
UPA, which formed the government in 2004 and 2009, has major allies
and seat counts from these states. On the other hand, it will be difficult to
draw any conclusions from the outcome of the recent state elections
where the BJP has outperformed their close opponents as these four
states constitutes only 13% of the total Lok Sabha seats. We believe the
performance of regional parties would be a decisive factor in the
upcoming elections where historically UPA has a clear edge over NDA in
terms of coalition.
134-142 187-195
A lot of factors like demographics, voter-turnout, results in important

states, vote share swings, caste based politics, social media, etc. will play
an important role in the 2014 general elections. This makes the outcome
highly unpredictable. Hence, we believe the opinion poll numbers should
be taken with a pinch of salt. The opinion polls in 2004 and 2009 elections
were way off the mark
In the recent state elections in four major states, BJP won in Chhattisgarh,
MP & Rajasthan and emerged as the largest party in Delhi. Although the
victory of BJP does show anti-incumbency, we believe it would be
imprudent to draw conclusions about national elections from these state
Source: Media sources, ECI, ICICIdirect.com Research
Political
landscape
Is Service
NDAs resurgence enough for 2014 elections???
Deal Team
At Your
Increasing role of alliance partners
Major Lok Sabha constituencies where regional parties have significant presence
Andhra Pradesh
BJP
INC
TDP
TRS
Others
Total
2004
0
29
5
5
3
42
2009
0
33
6
2
1
42
Bihar
BJP
JD (U)
RJD
INC
Others
Total
2004
5
6
22
3
4
40
2009
12
20
4
2
2
40
Maharashtra
BJP
INC
Shiv Sena
NCP
Others
Total
2004
13
13
12
9
1
48
2009
9
17
11
8
3
48
TamilNadu
BJP
INC
DMK
AIADMK
Others
Total
2004
0
10
16
0
13
39
2009
0
8
18
9
4
39
West Bengal
BJP
INC
TMC
CPM
CPI
Others
Total
2004
0
6
1
26
3
6
42
2009
1
6
19
15
0
1
42
UP
BJP
INC
SP
BSP
RLD
Others
Total
2004
10
9
35
19
0
7
80
2009
10
21
23
20
5
1
80
Election Year
1998
1999
2004
2009
Government
NDA
NDA
UPA
UPA
BJP/INC seats Partners seats Partner seats as % of Alliance

181
73
28.7
182
116
38.9
145
129
47.1
206
80
28.0
Vote share of Congress and BJP

Election Year
1998
1999
2004
2009
Congress
Vote%
25.8
28.3
26.5
28.6
BJP
Vote%
25.6
23.8
22.2
18.8
Seats
141
114
145
206
Seats
181
182
138
116
The six major states, which constitute ~54% of the total Lok Sabha seats,
are largely dominated by either UPA or regional parties. NDA has only 58
out of 291 Lok Sabha seats from these regions with no major allies from
Andhra Pradesh (AP), Uttar Pradesh (UP) and West Bengal (WB).
We believe the performance of
regional parties would be a
decisive factor in the upcoming
elections where historically UPA
has a clear edge over NDA in
terms of collaborations.
Increasing role of alliance
NDA has lost almost all its major

allies except SAD and Shiv Sena.
This implies that UPA still
commands an edge in terms of
coalition
Indian politics in the last 15 years has evolved around alliances with
regional parties. Alliances played a major role for the BJP during 1999
government formation wherein it retained its quota of 182 seats despite a
drop in vote share against the Congress. In 2004, the Congress realised
that and pooled alliance partners and formed the government despite a
decline in its vote share compared to 1999. Moreover, the BJP also lost its
important allies between 1999 and 2009 (JDU, BJD, TMC, etc.) as well as
vote share
Source: Media sources, ECI, ICICIdirect.com Research
BJP Alliance partners

NDA allies
1999 2004 2009
JD(U)
18
20
Shiv Sena
21
12
11
DMK
15
BJD
12
11
TMC
10
PMK
Indian National Lok Dal
MDMK
National Conference
SAD
Political
landscape
Is Service
NDAs resurgence enough for 2014 elections???
Deal Team
At Your
Historical 6 months Sensex performance post/pre central election
However, economic reforms to take their own due course
Year
1991
1996
1998
1999
2004
2009
Historically, the impact of general elections has been very less on the
economy as any economic reforms are a long term process to be
implemented at the ground level. Therefore, the market reaction to the
election would be a short-term phenomenon
We highlight that market sentiments could improve only with the start of
the positive outcome of economic reforms coupled with other economic
factor (such as crude price, gold import, higher tax revenues)
Macro indicators show little/no correlation with election year

Year
31 Mar 15E
31 Mar 14E
31-Mar-13
31-Mar-12
31-Mar-11
31-Mar-10
31-Mar-09
31-Mar-08
31-Mar-07
31-Mar-06
31-Mar-05
31-Mar-04
31-Mar-03
31-Mar-02
31-Mar-01
31-Mar-00
31-Mar-99
31-Mar-98
31-Mar-97
31-Mar-96
Real GDP growth (%)

5.4
4.8
5.0
6.2
9.3
8.6
6.7
9.3
9.6
9.5
7.1
8.0
3.9
5.4
4.1
8.0
6.7
4.3
8.0
7.3
Fiscal Deficit % GDP

5.0
4.8
5.2
5.8
4.8
6.5
6.0
2.5
3.3
4.0
3.9
4.3
5.7
6.0
5.5
5.2
6.3
5.7
4.7
4.9
CAD% GDP
2.3
2.6
4.8
4.2
2.8
2.8
2.3
1.3
1.0
1.2
0.4
-2.3
-1.2
-0.7
0.6
1.0
1
1.4
1.2
1.6
Source: RBI, Bloomberg, ICICIdirect.com Research
Pre Election Post Election

Party
Prime Minister
-38%
144%
INC
P.V. Narshimha Rao
-6%
-10% BJP+ United Front A.B. Vajpayee, HD Deve Gowda, IK Gujral
7%
-22% BJP+ United Front
A.B. Vajpayee
-29%
1%
NDA
A.B Vajpayee
-17%
27%
UPA
Manmohan Singh
25%
33%
UPA
Manmohan Singh
Market
Strategy
Deal Team
At2014
Your Service
1
10
Would
the economy
recover
progressively?
Deal Team
At Your
Service
Real GDP growth (%)
We dont expect economy to recover progressively from current growth

levels in CY14 and accordingly expect the nominal GDP (market price) and
real GDP growth to improve to 13% i.e. | 126.5 lakh crore and 5.4% i.e. |
60.8 lakh crore respectively in FY15E as against expected decade low
growth of 4.8% in FY14. Our confidence stems from the facts that most of
the lead economic indicators like IIP, M3, CV sales, etc not pointing
towards near term recovery, Agri and Exports growth have helped
Q2FY14 overall growth pickup however uptick in manufacturing yet not
significant, GFCFs (proxy for investment) incremental contribution
(~21%) to growth is at its lowest level since 2004, thereby pointing
towards poor capacity creation for future growth
FY13
5.0
11.7
55054
94610
7.4
7.5
8.1
54.4
-10.6
-4.8
4.8
5.2
FY14E
4.8
11.7
57722
106420
6.8
8.0
8.6
60.2
-8.6
-2.6
3.4
4.8
FY14E
4.5
6.2
2
280
Leading Indicators
FY15E
3.0
6.8
3
(%)
200
160
120
Real GDP
Real credit
Commercial Vehicles
FY15E
5.4
13.0
60831
120254
6.2
7.5
8.0
60.0
-7.7
-2.3
3.1
4.8
Agri GDP
Real Deposit
IIP manufacturing
H1FY14
H2FY13
H1FY13
H2FY12
H1FY12
H2FY11
H1FY11
H2FY10
H1FY10
H2FY09
H1FY09
H2FY08
H1FY08
H2FY07
H1FY07
H2FY06
H1FY06
80
Key Parameters
FY12
6.5
15.0
52436
89749
8.9
8.5
8.5
47.9
-10.1
-4.2
3.7
5.8
FY13
1.9
7.1
2
240
Agriculture which contributes ~14% of our GDP and provides

employment to almost half of its work force , is expected to aid overall
economic growth though not with the same intensity in FY15 as its
growth is expected to come down to 3% from 4.5% growth estimate of
FY14E. However, higher than expected Agri growth in FY14 can turn out
to be a positive surprise and can be expected to spur the slowing down
economy with its wide backward and forward linkages.
(%)
Real GDP
Nominal GDP (MP)
Real GDP (| bn)
Nominal GDP (MP) (| bn)
Inflation WPI (Average)
Repo rate (March)
G-Sec (March)
INR (Avg | / $)
Trade Deficit (% of GDP)
Current account deficit (% of GDP)
Capital account deficit/surplus
Fiscal deficit (% of GDP)
Real GDP (%)

Agri
Services
Industry
WPI primary
Real corp sales
M3
We have evaluated key lead indicators (mentioned in the chart) that

provide early signals about the movement in the economy. For the
purpose of assessment, we have deflated these indicators to real terms
and further indexed from FY06. As seen in the Leading Indicators chart, till
H1FY14, none of the readings have provided any signals of recovery. Real
growth has been higher and consistent only across financial services
segments like credit, deposit growth. However, Commercial Vehicles (CV)
sales volume and IIP manufacturing are yet to show signs of revival. WPI
primary article is depicting high inflation in food prices every quarter. Agri
GDP growth came strong at 4.8% in Q2FY14, but still remains a small
contributor on absolute basis and has not grown in real terms over the
years as seen in the indexed chart above
Source: RBI, ICICIdirect.com Research
10
Still
to see
GFCF
Dealtime
Team
Atrevival
Your in
Service
GFCF contribution incrementally declining in GDP
80
Savings Rate in India
70
40
58
40
42
30
20
10
35
30
31
37
43
28
28
(%)
(%)
60
50
32
23
21
0
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13
Gross fixed capital formation
13
25
31.3
30.3
36.9
32.9
32.4
33.8
32.3
31.7
31.8
31.7
11.9
11.3
11.7
10.2
12.2
9.1
Q1
Q2
FY14 FY14
30.8
30.6
29.8
29.6
20
15
10
18
34.6
33.4
FY06
FY07
Savings % GDP
FY08
FY09
FY10
Financial Savings % GDP
FY11
7.7
FY12
FY13
GFCF % GDP
The share of GFCF towards GDP growth has dipped to ~21% in FY13 and is still lower in H1FY14 compared to periods of sustained growth during FY04-08
where it contributed more than 40% to overall growth. The capex cycle is still struggling as indicated by jump in projects stalled as a % of implemented
projects, cost escalations, decline in capex based funding through banks/FIs. Revival of GFCF is crucial for growth sustenance which in-turn requires stable
savings to fund future growth
Domestic savings which feeds the investment, has also taken a knock declining to 29.6% respectively in FY13 compared to an average savings rate of 34%
over FY05-FY11. Within overall savings, net financial Savings (% of GDP) has declined to 7.7% in FY13 from 12% earlier. The recent efforts by RBI signal a
higher focus to curtail inflation by raising interest rates in the system. This would likely have a positive impact on deposit growth (8%- YTD FY14), which can
eventually lead to money moving into financial savings (currently at 7.7% of GDP in FY12) and thereby capital formation via credit.
Accordingly, we believe the focus of the policymakers would be to revive financial savings though deposits and other long term financial savings instruments
which can be channelized through credit for capacity creation.
Source: RBI, ICICIdirect.com Research

(Top Left) Financial Savings data available only till FY12
11
When
do we expect
theService
economy to revive?
Deal Team
At Your
Project implementation & growth
120
100
80
60
40
20
0
4000.0
3000.0
2000.0
1000.0
0.0
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
Declining capex based on funding by banks / FIs / ECB

(%)
(000' crores)
5000.0
Analysing the funding by banks and Financial institutions and via ECB/
FCCB for capital expenditure by Indian industries, there is a clear declining
trend.
Pvt. projects under implementation
% Govt project growth
% Pvt. Project growth
(%)
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14 Beyond FY14
972
1,653
2,091
2,768
3,079
3,367
3,290
2,374
1,388
ECB/FCCB
220
459
373
417
288
318
383
535
227
77
1,192
2,112
2,464
3,185
3,367
3,685
3,673
2,909
1,615
801
724
We dont see major change in the current tepid capex scenario till
H1FY15, primarily due to general election being scheduled in MayJune2014. Also, for any progress to be visible post new government, it
can be seen only by H2FY15.
Stalled projects as a % of implemented projects

6.0
5.0
4.0
3.0
2.0
1.0
0.0
-1.0
FY06
Banks/FIs
Total
FY13
Govt. projects under implementation
In | crore
Contribution of sectors in incremental real GDP

4.8
2.6
1.9
0.8
1.1
0.2 0.1 0.4
FY05
FY06
1.7
0.9
FY07
3.4
1.8
1.7
1.6 0.9
FY08
Government
FY09
For FY14, Incremental GDP is expected to be supported by financial and

agri section contributing 34.4% and 12.8% respectively. Whereas FY15 is
expected to see marginal revival in industrial growth contributing 8.1% vs
2.3% in FY14, (assuming marginal uptick in IIP) which shall lead Real GDP
to grow at 5.4% in FY15
2.8
1.2 1.6
1.0
0.9 0.9 0.7 1.1 0.81.1
FY10
Private
FY11
FY12
1.4
0.4
So overall, for FY14E real agriculture gdp is expected to grow by 4.5%

better than previous year, services at 6.2% and Industry at 1.9% taking
overall growth to 4.8%.
FY13
Contribution to Real GDP
Total
Real GDP (%)

Agri
Services
Industry
The recent efforts by RBI signal a higher focus to curtail inflation by raising
interest rates in the system. This would likely have a positive impact on
deposit growth (8%- YTD FY14), which can eventually lead to money
moving into financial savings (currently at 7.7% of GDP in FY12) and
thereby capital formation via credit. This has ability provide a much
needed boost to the economy for revival.
Source: RBI, CMIE, ICICIdirect.com Research
12
FY13
13.7
67.4
18.9
FY14E
13.6
68.1
18.2
FY15E
13.3
68.8
17.8
Market
Strategy
Deal Team
At2014
Your Service
1
10
13
How
FMYour
bridge
the fiscal gap?
Dealwould
Teamthe
At
Service
Maneuvering the fiscal target through rationalisation of Plan Expenditure
A sustained cut in Plan expenditure (at the cost of growth) would be the key lever for the govt. to attain its budgeted fiscal deficit target of 4.8% in FY14,
given the weaker revenue receipts, delay in disinvestment process and higher subsidy burden (food & petroleum).
We anticipate a sharp cut of ~19% in Plan expenditure (| 1.05 lakh crore or 0.9% of GDP ) by the govt. in FY14E. However, the challenges are expected to
resurface again in FY15E as the slower growth would continue to weigh on receipts, along with higher subsidies (mainly food).
Government Revenue & Expenditure

Particulars
Revenue Receipts
Net Tax revenue
Non Tax Revenues
Dividend
Economic services
Others
Total
Capital Receipts
Recovery of Loans
Disinvestments
Total
Total Receipts [A]
Non plan Expenditure
Subsidies
Fertilizer
Food
Petroleum
Other subsidies
Other expenditure
Total
Plan Expenditure
Total Expenditure [B]
Fiscal deficit [B-A]
GDP estimates
Fiscal deficit as % of GDP
FY14BE
FY14IE Difference
Comments
884,078
844,434
(39,644) Tax revenue to fall short of budgeted target led by poor macro environment
73,866
62,973
35,413
1,056,330
83,000
54,013
35,413
1,016,860
9,134 Higher dividend boosted by superior RBI dividend in FY14

(8,960) Expect shortfall in spectrum revenues
(39,471)
10,654
55,814
66,468
1,122,798
10,654
36,266
46,920
1,063,780
(19,548) Expect shortfall of ~| 19500 crore in disinvestment proceeds given the tough capital market conditions and delay in disinvesment process
(19,548)
(59,019)
65,972
75,972
10,000
90,000
100,000
10,000
65,000
92,298
27,298 Rupee depreciation and spill over effect of last year would lead to an additional burden of ~| 27,300 crore
10,112
10,112
878,891
871,364
(7,527)
1,109,975
1,149,746
39,771
555,322
450,646 (104,676) Expect 19% cut in plan expenditure
1,665,297
1,600,393
(64,904)
542,499
536,613
(5,886)
11,371,886 11,223,094
NA
4.8%
4.8%
Govt. to meet its fiscal deficit target albeit at a cost of lower future growth
Source: Budget Documents, MoF, ICICIdirect.com Research
14
Additional
fiscal
and key challenges before the government
Deal Team
Atburden
Your Service
No respite from Non Plan Expenditure
Looking at the current fiscal position (till October, 2013), non-plan
expenditure has already been reached close to 60% of total budgeted
target (includes various social schemes & subsidies) implying that FY14
could again see a higher non-plan expenditure largely contributed by
subsidies.
This would increase governments burden further by 10-13% (CPI-rural is

10.5% and CPI-Agricultural labour (CPI-AL) is 12.5%), that is |3465 - |4125
crore, on the current years allocation of |33,000 crore towards the
scheme.
Revised Allcation of MGNREGA

Particulars
MGNREGA FY14E Budget (| crore)
Index
CPI (AL)
CPI (Rural)
Additional Burden (| crore)
CPI (AL)
CPI (Rural)
Revised Allocation (FY14E Budget) (| crore)
CPI (AL)
CPI (Rural)
Subsidy pain not to subside

Among the non-plan expenditure, subsidies have been a significant drain,
which are further likely to go up to 2.4% of GDP (from earlier estimates of
2.0% of GDP) on account of higher food prices and weak rupee.
Fuel subsidies were budgeted to fall by 30% to | 65,000 crore but rupee
depreciation and spill over effect of earlier budget would lead to an
additional burden of | 27,300 crore in this fiscal.
Linking MGNREGA with inflation could increase the cost further
The government is likely to link the wages under MGNREGA (Mahatma
Gandhi National Rural Employment Guarantee Act) with the consumer
price inflation index in lieu of the rising food inflation in the country.
Increase of |3465 crore due to

indexation with CPI (Rural)
| crore
27000
29700
39060
40095
FY11
FY12
33000
33000
FY13
FY14E
9000
0
FY10
MGNREGA
4,125
3,465
37,125
36,465
We expect revenue shortfall of ~|14,880 crore from the telecom sector.

The government had initially budgeted for |40847 crore from Other
communication Services. In the first quarter of the fiscal, government has
collected | 4556 crore in form of license fees and spectrum usage
charges. In FY14E, we expect the government to collect about |17,975
crore in form of recurring revenue and | 7992 from spectrum auction to
be held in January 2014. Hence the total revenue from telecom sector
would be close to | 25967 crore in FY14E.
36000
18000
12.5%
10.5%
Lower growth, challenging economic environment to weigh on receipts

Amid slowing economy growth and upcoming elections, the growth in tax
revenues is expected to moderate further to 13.1% (net | 8,39,000 crore)
vs. projected net tax revenue growth of 19.1% (i.e. net | 8,84,000 crore).
MGNREGA allocation could go up ...

45000
| crore
33,000
Increase
Source: Economic Advisory Council Discussion Paper, Ministry of Agriculture, Budget Documents, MoF, ICICIdirect.com Research
15
Additional
fiscal
and key challenges before the government
Deal Team
Atburden
Your Service
Revenue from Telecom to fall short of target
Particulars
Expected revenue from spectrum auction
Other recurring revenue
Total Revenue from Telecom Sector
Estimated revenue from telecom (FY14BE)
Shortfall from telecom revenue
Disputed Tax cases

| crore
7,992
17,975
25,967
40,847
14,880
MNC's tax disputes

Nokia
Vodafone
IBM
Royal Dutch Shell
Achieving 4.8% Fiscal deficit target in FY14E comes with riders

Despite this, we believe there will be a need for successful upcoming
spectrum auction and speeding up in disinvestment process to meet the
deficit target. In addition, the government will have to take anti-growth
steps to rein in spending cuts majorily in plan expenditure (we build in
19% cut from the budgeted target in plan expenditure). Given the
challenging macro & time constraints, the government is also weighing an
option of taking higher dividends from PSUs to meet up the shortfall of
disinvestment target. Taking these in to our consideration, we project
4.8% fiscal deficit in FY14E.
Disinvestment proceeds could again miss its target

Due to the challenging equity market conditions and delays in the
disinvestment process by the government we expect a shortfall of
~|19500 crore from disinvestment proceeds. The government could
resort to higher dividend income from the PSUs in order to compensate
for the shortfall in disinvestment target.
Disinvestment Proceeds hinges on non-govt divestment

Particulars
Disinvestment Target (FY14E)
Expected disinvestment proceeds
PSU's
Power Grid
Coal India
Indian Oil
Divestment of stake in non govt. cos.
Expected disinvestment by March,2014
Shortfall in target
Amt. (| crore)
21,000
11,200
5,357
15,220
| crore
55,814
Further strain on FY15E budget due to NFSB

Food subsidy bill will leg-up by ~|10,000 crore in the FY14E budget
(~|50,000 crore in the FY15E budget) following the implementation of the
National Food Security Bill (NFSB) and rising food prices.
1,666
8,500
4,500
21,600
36,266
19,548
Expenditure for NFSB

Subsidy burden due to NFSB
Other Expenditure
Exp. To procure extra food grains
Cost of Handling Grains, Logistics, PDS reforms etc.
Total Expenditure
Revenues from Disputed tax cases could be a saviour

The government is also aggressively pursuing settlement of outstanding
tax claims against MNCs, ~|52800 crore (refer to table on top right), to
make up a revenue shortfall and circumvent the threat of credit rating
downgrade. We believe that any inflow from this source could be a kicker
for the budget.
Offtake of 100% As per current MSP

92060
106446
22120
15000
129180
22120
15000
143566
Increase in MSP further in FY15E could swell up this figure further straining
the fiscal deficit target
Source: Trai, Budget Documents, MoF, ICICIdirect.com Research
16
How
look like?
Dealwould
TeamFY15
At budget
Your Service
Government Revenue & Expenditure
Revenue Receipts
Net Tax revenue
Non Tax Revenues

Dividend
Economic services
Others
Total
Capital Receipts
Recovery of Loans
Disinvestments
Total
Total Receipts
Non plan Expenditure
Subsidies
Fertilizer
Food
Petroleum
Other subsidies
Other expenditure
Total
Plan Expenditure
Total Expenditure
Fiscal deficit
GDP estimates
Fiscal deficit as % of GDP
FY14BE
FY14IE
FY15IE
YoY (%)
Comments
884,078
844,434
964,443
73,866
62,973
35,413
1,056,330
83,000
54,013
35,413
1,016,860
65,000
54,013
38,051
1,121,507
(21.7) We budget | 65000 crore of dividend receipts in FY15 adjusting for higher RBI dividend which govt. received in FY14.
We build in similar economic services receipt based on flattish spectrum & other receipt
7.5
10.3
10,654
55,814
66,468
1,122,798
10,654
36,266
46,920
1,063,780
11,719
30,000
41,719
1,163,227
10.0
(17.3) We build in disinvestment proceeds of ~| 30,000 crore in FY15
(11.1)
9.3
65,972
90,000
65,000
75,972
100,000
92,298
75,972
143,566
71,538
10,112
878,891
1,109,975
555,322
1,665,297
10,112
871,364
1,149,746
450,646
1,600,393
10,515
971,239
1,272,831
518,243
1,791,074
542,499
11,371,886
536,613
11,223,094
627,847
12,682,097
4.8%
4.8%
5.0%
14.2 We estimate 14.2% YoY growth in FY15's net tax collection led by ~15% & 18% growth in corporate tax and service tax
respectively. Custom duty and excise duty collection is estimated at ~7% given the modest import and manufacturing
growth respectively.
43.6 Food subsidy is expected to grow by ~42% YoY assuming the full implementation of food subsidy bill.
(22.5) Petroleum subsidy is expected to decline by ~23% assumping monthly diesel price price hike of 50p/lt and full
implementation of LPG susidy cap.
4.0
11.5
10.7
15.0 We budget a 15% YoY growth in Plan expenditure given the lower base since the last 2 years.
11.9
13.0
We expect the fiscal deficit at 5% in FY15 as we believe that slower growth would continue to weigh on receipts.
Source: Budget Documents, MoF, ICICIdirect.com Research
17
Market
Strategy
Deal Team
At2014
Your Service
1
10
18
Has
outService
to warrant a rate cut?
Dealinflation
Team peaked
At Your
We believe, RBI may maintain status quo on the benchmark Repo rate for the majority part of the next calendar year as we do not expect headline inflation
(both WPI and CPI) to come down significantly. For FY15, we expect WPI inflation to average 6.5% and Consumer Price Inflation (CPI) to come in the 8-9%
range, lower from the current levels but expected to be above the RBI comfort zone. Also, if the fall in food inflation fails to bring down the headline inflation
significantly as is expected by RBI, a marginal 25bps repo rate hike in the near term cannot be ruled out taking repo rate to the 8% mark
For FY15, we expect WPI to average at 6.5%, a decline of 100bps from
current level due to softening of food inflation (weight 24%) and fuel
inflation (weight 14.9%). However core inflation (weight: 55%) is expected
to inch up from current 2.6% levels by around 120 bps to 3.8% keeping
headline WPI sticky
6.50
7.00
6.50
7.52
7.00
7.05
Fuel
26%
5.85
FY15
Mar-14
Dec-13
Nov-13
Oct-13
Sep-13
Core
17%
Aug-13
Jul-13
5.16
4.58
May-13
Jun-13
4.77
Apr-13
Mar-13
Feb-13
Jan-13
5.65
6.99
7.28
7.31
Wholesale price inflation % (WPI)
8.0
7.5
7.0
6.5
6.0
5.5
5.0
4.5
4.0
.... Core WPI can be a major

contributor FY15E inflation
Food was a major contributor

to current inflation ...
Other
Primary
articles
2%
Food
55%
Fuel
14%
Core
49%
Other
Primary
articles
2%
Food
35%
Core inflation (Weight: 55%) may scale up to 3.8% from 2.6% currently
primarily on account of waning high base effect (Core inflation peaked at
6% in August 2012 and since then has seen a slide for consecutive 10
months) leading to Manufactured goods inflation to move up from
average 3.30% in CY13 to 4.20%. Also, further upside risk to the same
remains if pick up in growth leads to higher pass on of increased raw
material cost and a wage price spiral
Food inflation is at 19.9% (November 2013) on account of unusual spurt in

price of vegetables. Once this fades off, food price inflation may come
down to 12% by March 2014 and further move downwards given the
lower MSP hikes and a bumper harvest this year.
Diesel price hike added 100 bps to CY13 inflation on direct basis and in
CY14 it may add another 60bps (direct impact) to the headline WPI
inflation if | 0.50 hike continues (factored in our estimate). However, range
bound global crude price may lead to stable prices of freely priced fuels
which can drag fuel inflation lower to 4-5% from current 11%
Similarly, CPI may also come down from current high of 11.24% on
softening of food prices but may stay elevated at 8-9% FY15E
Source: CSO, Bloomberg, ICICIdirect.com Research
19
When
would inflation,
Deal Team
At Yourinterest
Servicerates come down?
Total Savings have dropped from 37% of the GDP in FY2008 to less 30%
currently. In FY12, financial savings have fallen to 8% of the GDP from
12% in FY06. Physical savings during the same period has increased to
14.3% from 11.7%.
RBI needs to address negative real interest rate

environment
Real interest rates have been negative for investors since March 2009,
discouraging them from financial savings. Since inflation is sticky, nominal
interest rates needs to be higher to encourage financial savings.
Despite muted returns in physical asset (Gold -3% while property prices
down from the levels at the start of the year), major indicators indicate no
signs of improvement in financial savings.
SBI deposit rate-CPI
-5.0
Financial Savings(% of GDP) RHS
Real Interest Rate*
Reverse Repo
Apr-13
Apr-12
Apr-11
Apr-10
Apr-09
Apr-08
Apr-07
Apr-06
Apr-05
-10.0
CPI IW
Source: RBI, Bloomberg, ICICIdirect.com Research

(Right) Physical and Financial savings data available only till April 2012
20
Oct-13
Apr-13
Oct-12
Apr-12
14
12
10
8
6
4
2
0
Oct-11
Apr-11
Oct-10
Apr-10
Oct-09
Apr-09
Oct-08
0.0
Apr-07
5.0
Oct-06
Apr-05
10.0
Apr-06
15.0
Oct-05
Real interest rates (%)

20.0
Apr-08
Financial savings as % of GDP
20
15
10
5
0
-5
-10
-15
Oct-07
Although inflation is likely to be lower in 2014 from the elevated levels

witnessed in 2013, it will still be higher and may not lead to meaningful
positive real rate of return so as to encourage financial savings. RBI may
also consider this aspect while considering any rate cuts and would want
to encourage financial savings by providing impetus in terms of higher
nominal interest rates and improve financial savings over a medium term
Physical Savings(% of GDP)RHS
Market
Strategy
Deal Team
At2014
Your Service
1
Is the worst over for the rupee?
10
21
Is
the Team
worst over
theService
rupee?
Deal
At for
Your
Reduced gold imports due to government restrictions, increase in exports
due to better competitiveness and stable invisibles (software services and
remittances) will ease Indias CAD, going forward. It may also enable the
government to loosen its curbs on gold import (likely to contribute ~65%
towards reduction in trade deficit in FY14E)
Rupee to have an appreciating bias as CAD situation & BOP

improves
We expect the rupee to have an appreciating bias in CY14E on account of
improvement in current account balance and RBI's effective intervention
to handle capital flows. Increase in Indias Balance of Payments surplus
(forex reserves) owing to an improved CAD situation from 4.8% in FY13
to 2.3% in FY15E is likely to lead to strengthening of the Indian Rupee in
the forthcoming year.
The capital flows hold the key in improving Indias BOP as it has remained
volatile over the past two years. Considering that the US fed tapering
might now happen in a staggered manner, we believe India now is better
placed to withstand the volatility of currency as it is likely to keep its CAD
in check
Current Account Balance

FY11
-130.5
7.6
84.7
53.3
53.1
-21.8
-45.8
2.7
39.7
9.4
30.3
28.4
5.0
-0.1
-11.0
62.0
3.6
-3.0
13.2
FY12
-189.8
10.1
111.6
61.0
63.5
-12.9
-78.2
4.2
39.2
22.1
17.2
19.3
16.2
-0.1
-6.9
67.8
3.6
-2.4
-12.8
FY13
-195.7
10.6
107.5
63.5
64.3
-20.4
-88.2
4.8
46.7
19.8
26.9
31.1
16.6
-0.1
-5.0
89.3
4.8
2.7
3.8
FY14E
-159.1
8.6
109.9
67.3
65.0
-22.4
-49.1
2.6
20.5
22.4
-1.9
18.2
31.5
-0.1
-7.0
63.2
3.4
-1.0
13.0
Indias option to enter global emerging markets bond index may bring
additional capital flows of $14-18 billion initially, thereby improving the
rupee
FY15E
-161.5
7.7
113.0
71.4
66.3
-24.6
-48.4
2.3
36.6
24.6
12.0
19.9
16.4
-0.1
-7.0
65.9
3.1
-1.0
16.5
Indian petroleum and gold imports

200
30.2
150
31.7
28.7
33.4
36.3
30
100
50
10.0
11.0
11.5
20
11.0
6.4
0
FY10
Source: RBI Handbook, Commerce Ministry, ICICIdirect.com Research
22
50
35.8 40
FY11
FY12
FY13
FY14E
5.7
(%)
FY10
-118.4
8.7
80.0
48.2
52.0
-20.3
-38.4
2.8
50.4
18.0
32.4
12.4
2.1
-0.1
-13.2
51.6
3.8
0.0
13.3
US$ billion
($ billion)
Trade Balance (a)
As a % of GDP
Invisiblies (b)
-Software services
-Transfers
-Others
Current Account (c=a+b)
As a % of GDP
Foreign Investment (i)
-FDI
-FII
Loans (ii)
Bank Capital (iii)
Rupee Debt Service (iv)
Other Capital (v)
Capital Account (i-v) (d)
As a % of GDP
Errors and Omissions (e)
Balance of payments (c+d+e)
10
0
FY15E
Gold import (LHS)
Petroleum pdts import (LHS)
Gold import as % of total import (RHS)
PP import as % of total import (RHS)
How
currency
fare?
Dealwould
Teamthe
At
Your Service
India's trade account balance
We believe there will be an improvement in trade deficit (difference

between merchandise imports and exports) from 10.6%of GDP in FY13 to
8.6% and 7.7% of GDP in FY14E and FY15E, respectively, owing to
curtailed gold imports and pick-up in exports (Indias enhanced
competitiveness due to weaker currency)
FY15E
497.1
178.1
28.4
35.7
25.3
25.2
204.3
341.6
70.7
44.2
24.5
17.2
17.5
167.4
-155.5
Reduced gold imports are expected to contribute ~65% towards

reduction in the trade deficit. As per our sensitivity analysis, a 20%
increase in gold imports could push the CAD higher to 2.6% (US$54.1
billion) of GDP in FY15E
Elections, government finances and currency
6 4.8
FY13
FY12
FY11
FY10
100.0
161.9
-38.7
1.8
-2
FY09
110.0
178.1
-48.4
2.3
48
32
2.5
FY08
120.0
194.3
-58.2
2.8
4.9
0
FY07
22.7
-42.7
2.0
4.9
64
0
FY06
28.4
-48.4
2.3
3.3
5.8
16
FY05
34.1
-54.1
2.6
4.5 4.0 4.1
FY04
Bull
6.0 6.5
2
FY03
Base
6.2 5.9
5.4 5.7
FY02
Bear
6.5
Sensitivity of CAD to gold/crude oil imports

($ billion)
Gold
Import value
CAD
CAD as a % of GDP
Petroleum products
Crude ($/barrel)
Import value
CAD
CAD as a % of GDP
5.8
-4
(|/$)
FY01
FY14E
466.3
169.1
29.9
33.7
23.9
24.0
185.7
313.3
66.2
42.1
21.9
15.7
15.2
152.2
-153.1
FY00
FY13
490.7
164.0
53.8
31.4
27.6
22.7
191.2
300.4
60.9
43.3
18.4
15.3
14.7
147.9
-190.3
FY99
FY12
489.3
155.0
56.5
32.7
30.1
28.2
186.9
306.0
56.0
44.9
21.4
14.3
13.2
156.1
-183.4
FY98
FY11
369.8
106.0
40.7
26.6
23.9
34.6
138.1
251.1
41.5
40.5
16.0
11.9
10.7
130.5
-118.6
FY97
FY10
288.4
87.1
28.8
21.0
19.7
16.3
115.5
178.8
28.2
29.1
9.8
9.6
9.0
93.2
-109.6
(%)
($ billion)
Imports
Petroleum Products
Gold
Electronic Goods
Machinery(Excl. Electronic Goods)
Pearls & Precious stones
Others
Exports
Petroleum Products
Gems & Jewellery
Transport Equipments
Machinery and Instruments
Pharmaceuticals & Chemicals
Others
Trade Balance
-16
-32
Fiscal Deficit to GDP
CAD to GDP
|/$
While CAD continues to remain one of the key determinants of the

currency movement, the fiscal situation is also important in determination
of the direction of the currency movement. A higher than budgeted fiscal
deficit might weigh on the domestic liquidity and may limit RBI's capacity
to handle the forex stress
Source: RBI Handbook, ICICIdirect.com Research

Note: The commerce ministry data varies marginally from that stated in RBI Handbook
23
Market
Strategy
Deal Team
At2014
Your Service
1
10
24
What
Deal next
Teamastapering
At Yourbegins?
Service
Chancellor Angela Merkel, a firm advocate of eurozone integrity, augurs
well for the region as it will provide more breathing space to the periphery
Tapering could be non-event as growth recovery on radar

After almost three years of anxiety over the ever boiling European
sovereign debt crisis (which it was feared would culminate into eurozone
disintegration) the world seemed to have fathomed the issue and had
some different aspects to discuss for CY13. The year saw a preconceived
obsession towards the US Federal Reserves decision to taper (which
starts at last) its expansive policy as the agency kept investors across-theglobe on tenterhooks with its Catch me if you can approach. The
unprecedented rift in the US between the Democrats and Republicans and
geopolitical issues such as the island row between China and Japan
remained in the limelight as did Irans isolation and subsequent
settlement. Another over-emphasised issue like the Chinese hard landing
also faded in due course as the recovery momentum in the economy was
slightly stronger and more sustainable than what many had expected
The Chinese economy defied the prediction of hard landing at the start of
the year after the leadership change as GDP growth was in line in two out
of three quarters. The Chinese government unwrapped its boldest set of
economic and social reforms in nearly three decades in order to put the
world's second-largest economy on a more stable footing. With this, the
new regime has already made clear its intention to bring the economy to
its normalised growth path. What may bother investors are its geopolitical
ambitions as it has intensified its rift with Japan over the Senkaku islands
in East China Sea and with scores of nations over some more islands in
the South China Sea
IMF world economic outlook
CY14 is likely to carry forward the apprehensions of liquidity squeeze on

the back of a resumption of US tapering as most market players will try to
weigh the benefits of higher US growth against the inevitable reduction in
unhindered liquidity. With the passage of time, the world is likely to digest
these apprehensions while it is also expected to have positive
repercussions in the nature of growth. Suffice to say this event may also
turn out to be a non-event as the Fed has vowed to keep interest rates at
the current level beyond tapering
World
Advanced Economies
United States
Euro
Germany
France
Italy
Japan
BRIC nations
Brazil
Russia
India
China
After going through the motions for the better part of 2013, India looks
better prepared for a possible tapering off (and its impact on the currency)
as the government has taken scores of measures such as curbs on gold
imports, opening of special window for OMCs, attracting FCNR (B)
deposits, hike in bond limits, etc. Concerns regarding overshooting of the
current account deficit (CAD), which overshadowed the real concern of
fiscal deficit in mid-year, are clearly showing signs of waning
Europe finally had something to cheer about with the second and third
quarter GDP (sequential) growth picking up across Europe, ending an 18month economic decline. This, along with re-election of German
Source: IMF, ICICIdirect.com Research
25
CY12
3.2
1.5
2.8
-0.6
0.9
0.0
-2.4
2.0
CY13P
2.9
1.2
1.6
-0.4
0.5
0.2
-1.8
2.0
CY14P
3.6
2.0
2.6
1.0
1.4
1.0
0.7
1.2
0.9
3.4
3.2
7.7
2.5
1.5
3.8
7.6
2.5
3.0
5.1
7.3
US
tapering
landfallonly
Deal
Team makes
At Your
Service surprise, no shock
FOMC participants assessments of appropriate timing of monetary policy firming
Though modest tapering will start in January 2014; the Fed has assured of
near zero interest rates beyond the initial stated period. On the brighter side,
the Fed panel seems to have been convinced that the US economy is on
the recovery path
S&P 500
2,400
Apr-12
Jun-12
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
3
3
7
4
3
3
7
6
1
3
2
12
2
3
13
1
4
13
1
3
14
3
12
2
12
2012
2013
2014
2015
2016
2,200
Chronology of Fed events
2,000
Date
Event
Sep-12 Fed to launch QE3 by buying US$40 billion each month
Dec-12 Fed to buy more bonds worth US$45 billion per month as it sets jobless target
Jan-13 Bernanke signals tapering could begin at end of 2013
May-13 Bernanke tells Congress possible slowdown in bond buying
Jun-13 Bernanke says it could begin tapering later this year subject to economic improvement
1,800
1,600
1,400
1,200
Sep-13 Fed decides not to taper and continues bond buying

Dec-13 Fed starts taperering by $10 bn to $75 bn from January, 2014
US unemployment rate & non-farm payroll
US GDP Growth & ISM Mfg PMI
GDP Growth (LHS)
Source: Federal Reserve, Bloomberg, Reuters, ICICIdirect.com Research
26
ISM Mfg PMI
-300
-400
Jun-13
-200
0
-100
Sep-13
(x)
100
Dec-12
Sep-13
Jun-13
48
Uni.Mic.Consumer Sentiment (LHS)

Housing starts ('000)
52
50
Mar-13
2.5
1.1
Mar-13
0.1
Dec-12
Sep-12
Mar-12
Dec-11
Jun-12
1.2
2.8
3.7
1.4
0
Sep-11
Sep-13
May-13
Jan-13
Sep-12
May-12
Jan-12
Sep-11
May-11
Jan-11
Sep-10
500
Jun-12
2 53.2 52.9
200
Sep-12
700
60
50
54
Dec-11
56.2 56
Mar-12
300
Jun-11
900
10
400
Sep-11
80
70
4.1
58
4.9
(%)
1100
90
Dec-10
US Cons. sentiments & housing starts
Mar-11
Nov-13
Sep-13
Jul-13
May-13
Mar-13
Jan-13
Nov-12
Sep-12
Jul-12
May-12
Mar-12
Jan-12
1,000
6
5
Non Farm Payroll (LHS)
Unemployment Rate
Europe:
Disintegration
exorcised; some light at the end of the tunnel
Deal Team
At Yourghost
Service
Chronology of major Eurozone events
Anxiety over the European sovereign debt crisis and fears of a likely
breakup seem to have subsided helped by unlimited QE by ECB. The focus
is back on the macro the euro region came out of recession after six
quarters
Date
Event
May-11 Portugal becomes second country to seek EFSF bailout to which Eurogroup agrees
Oct-11 Eurozone leaders agree to amend EFSF mechanism to 780 billion and boost ESM
firepower to 1 trillion
Dec-11 LTRO 1, worth 489 billion to 523 banks, announced
Mar-12 LTRO 2, worth 530 billion to 800 banks announced
Jun-12 Spain requests banking bailout even as Cyprus joins countries with bailout requests
Sep-12 ECB cuts interest rates to 0.75% in July 2012 and announces bond-buying sterilisation
Sep-12 German court okays ESM participation while eurozone, IMF agree to bail out Greece
Dec-12 Eurozone finance ministers agree to have single banking regulator
Feb-13 European Union agree to cut spends by 34 billion over seven years
Mar-13 Fresh crisis as Cyprus rejects eurozone bailout deal terms
May-13 Eurozone unemployment hits new high of 12.2% vs, 11.8% (also a high) in January 2013
Aug-13 Eurozone hauled out of 18-month recession by Germany and France
Sep-13 Angela Merkel wins Geman federal elections
Dec-13 German Social Democrats vote to join Merkel coalition
FTSE Eurofirst 300

1,800
1,600
1,400
1,200
1,000
Eurozone GDP growth (%)
Dec-13
Oct-13
60
11.5
55
x
45
Source: Bloomberg, Reuters, ICICIdirect.com Research

LTRO : Long term refinancing operation, ESM: European Stability Mechanism, EFSF: European Financial Stability Facility
27
Nov-13
Jul-13
Mar-13
Nov-12
Jul-12
Mar-12
40
Nov-11
Oct-13
Jun-13
Feb-13
Oct-12
Jun-12
Feb-12
Oct-11
Jun-11
Feb-11
Oct-10
Sep-13
Jun-13
Mar-13
Dec-12
Sep-12
Jun-12
Mar-12
Dec-11
Sep-11
9.5
Jul-11
-1.0
50
Mar-11
-0.5
10.5
Nov-10
-0.2
-0.1
-0.3
-0.1
-0.2
12.5
0.1
0.3
0.1
0.0
%
Eurozone PMI
Eurozone Unemployment rate (%)
0.5
-0.5
Aug-13
Jun-13
Apr-13
Feb-13
Dec-12
Oct-12
Aug-12
Jun-12
Apr-12
Feb-12
Dec-11
Oct-11
Aug-11
Jun-11
Apr-11
800
China
hard landing
fearsService
unfounded regime change steam rolls reforms
Deal Team
At Your
Chinese government unwrapped its boldest set of economic and social
reforms in nearly three decades easing hard landing concerns. That said,
what could bother investors are its geopolitical ambitions including rift with
Japan and other neighboring nations and increasing militarization of the
zone.
Shanghai Composite
3,500
3,000
Date
Mar-12
Apr-12
Sep-12
Sep-12
Feb-13
Mar-13
Nov-13
Dec-13
Chronology of major Chinese events

Event
Bo Xilai scandal unfolded
China ups the limit for Yuan fluctuation to 1% in trading against the US dollar, from 0.5%
Tension rises between China and Japan over islands in East China Sea
China launches first aircraft carrier in South China Sea
Tension rises again with Japan after a ship row near disputed islands
Newly elected President Xi Jinping lauches efficiency and anti-corruption drive
Communist Party leadership announced scores of labour reforms
China unfolds economic reforms including likely change in one child policy
2,500
2,000
GDP growth (%)
Oct-13
Dec-13
China loan outstanding (YoY%)

35
28
Sep-13
Mar-13
Sep-12
IIP, YoY growth
10
Mar-12
Manf. PMI
15
Sep-11
Mar-11
49
20
Sep-10
10
Mar-10
50
25
Sep-09
12
Mar-09
51
30
14
%
52
Dec-12
Mar-13
Jun-13
Sep-13
16
Dec-11
Mar-12
Jun-12
Sep-12
53
Dec-10
Mar-11
Jun-11
Sep-11
7.8
Sep-13
7.5
Jun-13
7.7
Mar-13
7.9
Dec-12
7.4
Sep-12
7.6
Jun-12
8.1
Mar-12
8.9
Dec-11
9.1
Sep-11
9.5
Jun-11
Mar-11
Dec-10
9.7
9.8
Aug-13
China Mfg PMI & IIP
10
Jun-13
Apr-13
Feb-13
Dec-12
Oct-12
Aug-12
Jun-12
Apr-12
Feb-12
Dec-11
Oct-11
Aug-11
Jun-11
Apr-11
1,500
Shock
absorbers
place
India better prepared than last time
Deal Team
AtinYour
Service
To overcome currency volatility and CAD concerns, a series of measures were taken, namely: 1. gold import duty hike, 2. special swap window to attract FCNR
(B) deposits and foreign currency borrowings, 3. special window for oil marketing companies to help meet their daily forex requirement, and 4. hike in FII
investment limit in government securities & corporate bonds by U$5 billion to US$75 billion. These measures coupled with likely inclusion of Indian G-Secs into
the global indices could have appreciating bias on INR
Gold imports
FY15E
FY10
FY11
FY12
FY13
FY14E
FY15E
Gold Import as % of Total Import (RHS)
Petroleum Pdts Import (LHS)
20
2
1
FY11
FY12
CAD (LHS)
FY13
FY14E
0
-5.6
-10
FY15E
CAD as % of GDP (RHS)
29
Brazil
FY10
5.0
0.8
-1.5
8.1
Thailand
20
5.8
Taiwan
10
South
Korea
48.4
5
4
Indonesia
49.1
45.8
PP Import as % of Total Import (RHS)
17.9
India
US$ billion
40
38.4
20
$ billions
78.2
80
60
88.2
100
25
FII flows in emerging countries
Current account deficit
Philippines
Gold Import (LHS)
30
178.1
FY14E
50
40
35
169.1
FY13
100
31.7
28.7
164.0
FY12
30.2
155.0
28.4
FY11
150
35.8
106.0
29.9
FY10
36.3
33.4
87.1
53.8
56.5
20
10
40.7
30
11
5.7
US$ billion
6.4
200
14
11.0
50
40
11.5
11.0
10.0
28.8
US$ billion
60
Petroleum products
Oil
flare
up cooled
off byService
embargo; breathing space for India
Deal
Team
At Your
Oil flare-up led by Irans rhetoric to destabilise Opec production seems to
have cooled off led by landmark accord providing some breathing space to
India
Despite multiple confirmations, finally the US and Iran took a step forward to
resolve bilateral issues
Chronology of major events related to crude

Date
Jul-10
Brent Crude ($/bbl)

160
140
Nov-11
120
80
Dec-11
Jan-12
Feb-12
May-12
60
Jul-12
Oct-13
Jul-13
Apr-13
Jan-13
Oct-12
Jul-12
Apr-12
Jan-12
Oct-11
Jul-11
Apr-11
Jan-11
Oct-10
Jul-10
Apr-10
100
Oct-12
Feb-13
Shale gas production in US
48.9
50.4
2015E
2020E
2025E
2030E
2035E
2040E
20
Apr-13
May-13
Jun-13
Sep-13
Nov-13
Trillion cubic feet
49.6
51.1
52.4
58.5
47.6
2010
44.9
2005
25
41.5
4.1
20
30
36.8
40
22.8
60
55.1
35
63.2
80
77.2
40
95.9
100
On a different tangent, US shale gas discovery could be the potential game

changer in the longer run as it will not only attract investment in the US
(US$90 billion already announced largely in petrochemicals) but also reduce
its dependency on oil imports leading to a lower import bill
15
Shale gas
Others
Event
The US enacts the comprehensive Iran Sanctions, Accountability and Divestment Act
targeting Iran's energy & financial sectors
The US designates Iran as primary money-laundering concern, limiting Iranian banks'
access to US financial sector
US imposes sanctions on foreign banks that transact with Iran's central bank
EU oil embargo: EU bans shipping insurance for oil, precious metal trade from Iran
US signs executive order freezing Iranian assets in US
Talks between Iran and six world powers on its disputed nuclear programmefail to
produce breakthrough
Iran announces legislation intended to disrupt traffic in Strait of Hormuz following EU
embargo
EU toughens sanctions against Iran, banning trade in industries like finance, metals and
natural gas
US mandates that any countries buying Iranian oil must put purchase money into local
bank account
Israel stresses its readiness for lone strike on Iran
US imposes sanctions on those violating Iran sanctions
Iran elects new President who advocates more conciliatory approach to the world
First direct US-Iran talks since 1979
The US and five other world powers announce landmark accord that would temporarily
freeze Irans nuclear programme
Production (RHS)
Source: Bloomberg, Reuters, EIA, ICICIdirect.com Research
30
Market
Strategy
Deal Team
At2014
Your Service
1
10
31
ADeal
Bull Team
Run inWall
StreetService
or insanity on back of limitless printing?
At Your
Baa spreads* have historically been a coincident or leading indicator towards equity markets fall
Spreads rising beyond 300 bps has usually caused panic and led to equity declines e.g in June 2002, June 2008 and April 2010. Rising spreads through 300
bps coincided with equity declines in September 2001 and August 2011 as shown below. Spreads are currently hovering at levels of ~260 bps
700
AA rated bonds vis-a-vis S&P 500
700
1800
1600
600
AA rated bonds close correlation with S&P 500 in recent past
1800
1600
600
1400
1400
500
500
1200
400
1000
300
800
1200
400
1000
800
300
600
200
Are we seeing
a reversal in
spreads as
taper fears
turn into
reality?
200
400
100
200
0
Baa spread (LHS)
Baa spread (LHS)
200
Dec-12
Dec-11
Dec-10
Dec-09
Dec-08
Dec-07
Dec-06
Dec-05
Dec-04
Dec-03
Dec-02
Dec-99
S&P 500
400
0
Dec-01
Jan-86
Jan-87
Jan-88
Jan-89
Jan-90
Jan-91
Jan-92
Jan-93
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Dec-00
100
600
S&P 500

*Baa spreads reflect the gap between 10-year treasury yield and AA rated bonds in US. The premise of using this lies in the fact that empirical analysis shows this indicator tends to react early to unknown credit risk
events earlier than stock markets and spread of 300 has been like a warning bell for investors
32
ADeal
Bull Team
Run inWall
StreetService
At Your
Market believes taper means GDP growth! Could it go wrong as it ignores deflation risk?
Can the Lack of fiscal union in the EU region come back to haunt?
The recurrence of political fracas as EU members go for elections remains
a simmering risk at this time. The growing German dissonance towards
further debt to struggling nations could cause lead to yield spikes
The FED while starting QE knew some of the speculative risks attached
with it. The lack of investment demand in US caused carry flows moving
to emerging markets and causing various asset class distortions
We were looking at the euro region and felt that the staggering debt
servicing burden in place may percolate into one of the unknowns, which
the market is not yet factoring considering that large countries like France
and Italys growth is not only stalling but also turning negative rapidly
The US economy now seems to be responding and consumption demand

(PCE) continues to spearhead the growth with consistency spends by
consumers as investments lag .
The Fed though remains uncertain about effects of reducing asset
purchases as it fears that liquidity unwinding could turn into an avalanche
starting from developing markets. Even as Feds has tried to downplay its
impact on yields the US yield has climbed to unnervingly high levels of
~3% even with no sign of inflation expectations
There can always be a reason maybe a Black Swan which shrugs off this
drugged market back into reality and could cause Lehmanesque pain
Major Euro nations debt servicing burden
Since QE and easy monetarist era began the markets have felt nothing
can bring down markets-we are in a bull run as central banks have
created this sense of misplaced comfort on just optical GDP growth
bn $
Italy
France
Spain
Greece
Germany
UK
Portugal
Total
Growth without Inflation something's wrong? Key indicators signal deflation

Five year implied inflation via US treasury inflation protected securities
(TIPS) is at ~1.9%. It has fallen significantly from ~2.5% last year.
Historically, whenever it has fallen to ~1.5% it has led to sharp equity falls
The 10-years TIPS inflation expectation fell below its 200-day moving
average signalling a serious threat towards low inflation, if not deflation
2014E
534
454
285
33.2
306
153
37
1800
2015E
347
286
186
9.1
242
121
20
1211
Can crude come back to old ways and be volatile? OPEC loses oil hegemony
Though commodities have also seen QE driven price speculation, gold

and copper remain unique materials as one is looked as an alternative
currency/inflation hedge while the latter is a basic commodity in terms of
real economic activity
US pumps petroleum product exports and displaces Russia as No. 1 net

exporter in the world causing balance of "oil" shift towards the Pacific from
the Middle East and Central Asian region. 2013 also witnessed Mexico
opening up itself to global oil majors and end of Iranian conflict.
The prices of gold and copper have fallen sharply, which could be signals
towards inherent risks of deflation. For a decade and dot com bubble,
gold prices have been early indicators towards significant market
movements as is evident from the graph below. Copper prices have been
more coincident in nature towards price movements
Along with this, demand scenario might remain similar at best and start of
tapering could cause downward spiral in prices.
This could in turn cause trouble for OPEC nations as they could start
running into fiscal deficits if Brent crude prices fall below $90

What are TIPS? Its a treasury security that is indexed to inflation in order to protect investors from the negative effects of inflation. TIPS are considered an extremely low-risk investment since they are backed by the
U.S. government. It is also used as an indicator to forecast inflation expectations.
33
ADeal
Bull Team
Run inWall
StreetService
At Your
150
100
2.5
50
0
1.0
-50
0.0
-100
2
1
2000
1600
E
C
0.5
Jul-07
S & P 500Divergence ! Whats

going to happen?
D
1.5
Jul-06
Jul-05
Jul-04
Jul-03
Jul-02
Jul-01
Jul-00
Jul-99
3
2.5
1200
800
A: QE1 starts, B: QE1

ends
C: QE2 starts D: QE2
ends
Jun-90
Jun-91
Jun-92
Jun-93
Jun-94
Jun-95
Jun-96
Jun-97
Jun-98
Jun-99
Jun-00
Jun-01
Jun-02
Jun-03
Jun-04
Jun-05
Jun-06
Jun-07
Jun-08
Jun-09
Jun-10
Jun-11
Jun-12
Jun-13
-0.5
400
Nov-13
May-13
Nov-12
May-12
Gold price growth
Nov-11
May-08
-1
May-11
0.0
5-year implied inflation TIPS (LHS)
Nov-10
1.0
3.5
May-10
2.0
60
50
40
30
20
10
0
-10
-20
-30
-40
Jul-98
Nov-09
3.0
400
0.5
May-09
(%)
4.0
800
Copper price growth
Gold price movement tends to lead inflation
PCE (LHS)
1.5
(%)
5.0
1200
(%)
PCE (LHS)
2000
S & P 500
1600
Nov-08
2.0
5-year implied inflation TIPS (LHS)
Jul-97
3.0
3.5
Jun-90
Jun-91
Jun-92
Jun-93
Jun-94
Jun-95
Jun-96
Jun-97
Jun-98
Jun-99
Jun-00
Jun-01
Jun-02
Jun-03
Jun-04
Jun-05
Jun-06
Jun-07
Jun-08
Jun-09
Jun-10
Jun-11
Jun-12
Jun-13
(%)
4.0
200
(%)
Copper price trend more coincident historically
(%)
5.0

The 5-year TIPS implied inflation is perilously close to ~2% with a downward bias while the equities have shot up. Historically such divergences have not sustained and with deflation risks stoking globally this
divergence could end in pain for equities ; (Bottom Left) PCE refers to Personal consumption expenditures price index which is the preferred measure of core inflation in USA
34
What
risks
related
GDP?
Deal are
Team
At
YourtoService
Industry (27%):
We have analysed the correlation between the two variables over a period
of 8 years and we observe that 63.2% behavior of Agri GDP is explained
by volatility in the monsoon performance of that respective fiscal.
Probability of weak contribution to GDP can run high, atleast in H1CY14,

as interest rate cycle reversal might not happen that soon and revival in
capex cycle will gather steam post the election of the new government.
One of the best monsoons was experienced by India in CY13 as it was

better by ~7% over its long term average. This led to improvement in agri
GDP from 1.4% YoY growth in Q4FY13 to 4.6% in Q2FY14.
However, downside risks to GDP is not that high as manufacturing GDP is

at worst but only elongated time of manufacturing recovery can pose risks
to GDP.
However, risks are too high if monsoon may fail to deliver similar strong
growth as witnessed in CY13. Also, there will be high base impact next
year as CY13 is delivering decent agriculture GDP growth.
Investment side GDP
Agriculture (14%):
The chart below suggests that GFCF has been on declining trend post
FY11 as capex cycle has almost stalled. The GFCF cycle may be near to
bottom but is expected to pick pace only post the election period.
Monsoon deviation from long term average does make agri GDP lumpy
AGRI GDP vis--vis monsoon performance
Deviation from LTA
Agri GDP growth (YoY)
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14E

-0.4
5.7 -1.7 -21.8
2.0
2.0 -7.0
6.9
4.2
5.8
0.1
0.8
7.9
3.6
1.9
4.5
Persistent high inflation may curb consumer spending and compel them
to cut-back their expenses which may lead to moderation in growth of
PFCE.
Services (59%):
This has been the pillar of GDP growth so far but high base effect can
pose a minor risks to GDP growth.
Major components of investment side GDP
59.3
28.0
28.7
28.7
28.1
28.3
T
28.2
27.5
26.7
26.2
26.3
18.3
17.4
16.8
15.8
14.6
14.5
14.1
13.7
13.2
10.8
FY07
FY08
FY09
FY10
FY11
FY12
FY13
Q1FY14
Q2FY14
60
40
20
0
Agriculture
Industry
28.6
29.4
58.3
57.7
57.0
57.7
57.2
55.8
56.3
56.8
56.5
56.6
10.9
10.3
10.3
10.9
11.9
11.4
11.6
11.8
12.7
11.0
Q2FY14
56.8
29.6
Q1FY14
59.6
30.6
FY13
58.4
31.7
FY12
57.3
31.7
FY11
57.1
32.3
FY10
56.1
32.9
FY09
54.4
31.3
FY08
54.0
(%)
53.7
FY06
(%)
80
30.3
FY07
80
100
FY06
100
Service GDP consistently gaining market share
60
40
20
0
GFCE
Service
Source: Mospi, ICICIdirect.com Research
35
PFCE
GFCF
What
therisks
related
to Inflation?
Deal are
Team
At Your
Service
Primary and fuel segment have caused WPI to remain sticky
20
400
15
300
10
(%)
(%)
200
Onion price inflation
Primary Inflation (20.1%): It has been the major culprit for the rise in
overall inflation levels. Currently, it is hovering at ~16% led by food
inflation of 19.9%. We believe the primary inflation may come off from
their current peak levels as local food prices have corrected but sudden
erratic price of certain food items cannot be ruled out, which can push up
primary inflation in CY14E/FY15E.
Nov-13
May-13
Nov-12
May-12
Nov-11
May-11
Nov-10
May-10
Nov-09
7.5
Nov-13
May-09
7.0
Oct-13
Nov-08
6.6
Q2FY14
May-08
4.8
Q1FY14
Fuel Group
Nov-07
7.4
FY13
May-07
8.9
FY12
Primary articles
-100
Nov-06
9.6
FY11
Manufactured goods
May-06
3.9
FY10
WPI
100
Nov-05
8.1
-5
FY09
5
0
Classic case being onion and tomato prices have witnessed

volatility of high magnitude
Tomato price inflation
Just an unexpected rainfall at the end of season and probability of

hoarding had caused the onion prices to spike so sharply in H2CY13.
However, prices have corrected in local markets lately and hence primary
inflation may improve in 2014 albeit still staying in uncomfortable zone.
One or the other component has kept food inflation high
60
Fuel Inflation (14.9%): The major positive step taken by Government to

de-regulate petrol and diesel prices has led to spiral in fuel inflation
(currently at 10-11% range). Further routine 50 paisa hike per month for
diesel prices will have both direct (~60 bps impact on CY14E inflation)
and indirect impact on fuel based inflation.
These four components together

have weightage of 94.8% in food
inflation and 13.6% in total inflation
50
(%)
40
30
20
Manufactured good Inflation (65%): We believe the manufactured good

inflation may remain at current modest levels of ~3% considering lower
industrial activity and elevated interest rates, atleast in the H1CY14.
10
0
FY07
FY08
Cereals & Pulses
Source: Mospi,, IMD, ICICIdirect.com Research
36
FY09
FY10
FY11
FY12
Fruits & Vegetables
FY13 H1FY14 Oct-13 Nov-13

Milk
Egg, Meat & Fish
What
therisks
due to
FII flows Is China a threat?
Deal are
Team
At Your
Service
Risk of liquidity: Portfolio flows too swift and unpredictable
The GDP growth of India has tapered off while Chinas GDP growth is still
holding at decent level of 7.8%. On the other hand, the valuation gap
between the two has widened with Chinas valuation at compelling 10.5x
P/E on TTM basis compared to 17.8x for India.
India GDP growth
Sep-13
Mar-13
Sep-12
Mar-12
Sep-11
Mar-11
Sep-10
Mar-10
Sep-09
Mar-09
Sep-08
Mar-08
Sep-07
Sep-05
This coupled with a better growth rate of >7% can be a compelling factor
for China to attract global liquidity as from a 5 year perspective.
4.8%
Mar-07
China has clearly avoided a hard landing of its economy and the new
power at the centre does talk of a secular and structural growth trajectory
for China in years to come.
7.8%
6
4
2
0
Sep-06
(%)
Can China be a party spoiler???
GDP growth rate between India and China has widened
14
12
10
8
Mar-06
India depends significantly on portfolio flows to fund its current account

deficits. However, this exposes India to significant risks as these flows are
swift and unpredictable in nature
China GDP growth
In the last year, the Sensex has given a return of 8.3% while Shanghai has
recorded a return of -4.8%. Thus, India faces a risk of lower FII equity
inflow as China is better placed on growth and valuations
The Chinese equities has gone nowhere (up by only 23.4% from its
recession low of 2009) and can be a compelling story at 9.3x one year
forward P/E when compared to Indias dynamics of 4-5% GDP growth and
14x one year forward P/E
China available at relatively compelling valuations

60
Thus, there is a significant risk that FIIs might desert Indian equity market
and hence risk of correction can then loom large.
50
(x)
40
30
17.8
10.5
20
10
Sensex TTM P/E
37
Shanghai TTM P/E
Dec-13
Dec-12
Dec-11
Dec-10
Dec-09
Dec-08
Dec-07
Dec-06
Dec-05
Dec-04
Market
Strategy
Deal Team
At2014
Your Service
1
10
38
Are
good
betService
this year?
Dealcyclicals
Team aAt
Your
Even quasi defensives like cement and auto are commanding rich
valuations on the basis of the strong balance sheet, robust cash flows and
the lever of positive operating leverage that these companies can pull
during the resumption of the upturn
Defensives to outperform cyclicals

In terms of sectoral preference, we believe that defensives (IT, pharma,
FMCG) and quasi defensives (auto and cement) will fare better than
cyclicals (metals, capital goods & infrastructure and power)
Polarization of valuations will be skewed in favour of defensives: Time and

again the markets have witnessed this kind of euphoria wherein the sector
in flavour (defensives this time around) do reach euphoric valuations and
get all kind of investor/liquidity attention. This certainly goes beyond
business fundamentals. On the other hand, out of flavour sectors exhibit
zigzag rallies thereby oscillating in a range. Classic instances would be the
Tech Bubble of 2000 wherein IT stocks went to dizzying heights and more
recently the bull run of 2005-08 wherein sectors in vogue like capital
goods, metals and power saw a massive expansion in their multiples over
the cycle even though the earnings velocity came down during the same
period
The dimensions of performance can be looked upon from two

perspectives i.e. financial performance and stock price performance. On
the whole, the better financial performance (stable sales & PAT growth
visibility, robust cash flows, asset light business and minimal regulatory
hindrances) will help defensives to also outperform cyclicals (lower
visibility owing to regulatory hindrances, highly levered balance sheets
and feeble cash flows), even though there may be a short-term bout of
bounce back in cyclicals
The above point helps in equating with our view as to why we have
classified cement and auto as quasi defensives and not entirely as
cyclicals. We believe balance sheet strength and cash flows are key
variables that one should look at in a world where de-levered or
deleveraging has found flavour. Though cement volumes and auto sales
volumes are cyclical in nature, the balance sheets of companies in those
sectors are pretty robust and growth can bounce back for such companies
once the economy gathers steam (benefits of positive operating leverage)
Defensives are yet to witness frenzy and hence would continue to find
favour.
In terms of valuation, it is generally argued that defensives are trading at

rich valuations or above historical standards, which takes into account
all positive attributes while record low valuations of cyclicals do take into
account all the possible negatives. However, we would reiterate that
earnings are a moving target based on which various valuations metrics
are computed. The key advantage of defensives is that their earnings
profile has higher degree of visibility and consensus is still upgrading their
forward earnings cycle, which implies that optically rich valuations in
hindsight may appear to be fair once earnings come through. On the
other hand, earnings profile/recovery of cyclicals is based on various
permutations and combinations. Still, these sectors are facing earnings
downgrades, which implies higher than expected multiples that these
sectors are still commanding.
39
Macros:
Boon for
defensives
and bane for cyclicals
Deal Team
At Your
Service
Revenue growth for defensives continuously outpacing nominal GDP
growth as they are commanding better pricing power coupled with stable
volume growth
Headwinds such as rapid depreciation of the currency are a boon for

defensives (significant export driven sectors) while cyclicals are at risk
(raw material import/foreign loans)
Revenue growth of defensives vis--vis nominal GDP growth
Recent depreciation of rupee positive for defensives
10
2006
2013
2012
2011
2010
2009
2008
2007
0
-20
Cap Goods
Metals
Source: Bloomberg, Capitaline ,ICICIdirect.com Research

All sectors represent respective BSE sectoral indices
40
IT
Dec-13
Jun-13
Dec-12
Jun-12
Dec-11
Jun-11
Dec-10
Jun-10
Dec-09
Jun-09
Pharma
GDP (N)
2013
(%)
20
2012
30
Forex revenues as % of total revenues
2011
40
Power
Dec-08
GDP (N)
Revenue growth of Cyclicals vis--vis nominal GDP growth
-10
Jun-08
Dec-05
2013
2012
2011
Automobiles
2010
Pharma
2009
IT
2008
FMCG
2010
2009
2008
2007
Dec-07
10
Jun-07
20
2007
(%)
30
Dec-06
80
70
60
50
40
30
20
10
0
40
Defensives like pharma, IT and auto have

significant exports to global markets. Even
sustenance of |/$ in | 60-63 range will keep
realisations and margins robust
Jun-06
(|/$)
75
70
65
60
55
50
45
40
35
30
(%)
50
Trends
in operating
margins
of defensives and cyclicals
Deal Team
At Your
Service
Steady or rising margins for defensives/quasi defensives
Operating margins have been under pressure for Cyclicals
25
30
20
25
20
(%)
(%)
15
10
15
10
Automobiles
2009
FMCG
2010
IT
2011
Pharma
2012
Power
2013
2009
Catalyst for margin consistency/improvement

Catalyst
High competition
Increase in raw material
prices
Exchange rate fluctuations
Metals and Mining

2010
2011
2012
Capital Goods
2013
Catalyst for margin decline/pressure
Comments
New product innovations/launches mainly in FMCG and auto space.
Brand buyouts
Power of passing on prices with slight/moderate impact on volume
Catalyst
High competition
Negative operating leverage
Positive for margins as sectors like pharma, IT and auto are

favourably influenced
Exchange rate fluctuations
Source: Capitaline ,ICICIdirect.com Research

41
Comments
Sporadic ordering opportunity, uneconomical price bidding mainly in
capital goods and power segment. Lower metal prices owing to soft
global outlook
Slower execution, low capacity utilisation and high manpower &
administration costs impact margins negatively
Negative for power and metal companies as they significantly import
inputs like thermal and coking coal
Interest cover (as explained by interest to EBITDA ratio) has been

fairly high and stable for defensives as their balance sheets are
characterised by no or low leverage
1.8
FMCG
IT
8
6
4
2
Pharma
Capital Goods
Defensives have been exhibiting decling/low or no leverage over

FY06-13
Metals and Mining
2013
2012
2011
2010
2009
0
2008
Interest coverage ratio (x)
2013
2012
2011
2010
2009
Automobiles
Power
Balance sheet of cyclicals saddled with huge debt over FY06-13

2.0
1.5
Gross Debt/Equity (x)
Gross Debt/Equity (x)
Interest cover deteroriated sharply for cyclicals as aggressive

expansion led to rise in debt, hardening of interest costs
50
40
30
20
10
0
2008
Interest coverage ratio (x)
Leverage:
Key differentiator
between defensives and cyclicals
Deal Team
At Your Service
1.2
0.9
0.6
0.3
1.5
1.0
0.5
0.0
0.0
Auto
2006
Pharma
2007
2008
FMCG
2009
2010
2011
Capital Goods
IT
2012
2006
2013
Source: Capitaline ,ICICIdirect.com Research

42
2007
Metals
2008
2009
2010
Power
2011
2012
2013
EVA
defensives
far greater
and superior to cyclicals
DealbyTeam
At Your
Service
Cyclicals have started creating negative EVA* as RoE< WACC,
going ahead
50
25
40
20
30
15
RoE (%)
20
10
5
10
0
BSE Auto
BSE IT
2009
2010
BSE FMCG
2011
2012
2013E
BSE Cap Goods
BSE Healthcare
2014E
2009
Quality of earnings of defensives superior as RoA=RoE and no

dependence on leverage
30
2010
2011
2012
2013E
BSE Power
2014E
10
25
BSE Auto
BSE IT
BSE FMCG
2009
2014E
2013E
2012
0
2011
0
2010
BSE Healthcare
BSE Cap Goods
BSE Metals and Mining
2014E
2013E
10
2012
15
2011
RoA (%)
20
2009
RoA(%)
BSE Metals and Mining
Cyclicals have to resort to debt in order get better RoEs and,

hence, higher financial leverage
2010
RoE(%)
Defensives still exhibiting rising RoEs and adding substantial

shareholder value
BSE Power

*EVA: EVA is the profit earned by the firm less the cost of financing the firm's capital. The idea is that value is created when the return on the firm's economic capital employed is greater than the cost of that capital
In our case, Defensives have consistently created positive EVA and hence positive shareholder returns while Cyclicals owing to huge leverage and uncertain economic environment have been generating negative EVA.
43
Earnings
trajectory
still Service
up for defensives, hazy for cyclicals
Deal Team
At Your
Defensives still enjoying earnings upgrades in environment where things are getting murkier
2015
2016
Aug-13
Apr-11
Oct-13
Jun-13
Feb-13
Oct-12
Jun-11
Oct-13
Jun-13
Feb-13
Oct-12
Jun-12
Feb-12
5
Oct-11
10
Jun-11
7
Jun-12
15
Feb-11
EPS (|)
11
Feb-12
20
13
Oct-11
EPS (|)
25
2014
135
125
115
105
95
85
75
65
55
45
Apr-13
2016
Dec-12
2015
15
30
EPS (|)
2014
17
Aug-12
2016
Apr-12
2015
Dec-11
2014
35
TCS (Consensus EPS)
ITC (Consensus EPS)
Aug-11
Sun Pharma (Consensus EPS)
Outlook on cyclicals in terms of earnings hazy; calling a bottom for earnings decline depends on many permutations
35
44
Sep-13
May-13
Jan-13
Sep-12
May-12
Jan-12
Sep-11
May-11
Nov-13
Jul-13
Mar-13
Nov-12
Jul-12
0
Mar-12
0
Nov-11
15
Aug-13
25
2016
Apr-13
10
2015
Dec-12
15
5
Jul-11
2014
45
Aug-12
10
2016
Dec-11
20
2015
Aug-11
20
EPS (|)
25
15
2014
30
Apr-11
2016
25
Mar-11
EPS (|)
2015
Bhel (Consensus EPS)
EPS (|)
2014
30
SAIL (Consensus EPS)
Apr-12
DLF (Consensus EPS)
2007:
Expansion
multiples
for cyclicals, 2014: Can same happen in defensives?
Deal Team
AtofYour
Service
Trend of L&T EPS growth vis--vis P/E re-rating over FY03-09
EPS CAGR over:FY03-07:: 30.3%
Average P/E FY03-07:: 15.7x
20
30
15
(x)
40
10
EPS CAGR over:FY07-09:: 14%

25
25
20
EPS CAGR in FY12-14::34%

Average P/E FY12-14::24.1x
Oct-07
Apr-07
Oct-06
Apr-06
Oct-05
Apr-05
Oct-04

Average P/E FY12-14:: 19x

Note: During 2007, there was a massive expansion of multiples of the Cyclicals, which were in their multi year Bull Run. The same can happen with Defensives over 2014 can be a million dollar question.
45
Oct-13
Apr-13
Oct-12
Apr-12
Oct-11
Apr-11
Oct-10
Apr-10
Oct-09
Apr-08
Nov-13
May-13
Nov-12
May-12
Nov-11
May-11
Nov-10
May-10
Nov-09
May-09
May-08
15
10

Average P/E :FY08-12:: 19.6x
Nov-08
(x)
(x)
30
Apr-04
EPS CAGR over: FY08-12:: 20%

Average P/E :FY08-12:: 18.4x
30
15
10
Oct-03
Apr-02
Trend of TCS EPS growth vis--vis P/E re-rating over FY08-14
Trend of Sun Pharma EPS growth vis--vis P/E re-rating over FY0814
20
Apr-03
Jun-08
Dec-07
Jun-07
Dec-06
Dec-05
Jun-05
Dec-04
Jun-04
Dec-03
Jun-03
Dec-02
Jun-02
Jun-06

Average P/E FY07-09:: 29x
10
Apr-09
20

25
Oct-02
50
Oct-08
60
(x)
Trend of Reliance EPS growth vis--vis P/E re-rating over FY03-09
Debt
to Your
dominate
EV for cyclicals
Dealcontinues
Team At
Service
100
80
60
40
20
0
-20
-40
FY08
FY09
FY10
FY11
FY12
FY13
FY08
FY09
FY10
FY11
FY12
FY13
FY08
FY09
FY10
FY11
FY12
FY13
FY08
FY09
FY10
FY11
FY12
FY13
FY08
FY09
FY10
FY11
FY12
FY13
FY08
FY09
FY10
FY11
FY12
FY13
FY08
FY09
FY10
FY11
FY12
FY13
FY08
FY09
FY10
FY11
FY12
FY13
FY08
FY09
FY10
FY11
FY12
FY13
FY08
FY09
FY10
FY11
FY12
FY13
FY08
FY09
FY10
FY11
FY12
FY13
FY08
FY09
FY10
FY11
FY12
FY13
No or low leverage enables defensives to command and retain rich valuations
Hero
M &M
Maruti
Tata Motors
HUL
Auto
ITC
Infosys
FMCG
Mcap contribution to EV
TCS
Wipro
Cipla
IT
DRL
Sun Pharma
Pharma
Net debt contribution to EV
Debt makes majority of EV for cyclicals, which is hindrance for profitability and, hence, shareholder returns
100
80
60
40
20
-40
-60
FY08
FY09
FY10
FY11
FY12
FY13
FY08
FY09
FY10
FY11
FY12
FY13
FY11
FY12
FY13
FY08
FY09
FY10
FY11
FY12
FY13
FY08
FY09
FY10
FY11
FY12
FY13
FY08
FY09
FY10
FY11
FY12
FY13
FY08
FY09
FY10
FY11
FY12
FY13
FY08
FY09
FY10
FY11
FY12
FY13
FY08
FY09
FY10
FY11
FY12
FY13
0
-20
BHEL
L &T
Coal India
Hindalco
Capital Goods
JSPL
Tata Steel
Metals
Mcap contribution to EV
NTPC
Tata Power
Power
Bharti
Telecom
Net debt contribution to EV
Source: Capitaline, ICICIdirect.com Research

EV= Enterprise Value = Market Capitalisation + Debt Cash
EV of Defensives is comprises mainly of market capitalisation as their business are no or low leverage while the same for Cyclicals is highly characterised by leverage and hence valuations are factoring that into account
46
Euphoric
valuation
part &
parcel of markets: Defensives yet to enter that phase
Deal Team
At Your
Service
How have P/E multiples expanded for cyclicals during 2007
Cyclicals
Capital Goods
Power
Metals
Oil & Gas
P/E on March 2007

20.6
% rise in P/E
62.6
6.7
12.6
P/E on December 2007

33.5
32.7
12.4
20.4
85.1
62.0
Sector Benchmark
L&T
NTPC
SAIL
Reliance Industries
Defensives
FMCG
IT
Pharma
18.2
21.9
19.5
23.0
18.0
20.8
26.4
-17.8
6.7
ITC
TCS
Sun Pharma
BSE Sensex
16.0
20.0
25.0
P/E on March 2007

32.3
18
7.5
16.5
P/E on December 2007

53.1
28
15.5
21.5
% rise in P/E
64.4
55.6
106.7
30.3
20.6
28.7
23.5
24.9
21.1
16.1
20.9
-26.5
-31.5
Historically it has been observed that large caps have outperformed midcaps and small caps across various financial parameters be it
revenue, operating and PAT growth over FY06-13
40
30
35
29
23
22
17
20
24
17
21
20
15
14
13
6
10
-30
BSE Sensex CAGR 2006-13
BSE Midcap CAGR 2006-13
Source: Bloomberg, Capitaline, ICICIdirect.com Research

All P/E ratios on one year forward basis
47
BSE Smallcap CAGR 2006-13
PAT
Other
Income
Depreciation
-20
Interest
-10
Operating
Profit
0
Revenue
(%)
20
18
31
-26
Financial
parameters:
cap leads mid caps and small caps
Deal Team
At YourLarge
Service
Profitability growth profile over comparable periods
40
-60
BSE Smallcap
PAT CAGR 2006-08
Debt Equity (Average 2006:13)
The trend has reversed during FY08-13, where consistency of earnings

has taken centre stage. On the same lines, large caps have found flavour.
Hence, their ownership has increased 657 bps while the same for small
caps has declined 325 bps owing to their dismal performance and outlook
27.0
and simultaneous change of ownership patterns

18
10
5
BSE Sensex
BSE Midcap
bps
0
BSE Smallcap
Average dividend payout - 2006-13 (profit making companies)
800
600
400
200
0
-200
-400
-600
-800
672
657
-550
FII holding bps change 2006-08
Source: Capitaline, ICICIdirect.com Research
48
712
465
BSE
Smallcap
15
BSE
Midcap
(%)
21
PAT CAGR 2008-13
During FY06-08, ownership of small caps and midcaps was in vogue as

they exhibited stupendous PAT CAGR while large caps were relatively out
of flavour as the earnings profile was moderate compared to the former
Large caps have high, consistent dividend payouts
25
20
-2
BSE
Smallcap
-20
-40
BSE Midcap
-44
0
Sensex
1.3
1.2
0.7
Debt by EBITDA (Average 2006-13)
30
20
1.8
BSE Sensex
27
BSE
Midcap
5.1
4.6
Sensex
6
5
4
3
2
1
0
49
42
60
(%)
(x)
Large caps relatively immune owing to low leverage, strong

balance sheet
-325
FII holding bps change 2008-13
Market
Strategy
Deal Team
At2014
Your Service
1
10
49
Which
sectors
andYour
stocks
will find favour?
Deal Team
At
Service
Apparels
Banking
Apparel players have grown at 17% in FY13 led by the shift from the
unorganised to the organised segment. For the forthcoming year as well,
we remain positive on this segment considering the rising preferences for
branded products. We expect apparel players to grow revenues and PAT
at 20.0% and 23.0% in FY15E, respectively
We have a cautious view on the sector with a negative view on PSU banks
and relative preference for private banks as they have remained resilient
on earnings growth despite rising NPA provisions, mainly on account of a
diversified income and lower restructured and NPA portfolio
As GDP growth expectations remain muted at 5.4% in FY15E, we do not
see NPA and restructured assets cycle turning in the next couple of
quarters. System GNPA has doubled in two years to | 236000 crore (4.2%
of advances in Sep 13), whereas RA has been ~6% of advances
This growth is likely to be largely volume led owing to increased

distribution networks and entry into new markets. The womens segment
is likely to outpace the mens wear segment, especially in the innerwear
category. The increasing exports also augur well for apparel players.
Considering the ability to pass on cost increases, we expect operating
margins to improve marginally to 20.0% in FY15E
For our coverage universe, we expect PAT to grow at 7.6% CAGR over
FY13-15E to | 57662 crore from | 49796 crore in FY13 and absolute GNPA
and NNPA to rise 23% and 28% CAGR, respectively, over FY13-15E
The apparel players are better placed than the pure play textile companies
as they (a) are less capital intensive; (b) earn better margins and (c) enjoy
superior return ratios. We are, hence, positive on apparel players
IndusInd Bank, with 26% profit CAGR and reasonable valuation of 2.3x
P/ABV is our top pick among private banks. Within PSU banks, we prefer
SBI due to its strong liability franchise and better NIM than peers
Auto
Capital Goods
We favour the auto space considering its relative resilience in

earnings/modest valuations even with subdued volume growth. Empirical
analysis of down cycles highlight that volume recovery plays are swift;
earnings witness ~2x multiplier effect in next years as capacity utilisation
increases from ~65% to ~80%. Thus, we feel this time an urban recovery
coupled with rural demand could create similar earnings multiplier effect
H1CY14 is likely to witness sporadic ordering opportunities (bidding out of

8000 MW of BTG ordering opportunity, NTPC tenders & PGCIL capex of |
22000 crore ). However, recent run up in valuations of capital goods index
from 12x to 19x does make us cautious/sceptical given valuations have
priced in all positives in form a positive outcome of elections, peaking of
rate cycle and policy reforms and there is little room for complacency.
On sectoral positioning we feel comfortable on the consumer side i.e.

PVs/2Ws would be the first beneficiaries of recovery as the infra-led CV
recovery may be slightly protracted
CY14 strategy for the capital goods space would be to stick to large caps
like L&T (15% and 13% revenue & PAT CAGR, respectively; comfortable
D/E of 0.4x, diversity in geography, efficient working capital and focus on
enhancing RoEs by monetising strategic subsidiaries)
Another argument for preference lies in the margin of relative safety on

valuations as leading automakers are available at ~14x PE FY15E (below
long term average) even though these franchises are no lesser than say
other pure play consumers (at ~30x PE FY15E) on the earnings quality,
balance sheet and corporate governance front
For CY14/FY15E, we expect our coverage to report 8% growth in

revenues while profitability is expected to remain flattish YoY owing to
muted but flattish margins and 6.4% YoY growth in interest costs for the
sector, as a whole
Source: ICICIdirect.com Research

Positive Outlook on Sector
Neutral Outlook on Sector
Negative Outlook on Sector
50
Sectoral
Outlook
Deal Team
At Your Service
Cement
FMCG
After two years of slowdown and absorbing high cost pressure, the
sector is heading towards a recovery phase. We expect growth to pick up
at CAGR of 6.2% to 276 MT during FY13-16E vs. CAGR of 5.5% during
FY11-13. North and West would continue to perform better than east and
central regions due to lower capacity additions while South is likely to see
stabilisation in capacity additions with marginal recovery in demand
After an unpredicted slowdown in FMCG revenue growth to ~12% in

CY13E (~16% in 2012) due to weak macros, we expect the sectors
growth to recover to ~15% in CY14E. Growth would be led by a revival in
volumes (7-12%), changing product mix and higher pricing power
We expect rural sales (~40% of FMCG revenues) growth (1.3-1.5x of
urban sales growth) to be the key volume growth driver in CY14E with
urban demand recovering at a slower pace. Further, rural growth would
be supported by a trickle down effect of higher pre-election spending in
H1CY14 and better yields due to favourable monsoon in CY13.
Given the lower pace of capacity additions (i.e. at CAGR of 6% over FY1315E vs. FY10-13 CAGR of 11%) led by current surplus capacity of 35 MT,
utilisation levels of industry are likely to stabilise at 75%. Further, we
expect some recovery in prices after remaining stagnant for the last year.
Assuming 4% net increase in prices, we expect EBTDA/tonne to improve
by 11% to | 990/tonne in FY15E due to operating leverage benefit
We prefer Shree Cement given its presence in strong regions (i.e. North70%), better cost efficiency coupled with a strong balance sheet
The unfolding rural demand keeping abreast of the Indian consumption

story has significantly pushed valuations of FMCG companies with higher
rural exposure (HUL, Dabur). Hence, we prefer ITC and Marico, which are
actively expanding their rural reach and are available at relatively cheaper
valuation of 19x (FY16E EPS) and 22x (FY15E EPS), respectively
Consumer Discretionary
Healthcare
Sustained demand outlook from tier-II, tier-III cities would be key drivers
for CD companies. Electrical goods companies expected to record double
digit volume growth (10-15%) supported by new product launches and
expansion in new geographies. Further, paint companies are expected to
record high single digit volume growth(6-8%), despite GDP growth
slipping to 10 year low ~5%, supported by sustained repainting demand
We expect temperance in buying in the pharma space after yet another

outperformance (fourth in a row) as premium valuations in most cases
have little leg room left for further upsides. Structural strongholds such as
manufacturing fungibility, geographical diversification, product approvals/
pipeline and, hence, clear visibility will, however, keep the sector in focus
for corrective buying. We remain neutral on the sector
We believe higher advertisement expenditure and lower operating

leverage would keep EBITDA margins under check for electrical goods
companies. Paint & chemical companies will find it difficult to improve
current elevated margins (~15%) due to higher raw material prices and
adverse currency movements
On the exports front, domestic generic companies witnessed 25-30%

growth in the US market in CY13 (till date) on the back of new product
launches coupled with a favourable currency. We expect 15-20% growth
in dollar terms as most players have developed a rich product pipeline
over the last three or four years
We are positive on midcap electrical goods manufacturers with double

digit volume growth and attractive valuation. We prefer Bajaj Electricals
on account of its robust lighting & CD segment and compelling multiples
On the domestic front, after passive growth in 2013 is likely to accelerate

to 8-10% in CY14 (on a lower base) driven by mid-teens growth in chronic
therapies such as anti-dietetic, cardiology & neurology

51
Sectoral
Outlook
Deal Team
At Your Service
Hotel
IT
The growth in room demand has consistently remained subdued in the

past three or four years due to challenging macroeconomic conditions.
We expect the same trend to continue further with the industrys FY1315E sales CAGR of 8.4% vs. FY10-13 sales CAGR of 13.2%
FY15E key positives include 1) demand recovery in the US, 2) penetration

in Europe, 3) improvement in discretionary spends, 4) encouraging CY14E
IT budgeting environment, 5) improvement in deal closure velocity and 6)
large deal ramp-ups. Negatives could be cost pressures due to onsite
hiring, visa regulation, pricing, wage inflation and rupee appreciation
We expect competition to intensify with an additions of 10,400 premium

hotel rooms to the existing inventory of 51,600 premium segment rooms,
which will cause room rates to remain stagnant. In addition, a high debt
burden would be further likely to dent the net margins of companies.
However, possible floating of REITs could only be a positive trigger for the
sector to de-leverage
Rupee revenue growth for the sector could moderate to ~12-13% in

FY15E vs. expected 26.5% in FY14E (12-14% in dollars and ~12% YoY
depreciation in the average rupee). Tier-I EBIT margins could decline 39
bps YoY (23.3%) in FY15E vs. 80 bps (23.7%) improvement in FY14E as
we expect 80 bps appreciation in the average rupee rate in FY15E. We
expect 11.7% PAT growth (tier-I) in FY15E vs. 28.4% in FY14E
Given the challenges, EIH and IHCL remain in better position. While EIH
has given a stable performance in the subdued environment, IHCL has
shelved its major capex plans and cleaned up its notional losses, although
a turnaround of subsidiary companies remains a challenge for it
At 22% premium to the Sensex, IT index valuations (16.5x vs. 13.5x) are
demanding & suggest incremental returns could align to earnings growth
Infrastructure
Logistics
On the construction front, we do not expect any big bang project

awarding or revival in capex with the election code of conduct coming
into force in H1CY14 and elevated interest rate throughout CY14 causing
key downgrade risk to 18.4% YoY growth in bottomline
Container cargo growth at major ports remained flattish during CY13 and
significant freight rate hike (~18%) by railways adversely impacted the
volumes of domestic logistics companies. However, owing to relatively
stable margins and low leverage (FY15E debt equity: 0.1x), the sector has
an opportunity to benefit from positive operating leverage. Hence, we
maintain a neutral stance on the sector
On the infrastructure front, our coverage is expected to remain subdued

in FY15E. The key theme for CY14 is likely to be progress towards policy
reforms such as AERA ruling for aero charges for the next regulatory
period a key determinant for profitability for players like GMR & GVK and monetisation of assets to de-leverage their balance sheet given the
net debt to equity of 2.5x for our coverage
We expect the I-direct logistic universe to report a CAGR of 6%, 8% and

4% in revenue, EBITDA and PAT, respectively, over FY13-15E.
Furthermore, over two or three years, with the expectation of GST being
implemented and partial operation of dedicated freight corridor, a major
turnaround is expected in the sector
In a scenario of stressed balance sheet and elevated interest rate cycle,

we prefer Sadbhav Engineering whose projects are well funded and have
strong visibility over the order book. We also like JP Associates, which
would be focusing on de-leveraging its balance sheet
We prefer Container Corporation and BlueDart Express due to their

leadership in the respective segment along with superior infrastructure
and healthy financials

52
Sectoral
Outlook
Deal Team
At Your Service
Media
Oil & Gas
In the print space, ad growth is expected to slow down in FY15 as

compared to last year (15-20%) due to reduced FMCG spends on the back
of an economic slowdown. However, upcoming general elections would
aid double digit (12-14%) growth in regional print. Profitability across the
board is expected to improve on account of a stabilising currency leading
to reduced newsprint costs
Given the upcoming Lok Sabha elections, we believe there will be

uncertainty in implementation of reforms, which will offset the opportunity
from cheap valuations. Given the status quo, we would place our bet on
upstream companies (ONGC and Oil India), given the fact that they are
factoring in most negatives. We estimate the profitability of PSU oil
companies will increase 36.6% in FY15E on account of lower under
recovery and APM gas price hike ($ 6.3/mmbtu). However, the upside will
only be available once the trigger in the form of reforms plays out
We expect broadcasters to be major beneficiaries of digitisation and see a

spurt in their subscription revenues with an impressive growth of ~37%
in FY15E. However, ad growth is likely to remain flattish. Seeding of STBs
would help subscription revenues (ex-activation income) growth of ~49%
and 11% in Hathway and Dish, respectively
In the multiplex space, PVR is expected to post revenue & PAT growth of
15% & 56%, respectively, in FY15. Aggressive rollout, on time execution
and dominant market position would help it sustain rich valuations
For gas utility companies, we expect volume growth to be subdued due to

low growth in domestic production and no major RLNG capacity coming
on stream in FY15E. Also, we expect demand concerns to remain due to
higher LNG prices. We estimate the earning estimates of gas utility
companies to decline 4.2% to | 59.5 billion in FY15E. Hence, lower
earning growth will limit the upside potential of stocks
Metals
Power
We are underweight on the metals space on the back of subdued demand

growth and overcapacity scenario (global steel utilisation levels stagnated
at ~75-78%), thereby marring the profitability of metal manufacturers.
Adding fuel to global demand concerns has been relatively muted GDP
growth in China (accounts for ~45% of overall metal consumption)
In CY14, we would be cautious on the power sector, even though CY13

saw positive reforms taken by the GoI (FRP, SBDs FSAs and coal pass
through). However, our caution stems from upcoming elections and
implementation of tariff order (2014-19), that can spring negative
surprises. What will be crucial to watch is the discipline of SEBs in
maintaining commitments of FRP (tariff hikes/reducing AT&C losses)
Domestic GDP growth rate is likely to remain subdued. Hence, we expect

domestic steel demand growth to remain sluggish in FY14E (1% YoY)
with a likely rebound only in H2FY15 once some clarity emerges on
government policies post general elections in 2014. For FY15, we expect
demand growth of ~4.5%, predominantly back-ended
We expect ~15 GW to be added in CY14 (22 GW added in CY13) but the

financial performance of the sector is expected to be muted. Sales are
expected to grow 10.3% YoY (10% YoY in CY13) with PAT growth limited
to 7.8% YoY (up 34% in CY13) as higher interest cost (up 29% YoY)
would weigh as capacities come on stream
In our coverage, we like NMDC (low cost structure, healthy EBITDA

margins; dividend yield of ~5%, cash per share of | 57; available at 5.2x
FY15EV/EBITDA) and Hindustan Zinc (low cost structure, healthy EBITDA
margins, cash per share of | 56; available at 4.4x FY15E EV/EBITDA)
In terms of stock selection, in CY14, we would stick to Power Grid (robust

earnings profile as capitalisation of assets is robust) and CESC (stable
base business, improving retail business & BPO investment)

53
Sectoral
Outlook
Deal Team
At Your Service
Real Estate
Shipping
A challenging macro environment, elevated interest rate cycle ahead, and

peak level of property prices impacting affordability for buyers are
expected to pose a significant challenge for developers, going ahead
Though the Baltic Dry Index recovered towards end of CY13, freight rates
continue to remain subdued (~ 20% of historical highs) and are unlikely to
significantly improve the earnings of shipping companies. A substantial
increase in tonnage supply over next two years (16% and 9% of current
global fleet for dry bulk carriers and tankers, respectively) is expected to
keep freight rates capped. We maintain a negative stance on the sector
owing to depressed freight rates and muted global cargo movement
While some developers have managed to buck this trend so far through
new launches in certain pockets, the build up of high level of inventory in
existing projects may force developers to reduce new launches, going
ahead. This would pose a key risk to our coverage assumption of 21%
YoY jump to 7.0 mn sq ft in sales volume and 40% growth in the
bottomline in FY15E.
We expect total revenue for the I-direct shipping universe to grow at a

CAGR of 6.6% over FY13-15E to | 11968 crore. However, PAT is expected
to decline from | 666 crore in FY13 to | 391 crore in FY15E on account of
increased net loss by SCI (due to higher depreciation and interest cost)
We remain selective in stock picking based on balance sheet comfort,

quality of land bank and management. Consequently, ORL is our top pick
with an anticipated pick-up in sales volume with new launches such as
Mulund and Worli along with attractive valuation (1.4x FY15E P/BV and
0.7x its NAV)
Among shipping stocks, we prefer GE Shipping owing to its low leverage

(D/E of 0.9) and strong presence in the lucrative offshore segment
Retail
Telecom
After a couple of years of aggressive space addition, we expect relatively

lower space addition in the forthcoming year. We expect retailers to aim
at profitable growth in FY15. Hence, the focus will be on enhancing same
store sales growth (SSSG). We expect the apparel segment to
outperform. However, as the value retail format is likely to witness a
lukewarm year, we remain neutral on the retail sector
The regulatory scenario has eased considerably, with several pro industry
policies (M&A guidelines, spectrum sharing and trading, high quantum of
spectrum put up for auction and reduced spectrum reserve price)
The voice segment could see modest volume growth of 5.5% for the
three large listed operators in FY15 while ARPM would continue to
improve on the back of reduced discounts and offers. Realisation in the
voice segment may reach 37 paisa/minute in FY15 from 35 paisa in FY13
We expect SSSG of 6-8% and 8-12% for Future Retail and Shoppers Stop,
thereby leading to a 8% and 17% revenue growth, respectively. Space
addition is likely to be ~0.5 mn sq ft (earlier average of 1 2 mn sq ft).
The EBITDA margin is likely to remain flattish with a positive bias
Telcos may introduce further disruptive pricing in data. Though overall

data consumption would grow 42%, per subscriber data consumption
would grow 17% while realisation could decline 5% to 25 paisa/MB
In our retail pack, we like Titan Company. A lower base and increased
market share is likely to aid revenue and PAT growth of 23-24% (FY15E).
A likely reversal of gold import norms (with comfortable CAD) will benefit
Titan. Otherwise also, it is better placed to raise working capital
Declining capex intensity and improving operating performance will aid

free cash flow, enabling debt repayment. We expect all listed telcos to
collectively post 9.1% and 59.1% revenue and PAT growth in FY15 led by
reduced interest outgo. We remain bullish on the sector

54
Stock
Picks At Your Service
Deal Team
Bajaj Auto (BAAUTO)
Target Price: |2450
IndusInd Bank (INDBA)
The BAL managements highly focused approach towards motorcycles on

a global scale differentiates it from its domestic peers. The stock has
witnessed tremendous growth in the last five years with ~23% revenue
CAGR. Also, owing to its nimble low cost structure, profits have witnessed
CAGR of ~47%
IndusInd Bank has advances & deposits market share of ~0.8%. In the
past 22 quarters, it has augmented itself from low & volatile B/S growth to
steady & sustainable growth with strong profitability (70% CAGR in past
five years to | 1061 crore in FY13). IIB earns one of the best RoAs in the
industry at ~1.6% and has a high yield loan portfolio of 50% commercial
finance including CV and 50% corporate finance. Strong management
remains a key strength of the bank since it took over in FY08
BAL remains poised to witness richer ASPs as the product mix improves
in coming years as new product launches gain traction and urban demand
revives. Also, export profitability is set to improve on better $/| realisation
going on in the coming periods. Thus, the financial performance would
continue to remain above its competitors
The bank aims to achieve loan growth of 25-30% CAGR, double the
branch network to 1000, make fee income exceed loan growth & CASA to
be in the mid 30s over the next three years (FY14-16). We believe IIB is
well poised for another phase of healthy business, PAT growth of 20%,
26% CAGR, respectively, over FY13-15E with healthy Tier I of 13%. Return
ratios with RoE of 17-18% and RoA of ~1.6% provide comfort. We value
IIB at 2.7x FY15E ABV and assign TP of | 510, providing an upside of 21%
We feel BAL is factoring in a lot of concerns and provides a good case for
re-rating considering a strong franchise with high RoEs and good dividend
payouts are available at attractive valuations of ~13x FY15E EPS
Idea Cellular (IDECEL)
Target Price: |510
Target Price: |193
ITC (ITC)
Target Price: |387
Idea would benefit from increasing data penetration and reducing

discounts in voice. With 60% increase in data consumption to 123 million
GB & 25% increase in data subscribers to 49 million in FY15, data revenue
would grow at 55% contributing 13% to revenue up from 5% in FY13
ITC is our top pick in the FMCG segment considering its pricing power in
cigarettes, extensive distribution network and product launches in FMCG
keeping FMCG revenue growth at high teens, improvement in RoE from
hotel business and improving margins from paperboards business
Aided by industry wide curb on discounts, Ideas ARPM may expand 3.2%
to 38.7 paisa, up from 35.4 paisa in FY13. Led by higher operating
leverage in both data & voice, margins may expand 548 bps YoY to 32%.
We expect revenue & PAT to grow at 11% & 40%, respectively, in FY15E
Led by the companys strong pricing power in cigarettes, we believe EBIT

growth of cigarettes would continue to grow in mid teens (~80% of ITCs
EBIT) through FY16E. Further, with not more than 10% excise hike
expected in the FY15 Budget, we expect cigarette volume growth to
revive to 1% in FY15E and 2.5% in FY16E (-4% in FY14E)
Idea does not have any license coming up for renewal in CY14, which
would curtail capex in the next year. Also, higher FCF generation would
aid debt repayment and interest saving. Idea is at most comfortable
leverage levels (net debt to EBITDA at 1.1x vs. 2.0x for Airtel and 4.5x for
RCom) and remains the most attractive operator for a possible acquisition
by a foreign telco. We value Idea at | 193 using the DCF methodology
Currently, the stock is trading near its five-year average P/E multiple (oneyear forward) of 22x FY16E EPS. With cigarettes EBIT growth remaining at
mid-teens and FMCG business to breakeven by FY14E, we expect
multiples to expand from hereon. We have valued the stock on an SOTP
basis assigning it a target price of | 387 (~22% upside)
55
Stock
Picks At Your Service
Deal Team
Marico (MARIN)
Target Price: |262
Shree Cements (SHRCEM)
We prefer Marico over other FMCG peers led by its ability to strengthen
market share in hair oils (Parachute), increasing presence in high growth
healthy foods portfolio (oats & muesli) and revival in edible oil (Saffola)
sales. Further, led by the initiative to increase presence in rural market we
expect revenues to post strong growth of ~19% CAGR (FY13-15E)
Shree Cement is the largest regional player in North India. Being also one
of the most efficient players with highest EBITDA/tonne in the industry, it
has been least impacted by the ongoing slowdown with sales and PAT
CAGR of 15.3% and 14.2% over FY10-13 (June year ending)
The company is on track on the capacity expansion front. Cement
capacity of 13.5 MT is likely to increase to 21.5 MT by FY16E. Hence,
volume growth momentum is expected to continue, backed by an
improvement in the pricing scenario in the north. Also, the company has
560 MW for the power plant for captive consumption and external sales
Within our coverage universe, we believe Marico would post the highest
margin expansion of ~280 bps to 16.4% (FY15E) led by the strong pricing
power in the hair oils segment, increasing revenue contribution from
higher margin youth brands (Livon, Set Wet, Zatak) and cross pollination
of brands across geographies
Although challenges in terms of slowdown would remain in the near term,

a strong balance sheet and better efficiency in terms of cost remain key
positives for the company. The stock is trading at attractive valuations (i.e.
at $106/tonne (on full expanded capacity of 21.5MT) and FY15E
EV/EBITDA of 7.7x (vs. two year average trailing EV/EBITDA of 9.5x)
With the stock currently trading below its five-year average P/E (one-year
forward) of 23x and earnings expected to post robust growth of 25.8%
CAGR (FY13-15E), we have valued the stock at 27x FY15E EPS of | 9.7
arriving at a target price of | 262
Oberoi Realty (OBEREA)
Target Price: |5080
Target Price: |285
Titan Industries (TITIND)
Oberoi Realty (ORL) is our top pick in the sector given the quality of land
bank, cash rich balance sheet (cash and cash equivalent currently at
~10% of market cap), prudent land acquisition strategy and management
bandwidth to execute projects
Target Price: |280
Titan will continue to maintain its leadership in the domestic jewellery

market driven by its strong brand equity, pan-India presence and superior
financial structure. We expect revenues, PAT to grow at a CAGR of 19%,
16% (FY13-16E), respectively, bearing in mind the current regulatory
framework. It is likely to gain market share as its unorganised peers are
likely to find it difficult to survive in the current regulatory situation
We anticipate a pick-up in sales volume with new launches such as

Mulund and Worli lined up in FY15. Consequently, we expect sales
volume of 1.1 mn sq ft in FY15E vs. 0.5 mn sq ft in FY13. Furthermore,
with Esquire expected to reach revenue threshold in FY15, we expect a
healthy 16.8% and 23.3% YoY growth in revenues and PAT, respectively,
in FY15E
Owing to the strong balance sheet (cash of | 800 crore), Titan is better
placed to fund its working capital requirements. Being one of the least
leveraged (0.3x) against the industry range of 0.3-2.0x, it is likely to
continue to enjoy better interest rates. The EBITDA margin is likely to have
a positive bias (~10.5%) as operations under the new regime stabilise
Available at an attractive valuation (1.4x FY15E P/BV and 0.7x its NAV),
we believe key launches such as Mulund and Worli along with a pick-up in
sales volume will hold the key for CY14. We have a target price of
| 285/share(0.8x its FY15E NAV)
Considering the comfortable CAD situation, we believe the norms relating

to gold imports could be relaxed. At ~18x FY16E EPS, Titan looks
attractive and the risk-return trade-off works in favour of investors
56
Strategy
2013 Stock
Performance
Deal Team
At Your
Service
Strategy 2013 Stock Performance
Scrip Name
Balkrishna Industries
Cadila Healthcare
Heidelberg Cement
Idea Cellular
Info Edge
Kansai Nerolac
Mahindra Lifespace
Page Industries
TCS
Tata Motors
Tech Mahindra
Zee Entertainment
Rec Buying Range

255-275
840-880
50-53
97-98
330-350
1040-1100
380-410
3210-3320
1210-1260
290-305
880-915
180-200
Exit price/CMP* (|)

265
787*
38*
120
394
1081*
404*
3965
1430
360
1182
268
Return (%)
0.0
-8.5
-26.1
23.1
15.9
0.9
2.3
21.4
15.8
21.0
31.7
40.8

Strategy 2013 stocks recommended on December 27, 2012
57
Pankaj Pandey
Head Research
pankaj.pandey@icicisecurities.com
ICICIdirect.com Research Desk,

ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No 7, MIDC
Andheri (East)
Mumbai 400 093
research@icicidirect.com
Disclaimer
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written consent of ICICI Securities Ltd (I-Sec). The author may be holding a small number of shares/position in the above-referred companies as
on date of release of this report. I-Sec may be holding a small number of shares/position in the above-referred companies as on date of release
of this report. This report is based on information obtained from public sources and sources believed to be reliable, but no independent
verification has been made nor is its accuracy or completeness guaranteed. This report and information herein is solely for informational
purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other
financial instruments. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or
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Market Strategy 2014

December 26, 2013

Where are the markets headed in 2014?

How would general elections influence the markets?

Would the economy recover progressively?

How would the FM bridge the fiscal gap?

Has inflation peaked out to warrant a rate cut?

Is the worst over for the rupee?

What next as tapering begins?

What are the potential speed breakers for the markets?

Are cyclicals a good bet this year?

Which sectors and stocks will find favour?

Though sentiments have already rebounded, an economic recovery and

Strategy 2014 - Sensex & Nifty Target

Since we do not expect the economy to rebound meaningfully in the near

We are neutral on IT (demand intact, rich valuation), pharma (rich

We remain negative on capital intensive sectors like PSU banks (asset

Domestic equity markets had reacted vigorously to initial talks of QE

EPS CAGR (FY09-13): 12.6%

Oil and Gas

Sectoral EPS CAGR over FY09-13 (%)

Metals and Mining

Sectoral Contribution to Sensex EPS

Banking and NBFC

Source: Bloomberg, ICICIdirect.com Research

Where are the markets headed in 2014?

How would general elections influence the markets?

Would the economy recover progressively?

How would the FM bridge the fiscal gap?

Has inflation peaked out to warrant a rate cut?

Is the worst over for Rupee?

What next as tapering begins?

What are the potential speed breakers for the markets?

Are cyclicals a good bet this year?

Which sectors and stocks will find favour?

Political Landscape Is NDAs resurgence enough for 2014

Opinion Polls - Historically way of the mark

Outcome of various opinion polls

UPA NDA UPA NDA UPA NDA

Chhattisgarh (90) Chg

The Week-Hansa Research

State Election: BJP sweeps 3 states; emerges largest party in Delhi

Delhi (70) Chg

MP (230) Chg Rajasthan (200) Chg

Non-NDA parties dominating in larger constituency

A lot of factors like demographics, voter-turnout, results in important

Source: Media sources, ECI, ICICIdirect.com Research

BJP/INC seats Partners seats Partner seats as % of Alliance

Vote share of Congress and BJP

Increasing role of alliance

NDA has lost almost all its major

BJP Alliance partners

1999 2004 2009

Indian National Lok Dal

However, economic reforms to take their own due course

Macro indicators show little/no correlation with election year

Real GDP growth (%)

Fiscal Deficit % GDP

Source: RBI, Bloomberg, ICICIdirect.com Research

Pre Election Post Election

Where are the markets headed in 2014?

How would general elections influence the markets?

Would the economy recover progressively?