Top 1000 Companies Economic Review For The First Half Of 2018-2019

India today is considered as one of the fastest growing economies and it is tipped to become one of the top three economic powers of the world within a span of 10 to 15 years. It is currently the sixth largest fastest growing economy in the world with a nominal GDP of USD 2.61 trillion. The business-friendly policies, structural reforms and transparency in governance have attracted global attention. The global economy has been evolving despite the imbalance in the emerging markets and the pressure exerted on their currencies. The rising crude oil prices and the monetary tightening have somehow put many Indian sectors under stress. Also, the Indian rupee has witnessed its all-time low of Rs.74.39/ USD. All these factors have resulted in the widening of India’s current account deficit (CAD) and hampered the demand on the domestic front. The growth of the Indian economy has been trimmed down to 7.3 percent in 2019 and 2020 from 7.4 percent in 2018, according to rating agency Moody's.

Numerous developments have taken place during the first half of FY19.There have been various investments in multiple sectors of the economy. The merger and acquisitions (M&A) activity has reached USD 82.1 billion till November 2018. The companies in India have raised around USD 5.52 billion through Initial Public Offerings (IPO) in 2018, up to September. The FDI equity inflows reached USD 389.60 billion between April 2000 and June 2018. The maximum FDI contribution was from services, computer software and hardware, telecommunications, construction, trading and automobiles. The Indian economy created around 10.8 million jobs in the year of 2017 and the employment growth in corporate India moderated to 3.8 percent in FY18 from 4.2 percent in FY17. Indbankia's unemployment rate is expected to be 3.5 percent in 2018, according to the International Labour Organisation (ILO).

The year of 2018 was a rather scary year for the investors. It was a year of volatility with the US-China trade tensions, the IL&FS default triggering liquidity crisis among NBFCs, low FII outflows due to increased Federal Reserve interest rates and the reaction to the reintroduction of long-term capital gains tax. All have added to the jumpy Sensex and Nifty levels. Sensex gained 6 percent and Nifty climbed 3 percent after hitting life-time highs in August 2018. As compared to 2017’s rolling return, 2018 was a very slow and a flat year. The sectoral trend was mixed during the year with IT up by 24 percent, banking by 6 percent, financial services gaining 11 percent and FMCG up by 14 percent as noticeable gainers. On the other hand, among the top losers were auto index, which tumbled 23 percent, infra declined 13 percent, metals dropped 20 percent, pharma fell by 8 percent and realty was down 33 percent.

We have studied around 30 Indian sectors for the purpose of economic review for the period of H1FY19. One of the major sectors, the banking industry, played a major role in the economy. The private banks have expanded in India and have grown at a CAGR of 12.68 percent from FY13-18. In FY07-18, the total lending increased at a CAGR of 10.94 percent and the total deposits increased at a CAGR of 11.66 percent. India’s retail credit market is the fourth largest among the emerging countries. The government has been taking steps to induce financial inclusion through various measures like small payments banks and Jan Dhan Yojana. This has also increased competition in the already highly competitive sector. Due to this, the industry has witnessed higher consolidation of NBFCs with banks. The banking industry has however faced number of challenges due to the tightening of regulatory environment on recognition of non-performing assets (NPAs) over the last two years.

The auto sector, which accounts for 7.1 percent of the GDP and makes India the sixth largest market for cars in the world, is a sector of significance. The domestic automobile sales have increased at 7.01 percent CAGR between FY13-18 with 24.97 million vehicles being sold in FY18. The two-wheelers dominate the industry, contributing about 81 percent share in the domestic automobile sales in FY18. The Indian automobile industry is expected to reach Rs.16.16-18.18 trillion by 2026. In our analysis we have covered 17 companies and witnessed a growth of 19 percent in their topline. Tata Motors, Ashok Leyland and SML have all delivered in the period of H1FY19.

The cement sector has been dominated by select large companies which contribute about 70 percent of the total production. Our financial data analysis has taken into consideration the performance of 26 companies that have reported a topline growth of 7.5 percent during H1FY19. The major companies that shined were Grasim Industries, Start Cement and Ultratech Cement. The cement sector is largely expected to benefit from the supportive government reforms and policies on infrastructure and housing segments. The recent major government initiatives like development of 98 Smart Cities are expected to provide a major boost to the sector. The biggest demand driver of cement is the housing and real estate sector.

The agriculture sector has always been in focus. The Government of India has introduced several projects to assist the agriculture sector. These are Pradhanmantri Gram Sinchai Yojana, Electronic National Agriculture Market (eNAM), etc. These schemes aim to irrigate the fields of every farmer and improve water use efficiency to achieve the motto of Rs.Per Drop, More Crop’. Overall, the scheme ensures improved access to irrigation. The Government of India has set up an ambitious goal of doubling farmers' incomes by 2022. The agriculture sector in India is expected to generate robust growth in the next few years due to increase in investments in infrastructure, irrigation facilities, warehousing and cold storage. The Indian electronic market is expected to reach a turnover of US$ 400 billion in 2022, up from US$ 69.6 billion in 2012. The total production of electronics hardware goods in India is estimated to reach US$ 104 billion by 2020. This can be achieved with an ever-growing customer base and the increasing penetration in the consumer durables segment, which will definitely boost the Indian electronics sector. The topline of the sector has improved considerably by 30 percent and reached Rs.38,761.7 crore in H1FY19. The companies that posted stellar sales numbers in H1FY19 were Siemens, followed by ABB India and Havells India.

"The Indian economy created around 10.8 million jobs in the year of 2017 and the employment growth in corporate India moderated to 3.8 per cent in FY18 from 4.2 per cent in FY17. India's unemployment rate is expected to be 3.5 per cent in 2018, according to the International Labour Organisation (ILO)."

The power sector has faced shortage of domestic coal, which has impacted the private sector power generators’ performance as lower coal availability puts constraints on the volume of generation of power which, in turn, has dampened the margin of thermal generators. The Government of India aims to achieve 175 GW capacity in renewable energy by 2022, which includes 100 GW of solar power and 60 GW of wind power. Further, it is mulling a policy called 'rent a roof' which would aid in achieving its target of generating 40 gigawatts (GW) of power through solar rooftop projects by 2022.

As far as the plastic and packaging industry is concerned, it plays a vital role for a number of industries such as pharma, agriculture, FMCG, etc. The growth in the packaging industry is directly related to growth in major industries like FMCG and pharma. The Indian packaging industry, which constitutes about 4 percent of the global packaging industry, has been growing at an annual rate of 13 percent and is expected to touch $32 billion by 2020. The plastic industry is likely to grow with the growth in major sectors like construction, FMCG, textiles, automobile, etc. Also, the introduction of new technologies, strengthening distribution, coupled with rising focus of the government on construction and infrastructure would spur the demand for plastic products in times to come.

The economic growth of the country will depend on several macroeconomic factors. Also, the upcoming elections, the trade war tensions, the Brexit impact, the crude oil prices and rupee volatility will all decide the future economic growth. The GDP growth rate would be affected by the upcoming quarterly earnings and would partially decide the economic growth trajectory of the nation.

Methodology

We bring to you the vital financial data of top 1000 companies categorised by market capitalisation. These stocks are the most liquid and they represent a substantial portion of trading value and volume. These cowmpanies are then categorised into 25 sectors to provide you insight into the general trend of the financial performance for the first half of FY19. All data has been sourced from DION Global Solutions and Ace Equity. The focus of financial data was more on the revenue and profitability as many companies do not provide balance sheet on a half-yearly basis. We hope that our readers will get an overall perspective on different sectors so that they are able to take stock and sectoral calls judiciously.

Compiled by - Amir Shaikh, Apurva Joshi, Neerja Agarwal, Nidhi Jani, Pratik Shastri, Aakash Makhija, Dnyanada Kulkarni, Shohini Nath

Agriculture



Agriculture is a core sector of India with more than 40 percent land available for agricultural production. Th is is the sector which measures the overall growth of the country. A major chunk of the Indian population is employed by the agricultural sector, which meets the daily food requirements of Indians . Agriculture can be considered a s a source of livelihood and food security for a vast section of the society. The agricultural sector forms a basic source of business income for a number of agro-based industries and services. This sector should not just be observed from the farming perspective, but should be considered as a holistic value chain, as it includes number of activities such as farming, wholesaling, warehousing, processing and retailing.

The agricultural sector's performance is calculated as the overall performance of its various constituents such as crops, fruits, livestock, spices, tea, etc which can be further classified as agricultural and horticulture . The production of horticulture crops is estimated at record 307.16 million tonnes (mt) in 2017-18 as per second advance estimates by the Government of India. Total agricultural exports from India grew at a CAGR of 16.45 percent over FY10-18 to reach US$ 38.21 billion in FY18. In April-August 2018 agriculture exports were US$ 15.67 billion. India is the largest producer, consumer and exporter of spices and spice products. Spice exports from India reached US$ 3.1 billion in 2017-18. Tea exports from India reached a 36-year high of 240.68 million kgs in CY2017, while coffee exports reached a record 395,000 tonnes in 2017-18. The food and grocery retail market in India was worth US$ 380 billion in 2017.

During 2017-18 crop year, the foodgrain production is estimated at a record 284.83 million tonnes. In 2018-19, Government of India is targeting food grain production of 285.2 million tonnes. Milk production was estimated at 165.4 million tonnes during FY17, while meat production was 7.4 million tonnes. As of September 2018, total area sown with kharif crops in India reached 10 6 million hectares. Agribased companies saw strong growth during the first-half of FY19. Monsanto India, a corn and cotton manufacturing company, reported profit of Rs. 90.01 crore as compared to Rs.48.01 crore during the same period last year. Even at operational level, the company performed well and posted EBITDA of Rs.94.01 crore, while it posted net sales of Rs.389 crore, which was 17 percent higher when compared YoY for H1FY19. The shrimp feed company Waterbase Ltd postedsales of Rs.250.1 crore for H1FY19 which was higher by 9 percent than last year for the same period.



The Basmati rice company KRBL showed the way to its peers with a topline growth of 25 percent during H1FY19 as compared to the same period last year. Though its EBITDA margin saw marginal pressure due to currency fluctuations, the bottomline was still higher by 6 percent than same period last year. The performance of KRBL also shows the growth in demand for Basmati rice in India.

According to advance estimates of production of foodgrains published on the government website, d uring 2017-18 crop year, foodgrain production is estimated to be at a record 284.83 million tonnes. In 2018-19, Government of India is targeting food grain production of 285.2 million tonnes. The production of horticulture crops is estimated at 306.82 million tonnes in 2017-18 as per the third advance estimates. India is among the 15 leading exporters of agricultural products in the world. Agricultural exports from India reached US$ 38.21 billion in FY18 and US$ 21.61 billion between Apr-Oct 2018. Exports of ready-to-eat items from India reached US$ 689.80 million in FY18. The Government of India is aiming to achieve US$ 60 billion in agricultural exports by 2022. India was the ninth largest exporter of agricultural products in 2017.

The Government of India has set up an ambitious goal of doubling farm income by 2022. The agriculture sector in India is expected to generate robust growth in the next few years due to increase in investments in infrastructure , irrigation facilities, warehousing and cold storage. The government has targeted to increase the average income of farmers at current prices to Rs.219,724 by 2022-23 from Rs.96,703 in 2015-16. For achieving such a target, it is important to maintain and adopt appropriate methodologies for the farm sector. The adoption of food safety and quality assurance mechanisms such as Total Quality Management (TQM) including ISO 9000, ISO 22000, Hazard Analysis and Critical Control Points (HACCP), Good Manufacturing Practices (GMP) and Good Hygienic Practices (GHP) by the food processing industry will offer several benefits.

The Government of India has introduced several projects to assist the agriculture sector. These are Pradhanmantri Gram Sinchai Yojana , Electronic National Agriculture Market (eNAM), etc . Th ese scheme s aim to irrigate the field of every farmer and improve water use efficiency to achieve the motto Rs.Per Drop, More Crop’. Overall, the scheme ensures improved access to irrigation. Around 285 new irrigation projects will be undertaken in 2018 to provide irrigation for 18.8 million hectares of land. As per Union budget 2018-19, the scheme has been allocated US$ 401.6 million. The eNAM was launched in FY17 to create a unified market for agriculture- related products by networking existing Agriculture Produce Marketing Committees (APMCs). Up to May 2018, 9.87 million farmers and 109,725 traders were registered on the e-NAM platform. 585 mandis in India have been linked, while 415 additional mandis will be linked in 2018-19 and 2019-20. The cumulative trade on the platform reached Rs.41,855 crore by March 2018. In the Union budget 2018-19, an agri-market Infrastructure fund was announced to develop and upgrade the infrastructure in 22,000 Grameen Agricultural Markets (GrAMs) and 585 APMCs. Also, 42 mega food parks were sanctioned as of 2017, out of which eight became operational as of July 2018.



Auto

 

The Indian automobile industry is closely linked to country's Gross Domestic Product (GDP) growth and accounts for 7.1% of the GDP. It also contributes to nearly 22% of the country's manufacturing GDP. India is currently the sixth largest market in the world for cars and is expected to become the world's third biggest car market by the year 2020. As per the Automotive Components Manufacturers Association of India (ACMA), the world standings for the Indian automobile sector are as follows: a) Largest tractor manufacturer b) Second largest two-wheeler manufacturer and c) Second largest bus manufacturer, etc. Domestic automobiles sales have increased at 7.01 percent CAGR between FY13-18 with 24.97 million vehicles being sold in FY18. Two-wheelers dominate the industry, contributing about 81 percent share in the domestic automobile sales in FY18. The Indian automotive industry is expected to reach Rs.16.16-18.18 trillion by 2026.

India being one of the largest manufacturers of automobiles across various categories in the world, the rising population of automobiles in India has led to increasing concerns on the rising air pollution levels in the country. As a result, the government has been taking various steps to control the pollutants emitted by vehicles and improve the fuel efficiency level of automobiles manufactured in the country. The Supreme Court recently banned the sale of vehicles compliant with Bharat Stage III (BS-III) emission norms and implemented BS-IV emission norms from April 1, 2017 to curb the pollution levels in the country.

Impact of technological innovation on the sector
India will shift to BS- VI from BS- IV from April 2020. According to Supreme Court, the last date for registration of BS-IV vehicles is March 2020. Bharat Stage-VI being the most advanced emission standard for automobiles, would mean that OBD (onboard diagnostics) would be mandatory for all vehicles. The OBD unit identifies likely areas of malfunction by means of default codes stored on a computer. BS-VI compliant vehicles will be more expensive. Diesel vehicles and economy segment motorcycles will see a sharp increase in prices, which would help enhance industry topline in the coming years. The road transport and highways ministry is proposing to make it mandatory for automobile manufacturers to use 70% galvanised steel for car body panels. Currently, automakers in India use only 30% galvanised steel. Galvanisation or zinc coating makes steel less prone to corrosion which in turn makes the structure safer. The cost of vehicles priced around Rs.10 lakh is estimated to go up by 1% if 70% galvanised steel is used.

The year 2018 has been quite eventful for the automobile industry. Here are some of the major events that impacted the automobile industry: a) Demonetisation announced in November 2016, b) Supreme Court's BS-III vehicle ban came into effect on April 1, 2017, c) Goods and Services Tax (GST) implementation on July 1, 2018, D) Continued ban on diesel cars by National Green Tribunal (NGT) from September 2018, E) Cess increase in September 2017, etc. With the release of pent-up demand post demonetisation and BS-III vehicle ban, the demand for automobiles picked up in Q1FY18. However, the second half of FY18 had started witnessing strong positive sentiment backed by factors such as improved consumer sentiments with near normal monsoon in most parts of the country, higher MSPs for various crops, and consequently, higher farm incomes, new launches, implementation of the Seventh Pay Commission recommendations by the Centre and salary revisions by the states.



Financial performance:
In our analysis, we have considered 17 companies according to their market capitalisation. During H1FY19, the industry reported average topline growth of about 19 percent. Major companies which reported topline growth included HMT Ltd (135%), Tata Motors (44%), Ashok Leyland (29%) and SML Isuzu (28%).

Tata Motors: It is India's largest commercial vehicle company and fourth-largest PV player. In the PV segment, the company has products in the compact and midsize cars and utility vehicles. JLR, the subsidiary of Tata Motors, has been a catalyst for Tata Motors as JLR has maintained its EBIT margin guidance of 4-7% over FY19-21, and 7-9% beyond that. JLR's EBIT margin improved due to engineering focused on a) attaining scale and flexibility through MLA platform, b) products designed and engineered without unnecessary complexity, c) reduce development cycle times, and d) collaborations and partnerships to spread investments.

Ashok Leyland: It is constantly gaining market share in higher tonnage trucks (25T+) on the back of infra spending by the government, restrictions on overloading in many states and improving transport efficiency post-GST. The company has also grown during FY18 (+32%) in the LCV segment and is aggressively expanding its product portfolio. Improvement in working capital is visible and net cash has risen to Rs.35 bn in FY18 vs Rs.3.9 bn in end-FY17. It also plans to invest Rs.10 bn in FY19, out of which, 40% will be used for capacity related expansion and 60% will be used for R&D (BS VI technology and EVs) and new product development.

Outlook in the coming years
Going forward in FY19, the auto industry is expected to witness healthy growth as the disruptions caused by various policy implementations (demonetisation, ban on BS-III vehicles, GST, rate revisions) have almost moderated. Also, the demand is expected to improve on the back of various initiatives taken by the government in the Union Budget 2019 for the agriculture and infrastructure sectors. Also, in order to take the polluting commercial vehicles (CVs) off the road, the government may fix 20 years as the lifetime of the commercial vehicles. The vehicle scrapping policy is expected to come into force from April 1, 2020. This is expected to give further boost to CV sales in the country.



Auto Ancillary

The auto components industry contributes 2.3 percent of India’s Gross Domestic Product (GDP) and provides employment to over 1.5 million people directly and indirectly each. The Indian auto components industry is ancillary to the automobile industry. The demand swings in any of the auto segments (commercial vehicles, cars, two-wheelers) have an impact on the auto ancillary demand. Indian auto component industry is transitioning itself from a low-volume, highly fragmented one into a competitive industry backed by technology, efficiency and evolving value chain. The industry mainly caters to two segments – (1) original equipment manufacturers (OEM) and (2) replacement market (aftermarket). OEM dominates the auto component market, contributing around 80 percent, while the replacement market share is around 20 percent.

The growth prospects for the Indian auto components sector are bright over the next two-three years, according to the rating agency CRISIL. A report by the rating agency said the ancillary industry will clock healthy growth, steered by product changes like replacing metal with plastic or high-grade and lighter metals, increasing electronic content and regulations (emission and safety norms). The emerging technologies such as automated manual transmission, anti-lock braking systems, electronic control units/sensors and advanced engine designs will also support growth. Further, with safety turning into major objective for the customers, the requirement for advanced driver assistance systems for lane assistance, distance control and vehicle-to-vehicle communication is on the rise.

Auto component manufacturers are estimated to have incurred higher on-year capital expenditure for a couple of years from FY2018 on account of the government’s decision to implement BS-VI norms from fiscal 2021. Many players are also investing in new technology to capitalise on the rising demand for hybrid and electric vehicles. Domestic auto component production is expected to grow at 10-12 percent CAGR between FY2018 and FY2023 to Rs.522,300 crore, in line with the domestic automobile demand and exports. Auto component exports, the bulk of which are to the US and the euro zone, are expected to increase 8-10 percent on year, given the firm global automobile demand. The report expects imports to grow at a average rate of 6-8 percent CAGR till fiscal 2023 to support domestic demand, despite the higher anti-dumping duty levied on various engine, electrical and chassis parts under the Union budget 2018-19.

In our analysis we have considered 54 companies based on their market capitalisation. Considering the geometric mean, the companies have reported topline growth of 16.25 percent during H1FY19 period. The major contributors were Jamna Auto Industries Ltd.(71%), Lumax Auto Technologies Ltd. (64%), Setco Automotive Ltd.(47%) and Automotive Axles Ltd. (45%). JTEKT reported PAT of Rs.27.3 crore, a growth of 116 percent. Automotive Axles reported PAT of Rs.61.90 crore for H1FY19 period, a growth of 83 percent. There were some acquisitions during the year 2018. Motherson Sumi Systems Ltd (MSSL) announced the acquisition of the Netherlands-based Reydel Automotive Holdings BV for $201 million, Maharashtra-based Precision Camshafts Ltd, a leading supplier of camshafts to most passenger vehicle manufacturers, acquired German MFT Motoren und Fahrzeugtechnik GmbH for an undisclosed sum and wiring harness manufacturer Dhoot Transmission Pvt. Ltd acquired the UK-based Parkinson Harness Technology. Considering the technological innovations in the organic segment combined with inorganic expansions, we see an untapped potential in the industry.




Banks

Banking industry is one of the most important sectors and a direct bellwether of the activity in the economy. The credit offtake in the current scenario determines the incipient capex and the forthcoming projects in the pipeline. The banking industry is like oil to the economic engine, helping in directing money flow in the places needed. It is a huge institutional set-up and currently the Indian banking system consists of 27 public sector banks, 21 private banks, 49 foreign banks, 56 regional rural banks, 1,562 urban cooperative banks and 94,384 rural cooperative banks, in addition to cooperative credit institutions. The private banks have expanded in India and have grown at a CAGR of 12.68% from FY13-18. In FY07-18, the total lending increased at a CAGR of 10.94 percent and total deposits increased at a CAGR of 11.66 percent. India’s retail credit market is the fourth largest among the emerging countries. 

Consolidation seen in banking
The government has been taking steps to have higher financial inclusion through various measures like small payments banks and Jan Dhan Yojana. This has also increased competition in the already highly competitive sector. Due to this, the industry has witnessed higher consolidation of NBFC with banks. Bharat Financial Inclusion's merger with Indusind, Capital First's with IDFC and the recent Gruh Finance merger with Bandhan Bank are among the large ones, to name a few. This will definitely provide capital to high growth NBFCs and, on the other hand, help banks to report healthy growth numbers.

Asset quality challenge remains and eating into profits Banking industry has faced number of challenges due to tightening of regulatory environment on recognition of non-performing assets (NPAs) over the last two years. The higher provisioning due to decrease in the threshold for recognising NPAs to 90 days from 180 days led to declining profit in notional terms. This was necessary considering the rising NPAs in the financial system and the lower number of days gave early signal of the eventuality that could be avoided. To tide over the burgeoning NPAs resulting in lower Capital Adequacy Ratio, the government decided on recapitalising the banks. The government decided on a major recapitalisation plan of Rs.2.11 trillion for the public sector banks (PSBs). As per ICRA, the government will keep the bank recapitalisation plan for FY19 unchanged at Rs. 65,000cr. It is likely to provide support to PSBs that were breaching or likely to breach the regulatory capital ratio, i.e, capital to risk weighted assets ratio (CRAR) of 9 percent.

Rising interest cost to shrink margins
We see that banks in the short term will see NIM shrinking due to rising interest cost leading to asset liability mismatch in the short term, though we expect the spread to be more or less moderated over the long run.

The average corporate bond yields during Apr-Oct’18 were 9%, 70 bps higher than the yields in FY18. In the secondary market, the yield on corporate bond market had risen by 30 basis point during this period. Due to stress in certain categories of NBFCs, the sentiments in the corporate bond market was affected significantly. The corporate bond spread (all maturities) over GSecs widened in Oct. ’18 by 10 bps over Sep. ’18.

Increasing digitisation
Developing countries are looking at virtual branches and physical branches have been reduced to a large extent. We see digitisation wave to be high in India too, with higher percentage of transactions done digitally. Banks have been investing extensively in fintech to survive and derive benefits of customer ease and low cost. India’s biggest PSB SBI has launched digital initiatives like SBI InTouch, bank’s omni-channel platform YONO, CRM, optimisation and re-engineering of existing business processes in the branches. 

In totality, the share of alternative channels, including Internet, mobile, ATMs, POS and YONO in conducting transactions has increased to over 83 percent in September 2018, when compared to 78 percent in the same period last year.

Performance of banks
We see that banks, across the public and private domain, reported lower profits with 18 banks reporting losses in 1HFY19. State Bank of India reported a loss due to the merger of banks with lower asset quality and is undergoing restructuring. However, mostly the loss was due to higher provisioning due to lower asset quality and new NPA norms. Thirty banks reported an increase in GNPAs with an average increase of 22bps. The highest increase was seen in Lakshmi Vilas Bank and IDBI Bank with GNPAs rocketing to 12.3 percent and 31.78 percent, respectively. HDFC Bank, IndusInd, BoB, Federal and Canara Bank were better off showing recovery in profits. DCB also showed a disciplined approach with lower slippages and rise in net profits.

Outlook
We believe GNPAs are going to be an issue for banks. With the economy slowing down, we expect that due to demand shocks, companies may have short-term liquidity issues leading to a rise in GNPAs. Also, farm loan waivers can leave a bigger dent on banks' balance sheet. We believe consolidation in the industry and marrying of NBFC with banks is going to continue.

Cement

India is the second largest producer of cement in the world and it provides employment to more than million people directly or indirectly. The cement sector is largely expected to benefit from the supportive government reforms and policies on infrastructure and housing segments. The recent major government initiatives like development of 98 smart cities are expected to provide a major boost to the sector. The biggest demand driver of cement is housing and real estate sector, accounting for about 65 percent of the total consumption in India. The other major consumers of cement include public infrastructure, which contributes about 20 percent, and industrial development, which contributes about 15 percent. The cement production capacity stood at 502 million tonnes per annum (MTPA) in 2018. The pick-up in the housing segment and higher infrastructure spending will help growth in cement consumption.

The Indian cement industry is dominated by select large companies. Out of the total cement production in the country, the top 20 companies contribute about 70 percent of the total production. The top 210 large plants contribute for a cumulative installed capacity of over 350 million tones, and out of these 210 large cement plants, 77 are located in the states of Andhra Pradesh, Rajasthan and Tamil Nadu.

During FY19-20, capacity addition of 51 million tonnes is expected over the present 502 mn tonnes. The maximum capacity is expected to be added in the South (16MTPA) followed by West (15MTPA). 2018 has been a year of consolidation for the cement sector with Ultratech Cement acquiring JP group's,Binani Cement and Century Textiles' cement division. Being one of the many, these acquisition has helped Ultratech enhance its market share and production capacity. The consolidation in the cement sector through a flurry of merger and acquisition deals in the recent past is expected to bring in discipline in production, leading to price stability in the long run.

Clinker (semi-finished stage of cement) assumes higher significance, as clinker upon grinding with other additives yields cement and industry's cement producing ability is determined by its clinker capacity. Cement is a regional play with North and South being surplus areas, given concentration of limestone in these regions and West, Central & East being in deficit. Among these regions, the outlook seems most positive in the North, where clinker utilisation is estimated to rise from 80% to >91% over FY20-21. Central India, being a deficit region, is envisaged to continue to operate at >90% utilisation and is also likely to benefit from North's growing utilisation as bulk of Central's deficit is met via supplies from North. The expected rise in clinker utilisation will have a positive rub-off effect on cement prices. It is estimated that all-India cement prices would rise by 5% in FY19 and 6% in FY20. Among the regions, the expected price traction to be highest in the North and Central regions. Even as a rise in clinker utilisation must theoretically lead to jump in cement prices, there remains the risk of increase in competitive intensity, especially due to entry of a new player in a region either through greenfield capacity expansion or acquisition of an existing unit.

Cement cost link with crude oil
Raw material-mining cost : Mining equipments largely run on diesel. In majority of the cases, limestone is transported from mines to the plant by trucks. The cost of explosives used for blasting is also linked to crude oil. 0.6 litre of diesel is required for every tone of limestone mined. 

Power & Fuel cost : Coal is used in kiln as well in CPP. Imported coal has a long term correlation with crude oil. Freight is incurred for transporting coal from mine/port to the plant and freight cost can be 20-30% of the landed cost of coal. Freight Cost – Road : Cement is transferred by road through trucks. 65% of the industry despatches are by this mode and the diesel cost is 50% of road freight. While surging global crude oil and global coal/pet coke prices has led to jump in operating costs, the outlook on crude oil price going ahead points that it may have largely peaked.

Financial performance
In our analysis, we have considered 26 cement companies according to their market capitalisation. During H1FY19, the industry reported 7.5 percent topline growth. The major cement companies which reported topline growth included Grasim Industries(41%), Star Cement(18%), Ultratech Cement(17%) and Ramco Industries(16%).
1) ACC: A leading brand with pan-India presence (8% market share), is set to benefit from the expected rise in industry clinker utilisation. The ramp-up of its new Jamul unit led to 14% volume growth in CY17 (fastest in past six years). With plans to merge ACC with parent company Ambuja Cement shelved, both companies have agreed to enter into a master supply agreement (MSA) to trade goods and services.

2) Ambuja Cement (ACEM): The company's volume stood nearly flat during CY11-16 due to no clinker addition, despite cement capacity expanding 10% during the period. However, with pan-India market share of 7%, ACEM will benefit from rising industry clinker utilisation.

3)Shree Cement (SRCM): It is an investors' delight, given positives like: a) continuous gain in market share; b) sharp focus on cost, driving margins superior to its peers; and c) sustainable high RoEs (>17%). SRCM will also benefit from ~70% capacity exposure to North region, where the industry clinker utilisation levels are turning lucrative.

Chemicals

The Indian chemical sector is a knowledge intensive as well as capital intensive industry with an installed capacity of 22 million tonnes, while the production stands at 17-18 million tonnes. Nearly 9 million tonnes capacity is presently being added. In a CII conference, the Chemicals and Petrochemicals Secretary P Raghavendra Rao stated that the demand for cement is rising and there would be a gap of 7.5 million tonnes in ethylene alone. New manufacturing plants would be required to bolster domestic output which will require significant investments. The chemical industry contributes substantially to the Indian economy and supports an assortment of downstream industries like textiles and pharmaceuticals. The industry as a whole is immensely diversified as it offers over 80,000 commercial products.

In the overall exports for FY18, the share of chemical products stood at 12.38 percent amounting to a total of Rs.2,42,030.50 crore (provisional), up by 10.11 percent YoY as compared to Rs.2,19,810.37 crore in FY17. Of the total export of chemicals and related products in FY18, the highest contribution of 34.38 percent came from drug formulations and biologicals, followed by organic chemicals (18.99 percent), residual chemicals and allied products (11.95 percent) and bulk drugs, drug intermediates (9.43 percent). Moreover, the export of chemicals and related products surged 18.31 percent YoY in the month of March 2018 to Rs.25,507.91 crore (provisional) as compared to Rs.21,559.85 crore in March 2017. Similarly, in the overall imports for FY18, the share of chemical imports stood at 8.69 percent amounting to a total of Rs.2,60,365.14 crore (provisional), up by 15.26 percent YoY in comparison to Rs.2,25,884.60 crore in FY17. Of the total import of chemicals and related products in FY18, the highest contribution of 30.77 percent came from organic chemicals, followed by residual chemicals and allied products (16.15 percent), inorganic chemicals (11.80 percent) and fertilisers manufactured (11.51 percent). Furthermore, the import of chemical and related products surged 23.90 percent YoY to Rs.23,709.66 crore (provisional) in March 2018 as compared to Rs.19,136.38 crore in March 2017.

We analysed the performance of 73 companies in the chemicals sector during the periods of H1FY19 and H1FY18. Overall, the sector witnessed sales growth of 12.41 percent YoY. The EBITDA of the sector climbed 23.11 percent YoY while the EBITDA margin improved by 262.61 bps. The PAT growth of the sector stood at 33.07 percent YoY. In the pesticides and agrochemicals sub-sector, the company that showcased the best performance was Excel Industries, as it reported PAT growth of 333.20 percent YoY. Meghmani Organics was the second best as it reported PAT growth of 142.64 percent YoY. Contrarily, BASF India’s PAT de-grew by a substantial 80.51 percent. Other companies that witnessed de-growth in their PAT numbers include UPL, Bayer CropScience and PI industries. In the paints sub-sector, Asian Paints produced the highest growth in PAT of 17.12 percent YoY. On the other hand, Kansai Nerolac Paints experienced a drop of 8.27 percent YoY in PAT. Bhageria 

Industries produced the highest PAT growth of 245.26 percent YoY in the dyes & pigments sub-sector, closely followed by Sudarshan Chemical Industries, which reported PAT growth of 168.39 percent YoY. In the carbon black sub-sector, Philips Carbon Black produced PAT growth of 107.71 percent YoY, while Goa Carbon’s PAT de-grew by 68.33 percent YoY. Under petrochemicals, Rain Industries produced excellent results as its PAT climbed 3093.29 percent YoY. On the other hand, Multibase India’s PAT dropped 6.40 percent YoY. Some other companies that witnessed enormous PAT growth YoY include Sadhana Nitro Chem (3470.63 percent), Clariant Chemicals India (345.15 percent), Gujarat Fluorochemicals (278.99 percent) and India Glycols (274.16 percent). On the other hand, some of the companies that witnessed a drop in their profits include Supreme Petrochem (40.78 percent), GHCL (33.71 percent), SH Kelkar & Co. (20.98 percent) and Navin Fluorine International (19.78 percent).

The Government of India has permitted 100 percent FDI in the chemicals sector. The sector attracted FDIs worth Rs.1,547.87 crore in the October-December quarter. The government has forecasted India’s chemical sector to double its size to USD 300 billion by 2025, thereby clocking an annual growth rate of 8 to 10 percent.

As such, it is formulating policies to create an enabling environment that will cater towards meeting domestic demand for chemicals and curbing imports. The policy will be implemented in FY2019. The domestic agrochemical industry is expecting higher export revenue in FY19. There is a lot of disapproval and pessimistic sentiment surrounding plastic and petrochemicals as these have a detrimental impact on the environment. Thus, research activities are being undertaken with a view to developing eco-friendly alternatives and innovative products. Moving forward, the Petroleum, Chemicals and Petrochemicals Investment Regions (PCPIRs) policy needs reworking to make it more effective and conducive to additional investments. Backed by one of the strongest GDP growth rates in the world, the future looks bright for the Indian chemical industry.

Construction

Construction sector, which is mainly driven by infrastructure activity, building and industrial segment, is witnessing good traction lately. Road, urban infra, railways and irrigation segments in the recent period are witnessing strong traction due to the boost in infrastructure activity in the country. During the financial year 2016-17 and 2017-18, the overall projects awarded were at around 33,325 KM. To award this quantum of projects earlier, it took five years (33,263 KM projects awarded during FY12-16).

To analyse the sector’s health in terms of its financials, we have taken into consideration 1HFY19 results of 69 companies. After going through the financials of these 69 companies, we came to know that construction sector in 1HFY19 has gone through a smooth ride as it recorded aggregate sales growth of almost 19 percent from 1HFY18. Further, the aggregate EBITDA of all the 69 companies surged almost 29 percent yoy in 1HFY19. The net profit seems to be mirroring EBIDA growth as the aggregate profit after tax of all companies too grew by nearly 29 percent.

Outlook : Talking about the real estate sector, the sector is going through turbulence due to liquidity crisis, which was triggered by the IL&FS default. Home buyers are facing many issues due to the liquidity crunch, sanctioned home loans and committed funds for under construction projects are not being released by the NBFCs, as seen in the case of Vascon Engineering, where they had to cancel the recognised revenue due to housing finance companies not being able to process the loans for the customers. The government is looking to ease this liquidity concern, also the RBI is giving a helping hand to this sector by injecting money into the market through OMOs. On the other hand, the GST Council in its next meeting is expected to take decision to reduce rates on under-construction flats and houses to 5 percent. At present, the payment made for buying under construction property attracts GST of 12 percent if the completion certificate has not been issued. Postdemonetisation, the real estate prices in major cities have remained stagnant or declined in some cities. However, there are some cities which saw marginal uptick in real estate prices, namely, Mumbai, Hyderabad and Pune.

The healthy capex lined-up in the construction sector is likely to fuel the growth engine of construction activity over the foreseeable future. In the case of road segment, the government has earmarked almost Rs.7 lakh crore for five years for national highway under BharatmalaParioyjana. Further, for various state expressways, the government is likely to spend in the range of Rs.0.5 lakh crore to Rs.1 lakh crore for every year. This planned capex in road segment is building strong revenue visibility for the road developers. We can also see the result of these spends from the financial performance of 31 companies that primarily cater to infrastructure activity. These companies recorded robust 20 percent yoy growth in 1HFY19. The government is not just spending on road development, it is also providing impetus to develop other means of transportation such as railways, waterways and airports. As for railways, the government is expected to incur a capex of around Rs.1.5 lakh crore per year for station redevelopment, regular rail infrastructure development, etc. Notably, to develop India’s ports, the government is expected to spend around Rs.8 lakh crore over 20 years under Sagarmala projects. The government also aims to develop 100 airports in the next 15 year, for which it has earmarked capex of around Rs.3-4 lakh crore. 

In addition to these, other sectors such as water, irrigation and urban infra will also see money pouring in as the government is expected to spend around Rs.7-9 lakh crore on these sectors. The capex for water & irrigation would be majorly for National River Linking project and the Accelerated Irrigation Benefit Programme. In terms of urban infra, the capex would be to develop metro rail or mass rapid transit system, water supply and sanitation under the AMRUT scheme and other various projects such as Smart Cities, Swachh Bharat, Namami Gange, etc., which are likely to present enormous opportunities for the construction companies.

Consumer Durable

 
The Indian consumer durables sector has become one of the fastest growing sectors in India which is primarily driven by the growing Indian economy. With continuous increase in disposable incomes and the development of product technology, the demand for diverse consumer durable goods is growing. The Indian consumer market is extremely competitive in nature and fragmented as well. It is mainly dominated by the MNCs which are known to have superior products as well as technological prowess. About 65 percent of the market share is represented by MNCs, with LG and Samsung together accounting for 40 percent of the consumer durables market in India.

The consumer durable products are divided into three categories, namely, white goods, brown goods and consumer electronics. Some examples of the categories are given in the table below. 


The nation’s consumer electronics sector is set to grow at a compounded annual rate of 13.4%, to touch $20.6 billion by 2020. The consumer durables account for more than 40% of the end-consumer spending in India. The urban market in India accounts for a major chunk of the share, amounting to about 65 percent of the total revenues in the sector, while the remaining 35 percent is accounted by the rural market. But with various government policies and the simple reach of credit facilities, the rural market will be witnessing a rising trend in the demand as there will be a huge number of buyers. The growth in the coming years can also be credited to the government’s increased spending on rural electrification 

India consumes around US$125 billion worth of electronics, while the global electronics industry is worth US$1.8 trillion. This consumption is expected to grow to US$400 billion by 2020. This will be attributed to the increasing product awareness, the rise of innovative products, coupled with high disposable incomes which will also act as a catalyst for the strong growth in the consumer durables market in the country.

The consumer durable industry is highly related to festive seasons when the consumers indulge in festive shopping. The festive season boosts sales of white goods. It is noted that it is during these seasons where aggressive schemes pop-up and spur online sales too. With the increase in customs duty and the depreciation of the Indian rupee, many brands of the consumer durables industry have refrained from price hikes. Recently, the GST rate for TVs up to 32 inches has been reduced to 18 percent, which could result in higher consumer demand. There was a huge demand for MI panels given the attractive price.

To study the performance of the consumer durable sector, we have studied performance of 14 companies. The aggregate revenue produced by the sector was Rs.21,124.22 crore in H1FY19, up by 8 percent from Rs.19,575.12 crore reported in the corresponding period of the previous fiscal. The bottomline expanded by 6 percent in H1FY19 to Rs.1,373.75 crore from Rs.1,298.29 crore in H1FY18. We can attribute the growth in the sector with the penetration of the goods in the rural market, the brands not hiking their prices and also increase in disposable incomes of the consumers. The aggregate EBIDTA for the sector has increased by 13 percent to Rs.1.993.89 crore in H1FY19, as against, Rs.1,761.98 crore in H1FY18.

The company that has contributed the highest portion in the aggregate sales is Voltas, bringing in Rs.3,251.5 crore, followed by Whirlpool of India, which reported its sales at Rs.2,832.6 and Bajaj Electricals which reported Rs.2,717.8 crore in sales. However, Bajaj Electricals portrayed the highest growth in terms of sales, a whopping 39 percent hike to Rs.2717.8 crore in H1FY19 from Rs.1958.6 crore in H1FY18. The companies that performed poorly out of the lot were Symphony, Mirc Electronics and Dixon Technologies (India) posting sales drop of 28 percent, 21 percent and 17 percent, respectively, in H1FY19. In terms of PAT, Voltas and Whirlpool again topped the list, posting Rs.276 crore and 242 crore, respectively, for the quarter of H1FY19. Bajaj Electricals reported the highest growth in net profit, with a massive increase of 89 percent, followed by Blue Star with 54 percent growth in net profit in H1FY19 compared to H1FY18.

So, we can say that there is much to look forward to with regards to the consumer durable sector. The increasing awareness, easier access to goods through developing retail channels, the changing lifestyles and the easier access to credit facilities have been the key growth drivers for the consumer durable market.

We believe that the sector has some good years ahead as companies are relatively optimistic on the demand scenario and macro tailwinds such as rural electrification, infrastructure push by the government, falling commodity price and the rural consumer sentiment. In the coming years, we will observe innovation, expansion of goods into adjacent categories and a deeper penetration of commodities in the consumer durable sector.

Electricals & Electronics

The Indian electronics industry is moving at a rapid pace and is on the verge of becoming one of the largest in the world. The sector is projected to grow at a compound annual growth rate (CAGR) of 66.1 percent from $31.6 billion in 2015 to approximately $400 billion by 2020. We can attribute this to India’s rising disposable incomes, changing lifestyles and easier access to credit. Meanwhile, the government has been aiding the electrical and electronics sector by setting up Electronic Hardware Technology Parks (EHTPs), Special Economic Zones (SEZs) and creating a favourable climate for Foreign Direct Investment (FDI).

Electronics has brought about a huge wave of change in several segments by enabling the creation of products that enhance efficiency. There is extensive use of electronics and electrical appliances in sectors like lighting, automotive, communications, power, etc. As we go ahead, we definitely anticipate a greater opportunity for the electrical industry to meet the needs of the varied sectors where electronic products are in use.

The Indian electronic market is expected to reach a turnover of US$ 400 billion in 2022, up from US$ 69.6 billion in 2012. The total production of electronics hardware goods in India is estimated to reach US$ 104 billion by 2020. This can be achieved with an ever-growing customer base and the increasing penetration in the consumer durables segment, which will definitely boost the Indian electronic sector. Also, with the advent of digitisation, there is increased broadband penetration in the country which would open up newer avenues for companies in the electrical and electronics sector.

To observe the performance of the electronics and electrical sector, we have taken into account 20 companies. The topline of the sector has improved considerably by 30 percent and reachedRs.38,761.7 crore in H1FY19 fromRs.29,788.3 crore in the same period of the previous year. The bottomline has witnessed a substantial growth of 200 percent as the net profit of the sector was recorded atRs.4353.1 crore in H1FY19, up fromRs.1456.1 crore in H1FY18. The EBIDTA for the sector stood atRs.7874 crore in H1FY19, witnessing an expansion of approximately 200 percent fromRs.2638.3 crore in H1FY18. The companies that reflected stellar sales numbers in H1FY19 and pulled the parameters up were, Siemens, coming in with sales ofRs.6766.4 crore, followed by ABB India and Havells India, reportingRs.5157.7 crore andRs.4787.3 crore, respectively. In terms of sales growth, Inox Wind displayed the greatest strength of 910 percent growth fromRs.78.1 crore in H1FY18 toRs.788 crore in H1FY19. Inox Wind is followed by HEG and Graphite India, which have reflected 443 percent and 352 percent sales growth, respectively. Out of the lot of 20 companies, Igarashi Motors and Suzlon were the bottom performers, with 52 percent and 3 percent drop in their revenues, respectively. 

The electronics industry is shaping itself for an exciting phase owing to the revolutionary changes in technology, the launch of innovative products and the challenge of global competition. This has made it mandatory for the electronic product and component manufacturers to emphasise on continuous improvements in order to stay ahead of the pack. There is a pressing need for user-friendly and eco-friendly products to cater to the consumers, which will slowly shape the market in India. However, the major challenge that the Indian electronic manufacturing market is facing is the poor infrastructure, which needs immediate attention. In general, we can conclude by saying the prospects of the electrical and the electronic industry looks very bright. There is a growing customer base and the increased penetration in consumer durables segment which has provided enough scope and given strength for the growth of the Indian electronics sector. The sector is also receiving incentives from the Indian government, which will be an impetus to the growth of the electrical industry.

Engineering

Of all industrial manufacturing sectors in India, the engineering sector is the largest and most diversified of all. It plays a significant role as it serves as an input for several other industries and is closely associated with the manufacturing and infrastructure sectors. The biggest determinant of a company's performance in the engineering sector is the order book size. It sheds light on the company’s revenue visibility. The working capital requirements in this sector are massive as companies require substantial funds and resources to execute contracts.

We computed the performance of 36 companies in the engineering sector in H1FY19 and H1FY18. On an average, the sector witnessed sales growth of 21.37 percent YoY. The EBITDA of the sector grew 64.09 percent YoY, while the EBITDA margin dropped by 171.11 bps. The sector reported PAT growth of 97.23 percent YoY. Some of the companies that reported exceptional growth in their sales numbers include Kirloskar Industries (111.22 percent), Disa India (61.51 percent), MM Forgings (60.30 percent), Engineers India (55.97 percent) and ISGEC Heavy Engineering (51.71 percent). Meanwhile, some of the companies that reported outstanding PAT growth include Disa India (589.44 percent), Praj Industries (378.33 percent), Kennametal India (272.11 percent), Mahindra CIE Automotive (140.39 percent) and Yuken India (99.07 percent). On the other hand, BEML and Ricoh India reported losses in both H1FY19 and H1FY18. Elecon Engineering managed to turn the net losses incurred in H1FY18 into profits in H1FY19.

 

The rising investments in infrastructure and industrial production are the major growth drivers of this sector. The demand in the engineering sector is being driven by capacity creation in sectors like infrastructure, power, mining, oil and gas, refinery, steel, automotive and consumer durables. Several international players were attracted to the sector due to its ample growth opportunities after the government permitted 100 percent FDI in the sector. The government implemented initiatives like ‘Make in India’ which helped achieve greater self-sufficiency in the area of defence equipments, including aircraft. In the Union Budget 2018-2019, the government allocated US$ 92.22 billion and US$ 45.57 billion to the infrastructure sector and the defence sector, respectively. Furthermore, the Union cabinet has permitted incentives up to Rs.10,000 crore for investors by amending the M-SIPS scheme in order to attract investments in the electronics sector, generate employment opportunities and reduce reliance on imports by 2020.

Q3FY19 was dreary in terms of large order finalisation, particularly due to front-ended ordering ahead of elections. Although margins are likely to improve on successful order execution, profitability will experience pressure due to higher interest costs and stretched working capital. Investors should watch out for management remarks on sustainability of public infrastructure and rise in private capex, including greenfield projects, apart from working capital levels. Well-diversified large-scale players with robust balance sheets and steady cash flows will be able to withstand the headwinds. The momentum of order execution is likely to endure in Q3FY19, given healthy order books and focus on implementation post H1.

There were some major developments in the sector: In August 2018, IISC’s Society of Innovation and Development (SID) and WIPRO 3D entered into collaboration to produce India’s first industrial scale 3D printing machine. In October 2018, Filatex India declared its plan to undertake forward integration by setting up a fabric manufacturing and processing unit. Ashok Leyland is employing machine learning algorithms and its newly established telematics unit will improve the performance of its commercial vehicles, drivers, and so on. In conclusion, with a dedicated focus on developing industrial corridors and smart cities, the government aspires to guarantee holistic development of India. The corridors would further contribute in integrating, monitoring and developing a favourable environment for industrial development and will endorse progressive practices in manufacturing.

Fertilizers 

Fertilizers played a principal role in the triumph of India’s green revolution and ensuing self-sufficiency in foodgrain production. With the arrival of the Rabi sowing season, the production of fertilizers increased 1.8 percent during H1FY19 due to restocking. Nearly 60 percent of fertilizer production is composed of urea, whose domestic production grew 4 percent, while its imports increased 4.3 percent. This increase in production is attributable to the reopening of some urea plants that were closed during the previous year for operational maintenance. As a result, operational efficiencies improved and led to enhanced capacity utilisation. Import dependence of urea has remained unchanged at 22 percent in H1FY19. India primarily imports urea from Oman, Iran and China. The retail prices of di-ammonium phosphate (DAP) grew 20 percent in comparison to the previous Rabi season and are expected to continue to rise. Thus, the production of DAP plummeted by 28.4 percent. Consequently, the raw materials essential for the production of DAP were instead utilised for manufacturing nitrogen, phosphorous and potassium (NPK) grade fertilizers and complex grade fertilizers. Furthermore, imports climbed steeply by 41.2 percent to compensate for the domestic deficit and also because it was more feasible to import the finished product. China, Saudi Arabia, USA and Jordan supply DAP to India. India’s requirements of potassium chloride are met through imports from Canada, Russia, CIS+ Belarus, Israel, Jordan and Lithuania; however, the imports declined by 7.2 percent. The rise in demand for phosphatic grade fertilizers augmented the production of single super phosphate (SSP), which is produced indigenously. There is a shift in the preference of farmers to the lower ‘P’ grade product instead of the higher ‘P’ grade product like DAP. Overall, the sales of primary fertilizers increased 7 percent YoY in H1FY19 on account of healthy sales of non-urea fertilizers, while urea sales posted a meagre growth of 2 percent YoY in H1FY19. According to the rating agency ICRA, the demand for urea is expected to remain stable while the performance of players dealing in phosphorous and potash is likely to remain under pressure in 2019.

We computed the performance of 11 prominent companies in the fertilizer sector during H1FY19 and H1FY18. On an average, sales climbed 28.14 percent YoY while profit after tax increased 48.22 percent YoY in H1FY19 despite an increase in raw material costs and rupee depreciation. The highest sales growth of 76.94 percent was reported by Deepak Fertilizers & Petrochemicals Corporation, closely followed by Gujarat State Fertilizers & Chemicals (GSFC) which posted sales growth of 63.52 percent. However, in terms of PAT growth, GSFC reported the highest PAT growth of 146.34 percent, while Gujarat Narmada Valley Fertilizers & Chemicals came in second with a PAT growth of 78.04 percent. Despite healthy sales growth, Deepak Fertilizers witnessed a drop in PAT by 36.62 percent. Among the bottom performers were Nagarjuna Fertilizers and Chemicals and Zuari Agro Chemicals incurred net losses ofRs.173.45 crore andRs.13.76 crore in H1FY19, respectively. 

The deterioration of the Indian rupee had direct repercussions on the fertilizer industry due to its dependence on imports. The upsurge in international prices of raw materials like phosphoric acid, rock phosphates, ammonia and sulphur further enhanced the cost of manufacturing phosphatic fertilizers. The price of domestic natural gas increased 23.4 percent YoY to $3.06 mmBtu in H1FY19 due to the sharp hike in crude oil prices. It has been fixed at $3.36/mmBtu in H2FY19, which is 9.8 percent more than H1FY19. The availability of fertilizers was further impacted by the closure of plants in China in the face of rising global demand.

Fertilizer subsidy arrears to the industry dwindled by 75 percent toRs.10,000 crore in the past four years and the outstanding amount is expected to be remitted at the end of the fiscal. A Direct Benefit Transfer (DBT) scheme is being implemented to assist small and marginal farmers in funding seeds, fertilizers, pesticides and labour. The cost of implementing such a scheme would be Rs.1.25 lakh crore.

Another alternative includes the ‘price deficiency payment’ system in which a subsidy would be provided in the event the market price sinks below the floor price. In such a case, the difference up to a maximum of 10 percent would be paid to farmers. Resolving the issue of farm distress is on the agenda of all political parties due to its direct correlation with soliciting votes from rural voters. Despite robust historical growth, fertilizer consumption in India is skewed. Some states are under-penetrated, which creates headroom for growth. Fertilizers are being promoted via awareness campaigns. Rising rural incomes, together with easy availability of credit, will bolster fertilizer usage in India. The deterioration of the Indian rupee and increase in prices of phosphoric acid led to an increase in input costs. Some companies have passed these costs onto the farmers. However, the lag in doing so has impacted the profitability of these companies. Moreover, due to insufficient monsoon in some regions of India, some companies had to offer higher discounts to dealers. The fertilizer sector could face issues pertaining to liquidity of working capital and credit accumulation. However, the government is taking initiatives to resolve this issue. 

Finance 

Non-banking finance companies (NBFC) are among the most important segments of the Indian financial system. This sector plays a key role in building nation wide network and enabling financial inclusion to support the banking sector in extending credit to various segments of society, especially to the micro, small and medium enterprises (MSME), which form the cradle of entrepreneurship and innovation. NBFCs have ground -level understanding of customers' profiles and their credit needs, which gives them an advantage. This makes NBFC a perfect option for MSMEs for fund raising.

The market share of NBFCs would continue to expand and this expansion would be supported by their ability to customise products, price and management of credit costs related to small loans, micro finance, light commercial vehicles (LCVs), affordable housing loans and loan against property (LAP), etc. However, NBFCs face competition in certain segments .

The retail loans of NBFCs witnessed a growth of 46.2 percent during FY18 as against a growth of 21.6 percent during FY17, showing strong demand in vehicle loans segment. Besides, its lending to the micro, small and medium enterprises (MSME) sector was also robust . On the profitability indicators, returns on equity (RoE) and returns on assets (RoA) were higher during FY18 than a year ago, though the re was fall in the net interest margin (NIM).

Financial overview
On the financial front, the sector delivered very strong disbursements in Q2FY19, mostly on account of favourable base. However, for the first half of the current fiscal , the housing finance companies may face compression in margins. On the other hand, the AUM growth was registered at 22 percent YoY. The liquidity crunch in Q2FY19 was the major reason for the downfall in the overall industry, but its effects came in late in the quarter, so the effects will be seen in third quarter results.

Bajaj Finance Ltd, one the biggest companies in the sector, reported Q2FY19 consolidated NII at Rs.2665 crore as against Rs.1942 crore YoY , an improvement of 37 percent YoY . Its net profit for Q2FY19 came in at Rs.923 crore as against Rs.598 crore, showing up side of 54.3 percent YoY . Its gross NPAs rose by 10 bps QoQ to 1 .51 percent, while the net NPAs increased by 8.79 bps QoQ to 0.53 percent .

The countries largest and oldest housing creditor, HDFC Ltd , reported Q2FY19 NII growth of 16.3 percent YoY to Rs.2649 crore as against Rs.2278 crore in Q2FY18. It posted NIM of 3.5 percent for the quarter. HDFC’s net profit was higher by 24.7 percent YoY at Rs.2467 crore . Its gross NPAs for Q2FY19 stood at 1.13 percent , down 5 bps QoQ.

LIC Housing Finance's net interest income (NII) for the same quarter increased 9.2 percent YoY to Rs.1060 crore as against Rs.971 crore in the quarter last fiscal . The company’s net profit increased 11.5 percent YoY to Rs.573 crore in Q2FY19, up from Rs.514 crore in Q2FY18.

Mahindra & Mahindra Financial Services reported increased revenue Q2FY19 by 39 percent YoY to Rs.2148 crore from Rs.1540 cr. The NII for the quarter rose 49 percent YoY to Rs.1167 crore. Net profit for the quarter stood at Rs.381 crore, as against Rs.164 crore YoY.

Muthoot Finance's net profit for the quarter rose by 7 percent YoY to Rs.486 crore . AUMs were up by 6.4 percent on QoQ basis, while the rise in volume was 4 percent QoQ . After six quarters of softer growth momentum, gold loan AUM gained traction and was higher by 10 percent YoY, with added support from 4 percent QoQ rise in volume (to 161 tonnes) and a 2 percent QoQ rise in AUM/gram which stood at Rs.1898/g ram .

Cholamandalam Investment and Finance Company's Q2FY19 revenue improved 24 percent YoY to Rs.1676 crore. Its NII for the quarter stood at Rs.812 crore as against Rs.739 crore, an improvement of 9.8 percent YoY. Its net profit came in at Rs.305 crore, as against Rs.227 crore YoY, registering a growth of 34.2 percent YoY. Its gross NPAs have declined by 20 bps to 3.4 percent.

Roadmap ahead
NBFCs maintain asset-liability balance which helps them in times of tight liquidity and rising interest rates. On other side, there are few NBFCs that are aggressive in lending unsecured credits and have increased dependence on short-term funding, which disturbs asset-liability balance . In an increasing interest rate scenario, the margins may be under pressure .

NBFCs were able to withstand the double impact of demonetisation and GST implementation. But the government’s increased focus on the rural economy could provide a boost to NBFCs with significant presence in rural areas. Though few segments were impacted due to lack of quality management practices and the sudden impact on the demand in some sectors . Further, the pressure on NBFCs' book s could be due to their exposure to real estate developers, where stress would start reflecting, especially if funding becomes tighter either from NBFCs or private equity firms .

However, soothing some worries, the Reserve Bank of India (RBI) in its latest report has said that the consolidated balance sheets of NBFCs expanded in 2017-18 and during the first half of 2018-19. It further noted that the profitability of NBFCs improved on the back of fund-based income, relatively lower NPA levels and strong capital position.

Hotels 

India is a country that is rich in culture and diversity. This is mirrored in its hotels, as India is popular for its endearing hospitality and congeniality. Hotels in India are categorized on the basis of their location as heritage hotels, luxury hotels, budget hotels and resorts. The Indian hotel industry has witnessed improvement in demand in recent years on the back of rapid urbanisation, growth in disposable incomes and modernisation. The government initiatives towards boosting travel and tourism have helped the hotel industry grow as well. This has led to an increase in the average revenues earned per room, which prompted hotels to scale up the room availability. The average room rate (ARR) growth stayed negligible at 2 per cent in FY18. The revenue per available room (RevPAR) in most cities except Noida and Gurugram climbed 3 per cent due to demand recovery and fewer supply additions. Mumbai witnessed the highest RevPAR and occupancy in comparison to its contemporaries at Rs.5,867 and 75.8 per cent, respectively. Robust corporate demand and a growing MICE segment were chief reasons for the city’s strong performance. Pune witnessed the highest YoY growth in RevPAR of 13.5 per cent due to a significant increase in both occupancy and average rates. Moreover, Agra and Jaipur also delivered record performances in 2017-2018. Goa outranked Mumbai and secured the position of rate leader in India.

100 per cent FDI is permitted through the automatic route in the hotel and tourism sector. Furthermore, a five-year tax holiday has been offered for 2, 3 and 4 star category hotels located around UNESCO World Heritage sites (except Delhi and Mumbai). The sector received total FDI of US$ 11.39 billion between April 2000 and June 2018. In H1FY18, market-wide occupancy, ADR and RevPAR were at 65.9 per cent, Rs.5,868 and Rs.3,868, respectively. It is interesting to note that leisure hotels have consistently outperformed their urban counterparts and have registered a RevPAR premium of 61.8 per cent in 2017-2018, driven by higher average rates of Rs.14,292. This is nearly double the average rate of Rs.7,831 of urban hotels.

Prominent players like Hotel Leela Venture and Jaypee Hotels are struggling to repay their mounting debts. In the face of intensifying competition, existing players are attempting expansion by collaborating with property developers. The astronomical real estate prices make it substantially challenging for branded chains to procure land for operating hotels and other hospitality projects. Other challenges involve the hold-ups on account of high cost of capital for financing both greenfield and brownfield developments. 

We analysed the performances of 10 notable companies in the hotels sector during H1FY19 and H1FY18. On an average, the sales in the sector witnessed a growth of 5.56 per cent YoY. Three companies that reported the healthiest sales growth of 20.04 per cent, 17.84 per cent and 16.71 per cent, respectively include EIH, Taj GVK Hotels & Resorts and Lemon Tree Hotels. The Indian Hotels Company also reported satisfactory sales growth of 9.76 per cent. However, the YoY sales of some companies dropped in H1FY19. These companies include Coffee Day Enterprises, which posted a drop in sales of 44.20 per cent; Mahindra Holidays & Resorts India, whose sales plummeted 13.56 per cent and EIH Associated Hotels, which registered a de-growth of 4.31 per cent. Similarly, Oriental Hotels also witnessed a drop of 1.88 per cent YoY in its sales growth. On the basis of profit after tax (PAT), EIH posted the highest PAT growth of 171.83 per cent, followed by India Tourism Development Corporation, which showcased a growth of 59.40 per cent YoY. Contrarily, Mahindra Holidays & Resorts India and EIH Associated Hotels reported PAT de-growth of 55.98 per cent and 6.86 per cent, respectively. The companies that reported net losses in both H1FY18 and H1FY19 include Coffee Day Enterprises, Hotel Leela Venture and The Indian Hotels Company. Two companies that had incurred losses in HIFY18 but reported profits in H1FY19 include Lemon Tree Hotels and Oriental Hotels. On an average, the EBITDA margin of the hotel industry increased 56.4 bps YoY.

The demand for hotels in India is growing at a pace that is twice the rate of supply. While the supply in the hospitality sector is 0 20 40 60 80 100 120 140 160 180 200 P/E rising 8 per cent YoY, the demand is growing at twice this rate. Thus, there is great potential for expansion in the sector, driven by branded chains. However, this is likely to cause an increase in hotel tariffs in 2019. Based on a forecast by the American Express Global Business Travel’s Hotel Monitor 2019, the hotel tariffs in Bengaluru and Hyderabad are expected to climb 4 per cent in 2019, while in Mumbai and Delhi, they are expected to grow by 2 per cent. However, the tariff rates in Chennai are expected to drop by 3 per cent, while these are expected to remain flat in Pune. Several international hospitality chains are also expected to arrive in the Indian market, while some of the Indian hotels are venturing abroad and making their debut in the overseas market. A good example is Lemon Tree Hotels, which through its subsidiary Carnation Hotels, has inked a contract with Al Waleed Real Estate to open its first hotel in Dubai. Thus, we can conclude that the overall prospects of the hotel industry look optimistic in the upcoming years.

IT 

The IT sector has advanced in leaps and bounds. To better understand its prospects for 2019, we computed the performance of 48 companies in the IT sector during H1FY19 and H1FY18. On an average, the sales in the IT industry climbed 14.17 per cent YoY. Consequently, EBITDA surged 14.75 per cent YoY; however, the EBITDA margin plummeted by 660.74 bps. Overall, the PAT of the sector soared 16.35 per cent YoY. Some of the companies that reported the highest sales growth YoY include Infibeam Avenues, Mindtree and Intellect Design Arena as their sales climbed by 504.82 per cent, 135.78 per cent and 62.10 per cent, respectively. Contrarily, the companies that reported a drop in their sales YoY include Vakrangee (54.18 per cent), Take Solutions (36.50 per cent) and Zen Technologies (12.13 per cent). Some of the companies that showcased colossal PAT growth are NIIT (589.19 per cent), Take Solutions (451.66 per cent), Newgen Software Technologies (353.63 per cent), 8K Miles Software Services (295.51 per cent) and Xchanging Solutions (266.67 per cent). On the other hand, Vakrangee, Aptech, eClerx Services, Majesco and Wipro were amongst the bottom performers as their PAT dropped by 96.13 per cent, 82.37 per cent, 28.32 per cent, 47.06 per cent and 15.64 per cent, respectively.

The demand in the IT sector was quite positive during H2FY18 owing to improving investment scenarios and the entry of more players in the sector.

According to the staffing firm TeamLease, 2019 will witness addition of 2.5 lakh jobs in the IT sector, wherein senior level hiring is likely to shrink, while the mid-level hiring will continue rising. Most IT firms have committed to an upswing in their workforce by 2020, particularly through campus hiring. The job landscape will undergo significant changes as the skill-sets required are changing radically owing to the proliferation of automation, AI and robotics. Thus, the gap between candidates’ skills and industry requirements needs to be bridged through adequate training and recruiting. Most jobs in the IT sector will revolve around the fields of computer, mathematics, architecture and engineering.

A major contributing factor to the growth in the IT sector is the ‘Digital India’ initiative. Business-IT hybrid roles will become commonplace as organisations are adopting digitisation. Another important factor to look forward to in 2019 is the launch of 5G services in India, which will increase the jobs in technology. Big data analytics, machine learning and AI developers will emerge as strong areas of employment across numerous industries. Salaries in India are projected to rise by 10 per cent to 13 per cent in 2019. 

According to The National Association of Software and Solutions Companies (NASSCOM), the IT industry is wellplaced to grow by 9 per cent in 2019. The technology industry at large has great prospects; however, the software services space is weighed down by some uncertainties. The rise of digital services has been substantial enough to account for nearly 20 per cent of the total exports. NASSCOM has forecasted digital services to grow 1.5 to 2 times over rest of the business. NASSCOM has also projected IT services exports to grow at 7 to 9 per cent in FY19 as against 7 to 8 per cent in FY18. Thus, we can conclude the IT industry offers a cautious optimistic outlook for 2019.

Iron & Steel 

The iron and steel industry in India has been through tremendous changes over the years. Iron and steel industry plays a vital role in the development of the economy. Iron in all its forms, cast iron, steel and rolled metal, is the most used construction material in the global economy. For centuries, the engineering industry has been using the ferrous materials relatively more than any other industry. The steel consumption on a global level has been characterised by an upward trend and it has been noted that the developing countries have a higher steel consumption level.

The steel industry has been classified into three categories, namely, major producers, main producers and secondary producers. On the global front, in February 2018, the world's total crude steel production came in at at 132 million tonnes (MT), up by 3.5 per cent from the corresponding period last year as India grabbed the second position just behind China, which continued to be the biggest producer of the commodity in February 2018 with a production of 64.9 MT, increasing by almost 6 per cent from the same period last year. On the production side, India manufactured 8.5 MT of crude steel in February 2018, up by 4.3 per cent from February 2017.

To analyse the Indian iron and steel sector, we have taken into consideration 38 companies.On an average, the sales of the sector posted a substantial jump of 26 per cent YoY in H1FY19 and reached Rs.4527.7 crore as against Rs.3617.3 crore in the corresponding period last year. Similarly, on an average, the sector’s PAT for H1FY19 stood at Rs.345.9, managing a turnaround in its bottomline from a loss of Rs.20.9 crore in H1FY18. The company which contributed the highest share to the sales figure for H1FY19 was JSW Steel, bringing in Rs.37558 crore. It was closely followed by Tata Steel with sales of Rs.33734.1 crore in H1FY19.

The top 3 companies with the highest sales in H1FY19 are JSW steel, Tata Steel and Steel Authority of India.

Taking into consideration individual company growth in the iron and steel sector, the company to have registered the highest growth in terms of PAT is Godawari Power & Ispat, posting 300 per cent jump to reach Rs.117.4 crore in H1FY19 versus Rs.29.3 crore in the same period of the previous fiscal. In terms of sales, the company to have registered the highest growth is RMG Alloy Steel with 326 per cent leap to reach at Rs.240 crore. The companies that have performed poorly in terms of sales growth are Usha Martin, Jindal Stainless (Hisar) and Arikalahasthi Pipes, which have registered a decline of 18 per cent, 8 per cent and 6 per cent respectively. 

The Ministry of Steel in India is aiding to set up an industry driven Steel Research and Technology Mission of India (SRTMI) in association with the public and private sector steel companies to commander research and development activities in the iron and steel industry at an initial corpus of Rs.200 crore (US$ 30 million). The steel industry has seen significant volatility largely due to a sharp fall in the demand, which was an outcome of the global economic crisis. But on a positive note, the Indian steel sector is likely to perform well in the coming years on the back of demand growth in domestic and global markets. However, multiple geopolitical changes still create some concern for the steel sector going ahead.

Media 

The Indian Media and Entertainment (M&E) industry is a rising sector for the economy and is making high growth strides. It is one of the fastest growing industries witnessing a strong growth phase, backed by rising consumer demand and improving advertising revenues. It has registered overall growth of around 13 per cent on a YoY basis. The industry breakdown comprises of television (44 per cent), print (20 per cent), films (10 per cent), digital (9 per cent), animation & VFX (5 per cent), live events (5 per cent), gaming (2 per cent), OOH (Out-of-Home) (2 per cent), radio (2 per cent) and music (1 per cent).

Indian television industry segment is a rapidly growing segment holding the second largest television market in the world. Indian television industry, which is the highest contributor to the Indian M&E industry, accounted for 44.24 per cent of the revenue share in FY16, which is expected to grow further to 48.18 per cent by FY21. The Indian television industry's revenue majorly comprises of advertisement revenue (68 per cent) and subscription revenue (32 per cent) as of FY18. The advertising segment growth was due to elections, penetration of regional channels and launch of new channels. Further, the boom in the industry was majorly supported by the digitisation. Also, DTH subscription is growing rapidly, driven by content innovation and product offerings. 

The Indian film industry witnessed growth of 27 per cent in FY17, led by healthy box office growth domestically as well as internationally. India is ranked as the fifth largest box office market in the world, with total box office revenue of 1.6 US$ billion as on FY17. The film industry has received some relief as in the recent GST Council meet, the GST on movie tickets up to Rs.100 has been reduced to 12 per cent from 18 per cent, while tickets of more than Rs.100 will now attract 18 per cent GST, as against 28 per cent earlier. This rate cut would be a positive move if the industry passes it on to the customers. As per IBEF, the revenues earned by the Indian film industry in 2018 would reach Rs.165.7 billion (US$ 2.56 billion) and are expected to further grow at a CAGR 4.98 per cent during FY18-20.

The Indian print industry, which accounts for the second largest share in the M&E industry, has witnessed moderate growth of 3.4 per cent on YoY basis in FY18 and it is likely to growth at a CAGR of 7 per cent till 2020. The print market is likely to reach US$ 6.69 billion by 2021, supported by rising income levels and evolving lifestyles which would lead to robust growth in niche magazines segment. Also, the digital and OOH segment is in focus, led by rising internet and digital media. Further, the FM radio segment grew by 7.9 per cent YoY in FY18 and it is likely to grow further due to the rise in use of mobile phones and car music systems. Moreover, the rising 3D,4D and HD movies scenario, coupled with growing focus on kids genre, augurs well for the animation and gaming segment.

For the purpose of sector analysis, we have analysed 22 companies according to their market caps. The overall revenue of the sector increased by 27 per cent to Rs.13637 crore during H1FY19 and operating profit also increased significantly by 27 per cent to Rs.3888.7 crore. However, the net profit declined by 24 per cent to Rs.1247.5 crore in H1FY19. The entertainment major, Zee Entertainment Enterprises’ revenue jumped by 22 per cent to Rs.3240 crore and PBIT also increased by 24.4 per cent to Rs.1198.7 crore. However, profit declined by 19.5 per cent to Rs.743.5 crore during H1FY19. Sun TV Network reported healthy set of numbers as revenue and EBITDA jumped by 28 per cent and 36.4 per cent to Rs.1870 crore and Rs.1288.7 crore, respectively. Also, its net profit jumped by 42 per cent to Rs.760.5 crore during H1FY19.

Multiplex operator PVR Ltd reported healthy numbers with rise in revenue by 17 per cent to Rs.1328 crore. Also, EBITDA and net profit jumped significantly by 27 per cent and 24 per cent to Rs.241 crore and Rs.80.3 crore, respectively, during H1FY19. The Direct-to-Home (DTH) service provider Dish TV India reported surprising performance with sharp jump in revenue by 122 per cent to Rs.2033 crore. Also, its EBITDA jumped by 339 per cent to Rs.305.8 crore with jump in PAT to Rs.54.9 crore from just Rs.2.3 crore. Further, TV18 Broadcast, a part of the Reliance Industries-owned Network18 Group, has reported significant jump in revenue by 40 per cent to Rs.437 crore. Also, the operating profit grew by 11.2 per cent to Rs.56.8 crore, but the net profit declined drastically by 37.9 per cent to Rs.20.4 crore during H1FY19.

Going ahead, Indian M&E industry is likely to be in the limelight with supportive government moves like Digital India and Make in India. Also, the government has increased the FDI limit to 100 per cent from 74 per cent in the M&E industry, which bodes well for the industry. Also, the rapidly growing demand for HD and easy availability of 4G data would further aid growth of the industry. As per IBEF, the Indian M&E industry is expected to grow at ~13.10 per cent CAGR over FY18-23E. Overall, we see the media and entertainment industry to deliver cheerful performance in the long term.

Paper 

The Indian paper industry accounts for about 3 per cent of the world’s production of paper. The sector has faced a number of challenges like dearth of raw materials, highly capital intensive nature of the industry and threat of cheaper imports from the overseas markets. The per capita paper consumption in India stands at a little over 13 kg, which is significantly lower than the global average of 57 kg. On the positive front, most of the paper mills in the country have updated their technologies by incorporating the latest equipment and know-how in their operations. The paper industry is one of the most capital intensive industries in India as it warrants substantial investments in land and machinery for paper mills. The cost of repairing and maintaining the mills, upgrading technology, cost of environmental compliance and creating a distribution network constitute major outflows. Furthermore, the use of working capital in the industry is above average.

The export of paper and related products amounted to US$ 2,649.30 million in FY18, up by 13.45 per cent YoY. On the other hand, the import of paper and related products stood at US$ 8,277.28 million in FY18, up by 18.35 per cent YoY. The duty-free paper imports more than doubled in H1FY18 due to the high cost of domestic wood in India in comparison to Association of South-East Asian Nations (ASEAN) countries. 

The demand for paper is mounting on the back of rising income levels, growing per capita expenditure, urbanisation and a substantial chunk of the earning population leading consumption. The developments in industries like FMCG, food and beverages, pharmaceuticals and textiles bode well for the paper industry as these industries have increased their demand for packaging paper and board segment. Moreover, improving literacy rates, pick-up in the education sector and rising enrolment rates due to increase in the number of schools and colleges have also contributed to the increased demand for the printing and writing segment. The demand for paper packaging products is rising due to the increased usage of folding cartons in India, particularly in the FMCG sector. The corrugated box market has also progressed owing to the development of the logistics sector and rise in exports.

We analysed the performance of 12 major companies in the paper industry in H1FY19 and H1FY18. On an average, their sales climbed 28.91 per cent YoY, while EBITDA registered a growth of 67.12 per cent YoY. Consequently, EBITDA margin witnessed an improvement of 512.29 bps. Overall, the sector experienced PAT growth of an impressive 373.17 per cent YoY. Ballarpur Industries and Tamil Nadu Newsprint & Papers registered highest growth in their sales, clocking growth of 92.35 per cent and 71.76 per cent, respectively. Furthermore, Tamil Nadu Newsprint & Papers managed to make a turnaround from the losses incurred in H1FY18 to profits during H1FY19. On the other hand, Rushil Décor registered a fall of 1.74 per cent in its sales figures and its PAT de-grew by 44.20 per cent YoY. On the profitability front, Emami Paper

Mills produced the highest PAT growth of a whopping 1111.65 per cent. International Paper APPM and Satia Industries Ltd. witnessed healthy growth of 177.94 per cent and 77.12 per cent, respectively, in their PAT numbers. Despite producing a meagre sales growth of 0.23 per cent, Orient Paper & Industries witnessed PAT growth of 110.29 per cent. Ballarpur Industries was at the bottom of the heap as it incurred losses during both H1FY18 and H1FY19.

Paper prices witnessed stagnation for nearly three years before they started firming up in FY18. The positive performance in FY18 resulted in most paper mills raising their prices by 2-3 per cent in FY19 in order to compensate for the rise in the cost of raw materials. The depreciation of the Indian rupee, in conjunction with global players raising prices by 6 to 8 per cent, has created opportunities for Indian players to hike prices. As the industry expects the raw material costs to continue rising and as the global paper prices are climbing, the domestic prices of paper and associated products are also expected to continue their ascent in 2019. This holds true, particularly in the face of high imports, stabilisation in wood prices and lower power and fuel costs.

The competitiveness of the paper industry can be enhanced by developing and improving key ports, roads, railways and communication facilities. The forest policy needs to be revised so that the industry can make use of degraded forest land for growing plantations.

Overall, the paper industry attracted FDI worth Rs457.79 crore in FY18, which constitutes 0.36 per cent of the total FDI inflows. The industry as a whole is seeking assistance from the Union government to restrict imports. With excess capacity being absorbed, the companies have integrated backward through farm forestry to procure raw material. The imports are falling on account of depreciating rupee, high realisations for paper globally and the risk of imposition of anti-dumping duty. The Indian paper market is one of the fastest growing markets in the world, growing at 6 per cent per annum. However, the rapid proliferation of electronic media has arrested paper consumption in the developed markets. On the whole, the rising consumerism, burgeoning e-commerce and increasing literacy continue to propel the paper industry forward. The Associated Chambers of Commerce and Industry of India (ASSOCHAM) forecasted the production in the Indian paper industry to reach 25 million tonnes in 2019-2020 from 20.37 million tonnes in 2017-2018. A phase of consolidation is imminent in the paper industry; only the pace remains uncertain. On the whole, the prospects of the paper industry look good for 2019.

Plastic & Packaging

The plastic industry has been one of the fastest growing industries in the Indian economy. India is a major exporter of plastics and exports to around 185 countries. India has witnessed an increase of 17.1 per cent YoY in its exports to USD 8.85 billion in FY18. The top ten trading partners of the Indian plastic industry are the US, UAE, Italy, UK, Belgium, Germany, Singapore, Saudi Arabia, China and Hong Kong. The entire industry is divided into two segments: manufacturing of polymers and preparing articles from polymers. There are around 30,000 registered plastic processing units, out of which about 85-90 per cent are SMEs. The industry also consumes recycled plastic, which constitutes about 30 per cent of total consumption.

The sector has enormous unrealised potential, as is evident from the current very low per capita consumption levels of polymers in India, which is 11 kg as against 38 kg in China, 65 kg in Europe and the global average of 28 kg. However, despite the good growth potential, the plastic industry is struggling with many issues like environmental threats, slowdown in adopting new technologies, limited infrastructure, etc. As per the Plastics Export Promotion Council (PLEXCONCIL), the Indian plastic industry has reached over USD 8.8 billion in FY18 and has targeted to reach USD 10.6 billion by FY19.

On the packaging front, the packaging industry plays a vital role to number of industries such as pharma, agri, FMCG, etc. The growth in the packaging industry is directly related to growth in major industries like FMCG and pharma. The Indian packaging industry, which constitutes about 4 per cent of the global packaging industry, has been growing at an annual rate of 13 per cent and is expected to touch $32 billion by 2020. The per capita packaging consumption in India is significantly low at 8.7 per kg, as against Germany (42kg) and Taiwan (19kg), which provides enormous opportunities for the packaging industry going ahead. 

In the current scenario, the flexible packaging is quite popular and FMCG is the biggest consumer of flexible packaging with a huge share of around 70 per cent. Flexible packaging is less costly and occupies lesser space which makes it popular. Other packaging options like paper packaging is contributing around 30 per cent to the overall packaging market.

For the purpose of sector analysis, we have analysed 22 companies according to their market cap from the plastics and packaging sector. The overall revenue of the sector increased by 16 per cent to Rs.19929 crore during H1FY19 and operating profit also increased significantly by 34 per cent to Rs.2892 crore. Also, the net profit jumped significantly by 49 per cent to Rs.1328 crore in H1FY19. The revenue of Supreme Industries, India's leading plastics product manufacturing company, jumped by 20 per cent to Rs.2662 crore and EBITDA also increased by 31.5 per cent to Rs.397 crore. Also, its profit jumped by 79 per cent to Rs.259 crore during H1FY19. Astral Poly Technik, a pioneer in manufacturing of CPVC pipes and fittings, reported 8 per cent jump in revenue to Rs.782 crore and 27 per cent jump in EBITDA to Rs.117 crore. Also, its net profit jumped by 32 per cent to Rs.58 crore during H1FY19. VIP Industries, the leader in baggage industry, reported 28 per cent jump in revenue to Rs.920 crore and 49 per cent jump in EBITDA to Rs.138 crore. Also, its net profit jumped by 46.5 per cent to Rs.91 crore during H1FY19.

In the packaging industry, Essel Propack, the largest specialty packaging global company, reported 5 per cent decline in revenue to Rs.418 crore and 4 per cent decline in EBITDA to Rs.87 crore. Also, its net profit declined by 15 per cent to Rs.32 crore during H1FY19. Time Technoplast, a leading technology-based innovative polymer product company, reported 18 per cent jump in revenue to Rs.950 crore and 6.6 per cent jump in EBITDA to Rs.134 crore. However, its net profit declined by 1.5 per cent to Rs.42 crore during H1FY19.

Going ahead, the plastic industry is likely to grow with the growth in major sectors like construction, FMCG, textiles, automotive, etc. Also, introduction of new technologies, strengthening distribution, coupled with rising focus of government on construction and infrastructure would spur the demand for plastic products in times to come. However, the packaging industry is likely to drive the demand with significant improvement in the packaging processes. The packaging industry is adopting various technologies led by changing customer preferences. Also, the recent drop in crude oil prices and the rising e-commerce business will further benefit the packaging industry. Notably, the Indian packaging industry has registered a robust growth of 15 per cent CAGR in the last five years and is estimated to achieve $32 billion annual turnover by 2025. Going ahead, the linkage of plastic waste business with recycling business could create various opportunities for the recycling companies. Meanwhile, with growing environmental awareness, the plastic and packaging industry would be moving towards tapping markets for plasticulture, key end-use industries and bio-plastics in India.

Personal Care 

The personal care sector is the one that is ever growing and expanding its market of products. Personal care products play an enormous part in everyone’s lives. From morning till bedtime, we use multiple personal care products without which it would be hard to live our day-to-day lives.

India is known to have a long heritage of personal care products and beauty products. The western trends have greatly influenced the personal care and cosmetics industry and brought it into limelight in the country over the last couple of decades. Today, the personal care industry is one the fastest growing consumer product industries accounting for a huge customer base. The industry is witnessing an enormous wave of products being introduced for the many needs of the public. India stands as one of the fastest growing consumer markets at the global level and has transitioned from an unorganised market to an organised retail market place spanning across metros as well as Tier-I and Tier-II cities.

Over the last few years, the personal care industry has shown consistent performance with robust growth, occupying increasing shelf space in boutiques and retail stores across the country. The Indian markets are undergoing a glamorous makeover as several major international brands are making their presence felt in the domestic market. The domestic market for personal care products is projected to grow at a CAGR of around 22% during the period 2017-2020.

The market is expected to maintain a healthy growth due to the rising preference for the cosmetic and personal care products. The major areas where growth will be visible in the personal care industry include colour cosmetics, fragrances, specialised skin care, hair care and make-up cosmetics. Currently, India accounts for a market share of about one per cent of the total global personal care market. However, the share is expected to grow significantly over the next five years. This growth will be triggered by the increasing disposable incomes, relatively young urban elite population and the burgeoning middle-class population. The competition in the market is hotting up due to the large number of foreign companies entering the Indian market. 

To study the personal care sector, we have taken into account 10 companies. The sector’s topline has expanded by 11 per cent to reach Rs.32,214.6 crore in H1FY19 as compared to Rs.29,040 crore during the same period of the previous fiscal. The industry’s EBIDTA rose by 19 per cent as it came in at Rs.7,305.1 crore for H1FY19 period as against Rs.6146.6 crore in H1FY18. The net profit for the sector soared by 18 per cent in H1FY19 and stood at Rs.5121.7 crore as against Rs.4331.6 crore in the corresponding period of the previous fiscal. Hindustan Unilever has reported the largest sales figure at Rs.18,494 crore in H1FY19. In terms of sales, following Hindustan Unilever, Dabur and Godrej Consumer Products have come in at Rs.3010.3 crore and Rs.2759.2 crore, respectively. However, in terms of sales growth, Dabur India has registered 14 per cent growth, followed by Godrej Consumer Products at 9 per cent and Hindustan Unilever at 7 per cent. However, Procter and Gamble Hygiene & Healthcare (P&G) and Gillette India have posted negative sales growth. Both companies’ sales de-grew by 3 per cent and 11 per cent, respectively. However, it is to be noted that the EBIDTA margin for the industry has dropped by 20.03 bps.

The personal care sector has witnessed a shift in trend to a more organic-based product as there is an increasing awareness of a number of healthcare problems associated with traditional cosmetics which are eventually compelling consumers to shift to organic cosmetics. The younger generation is very concerned and health conscious and a major share in demand for organic products across the globe is from consumers below the age of 30. Catering to this need, major players are heavily investing in innovations like hypoallergenic creams, which are said to have minimal impact on health. 

When it comes to personal care products, we as consumers sway a little towards the packaging and the ad content. Both ads and packaging play a significant role in augmenting the companies’ sales figures in this sector. It is about innovative packaging and also the use of environment-friendly packaging material which lures the consumers. Going green has become the new buzzword in the fashion and lifestyle categories and many of the brands are going eco-friendly with their range. The consumers of today are actively in search of cosmetics with labels that indicate that the manufacturer complies with environmental ethics. This is largely to attract a bigger crowd. What is driving the retail market in India is the healthy economic growth, changing demographic profile, increasing disposable incomes which are changing tastes of consumers. We can say that the beauty and personal care market is moving towards a very positive change. There lies an enormous opportunity for growth of the sector but, more importantly, it is due to a more evolved and aware consumer base that there is a demand for natural and ethical personal care products which will eventually make the industry work towards more innovative, effectual and environmentally sustainable products and practices. Considering the rising awareness of personal care products as well as the changes in consumption patterns and lifestyles and, not to forget, the improved purchasing power, the personal care industry has promising times ahead.

Petroleum 

India is the third largest oil consuming nation after the US and China and has imported 4.5 million barrels per day (mb/d) in the current fiscal (till September 2018). Iran is the third largest supplier of crude oil to India, after Iraq and Saudi, and under the temporary exemptions; India is allowed to import up to 300,000 barrels a day compared with an average daily import of nearly 560,000 barrels earlier.

The oil market is undergoing a stunning reversal as crude futures wipe out this year's gains after hitting their highest levels since 2014 just 3 months ago. During April to September 2017, the crude oil prices were hovering in the range of USD 42-53 per barrel. Post-September 2017, the prices kept marching northwards and soared as high as USD 76.4 per barrel by October 2018. However, post-October, in last couple of months, the oil prices corrected and closed at USD 45.3 by the end of 2018. In January 2019, the crude oil prices agian spiked to the range of USD 53-54 per barrel.

The impact of volatility in crude oil prices has been on various sectors in India, including aviation, lubricants, paints, tyres and plastics. The overall margins of the companies belonging to these sectors were affected adversely, especially in the September and December quarters.

The oil companies in India together spent about Rs.57,000 crore between April and November 2018, which was 63 per cent of their capex target of Rs.89,000 crore for FY19. The state refiners are spending thousands of crores in expanding capacity and upgrading their facilities to produce low-emission fuel and improving their marketing infrastructure across the country to cater to the increasing demand for fuel. GAIL, the country’s largest gas marketer and pipeline operator, achieved 72 per cent of its annual capex target, with most of its capital being deployed in laying a pipeline that would get natural gas to most of eastern India soon. The government has revised the domestic natural gas price which will remain in force from October 1, 2018 to March 31, 2019. The gas price for locally produced fields has been increased by 9.8 per cent and the ceiling price for gas to be produced from difficult fields has been raised by 13.1 per cent. The upstream oil and gas exploration companies like ONGC and Oil India will benefit as higher gas prices will lead to higher earnings due to improvement in per unit realisations in the natural gas segment. 

In our analysis, we have considered 16 companies from this sector ranked as per their market capitalisation. During H2FY19, on an overall basis, all the companies have performed better as compared to H1FY19. Except Linde India, all other companies’ revenues have grown in high double digits. Revenues of companies like Hindustan Oil Exploration Company, Gujarat State Petronet and GAIL have grown by 721 per cent, 57 per cent and 53 per cent, respectively, on a YoY basis. The EBITDA of Hindustan Oil Exploration Company grew exceptionally by 1159 per cent YoY, while that of Confidence Petroleum and ONGC increased by 73 per cent and 56 per cent YoY, respectively. However, EBITDA of Mangalore Refinery & Petrochemicals and Chennai Petroleum declined by 34 per cent and 17 per cent, respectively. The PAT of Hindustan Oil Exploration Company jumped by 678 per cent YoY and that of Confidence Petroleum and ONGC was up by 167 per cent and 60 per cent YoY, respectively.

Some of the top oil & gas companies are going in for extensive expansions. ONGC is going to invest Rs.17,615 crore on drilling oil and gas wells in FY19, while Bharat Petroleum, Hindustan Petroleum and Indian Oil Corp plan to spend USD 20 billion on refinery expansions by 2022. Indian Oil Corporation plans to make an investment of USD 22.91 billion in the next 5-7 years. India targets USD 100 billion worth investments in gas infrastructure by 2022, which will include addition of 228 more cities to city gas distribution (CGD) network.

As per Moody’s estimates, the global oil and natural gas prices will be volatile but range-bound in 2019. It expects the medium-term price band for West Texas Intermediate (wti) crude, the main North American benchmark, to be $50-$70 per barrel. While the medium-term price band for North American natural gas at Henry Hub to be around the average of $2.50- $3.50/mmbtu.

Pharma 

The US pricing was the underlying tone for the pharma MNCs for CY18 and the effect of the same will continue in CY19. There has been an increasing need felt by the regulators to cap the pricing of patented drugs by adding more competition of generic or non-generic drugs. The performance of MNCs was, therefore, a mixed bag, with the recovery aided by currency depreciation in the second half. The currency deprecation came as windfall gain for the pharma companies facing margin pressure, which helped the companies to become profitable.

The companies are increasing focus on APIs, drug discovery through non-traditional means of data analytics and patients inputs. Also, the focus will be on rare diseases and oncology drug indications that benefit from orphan drug status and have longer patent protection of 7 years in the US markets.

It has also been noticed that due to the heightened competition, companies that introduced generic are seeing first mover advantage waning off faster than it used to be earlier, leading to lower cash flow predictability cycles. Natco, for example, is already seeing lower cash flows from its drug Copaxone, which was approved after 8 years of wait.

Appreciating the pharma companies' need to do R&D and remain profitable, the Indian government exempted innovative medicines developed by foreign companies from price control for five years. Earlier, Advanced Medical Technology Association has asked for suspension of Generalised System of Preferences (GSP) benefits to India due to its price control on coronary stents and knee replacement implants, the prices of which have been slashed by 85% and 70%, respectively.

India leads the world in generic drugs and its industry is quite internationally-oriented. However, as per Glenmark Pharmacueticals Chairman and MD Glenn Saldanha, the US generic market is expected to remain challenging due to pricing pressure. Glenmark itself is looking at speciality products in dermatology and respiratory space, while Lupin is targeting complex generics, biosimilars and specialty medicines.

Some of the companies like Dr. Reddy and Biocon have great potential to benefit in the long term from their biosimilar portfolio. The generics pipeline in the long term is running dry and to survive and grow, the companies are shifting focus on markets of China, Africa and Europe.

Any regulation changes in China which provides auto approval to generic drugs approved by developed nations can be a big factor benefiting the pharma companies.

On the domestic front too, the growth was flattish due to higher base of pre-buying due to GST evident in Q2FY18. As was evident from the results of Cipla, the domestic market growth was flat, while Europe and rest of the world showed declining trends. As per Cipla, the US is showing signs of revival, though it contributes only 19% to its revenues. However, the industry veterans expect double digit growth in the domestic market and introduction of new products consistently.

The average sales growth of 55 companies considered by us was 10% yoy, which were benefited by the depreciation in rupee. The EBITDA grew by 14.8% yoy, while margins declined 56 bps. However, overall, we see that PAT increased by 25% yoy due to revival seen in Dr. Reddy's, Biocon and Ipca Laboratories. 

Dr. Reddy’s also faced 10% decline in the revenues in the US and 21% in Europe in the latest quarter, but was helped by 36% growth in emerging markets. Also, the gross margins improved due to new launches. The company is now looking at R&D mix spending of 60% generics and 40% biosimilars. The management believes that the pricing has more or less stabilised.

Biocon reported better-than-expected numbers in Q2FY19 due to better sales in small molecules, strong growth in biologics and robust API sales in Latin America, Europe and the Middle East markets, better product mix across immunosuppressants, statins and other key APIs. Due to planned new launches, the company management is confident of strong performance in times to come.

Healthcare : Healthcare has been through a tough first-half, with the industry witnessing consolidation. There is likely to be more private public partnerships that will show the way for the patient-centric approach. The margins are expected to be lower due to pricing caps and it will be driven more by volumes. We see that the new scheme of Ayushman Bharat Yojana makes healthcare accessible and affordable. The healthcare sector is still under-invested and needs more infrastructure to support the growing need. Also, the higher penetration of insurance will provide higher accessibility.

As per Manipal Hospital Chairman H Sudarshan Ballal, demonetisations, GST, tightening of cash transactions and regulatory issues squeezed small players and have made them unviable. The tightened regulatory environment is likely to lead to higher consolidation. The sector has already seen the deal of Fortis finally go through, and also KKR-backed Radiant Life Care acquired majority stake in Max Healthcare.

The set of 10 companies we considered under healthcare have seen average growth of 12.6% yoy, while the EBITDA increased less than proportionately by 8.6%, with margin contraction of 130 bps which eventually led to an average decline of 10% yoy in PAT.

We see that Apollo Hospitals have seen improvement in the financial performance after its expansion plans and also it is positive about its future performance. 

Power 

Talking about India’s power sector, India gets its power from various conventional sources and non-conventional sources as well. In terms of conventional sources, India generates power from sources like coal, lignite, natural gas, oil, hydro and nuclear power, while non-conventional sources of power include wind, solar, and agricultural and domestic waste. As of August 2018, the overall installed capacity of power stations in India stood at 344.69 gigawatt (GW). India’s power sector companies, which play an important role in lighting up our country, have ironically been in the dark themselves. This is due to excessive power supply, onslaught of renewable energy and poor investor sentiment, etc.

Besides, the shortage of domestic coal has hammered the private power generators’ performance as lower coal availability puts constraints on the volume of generation of power, which in turn has dampened the margin of thermal generators.

To analyse the financial performance of this sector, we have taken into consideration the 1HFY19 results of 24 companies. The results indicate that the power sector is not shining.

The aggregate sales of these 24 companies grew marginally by 3 per cent only in the first-half of FY2018-19. Some of the companies like Adani Power, GVK Power & Infra and NLC India registered disappointing numbers, with their sales plunging almost 63 per cent, 39 per cent and 21 per cent, respectively. However, there were some companies such as Adani Green Energy, BF Utilities, and RattanIndiaPower which not just managed to post positive growth but lifted their sales with strong growth of 157 per cent, 96 per cent and 38 per cent, respectively.

In terms of operating profit, the aggregate EBITDA of these 24 companies remained flat. Notably, there were few companies which managed to turn their EBITDA from loss to profit. Companies such as GVK Power & Infrastructure and Reliance Power reported EBITDA of Rs.3.3 crore and Rs.8.5 crore in 1HFY19, respectively, from the EBITDA loss in the same period of previous year.

The overall net profit of these 24 companies was disappointing as it tanked nearly 70 per cent in 1HFY19 from the same period of previous year. Tata Power Company, RattanIndia Power and Adani Green Energy were already reporting net losses, and in the first half of FY19, their net loss worsened further. However, Nava Bharat Ventures (diversified business), Indian Energy Exchange and Torrent Power were the leaders among the chosen 24 companies which reported stellar PAT growth of 51 per cent, 32 per cent and 23.3 per cent, respectively. An International Energy Alliance (IEA) study indicates that share of renewables in India's energy sector is expected to jump to 16 per cent from the current 5.3 per cent in the next five years.

The market participants were expecting dilution of RoE for power companies, thus the Central Electricity Regulatory Commission’s recent decision to keep base return on equity (RoE) unchanged at 15.5 per cent for both generation and transmission augurs well for the overall sector.

The Government of India aims to achieve 175 GW capacity in renewable energy by 2022, which includes 100 GW of solar power and 60 GW of wind power. Further, it is mulling a policy called 'rent a roof' which would aid in achieving its target of  generating 40 gigawatts (GW) of power through solar rooftop projects by 2022. However, the capacity addition in renewable energy in the near term is likely to normalise owing to the recent higher interest rates and volatility in the currency. Also, macroeconomic factors such as weakening of the rupee and liquidity crunch in the domestic market might act as speed breakers in the long-term growth of the renewable sector. But these factors are expected to diminish in the near term due to measures taken by the government. Further, the scale-up in industrial demand is likely to result in demand uptick for power. 

Going forward, we need to be watchful on thermal generators about how these players handle the low availability of domestic coal. Nevertheless, the shortage of coal can be bridged with imported coal as most of India’s thermal power plants are configured to use imported coal. The Government of India’s impetus for 100 per cent village and household electrification through its various initiatives such as the DeenDayal Upadhyaya Gram Jyoti Yojana (DDUGJY) and Saubhagya schemes bodes well for the power sector as it would result in an increase in demand. 

Textile 

The textile industry is one of the oldest industries in India, spanning across a far-reaching continuum of segments - from the unorganised hand-woven segment to the organised capital and technology intensive segment. On a global scale, India ranks the largest producer of jute and the second largest producer of silk and cotton. The textile sector engenders considerable employment opportunities, providing employment to about 10 crore people, both directly and indirectly, particularly in rural regions and is the second largest employment provider in India.

We computed the performance of 42 companies in the textile sector during H1FY19 and H1FY18. On an average, the sales in the sector climbed 7.71 per cent YoY, while the EBITDA margin improved by 721.85 bps. Swan Energy was the best performer as its sales reported a growth of 488.42 per cent YoY, while its PAT surged 670.42 per cent YoY. Although PDS Multinational Fashions reported robust sales growth of 139.40 YoY, it reported net losses during both periods under consideration. Filatex India performed very well as it registered YoY sales and PAT growth of 59.54 per cent and 45.03 per cent, respectively. Contrarily, LS Industries produced dismal results as its sales de-grew by 70.75 per cent YoY. Alok Industries also reported a drop of 53.10 per cent in sales. Jindal Worldwide, Indo Count Industries, Monte Carlo Fashions and Gloster reported YoY PAT degrowth of 48.85 per cent, 25.49 per cent, 36.63 per cent and 12.48 per cent, respectively. 

To bolster the performance of the industry, the government has provided incentives like minimum support prices to cotton farmers, technology upgradation for the handloom weavers and centres for trade facilitation. The export of textiles and allied products dropped 3 per cent YoY to US$ 3,480.77 million in March 2018 due to the slowdown in demand from the developed countries following tepid economic activity. However, exports of textiles and apparels rose 11 per cent in July 2018. The favourable trade policies and superior quality will aid exports in the years to come. Although India is not dependent on imports, the import of textiles and allied products surged 5.85 per cent YoY to US$ 422.13 million in March 2018, attributable particularly to the 18 per cent climb in manmade yarns, fabrics and made-ups, as well as the 3 per cent increase in cotton raw, including waste. However, government measures to increase import duty on various textile and apparel items will help curb imports.

The sector is allowed up to 100 per cent FDI through the automatic route. In Q4FY18, the sector attracted FDI worth US$ 109.09 million versus US$ 139.69 million in Q3FY18. As per RBI Financial Stability Report- June 2018, the stressed advance ratio of the textile sub-sector improved to 22.3 per cent in March 2018 from 23.7 per cent in September 2017. The dearth of fiscal support to small scale players is likely to burden the industry in terms of production and technology. Furthermore, the stiff competition from other home textile exporting nations such as China, Vietnam, Pakistan and Turkey is a concern. Even then, the Indian textile industry is set for sustainable growth on the back of strong domestic consumption and export demand. Lower cotton prices and recovery in demand are likely to support textile sector's profitability. Exports are likely to improve with a special package of Rs.71.48 billion for FY18-19, particularly in the light of the rupee's depreciation against the dollar. The rising per capita income, favourable demographics and a swing in preference to branded products is likely to lift demand. Thus, the overall prospects of the textile sector in 2019 look very promising.

Service SECTOR

The service sector in India is one of the dominant sectors contributing to India’s GDP. It also attracts substantial foreign investment flows and also contributes significantly to the exports. The service sector in India provides large-scale employment and includes sub-sectors like trade, hotel and restaurants, transport, storage and communication, financing, insurance, real estate, business services, community, social and personal services.

India is the export hub for software services. There is enormous manpower in India, especially in the areas of IT and the ITeS available at a relatively low cost. Also, India supports a rapidly increasing youth population, which is looking to migrate from agriculture to other sectors. This gives India the competitive edge. The service sector has received the highest FDI inflows between April 2000 and June 2018 totaling USD 68.62 billion. The Government of India is quite focused on removing the many trade barriers to services.

The service sector is the key driver of economic growth in India. In H12018-2019, the sector contributed 57.12 per cent of India's gross value added (GVA) at the current price. The net service exports stood at USD38.95 billion for H12018-2019. 

The Indian logistics industry is a sub-industry of the service sector and it is highly fragmented and unorganized and has always been crucial to the country’s infrastructure and economic development. This is because the organised players in the logistics industry account for only 10 per cent of the total market share. However, the sector provides employment to more than 22 million people. This segment contributes around 14 per cent of the country’s total GDP. The implementation of GST aided the logistics and transport sector.

The Indian travel and tourism industry is one of the key drivers of growth in the service sector in India. It accounts for 7.5 percent of the GDP and is the third largest foreign exchange earner for the country. India has evidenced sustainable and inclusive economic growth due to the wide expansion of the tourism sector. The growth of tourism sector has resulted in employment generation, foreign exchange earnings, expansion of infrastructure facilities, capital investment, socio-economic growth and increase in the contribution to GDP, and so on. The government has taken several initiatives to boost this sector, including pre-loaded SIM card for tourists arriving on e-visa, development of five cruise terminals, sanctioning of Rs.1,200 crore for the development of beaches and rivers, etc.

To study the service sector, we have taken into account 51 companies. The topline of the industry had climbed 16 per cent in H1FY19 to Rs.66,853.4 crore from Rs.57,767.1 crore in the same period of the previous fiscal. The EBIDTA has expanded by 12 per cent as the aggregate EBIDTA calculated for the service industry came in at Rs.3,956.8 crore in H1Fy19 versus Rs.3529.3 crore in H1FY18. The bottomline has exceeded 26 per cent and reached Rs.2230 crore in H1FY19 as against Rs.1767 crore in the period of H1FY18.

In terms of sales, the company to have the highest share is MMTC Ltd at Rs.12,510.9 crore, followed by Redington and State Trading Corporation of India with Rs. 7741.7 crore and Rs.6570 crore, respectively. However, the company to have witnessed the highest growth rate in terms of sales for the period of H1Fy19 is Grandeur Products showcasing 1663 per cent jump. The company is followed by HCL Infosystems, registering 87 per cent expansion in sales. In terms of PAT, the top 3 companies to have contributed to the aggregate PAT is, Container Corp, Sundaram Fasteners and Gujarat Gas. The companies to have performed rather poorly in terms of PAT growth are Kushal, GATI and Novartis, with decline of 75 per cent, 66 per cent and 41 per cent, respectively.

Both, global and domestic factors govern the growth of the service sector. The Indian facilities management market is estimated to grow at 17 per cent CAGR between 2016 and 2020 and will surpass the USD 19 billion mark. We can attribute this to the booming real estate, retail, and hospitality sectors and the sub-sectors of the service sector.

Miscellaneous