Green start for Monday morning
If you refuse to be made straight when you are green, you will not be made straight when you are dry. - African Proverb
While the skirmishes continue near the border with exchange of fire reported between terrorists and the Indian armed forces, the stock market is likely to breathe easy for now. Friday's sell-off by foreign investors may cause a temporary worry but September saw FPIs invest ~Rs 20,000 crore into Indian market. The outlook is a flat to positive start. Nikkei Manufacturing PMI for Sept will be announced today. The lows of Friday may act as a support for now. Auto stocks will be in focus. Maruti could see action after its sales grew over 31pc yoy in Sept as it announced record total sales. Disinvestment is in full swing as the government is considering offloading stake in 22 listed and unlisted companies. The monetary policy committee (MPC) meets today and tomorrow and the new RBI governor will announce the policy post lunch tomorrow. The dollar is firming up while the sterling hit over a month-low after Britain set a March deadline for Brexit.
Thematic Report
Infra Sector: Roads and Highways show the way
The Infra sector, as a whole, has not yet significantly recovered from the sluggishness that has prevailed since the last few years. However, certain sectors like roads and urban infra have witnessed substantial pickup off late. Not only has the Ministry set aggressive development targets for Roads and Highways, it has also extended strong budgetary allocations to that effect. Improvement on the ground is also visible with the sharp rise in the awarding of road contracts during the recent quarters. The introduction of the highly innovative Hybrid Annuity business model and prudent policy measures in the Roads sector have played a pivotal role in boosting private participation.
Select sectors to witness strong investments in coming years
We believe the improving fiscal situation would lend more flexibility towards improving infra investments. While the central budget has allocated higher funds to select infra sectors, major states have cut down capex owing their specific funding constraints. As the overall infra sector takes time to pick up, we believe sub-sectors like Roads and Highways are likely to witness strong investments. Given the pipeline of investments, we see a strong opportunity for most players across select verticals like Roads and Highways. While we are positive on asset light EPC focused companies in this space, we continue to remain cautious when it comes to asset-heavy companies, owing to their stressed balance sheets and challenging business models.
Cherry picking among players: Who is the best-placed to cash in?
There are several companies engaged directly or indirectly in infra space. We have divided them into two sub categories:
a) Players focused on the EPC segment; and
b) Players focused on BOT segment (development and maintenance).
EPC players typically have an asset-light business model and are immune to concerns pertaining to traffic and toll growth (in case of Roads), whereas BOT players recover their returns from toll, which makes the risk element more pronounced. BOT players have struggled during the past two years, owing to modest traffic and toll rate hikes. Thus, we believe EPC focused players would be better bets compared to developers. Even as few big players continue to struggle because of high leverage and some company-specific issues, mid-sized EPC players are set to benefit significantly. We remain bullish on selected EPC players with strong earnings visibility.
Rating Summary
| Company | CMP | Target | Rating |
| ITD Cementation | 142 | 151 | ACCUMULATE |
| PNC Infratech | 122 | 145 | BUY |
| KNR Constructions | 763 | 802 | ACCUMULATE |
| Simplex Infra | 338 | 391 | BUY |
| NCC Ltd | 85 | 88 | REDUCE |
| Ashoka Buildcon | 175 | - | NOT RATED |
| MBL Infra | 103 | - | NOT RATED |
| Jkumar Infra | 187 | - | NOT RATED |
Source: IIFL Research
Company Research
IPCA Laboratories: Strong re-rating candidate – BUY
CMP (Rs) 598, 12-mts Target (Rs) 760, Upside 27.0%
IPCA Laboratories is on the comeback path after the lows in margin and PAT touched in FY16. Reeling under triple import alerts, an unparalleled event in its history, the company should gradually regain momentum in ex-US operations that were impacted by currency depreciation and withdrawal of global fund business last fiscal. Company has been a cost leader with margins in excess of 20% in the three year run up to alerts; indeed FY14 margin of ~25% is comparable to larger peers despite having a lower share of US revenues, a traditionally high margin business. Management remains confident of growth in international branded operations while generics would clock 13% Cagr over FY16-19E without Global Fund and US sales. In the domestic arena, FDC ban and NLEM impact would be offset by price hikes in FY17E with estimated 13% Cagr over next 3 years. We factor in average ~200bps margin improvement in FY18/19E each, which translates into ~50% compounded PAT growth over FY16-19E. Stock is attractively priced at 16x FY19E EPS and we recommend BUY.
Macro Economics
Eight core Industries Production – Aug'16
India's core sector growth during August grew 3.2%, helped by momentum in steel and fertilisers, however activity in coal and electricity generation proved to be a disappointment. The monthly reading for the eight infrastructure sectors does not exhibit too much vitality, however, one can derive optimism from the cumulative reading for the first five months of this fiscal year which shows growth of 4.5%, much higher than the number of 2.4% during the same period of last fiscal year. Steel output grew 17%, recovering sharply from the contraction of 0.5% during the prior month. The rebound in the number can also be attributed to relatively low base during August last year. Similarly, Fertilisers output grew 5.7%, recuperating from the decline of 4.3% during July this year. Cement sector grew 3.1%, as August monsoons turned out to below average. Output of refinery products grew 3.5%, however, the growth reading decelerated, when compared with last six month average of 9.2%. On the negative side, Coal output contracted by 9.2%, a complete contrast when compared with last six months average of 4.5%.
Sector Update
Auto volume update: September 2016
² Maruti surprises yet again with highest ever volumes, clocking 31.1% yoy growth
² Ashok Leyland M&HCV volumes disappoint due to high base, but LCVs stay strong
² Eicher reports industry beating performance in CVs, Royal Enfield sees 30% growth
² M&M UVS disappoint with just 2.6% yoy growth, strong show in <3.5ton LCVs
Technical Track
Lack of follow-up selling was evident following a sharp decline in Thursday's trade. Despite corrective action, structure of higher top and higher bottom, in place since March 2016, continues to remains intact. 3 digit gann number of 856(0) has provided respite in last two sessions. Moreover, 4-digit gann number of 8557 also came to the rescue of the index in Friday's trade. Incidentally, Nifty made a low of 8555 in Friday's trade before providing a pullback to settle at 8611. Only if gann support of 8560 is held, a rally is possible towards 8700 in the near term.
Derivatives Diary
² Nifty continue to remain volatile on back of global cues and domestic news flows, focus will be on RBI policy event lined up on 4th October.
² SGX nifty indicating mild gap up opening in line with global peers.
² Open interest additions seen across the board with maximum base at 9000 call and 8500 put for October series. FII's index futures long to short ratio stands at 6.46x.
² India VIX down 7% as sharp selloff arrested near 8600 zone on Nifty futures. However still remain at elevated levels near 17.5 on VIX index.
² Rate sensitive will remain in traders focus on back of policy action.
Fixed Income Synopsis
The 10Y benchmark 7.59% GS 2026, ended ~5 bps lower at 6.96% vs previous close of 7.01%, and the 6.97% GS 2026 ended ~5 bps lower at 6.81% vs previous close of 6.86%. Gsecs recorded total trading volume of ~Rs. 590 bn.
The demand at the fixed Repo window was Rs. 74.29 bn, while the supply at the fixed Reverse Repo window was registered at Rs. 123.99 bn. The Call WAR closed higher at 6.45% vs previous close of 6.44.
The benchmark five-year OIS and one-year OIS closed higher, with the 5-Y OIS closing at 6.37% vs. previous day's close of 6.40%, while the 1-Y OIS closed at 6.48% vs. previous day's close of 6.49%.
The Reserve Bank of India's Reference Rate for the US Dollar is Rs.66.66 on September 30, 2016, while the corresponding rate for the previous day (September 29, 2016) was Rs.66.55.
Commodity & Currency Cues
Gold prices inched lower, weighed down by late recovery in global equities. Broader markets breathed a sigh of relief after it was reported that Deutsche Bank is on the verge of reaching a US$5.4bn settlement with U.S Department of Justice for mis-selling mortgage-backed securities. This penalty amount is less severe than the earlier US$14bn demanded by U.S authorities. Nevertheless, the yellow metal derived some support from dovish remarks from Dallas Fed President, stating that Federal Reserve should persist with the accommodative stance given that US economic data does not show any signs of overheating. On macroeconomic side, US Core PCE index (gauge of inflation) for August was reported at 1.7% (yoy), when compared with 1.6% during the prior month. Of late, the reading has scaled higher, however, it continues to remain below Fed's inflation target of 2%. Meanwhile, US consumer spending during August declined by 0.1% (mom). Such numbers convey an ambivalent picture and it is difficult to take a call on whether Fed will have the courage to hike rates in December.
Crude oil futures persisted with firm tone, helped by OPEC's planned production cuts. However, recent output numbers give birth to doubts over seriousness of the cartel on concrete price stability measures. Preliminary estimates state that OPEC produced around 33.6mbp during September, up from August level of 33.5mbpd (revised).
Sterling remained on the defensive, impacted by widening current account deficit. CAD for second quarter of this calendar year was reported at 28.7bn pounds, equivalent to 5.9% of British GDP, up from 5.7% during the prior quarter. The trade deficit also expanded to 12.7bn pounds or 2.6% of GDP.
Corporate Snippets
² Godrej Consumer Products has entered the kids segment with a new range in the personal and outdoor category under the Goodknight brand. (BL)
² Alkem Labs has received 13 observations from the US drug regulator for its manufacturing facility at Daman. (BS)
² Promoters of Lovable Lingerie are in talks with private equity funds Samaara Capital, Multiples Alternatives and CX Partners to sell anywhere between 15 and 20% stake in the company. (ET)
² Zydus Cadila will collaborate with Medicines for Malaria Venture (MMV) to develop a potential anti-malaria drug. (BL)
² Jubilant Life Sciences said its subsidiary Jubilant Pharma has raised USD300mn (approx Rs19.98bn) through issuance of five-year bonds to mainly retire debts. (BS)
² Cipla said the US health regulator has issued four observations across its three manufacturing facilities in Goa after the inspection. (BL)
² Indian Oil Corp (IOC) will invest over Rs98bn in expanding its Barauni refinery in Bihar and setting up a petrochemical unit at Panipat refinery in Haryana. (BL)
² Bhilai Steel Plant (BSP), the flagship entity of the Steel Authority of India Limited (SAIL), has developed special grade of steel for defence establishment that can be used in terrains where temperature dips far below zero. (BS)
² Central Bureau of Investigation (CBI) has conducted raids on the offices of Usha Martin, in connection with a case related to the company's iron ore mine at Ghatkuri in Jharkhand. (ET)
² The Indian Commodity Exchange (ICEX), where Reliance Capital is an anchor investor, has got markets regulator Sebi's approval to recommence operations, which are expected to begin in November. (BS)
² A promoter of Reliance Communications has pledged 70mn shares valued at around Rs3bn with L&T Finance Limited on September 28. (BS)
² Mahindra Holidays & Resorts India (MHRIL) has inked a pact to acquire 12% stake in Nreach Online Services. (BS)
Economy Updates
² Union Power Minister said so far Rs1.67trn worth of bonds have been issued under the Ujjwal Distribution Assurance Yojana (UDAY) and it is now hot property and in demand. (BS)
² The Government reduced the prices for domestically produced gas to USD2.50/mmbtu for the period October-March 2017 period on gross calorific value basis. It was earlier priced at USD3.06/mmbtu. (BL)
² Petrol price was hiked by 36p/l, the third increase in two months, but that of diesel was cut by 7p/l in line with international trends. (BS)
² Fiscal deficit in the first five months of the current fiscal stood at Rs4.08trn, which was 76.4% of Budget estimates for 2016-17. (BS)
² India's largest-ever spectrum auction kicked off with major telecom operators placing bids worth Rs535.31bn across bands, even as the premium 700Mhz and 900Mhz frequencies did not find any buyer. (BL)
Happy Investing!
Amar Ambani
Head of Research
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