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Market experts on what to expect from various sectors in 2014

Rahul Oberoi January 2, 2014

Experts tell Money Today about their expectations from the various sectors.

INFORMATION TECHNOLOGY

"We are seeing clients enter IT budgeting sessions on a positivenote" Dilip Bhat, Joint MD, Prabhudas Lilladher

The performance of IT services companies is likely to improve in2014-15 , with nearly all Tier-1 players delivering around 15%growth. We expect growth to be broad-based, with contribution

from all geographies, ver ticals and service lines. The quarter went by saw a ris e in sales,aided by a weak rupee. After nearly two years, we are seeing clients enter IT budgeting

sessions on a positive note.

Infosys

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Target price: Rs 3,900

Infosys had its best quarter since October-December 2011, aided by project ramp-ups andmore deal closures. The management is noncommittal on margin expansion. However, webelieve that the margins have bottomed out and will rise in the October-March period. Weexpect the company to return to mid-teen revenue growth in FY15.

WiproTarget price: Rs 600

The company has bagged many multi-million dollar deals over the last two-three quarters.We expect growth to pick up over the next two-four quarters. We see Wipro winning moredeals while improving its margins. The stock is at an early stage of a re-rating cycle.

NIIT TechnologiesTarget price: Rs 380

NIIT's deal pipeline is improving. The order intake, too, is likely to pick up, after an aberrationlast quarter. Margins are expected to stabilise. The company is trading at 6.6 times 2013-14earnings. We expect 16% annual earnings per share growth between 2012-13 and 2014-15.

AUTOMOBILE

"A fall in interest rates is expected to create a conduciveenvironment" Gaurav Dua, Headof Research, ShareKhan

After the slowdown of the last two years, the automobile sector ispoised for a comeback. Faster economic growth is likely to drivevolumes. A fall in interest rates and stable fuel prices are expected

to create an environment conducive for growth.

Many foreign companies have been increasing their presence in India. Competition hasincreased across the spectrum. To counter this, the companies are focusing on exports,which augurs well for their profitability.





Bajaj AutoTarget price: Rs 2,342

Bajaj is working on six new launches to boost market share in the executive motorcyclesegment. A recovery in the premium motorcycle market, where Bajaj is the leader, will boostvolumes. The company also plans to tap new markets for exports.

Mahindra & MahindraTarget price: Rs 1,122

We expect a rise in tractor sales due to higher crop output and an increase in minimumsupport prices. Volumes will recover in 2014-15 due to revival in demand and launch of newproducts. The prospects of M&M's subsidiaries (Ssangyong, Tech Mahindra and M&MFinancial Services) have also improved over the last few months.

Maruti Suzuki

Maruti plans to launch a number of utility and multi-passenger vehicles. Also, the parent,Japan's Suzuki, has big plans to use the company's facilities to cater to the markets of Africa, Latin America and South East Asia.

BANKING

"We see long-term value in private sector banks and nicheNBFCs"

Rajiv Mehta, AVP, India Infoline

While business sentiment and policy reforms should pick up after the general elections in 2014, the investment cycle may take time





for any significant revival. That is why the demand for corporate credit may remainsubdued in 2014 . However, growth in credit to retail segment and small and mediumenterprises is anticipated to rise.

Macroeconomic stress is likely to keep asset quality of both public and private sector banksunder pressure. Net interest margins have improved with rates at the shorter end coming off on the back of improving liquidity. With interest rates on three-five year term deposits likely toremain firm due to high inflation, banks with lower wholesale funding may find it difficult tomaintain margins unless they increase lending rates.

Private sector banks are better placed than public sector banks to absorb the rising creditcosts due to their high margins and low costs. Though our sector view is cautious, we seelong-term value in private sector banks and niche non-banking finance companies if theycorrect significantly from current levels.

ING Vysya Bank

Target price: Rs 712

The bank delivered 36% a year earnings growth between 2009-10 and 2012-13 andexpanded return on assets by 50 basis points. It is expected to keep doing well, aided byrobust loan book, rising margins and efficiency gains. Gross non-performing assets havefallen over the past two years, provision coverage is 90% and loan restructurings have beennegligible so far. Earnings are expected to grow 22% a year between 2012-13 and 2014-15.The current valuation does not fully capture the bank's resilient profitability and capital base.

HDFC BankTarget price: Rs 777

HDFC Bank is the best in the industry with a substantial retail lending and deposit franchise

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BataTarget price: Rs 1,083

Bata's biggest strength is its employee incentive structure that creates an entrepreneurialculture. It has widened its product base and is now focussing on improving brandcommunication and inventory management, besides introducing new retail formats, in 2014and 2015. We expect 17% and 20% a year growth in revenue and earnings per share,

respectively, between 2012 and 2015.

TTK PrestigeTarget price: Rs 3,799

Near-term headwinds specific to Tamil Nadu and Andhra Pradesh and a high base effect dueto stellar sales of induction cook tops in the third quarter of 2012-13 are likely to ensureslower growth during the third quarter of 2013-14. However, the consequent fall in the stockprice will offer investors an attractive entry point. The company is on a high growth trajectorywith sustainable advantages over competition in innovation, distribution and brand recall. Weexpect earnings growth momentum to revive from January-June 2014 onwards.

OIL & GAS

"Crude oil prices are expected to hover between $95 and $112 in2014" Sudip Bandyopadhyay, President, Destimoney Securities

The year 2014 is expected to be a landmark for the global oil andgas industry. The gradual easing of tensions between US and Iranmay lead to normalisation of flow of crude oil from the west Asian





country. Improvement in supplies from Lybia and Iraq may also ease pressure on global oilprices.

However, pick-up in growth in US, Europe and China may lead to increase in demand. Thus,crude oil prices are expected to hover between $95 and $112 in 2014.

There has been a sea change in the global natural gas business over the last couple of years. This trend is expected to continue in 2014.

With discovery of new shale gas reserves and stabilisation of shale gas production in theolder blocks, the US is now meeting a large part of its energy requirement through localproduction. This has depressed natural gas prices.

However, since logistics of natural gas transportation across continents continues to remaina challenge, prices differ significantly in various parts of the globe.

In the long run, it is expected that fresh discoveries across the world will bring down prices.However, globally, we expect prices to remain firm during the first four months of 2014 due tohigh demand during the winter season.

From the Indian capital market perspective, we like Cairn India, BPCL and HPCL. We believethat these companies are very strong and have the potential to provide handsome returns toinvestors over the next couple of years.

In case of BPCL and HPCL, the structural problem created due to the subsidy burden is

expected to ease over the next 6-12 months.

CONSUMER DURABLES





"Fridge, washing machine, microwave oven firms offer investment opportunities" VK Vijayakumar, Investment Strategist, Geojit BNP ParibasFinancial

The consumer durables industry does well when the economygrows. This is more so in an emerging country such as India whereaccess to consumer durables is still very limited. During the boom

years from 2004 to 2011, fast economic growth, which led to a spike in discretionary income,ensured that the industry did spectacularly well. But since 2011, with growth slowing andhigh inflation eating into household savings, the industry has been facing rough weather.Rising interest rates and import costs due to rupee depreciation have added to the industry'swoes.

Segments like smart phones and tablets are growing at a fast pace, but do not offer anyinvestment opportunity, as these are dominated by unlisted MNCs. In the LED TV segment,cheap imports are posing a problem. However, refrigerator, washing machine andmicrowave oven companies offer good investment opportunities.

Though the industry continues to suffer from deficient demand and declining margins,investors can buy good stocks for the medium to long term, particularly in the context of thebullish trend in the market driven by expectations on the political front.

Whirlpool IndiaTarget price: Rs 250

The stock is trading at a price-to-earnings ratio of 25. Considering the vast potential of this





industry in a market like India and the company's leadership position, the stock has thepotential to rise to 250 in one year. At present, it is trading around Rs 200.

TTK Prestige

The stock, which has returned 1,600% in the last six years, still offers value to long-terminvestors. The company's top line is growing above 25% even in the current slowdown. Saleof pressure cookers has crossed the five-million mark while exports have crossed onemillion. Its induction cook-tops are recording decent sales. TTK Prestige, with a phenomenal58.4% return on capital, can rise by 25% within a year.

METALS

"Stability in steel prices globally is a big positive for the sector" Lalit Thakkar, MD, Institution, Angel Broking

Stocks of metals & mining companies fell sharply between Januaryand July this year as prices and demand fell and growth in capitalexpenditure slowed. However, since August, they have risensharply, led by improvement in sentiment in developed countries,

rupee fall and low valuations. In July-September 2013, most metal companies reportedbetter-than-expected revenues. We were especially surprised by sales reported by steelmakers.

Recently, companies have shrunk their expansion plans. Nevertheless, the global economicsentiment has improved, as manufacturing picks up. Stability in steel prices globally is a bigpositive for the sector. Although domestic demand is weak, some companies, for instanceJSW Steel and Essar Steel, are increasing exports to gain from the weak rupee.

However, after the recent rise in stock prices of metal companies, we recommend investorsto buy selectively.





NMDC

The company recently increased iron ore prices after a series of cuts between October 2012and July 2013. Strong balance sheet, decent sales growth, low capital expenditure anddecent dividend yield make us bullish on the stock.

Hindustan Zinc

A cash-rich balance sheet and expected sharp growth in production of zinc, lead and silver make us positive on the stock. A stake sale by the government will be good for minorityshareholders. Low valuations are likely to limit the downside.

Tata Steel

Over the past three quarters, Tata Steel has reported a better-thanexpected operationalperformance, especially from its European operations. We maintain our positive stance onTata Steel as its earnings growth is likely to be driven by higher sales volume on the back of 2.9 million tonnes expansion in Jamshedpur and improvement in profitability of Europeanoperations.

CAPITAL GOODS

"We see big changes in the capital expenditure cycle in the next 12-18 months" Deepak Ladha, Executive Director, Ladderup Corporate Advisory

It has been estimated that India's capital goods market can growfrom $71.7 billion in 2011-12 to $153.3 billion by 2016-17, a





compounded annual growth rate of 16%. Also, capital goods,infrastructure and power companies are likely to benefit frompolicies that the new government (after the 2014 general elections)pursues to increase economic growth. Also, the sector will gainfrom the special economic zones the government has sanctionedfor the industry.

India's share of global capital goods exports is low (0.1-0.6%).There is a huge potential for growth here. Infrastructure and capital

goods indices as well as select stocks have rallied sharply of late, partly on expectations thatthe NDA will be able to form a government at the Centre next year. On this basis, we see bigreforms and changes in the capital expenditure cycle over the next 12-18 months.

Kirloskar Oil & EnginesTarget price: Rs 225

The stock may get a boost from expected economic revival, higher government spending,strong balance sheet, good cash flow and high return on equity. Also, the new pollutioncontrol norms, to be implemented soon, will lead to a 10-15% increase in prices of enginesand 5-7% in prices of gensets.

Praj IndustriesTarget price: Rs 60

Praj accounts for 10% of the world's ethanol production. The cashrich company will benefitfrom the mandatory ethanol blending in petrol likely to be implemented soon. For this, it isplanning to set up India's first plant to make new generation ethanol directly from agro-waste,a shift from the traditional molasses-based extraction. Exports, too, are expected to rise as





more and more countries opt for fuel blending.

Larsen & ToubroTarget price: Rs 1,400

While high interest rates and weak economy are likely to have an impact, L&T continues tomeet order inflow targets. It is expecting to raise Rs 4,200 crore from stake sale in L&T IDPL,a subsidiary. This will provide L&T the much-needed cash flow given that it has equitycommitments of Rs 8,100 crore over the next five years. Revenue growth is expected to beled by growth in infrastructure & heavy engineering segments.

HEALTH CARE

"Revenues are expected to grow at 10% a year till 2014-15" Rakesh Goyal, Senior Vice President, Bonanza Portfolio

The sector has shown consistent double-digit growth in the recentpast. However, the US Food and Drug Administration's demandingguidelines have hit overseas sales. Also, the government's newpricing policy has impacted margins.

The domestic pharma market grew about 12% in 2012. Revenues are expected to continuegrowing at 10% a year between 2013-14 and 2014-15.

Generics is emerging as one of the leading segments that will gain as a number of drugs gooff-patent in the next few years.

Government initiatives such as allowing 100% foreign direct investment in health and medicalservices will also benefit the sector. The government also plans to increase healthexpenditure to 2.5% of gross domestic product by the end of the 12th Five-Year Plan (2012-17), which will give the sector another big boost.

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LupinTarget price: Rs 950-970

The company's focus on strengthening business in the US and operational efficiencies hasled to a sustainable rise in profits. The company reported 40% growth in net profit for thequarter ended September 30. Technically, the stock is in a long-term uptrend, and is likely tohit Rs 950-970 in the medium term.

BioconTarget price: Rs 450

The company has improved its performance over the last two quarters. It is expandingpresence in emerging markets. On the charts also, the stock is showing strength in the near to medium term. We expect it to hit Rs 450 in the next six to 10 months.

Sun Pharma

Target price: Rs 650

The stock has performed consistently even in adverse market conditions. At present, it is in aconsolidation phase. It may be bought at current levels with a target of Rs 650 and above inthe medium term.

POWER

"Gains from falling prices of imported coal are not sustainable" Daljeet S Kohli, Head of Research,IndiaNivesh Securities

The sector has done very poorly over the last few years as profitsslumped due to high fuel prices. But things are changing. The





government is trying to sort out issues related to fuel supply andlosses of state electricity boards. Further, India's per capitaconsumption of 704 units a year is minuscule compared todeveloped countries, which indicates the sector's potential.

We believe that earnings will continue to remain volatile due to fuel-supply risks, debt-heavy balance sheets and movement of therupee. While there may be some near-terms gains due to rupeestability and falling prices of imported coal, we believe these are not

sustainable. So, we prefer utilities that have: a) assured and regulated business model andnot one based on competition; b) fuel linkages and low dependence on imported coal; c)strong balance sheets and; d) low-risk business model.

Tata PowerTarget price: Rs 106

Tata Power recently commissioned the full capacity of Maithon Power, which will addsignificantly to revenue and profitability. In our view, valuations are factoring in all thenegatives. At Rs 92, the stock is trading at 1.63 times 2014-15 book value. We have a 'buy'rating on it with a target of Rs 106.

Reliance PowerTarget price: Rs 90

A positive decision by the regulator on tariff revision for Sasan and Tilaiya projects will boostprofitability. Rapid capacity addition in the last couple of quarters, easy availability of fuel andattractive valuations provide us comfort that the stock is poised for a re-rating.





NTPCTarget price: Rs 194

NTPC's growth is expected to be driven by huge capacity addition. We expect 12-15% a year growth in top line due to significant capacity addition in the last few quarters. At Rs 154, thestock is trading at 1.35 times 2014-15 book value, lower than the historical average of twotimes.

REAL ESTATE

"The belief of Indians that real estate is the best investment remains intact" Vikram Dhawan, Director, Equentis Capital

Real estate companies are facing the brunt of high interest rates,tight liquidity, large debts and lending curbs. A slowdown in demandmeans there has been a sharp spike in inventory of late. The global

recession and impending tapering of the easy money policy by the US central bank do notaugur well for fund flows to the sector.

For investors, however, it is not all doom and gloom, as most real estate stocks are availablefor as low as a fraction of their book values, making them attractive from a long-termperspective. Moreover, the belief of Indians that real estate is the best investment remainsintact. That makes us bullish on the sector for the long term subject to pick-up in economicgrowth and revival of the investment cycle.

Barring a speculative rally based upon anticipation of favourable election results in May 2014,we do not expect the fundamentals of the sector to change any time before the middle of 2014. We are probably a few quarters away from when the sector should bottom out.





DLF

The company has been trying to reduce debt for the last few quarters. It is also attempting toreduce the interest burden by entering into big-ticket commercial mortgage-backed securitiesdeals. Also, new projects launched by the company have received a better-thanexpectedresponse. The existing project pipeline and improvement in execution will ensure that thecompany is well-placed when the sector rebounds.

Indiabulls Real Estate

Debt levels appear to have peaked as expected cash flow helps the company pare debt.Improving earnings and cash flow earnings are positive for the stock.

The company's pipeline of ultra-luxury projects not only makes it relatively immune fromeconomic sluggishness but also increases the chances of significantly higher cash flows inthe next few quarters.

TELECOM

"Margins will inch up as contribution of data to the overall revenuerises" Deven Choksey, Managing Director, KR Choksey Securities

The year 2013 has been a game changer for the telecom industry.The government not only tried to reduce regulatory hurdles byensuring clarity on issues such as mergers and acquisitions but

also increased the foreign direct investment limit in the sector from 76% to 100%. Also, theapproval by the empowered group of ministers to a proposal for reducing spectrum prices by





25-50% will lower costs.

The industry went through one of its worst periods in recent times as cut-throat competitionand regulatory mess brought down operating margins from 40% to 25%. First, discounts bynew entrants forced the established companies to reduce tariffs. Then came the court trial inthe spectrum allocation scam, which brought all policy-making under a cloud, forcing theSupreme Court in 2012 to cancel a total of 122 telecom licences.

Fortunately, the industry is coming out of the woods. Companies have discontinued theservices of inactive and low-value subscribers and shifted focus to active and revenue-generating subscribers. Competition has eased, leading to increase in tariffs. The number of data services subscribers, who generate decent revenues, has been growing 30% on aquarter-on-quarter basis.

Reforms, especially the clarity on M&As rules, will lead to consolidation and, thus, anincrease in revenue for the bigger companies. Margins will inch up as contribution of data tothe overall revenue increases.

Bharti AirtelTarget price: Rs 390

The market leader accounts for 28% subscribers and 30% revenue. Its voice segment isshowing healthy revenue growth, led by an increase in subscribers and revenue per user.

Blended operating margin is also rising, led by cost rationalisation of India operations andhigher Africa margins. Improvement in key performance indicators will support revenuegrowth. Data services continue to show grow on both subscriber and revenue per user fronts. We recommend a 'buy' on the stock with a price target of Rs 390, an upside of 16%




from the current levels.

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