India Strategy
(Thematic)
Follow the ‘New’ leaders…
Nikhil Vora / Nikhil Salvi
IDFC Securities Ltd
(Dir) +91-22-6622 2567 / 2566
(M) +91 –98211 32471
Email: [email protected] / [email protected]
SEBI Registration Nos.: INB23 12914 37, INF23 12914 37, INB01 12914 33, INF01 12914 33.
For Private Circulation only. Important
disclosures appear at the back of this report”
‘Follow the leader’….are we playing even today?
Children all over the world have been playing a
simple game called ‘Follow the leader’ since many
years. This simple game that teaches at an early age
to observe, listen and identify who the leader in a
group is and follow him/her. The one who does it the
best gets rewarded. Everyone likes a leader and the
stock market is no exception to this common
phenomenon.
From time to time, certain sectors benefit from
favourable
conditions
that
propel
growth,
profitability and emerge as leaders in terms of
investor interest. Just as in a rising tide, in which all
boats-big and small-rise, similarly in a sector that is
benefiting from favourable environment, most stocks
rise. Savvy Investors turn risk-adjusted return ratio
in their favour by choosing the ‘right’ sector in which
to increase exposure, i.e. those sectors which are set to
attract increasing investor interest. But how do we
identify tomorrow’s leading sectors?
Investors seek out sectors that ‘Lead’
Depending on favourable factors different sectors emerge as ‘leaders’ in terms of growth and
profitability relative to other sectors
Savvy Investors turn risk-adjusted return ratio in their favour by choosing the
‘right’ sector in which to increase exposure
Consumer
goods
from 1997-2001
Oil & Gas
from 2002-2005
from 2006 - 2009
(%)
(%)
35.0
Change
in
Sensex
weight
of
sector
Financials
20
32
30.0
18
19
22
20
27
28
20.5
15
12
24
25.0
6
20.0
13.5
5
15
1997
1998
1999
2000
2001
13
10.0
0
10.0
17
17.0
10
15.0
(%)
24.0
2002
2003
3
2004
2005
2006
2007
2008
2009
‘Financials’ sector outpaced others in the past decade
Several factors contributed to phenomenal growth of Banking &Finance in past decade
High growth in Indian economy
during 2000-2010 compared to
previous decade (~7% vs ~4%)
Banking sector
in India has
grown at 25%
CAGR in past
10 years due to
host of factors
High credit demand to finance
large scale infrastructure
addition programs (share of nonfood credit increased from ~3%
in 2002 to ~15% in 2012)
Profitability of banks
improved (RoA doubled from
0.5% in 2002 to ~1% in 2012)
Bankex increased at 31%
CAGR, as investors chased
banking stocks to capture
growth
Consequently
 ‘Financials’ weight in Sensex
increased from 6% in 2002 to
26% in 2012
‘Technicals’ (Sensex weight) in sync with ‘Fundamentals’ (profitability) for Bankex
4
Sensex weight as barometer of ‘Sector’ leadership
Changes in sector weights act as the ‘Leadership
5
Compass’
Sensex weight change driven by index scrip selections
Index construction methodology based on free float market capitalization
Quantitative
criteria for
selection of
constituent
scripts in
Sensex
Market Capitalisation
Scrip should figure in the Top 100 companies listed by full
market cap
Trading Frequency
Scrip should have been traded on each and every
trading day for the last one year
Average daily trades
Scrip should have been traded on each and every
trading day for the last one year
Average daily
turnover
Scrip should be among Top 150 by average value of shares
traded per day for the last one year
Industry
representation
Scrip selected to maintain index sectoral weights that are broadly
in-line with the overall market
Index constitution mechanism ensures representation to sectors in proportion to investor
expectations (reflected in market cap)
6
Sector weights reflect sector relevance over time
Metals
Construction
Oil & Gas
Consumer Goods
Banking & Finance
IT Services
‘New’ economy
sector relevance
increased
100%
12%
27%
80%
32%
40%
60%
40%
42%
20%
21%
0%
‘Old’ economy
sector relevance
declined
FY93
FY98
FY03
FY07
FY13TD
Sensex changes reflect changing investor expectations towards sectors
7
Identifying when a sector leader ‘peaks’
Historical average weight of Consumer goods in Sensex is 16%
Weight (%)
Peak
weight in
Sensex
30
28
Consum er Goods
25
Current
weight in
Sensex
Bottom weight
in Sensex
20
15
14
10
7
5
0
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
Historical peak weight of Consumer goods in Sensex is 28%
8
FY12
FY13TD
Identifying when a sector leader ‘peaks’
Historical average weight of Oil & Gas in Sensex is 15%
Weight (%)
Oil & Gas
Peak weight
in Sensex
30
27
25
Bottom
weight in
Sensex
20
15
10
9
5
0
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
Historical peak weight of Oil & Gas in Sensex is 27%
9
FY05
FY06
Identifying when a sector leader ‘peaks’
IT Services ‘highest plateau’ at ~18%
Weight (%)
IT Services
20
15
Peak
weight in
Sensex
18
18
Bottom
weight in
Sensex
18
10
10
5
0
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
Average weight of IT Services in Sensex is 15%
10
FY11
FY12
FY13TD
Past leaders in Sensex weights and peak weights
Construction
(27%)
1992-1996
Oil & Gas
(20%)
IT services
(19%)
2004
2006-2007
Financials
(26%)
???
2010 – 2012
2013-…
1997-2003
2005
2008 – 2009
Consumer Goods
(25%)
Financials
(19%)
Financials and
Oil & Gas alternately
(20%)
Investors need to find the ‘next’ leader and leave the ‘current’ leader
11
“What goes UP must come DOWN”
― Isaac Newton
12
Has ‘Financials’ reached its peak in Sensex weight?
Weight (%)
Peak
weight in
Sensex
Banking & Finance
30
Bottom
weight in
Sensex
25
20
26
15
10
5
6
0
FY02
1
2
FY03
FY04
FY05
Overbought signals by
‘Technicals’
‘Fundamentals’
to follow
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13TD
 Financials currently at 26% of Sensex weight
 Historical peak for various sectors is 25-27%
 Average weight of financials in Sensex is 16%
 Spectre of looming NPAs unwilling to go away
 Competitive pressure may cap gains from lowering of policy rate by RBI
 Past driver of growth – Infrastructure lending- unlikely to be revived
quickly
13
Does any other sector hold potential to be leader
Several sectors are facing their own set of challenges
Construction and Engineering: Infrastructure and capex growth slowed down
IT Services: Weak economic growth in key markets (US, Europe)
No clear ‘leader’
among several
sectors
Metals: Volatility in global commodity prices and demand
Telecom: Regulatory headwinds and unabated competitive intensity
Power Utilities: Concerns on availability and cost of fuel for existing capacities,
while new capacity additions hampered by delayed clearances for projects
Automobiles: Weak economic growth clouds future prospects
14
Are Consumer and Pharma next ‘Leaders’?
Strong consumption trend among ‘favourably changing demographics’
Rising income levels
Propensity to consume higher
Consumer goods driven by
strong structural changes
Premiumisation in established product categories to improve profitability
Steady growth in global spending on medicine expected to continue
The opportunity for Indian companies to increase market share is large
Investors to look favourably at several positive attributes of Indian Pharma
Pharmaceutical sector
driven by favourable global
trend
• Low leverage
• Strong FCF
• Proven ability to pursue large ticket acquisitions
• Execution skills demonstrated in acquisition deals that created value
Consumer and Pharma weight in Sensex set to increase
Current
Consumer weight
in Sensex (14%) far
below historical peak
(27%)
Current Pharma
weight in Sensex (5%)
far below historical
peak (10%)
Market cap of non-Sensex consumer stocks
more than bottom Sensex companies
• Market Cap of Nestle (non-Sensex) is higher
than 10 Sensex stocks
• Market Cap of each of United Spirits, United
Breweries and Godrej Consumer is higher
than the bottom-most Sensex stock Hindalco
Market cap of non-Sensex Pharma stock
more than bottom Sensex companies
Periodic index
revisions to take
cognizance of
increased relevance
of Consumer Goods
and Pharma stocks
• Market Cap of Lupin Labs is higher than the
last two Sensex stocks by market cap –
Tata Power and Hindalco
Several Consumer Goods and Pharma stocks expected to enter Sensex
16
‘Caveat Emptor’ to our view on Financials
1
2
If Government allots much awaited banking licenses to new entities….
IDFC, L&T Finance, Bajaj Finserv, M&M Financial Services….
Bank licenses will boost investor sentiment towards banking sector
……will sustain leadership of financials in Sensex weight
Consumer and Pharma likely to share co-leadership with Financials
17
Our view : Follow the ‘New’ leaders
’Consumer
Goods and Pharmaceuticals’ weight in
Sensex expected to  going forward
18
“We always overestimate the change that will occur in the next
two years and underestimate the change that will occur in
the next ten”
- Bill Gates
19
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Explanation of Ratings:
1. Outperformer
:
More than 5% to Index
2. Neutral
:
Within 0-5% (upside or downside) to Index
3. Underperformer
:
Less than 5% to Index
Copyright in this document vests exclusively with IDFC Securities Ltd.
November 2012
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