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The above Chinese adage aptly sums up the positive and negative responses of two sets of people to a challenging situation. The Indian economy is witnessing winds of change due to demonetisation and some are busy building walls to prevent themselves from being blown away, while others are building windmills and investing in opportunities. This was clearly evident from the fact that while most of the businessmen whined aloud about the slowdown in their businesses due to demonetisation, some innovative and creative entrepreneurs especially in the ITeS space were turning the crisis situation into an opportunity to kick-start and expand their businesses. In the first half of FY17, the Indian economy had to brace itself with some major geo-political events. Much of the big events like GST, 7th Pay Commision implementation, farewell to previous RBI Governor Raghuram Rajan, interest rate cut by RBI, reduction in crude oil prices,BREXIT, US presidential election, among others, have had their impact on the Indian economy and the Indian markets too reacted as they are wont to.

BSE Sensex, the barometer of Indian markets, touched 28K level in the month of August 2016, up from the 25K-level reached in April 2016. We expected the benchmark to touch 30K, but demonetisation hit it like a bolt from the blue and brought it down to 26K-odd level. Meanwhile, we also looked at the sectoral performance of the Indian markets and we made an attempt to decipher it.

The demonetisation move by the government has trimmed the returns of some of the main sectors, including realty, automobile and auto ancillary, consumer durables and capital goods. Owing to the impact of demonetisation, many global agencies have scaled down India's GDP forecast to 7--7.1 per cent for the current fiscal. Meanwhile Nikkei India Manufacturing Purchasing Managers Index (PMI) fell to 52.3 in November 2016 from a 22-month high of 54.4 in October 2016. On the other hand, oil & gas and metals sectors have outperformed the Sensex by 28 per cent and 41 per cent, respectively. The automotive sector has outperformed the benchmark by six per cent, with an increase of 23 per cent in H1FY17. The demand was driven by interest rate reduction and the proposed regulatory changes which will have effect in FY18.

Demonetisation has put brakes on an overall positive H1FY17. The volumes in auto sector were up by ~10 per cent YoY in H1FY17 but sales volumes in November 2016 were down by 7 per cent YoY due to the cash crunch. The realty sector has felt the heat of demonetisation, which is evident from the fact that it has posted negative returns of 5 per cent till date. This is because a major share of the unaccounted money flowed into this sector and demonetisation has dried up this flow due to which the sector is reeling under the drought of cash as of now. It will take next two quarters to bring about some recovery in this sector.

The consumer durable and capital goods index also slipped -7 per cent and 5 per cent, respectively, down from the double digit growth in the month of October,16. The demand for consumer durables was dented in November month post demonetisation. The financials of the sector may remain weak for a couple of quarters owing to the declining demand. The IT index suffered loss of 12 per cent as against BSE Sensex’s gain of four per cent. The loss of IT sector was mainly due to sluggish growth in various verticals like finance in Europe. There are visa issues for personnel of Indian companies executing overseas projects. The macro-economic changes such as BREXIT and the policies of US president-elect Donald Trump are likely to act as headwinds for the IT sector. As for banking, while the Bank Nifty outperformed the benchmark index by some margin, this performance belied the reported half-yearly results which remained under pressure from the continued slippages in asset quality and creation of provisions for the same. Going forward, banking stocks will likely remain in the limelight given the recent furore over demonetisation. 

The discretionary spending is purely dependant on individual’s earnings. The increment in earning capacity of an individual leads to rise in demand for hospitality sector that includes hotels, resorts, travel and tourism. The overall economy of the country is positive, giving thumbs up for the hospitality sector too. The pharmaceutical industry's growth is expected to remain subdued due to the current regulatory headwinds and competitive pressures on growth in realisations faced by Indian players in regulated markets. Increasing healthcare spending by the government, demographic trends, increasing disposable income and higher incidence of lifestyle diseases augur well for the growth of the domestic pharmaceutical market.

The agriculture sector has been suffering from temporary stress due to sudden demonetisation. The fruits of which are likely to be reaped in the form of better access to credit for farmers, elimination of middlemen, direct transfer of subsidies to farmers and ultimately linking the Indian farmer to the global agricultural market. The next half of the financial year will remain cautious for the agriculture sector.

There has been phenomenal upside in the metals index to the tune of 41 per cent in FY17 till date on account of increasing commodity prices on global front. But there are problems for the sector on account of the large scale dumping of metals by China. To ensure level playing field for the domestic players, the Indian government has imposed import duty on the dumped metals. On other hand, the government’s infrastructure spending and orders for upcoming smart cities have started floating into the market giving thumbs up for the sector. The oil and gas sector’s growth is dependent on crude oil prices. There is surge in crude oil prices after the Organisation of the Petroleum Exporting Countries (OPEC) decided to reduce crude oil production. The price of crude oil is trading at about USD 55 per barrel and the outlook will remain bullish in couple of quarters.

Overall scenario is positive for oil upstream companies while cautious for aviation and downstream companies. The demand for the engineering sector is expected to remain strong. Thanks to industrial boost from the government through the Make in India initiative, most of the companies have plans for capex expansion on the back of expected infrastructural boost from the government. With 100 per cent foreign direct investment (FDI) allowed through the automatic route, the engineering sector will have positive outlook in H2FY17. The Indian packaging industry constitutes about 4 per cent of the global packaging industry. The per capita packaging consumption in India is quite low at 4.3 kg as compared to countries like Germany and Taiwan where it is 42 kg and 19 kg, respectively. However, organised retail and boom in e-commerce, which offer huge potential for future growth of retailing, is giving a boost to the packaging sector.

The textile sector’s prospects of a positive outlook are limited for FY17. There are fundamental issues of taxation and duty structure in synthetic textiles, need for modernisation in the weaving/processing sector, and expansion of scale need to be addressed in the long run. The crash in prices of cotton and yarn led by uncertainty from China on buying of cotton/yarn is a key risk, and could lead the outlook revision to negative for cotton textiles. The performance of power sector remained stable at 9 per cent, irrespective of the recent demonetisation that hit most of the sectors in the economy. This was in the wake of cashless transactions encouraged by power utilities and DISCOMS. Going forward, the earning of sectors that will take the brunt of demonetisation will be impacted in the next two quarter earnings. The stocks of companies operating in these sectors will see volatility in the markets. The Budget session to be held in the month of February 2017 and the Q3 and Q4 earnings will be the key determinants of GDP growth and the economic trajectory of the country.

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How is the infrastructure push by the current government helping your company grow?

As you are aware, the key component of any infrastructure project – whether it is roads or bridges, highways or housing, irrigation or power – is construction. Cement and steel constitute major inputs in all construction activities. Naturally, the increased thrust by the government on infrastructure translates to enhanced demand for these industries. Our company expects to be a beneficiary of this thrust with a boost in demand for cement. We have the additional advantage of having the Boards Division. The demand for boards and panels is also likely to grow along with the demand for cement. We have embarked on expansion projects to augment our existing capacities in both cement and boards to enable us to participate in the growth story. 

Which policy initiative and action by the current government has been a boon for the sector in general and for your company in particular? 

The response to the previous question partially answers this question too. Any initiative in the development of infrastructure helps the steel and cement industry, of which our company is an integral part. I cannot really identify any initiative that can single out our company as a sole or particular beneficiary. As I said earlier, being also manufacturers of boards and panels, we perhaps get a slight incremental advantage, since we have an additional product to offer, apart from cement. From this perspective, I think the ‘Housing for All’ initiative helps us, since there will be an increased demand for doors, panels, etc. in which we can participate, while the other pure cement companies cannot.

Which business segment of your company is showing maximum traction in growth?

Undoubtedly it is the cement segment, which accounts for 84 per cent of our turnover. However, as I have mentioned earlier, we are seeing encouraging growth in the Boards Division also. We are implementing expansion projects in both these divisions. Cement is the major contributor to your company currently. 

Can you throw some light on contribution from other business segments with focus on volumes growth and margins specific to the business segments?

Cement has always been the major contributor. I would say that while cement constitutes the bread, the other divisions provide us the butter and jam, which make the meal tastier! The Boards Division contributes about 11 per cent of the revenues and RMC about 4 per cent. Coming to margins, they keep fluctuating in cement, depending on the cyclical nature of the industry and the demand-supply scenario at any given time. However, the margins in the Boards Division are more or less steady, aroundRs.5 crore per quarter. The margins are also healthy in the Energy Division when we are able to operate at optimum capacity. However, there is an element of unpredictability about the operating levels in hydro-power, since power generation is dependent upon weather gods – rainfall and release of water in the canals. Due to insufficient rainfall in catchment areas, the contribution from the Energy Division has been disappointing this year. During the best year, the Energy Division contributed more thanRs.6 crore to the bottomline. 

How do you expect demonetization to affect your company in the short term as well as long term? 

I don’t see any long term effects. Cash transactions are not very significant at the corporate level. There have been some temporary difficulties at the retail level due to shortage of liquid cash. To some extent, transportation also has been affected, since many transporters are used to cash transactions. These resulted in a slight slump in sales and despatches. However, as I said, these difficulties are transient. 

Demonetization does not have a long term impact on our company. With GST expected to be implemented in 2017, how will it affect your growth potential?

GST will bring in an era of uniform taxation, which will bring about a level playing field. Further, we expect the logistic costs to come down by 1 to 2 per cent, as GST will be levied on transportation and full credit will be available on inter-state transactions. I can also foresee considerable improvement in delivery schedules, since the detention and slowdowns at border check-posts will be phased out. Overall, I must say GST will bring about greater economies and operational efficiencies.

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Please give us a brief of your current business?

We are into manufacturing of pigments. Pigments are basically colourants. So, whereever you see colours around you, except textiles (which use dyes), you can see these pigments, be it in paints, inks or plastics. Asahi is focused on Blue pigments and we make main raw materials also.

Please give us a brief background of your customers as we see most of your business is export related?

Yes, we have always concentrated on exports. We export predominately to USA, Germany and Japan. About 75 per cent of our business is exports and Asahi is a EOU Unit. Our customers are leading MNCs in the field of chemicals, to name a few- DIC of Japan, Sun Chemicals of USA, Clariant, BASF, etc. We have never lost a major customer in the past 10 years. We see that the Company is almost debt free.

Do you plan to use this position of strength to expand & grow? 

Yes, Asahi is a dominant world player in the Blue pigment space and over the last few years we have done very well, and so our balance sheet is strong. We do hope to take advantage of this and become one of the leading pigment companies in the world.

Can you talk about your expansion plans? 

We have already undertaken a Brownfield project to expand our current capacity with Rs.25 crores expansion which should be completed by May 2017, and should add roughly Rs.60 crores to our top line. We have also introduced two new products that have been developed by our own lab and we hope to get a good market share in this area in 2017. These are two different value added blue pigments that find application in plastics and paints respectively. Your EBITA margins have seen a marked improvement over the last several quarters.

Do you see this trend as sustainable in the future?

Yes, we believe that we are doing very well at the operational level, and the EBITA margins at 20 per cent look sustainable.

How do you see the demonetisation move of Modi’s government impacting business? 

The current environment is suitable for growth and consolidation for the organised players in the chemical industry. With demonetisation our government has put INDIA on a fast track. Many attractive business opportunities will open up as India starts realising its true potential. We applaud this brave and dynamic move of the Modi government along with this dynamic move of demonetisation, we would like to expand our manufacturing facilities under the governments MAKE IN INDIA initiative and Asahi is well placed to take advantage of the market shift.

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B.L. Kashyap and Sons Ltd (BLK) is a listed construction company which builds hospitals, hotels, industries, metros, commercial spaces, residential buildings, and airports etc. You can find out more details on www.blkashyap.com. Some of the more recent projects of BLK are: Shangri-La Bangalore, Embassy Golf Links, Manyata Tech Part, New Flip Kart Office, VR Bengaluru, Phoenix Mall, Bangalore, Prestige Golfshire, Bhartiya City, Four Season Residences, Select City & DLF Promenade Mall, New Delhi, JW Marriott Aero-city, AIIMS Patna, Raipur, IIT Delhi, Supernova, Hines, Taj Jodhpur, Oberoi Shimla etc. With over 1,000 engineers and professionals and the total company strength of over 10,000 workers across India, BLK has the bandwidth to service across cities and sectors. At BLK, the management believes that the heart of any building is value engineering and we bring that to every project in every city.

What are the key risks and challenges faced by the construction industry in India in general and your company in particular? 

As far as the industry in general is concerned, the key risks and challenges in my view are: 

(1) Shortage of talented and experienced engineering staff along with quality of new graduates.

(2) Shortage of skilled and unskilled labour. 

(3) High cost of funding due to nonrecognition of the construction sector as an industry, slow arbitration processes and impact on the real estate space post demonetization are the key risks and challenges faced by the construction industry in India.

BLK, as a company, in addition to what I have mentioned, is facing issues like high finance cost and outstanding payments.

How has demonetization affected your operations and by when do you think the operations will be normalised for your company?

I feel it is a revolutionary step taken by the Government of India, although companies across industries have been affected adversely. In the short term, we are facing problem of payment of wages to labour due to scarcity of funds. We believe that the steps taken by the government and the company to provide adequate assistance to the labour to understand the use of non-cash methods of payments will help in reducing the queues outside the banks, but it will take 3-5 months' time for easing out the process. One of the key challenges we are facing is getting support from the banks for opening new accounts of workers. In the long term, this will reduce the difference between small, unorganized construction companies and construction companies in the organized sector and small real estate operations from the larger ones.

How has the Real Estate Bill affected your company so far? How do you think the bill will impact the construction industry in long term? 

The Real Estate Bill directly does not affect BLK, as we are at the service side of the real estate industry. We believe in the long run it will benefit the real estate industry and also help construction companies. The construction industry will have a positive impact after this change and certainly believe that construction companies having the ability to deliver quality and timely work would not have shortage of work. Payment to construction companies would now be assured due to escrow accounts opened by the clients and projects will not get delayed due to shortage of funds.

What steps are being taken to reduce the cost of capital for your company? 

BLK has been cautiously monitoring its working capital cycle and closely working to reduce cost of capital, weighing various steps including selling our non-current investments/assets which will reduce our borrowing substantially. Further, the construction industry through various forums is trying to get the status of ‘Industry', which will also help in reducing the cost of capital.

Do you see demand revival from the residential sector or commercial sector? What is your general view on real estate sector in terms of consumer demand in 2017? 

The year 2017 is going to see renewed interest in commercial sector and eventually uncompleted residential projects will be "supported" by way of last mile funding. The Real Estate bill, once it is implemented by the states, should strengthen both the buyer's interest as well as that of real estate developers. Transparency should bring buyer's interest in the residential sector, especially the middle-income group. The secondary sales will take a hit but we do feel primary market buyers of sub-income ‘one crore level' in ‘A' cities should see some improvement. The demand for residential sector would be subdued for at least a year or so, but in various ‘A' cities we are looking at increased demand for commercial spaces. We also see an increase in the flow of enquiries from the commercial segment.

Which part of India do you see maximum traction in the coming year? 

We should see maximum traction in Bangalore, Chennai, Hyderabad and surrounding regions.

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There have been several new product launches made in recent quarter by your company. Tell us about the response for these products so far and how these are expected to impact the revenues and profitability in coming quarters? 

In line with our broad strategy to enhance value added products portfolio, we have launched several new products during last few quarters, such as:

1. Black Velvet Films - BOPP based black velvet lamination films with enhanced aesthetics which is perfect for post-lamination processes like spot UV, foil stamping, printing, etc.

2.Cement Bags — Primarily to reduce cement wastage and better presentation of cement bags 

3.Lidding Film - Universal lidding film which laminates with different plastic and paper materials and has easy release 

4.Tape Release Film - Release coated BOPP liners

As these are going to add direct value to customers, the response is quite positive and there is good development on most of these new launches. For example, a couple of cement companies have started using our cement bag films already. We are trying to further educate the consumption industry about advantages and value addition from these products. I think sooner rather than later customers would realize the benefits and demand is only going to pick up. This will definitely have positive impact on profitability as margins in value added products are better than commodity products.

Can you throw some light on your expansion plans? 

The company has announced 10.4 metre width BOPP production capacity addition about one year back, which is expected to commence commercial production from Q4FY16-17. This new capacity addition is expected to be one of the lowest cost producing lines and would add almost 40 per cent to our existing BOPP production capability. Besides, a 7K MT annual metalizing capacity is going to be functional by the end of FY16-17.

Further, the company is studying 2-3 specific projects, which shall be in line with our strategy to enhance speciality product portfolio and become one of the lowest cost producer for commodity products. We should be able to come out with more detail on this once our study is complete and it is approved by the company's board.

How do you see your company growing in the coming years? What are the growth challenges faced by your company? 

As indicated earlier, the new BOPP production line will enhance current BOPP production capability by about 40 per cent and the company will be looking forward for further growth, particularly in niche value added product segments. We are a growth-oriented company with financial discipline and shall continue to be working towards our aspiration to become close to USD 1 billion company by revenue in the next 5-6 years. One of the growth challenges could be the ability to respond to a fast-changing India and the global environment. We at Cosmo are trying to maintain organizational flexibility and risk management for strategic growth objectives.

How is packaging industry doing overall and in your view what is the scenario going forward for the industry? 

There are couple of fundamental reasons supporting BOPP industry to grow, such as:

1.Low packaged food penetration in India and rising personal disposable income 

2.Clear shift towards flexible packaging (change in pack format from rigid to flexible)

3.Investment and focus in organized retail industry

We believe India's BOPP industry is set to witness double digit annual growth over the next decade, which would further be facilitated by organized retail and e-commerce.

On a Q-on-Q basis, your gross margins have declined due to subdued demand in overseas market and commissioning of new capacities. By when do you see the overseas demand picking up? 

Ans: There has been pressure on the commodity gross margins during Q2FY16-17, which resulted in margin reduction, particularly for industry players with higher commodity films. However, Cosmo Films with its significant value added business could compensate the commodity films margin pressure by increase in the specialty films and the operational efficiencies. This could have been possible as we could decommodized business to a large extent.

While nobody can say with 100 per cent certainty on overseas demand and margins, our belief is that the broader level global BOPP industry should grow almost double than the global GDP rate in line with the growth projections.

What is the strategy going forward to grow profitably? 

We shall be working towards twin strategic objectives of enhanced focus on value added films and lower production cost for commodity products. These twin strategic goals shall always differentiate Cosmo Films from the competition.

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Agriculture plays a vital role in India's economy. Over 58 per cent of the rural households depend on agriculture as their principal means of livelihood. Agriculture, along with fisheries and forestry, is one of the largest contributors to the Gross Domestic Product (GDP). The year 2016 was very good for the sector and came as a big relief with normal rainfall returning after a gap of three years. According to the advanced estimates of MOSPI, agriculture and allied sectors have recorded a CAGR rise of 6.64 per cent during FY07-16. As per the Union Budget 2016-17, the major focus would be on doubling farmers' income by 2022. Other than that, the government would increase expenditure in farm and rural sector, infrastructure sector, social sector and also work on employment generation. Therefore, the investments in this sector are bound to increase in the upcoming years Several players have invested in the agricultural sector in India, mainly driven by the government's initiatives and schemes. According to the Department of Industrial Policy and Promotion (DIPP), the Indian agricultural services and agricultural machinery sectors have cumulatively attracted Foreign Direct Investment (FDI) equity inflow of about US$ 2,278.3 million from April 2000 to March 2016.

Government of India has started working on 99 major and medium irrigation projects, slated to be completed by 2019. These projects will bring 7.6 million hectares of land under irrigation in some of the most drought-prone regions of India. On the other hand, the government has already taken steps to address two major factors (soil and water), which are critical to improve agricultural production.

While analysing the financials of the sector, we took 12 companies, which are operational in the sector. On the financial front, the net sales of the agricultural sector for H1FY17 stand at Rs.8275.63 crore, which has increased by 20.02 per cent as compared to the previous year. PBITD stands at Rs.979.86 crore, which has increased by a whopping 11 per cent as compared with H1FY16. The sector's profit stands sharp at Rs.501.70 crore, which has increased by 39.2 per cent YoY.

KRBL is the largest company in terms of the market capitalisation of Rs.6201.34 crore, followed by Advanced Enzyme Technologies, which has a market capitalisation of Rs.42698 crore. Both the companies put together represent 46 per cent of the total profits. On the other hand, no company is loss making in the listed 12. Jain Irrigation, which is the third largest in the sector as per its market cap in H1FY17 the highest in terms of net sales, which stand at Rs.3096.44 crore. Advanced Enzyme Technologies is a company, which has seen highest double digit profits YoY in the sector. Its net profit stands at Rs.56.47 crore,

which has increased by 73.5 per cent, in addition to a doubledigit EPS growth of 72 per cent being delivered as compared with H1FY16.

According to IBEF India, the agricultural industry is expected to grow at 7.5 per cent annually, while the domestic demand is expected to grow by 6.5 per cent per annum and export demand at 9 per cent per annum. The agricultural sector in India is expected to generate better momentum in the next few years due to increased investments in agricultural infrastructure such as irrigation facilities, warehousing and cold storage. Factors such as reduced transaction costs and time, improved port gate management and better fiscal incentives would contribute to the sector's growth. Furthermore, the increasing use of genetically modified crops will likely improve the yield for Indian farmers.

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Indian automotive sector is one of the fastest growing automotive industries in terms of volumes in the world. Auto sector posted ~10% yoy growth against expected growth of 13-15% due to uneven distribution of monsoons dampening rural demand. Two-wheeler segment (world's second largest market) accounting for 78.59% of FY16 total volumes has grown at ~11% in H1FY, but other segments were mixed bag. We see initial green shoots on the back of 7th pay commission and lower interest rates which will drive retail segment demand. Emphasis of Government on improving infrastructure has helped nurture volume demand in commercial vehicle segment. Government initiatives undertaken under "Make in India" to make India an automobile manufacturing hub has attracted huge FDI investments.

Total gross turnover of top 14 automotive manufacturers in India expanded 11% yoy in H1FY17 to Rs.2,43,856.17 cr. gross PBITD for the manufacturers in H1 came under pressure and fell 4% yoy however, auto companies experienced margin expansion of ~25 bps on an average on the back of lower raw material costs and operational efficiencies. In the retail segment Maruti Suzuki, Hero Motor Corp, Bajaj Auto, Force Motors, Eicher Motors and TVS Motors have posted strong top and bottom line growth with average PBITD margin expansion of ~101 bps. Maruti Suzuki has posted strong growth on all parameters on the back of 12% yoy increase in volumes helped by new launches. JLR & Range-Rover brands continue to grow and support Tata Motor's top-line with 22% yoy volume jump to 2.8 lac units on the back of demand traction in China 33% yoy and North-America 28% yoy volume growth. In the two-wheeler segment Eicher Motors, Hero Motor Corp. and TVS have posted healthy volume growth of 41%, 11% and 16% respectively whereas Bajaj Auto experienced de-growth of 2% on the back of lower exports.

On 8 November 2016, government announced demonetisation of high value currencies which impacted footfall in showrooms of all Auto OEM's. They experienced on an average 30% decline in average footfall. Two-wheeler OEMs (except Eicher Motors) are expected to be impacted as cash transactions form 50% of non-finance (30-35%) transactions. Cash crunch in the market owing to note ban has driven potential buyers to either postpone their purchase plan, if not scrap the decision. Vehicle loan disbursals from banks and financial institutions have moderated as most of the staff is busy dealing with cash exchanges.

Car makers such as Maruti Suzuki, Honda Motor, Hundai Motor, Mahindra & Mahindra, Renault Nissan and Ford Motor are extending their shutdown from week to around two weeks this and next month consequent to inventory built up with dealers. Sales volume as reported to SIAM saw volumes decline 7% yoy to 12,84,203 unit's consequent to demonetisation for month of Nov-2016. However, we expect sales to return to normal rates in couple of quarters as cash circulation normalises in the economy. Going forward, changes in regulatory provisions related to two-wheelers, passenger vehicles and scrapping of old vehicles is expected to drive next leg of growth in volumes. Government's initiative to promote eco-friendly technology like CNG driven vehicles, hybrid vehicles and electrical vehicles is expected to benefit companies like M&M, AL and Maruti which have developed such technologies. Automotive sector has the potential to generate USD 300b as annual revenues in the next decade creating 65mil additional jobs and contribute over 12% to India's GDP. Auto Mission Plan (AMP) 2016-26 expects Passenger Vehicles (PV) market to triple to 9.4mil units.

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Auto component market is split into six product segments, namely: engine parts, drive transmission and steering parts, body and chassis, suspension and braking parts, equipment and electrical parts. Out of these, engine parts account for 31 per cent of the entire product range, followed by drive transmission, which contributes 19 per cent. Auto sector, with which fortunes of auto ancillary sector is closely linked, posted 10 per cent YoY growth in H1FY17. Exports accounted for 28 per cent of demand for auto components in India. The US and European regions, the biggest export markets, form ~61 per cent of exports in volume terms followed by Asian region with 25 per cent share. The US market, which accounts for 25 per cent of exports from India, is experiencing slowdown in M&HCV demand, which impacted their 1HFY17 sales. However, healthy demand from the US and European PV market has offset this slowdown to some extent.On product basis, manufacturers have been focusing on innovation and higher integration with OEMs for moving up the value chain. The organised sector of auto components is ~15 per cent and has been putting its weight to improve quality and value per vehicle. Also, companies are deleveraging their balance sheets by selling non-core assets and focusing on expanding their core strengths.

The H1FY17 was a strong half for two-wheeler and passenger vehicle (PV) segments. However, the medium and heavy commercial vehicle (M&HCV) played spoilsport with sharp double digit decline in volumes. The gross turnover of 48 ancillary companies under review have posted ~12 per cent YoY top line growth to Rs.56,851.33 crore. Their gross PBITDA increased 16 per cent YoY in H1 with an average 125 bps margin expansion. The top 5 auto components manufacturer which represent 59 per cent of total gross turnover have posted 12 per cent YoY top line growth with 34 per cent YoY bottom-line growth. However, these companies also experienced margin contraction of ~10 bps on the back of stiffening of metal prices. Commodities like steel, rubber and copper have witnessed sharp jump in prices from December 2015 lows. This increase is expected to be passed on to OEMs with a lag of few quarters.

Going forward, we expect OEM demand to normalise by Q4FY17 as liquidity conditions improve. However, in the interim period, we expect auto sales and aftermarket to be under pressure affecting volumes for component manufacturers. We expect prebuying - ahead of nationwide BS IV emission norm implementation - will propel M&HCV demand going forward. Also, regulatory changes like mandatory heating, ventilation and air conditioning systems in M&HCV from April 2017 is expected drive demand. In two wheelers, compulsory installation of CBS and ABS braking systems depending on engine capacity is expected to drive demand. Availability of abundant skilled/semi-skilled labour and government initiatives to make India an automobile manufacturing hub provide a huge opportunity for localised production of high value components. We expect auto component industry to clock higher growth than underlying automotive industry, given the increased localisation by OEMs and higher content per unit.

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Banking sector is a keystone in the India's economic growth story currently being scripted. However, poor asset quality concerns continued to shadow the banking sector, particularly the public sector banks (PSBs), in the six months ended September 2016. The recognition of NPAs and provisioning for bad loans continued at a brisk pace. The government infused Rs.22,915 crore into 13 PSBs in July 2016 to help shore up their balance sheets. In addition, Reserve Bank of India's (RBI) sanction to include additional reserves has increased Tier-I capital and CET-1 ratios all around. These measures have also allowed the banks to meet the more stringent capitalisation requirements and improved availability of funds to increase their advances.

Additionally, a 25 bps rate cut by the RBI on April 5, 2016 aided a respectable expansion in the loan books of most banks over the six months ending in September 2016.Other significant events for the half year included the private sector RBL Bank executing a turnaround post a management change in FY11 and has since been one of the fastest growing private banks in India. It has also entered our universe post its listing on the bourses in August 2016. Also, India's largest lender State Bank of India (SBI) approved the consolidation of operations of few of its associate banks with itself. After the merger, State Bank of Hyderabad, State Bank of Patiala, State Bank of Travancore, State Bank of Mysore and State bank of Bikaner & Jaipur and Mahila Bank will stand merged with SBI.

On an aggregate basis (40 banks in our universe), the banking sector's interest earned rose 1.1 per cent YoY. However, continual recognition of stressed assets has increased average gross non-performing assets as a percentage of loans outstanding (GNPA percentage), while provisioning for bad loans has resulted in a 52.1 per cent YoY decline in aggregate net profit numbers. The best and worst performers from the group in terms of net profit were IDFC Bank and State Bank of Travancore, respectively.

Overall, the public-sector banks (PSBs) seem to have performed worse than their private sector peers. Our banking universe consisted of 24 PSBs. Their aggregate interest earned fell by 3.2 per cent YoY. On an aggregate basis, the PSBs reported a net loss in H1FY17 versus a net profit during the corresponding period last year. The PSBs also saw more slippages in terms of GNPA percentage compared to private banks. Aggregate performance for the balance private players was much better: interest earned rose 15.1 per cent YoY and aggregate bottom-line improved by a modest 3.9 per cent. In terms of net profit.

The banking sector stands at a major inflection point at the end of H1FY17 due to the demonetisation of 500 and 1000 rupee notes. The immediate inflow of deposits and the 25 bps repo rate cut announced on 4 October, will allow banks to reduce rates to attract new loan business. However, the stress on assets due to the slowdown in economic activity and possible outflow due to withdrawal as soon as restrictions are lifted, increases uncertainty regarding future prospects. The RBI also recently increased the CRR for incremental deposits from September 16 to November 11, 2016 to 100 per cent for a fortnight starting November 26, 2016 to soak up the excess liquidity in the system. Since CRR posted with RBI earns no interest and considering that banks must pay ~4 per cent interest on the new deposits, this leaves the banks with a short-term negative carry on the incremental amount. Passing of the Insolvency and Bankruptcy Code in May marks a landmark moment for the banking sector which has been struggling with the issue of stressed assets. Provisions of the code seek to ensure time-bound settlement of insolvency, faster turnaround of businesses and create a database of serial defaulters. Proper implementation will be a key factor to watch out during next one year.

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India is the second largest producer of cement in the world and the sector is a vital cog in the country's development story due to its importance in infrastructure development. The six months ended September 2016 was an eventful period for the Indian cement sector. The demand spurt expected due to the government's infrastructure push and the 7th Pay Commission improving demand for housing had partially materialised. The industry also saw number of merger and acquisition activities, chief amongst them being the acquisition by Ultratech of Jaiprakash Associates' cement plants having 21.1 MTPA and the holding company level restructuring resulting in ACC becoming a subsidiary of Ambuja Cement.

A flurry of activity was also seen as capital expansion projects were undertaken in expectation of higher demand, both from the factors mentioned above and the forecasts of a favourable monsoon improving rural demand. The capacity additions were mostly skewed towards the north, with the north-east attracting a good chunk of the investments due to the existing supply deficit. The capacity expansion was undertaken by both incumbent players seeking to strengthen their presence and also players aiming to secure a share of the promising market. The southern states, in contrast, continued to face the issue of excess capacity. However, restrained production from major players and slight demand revival saw cement prices remain largely stable. Another major development was the reaffirmation of the penalty of Rs.5,693 crore on eleven major companies by the CCI for cartelization in FY10-11. However, this did not seem to have much impact on cement prices which remained stable, particularly in the northern states.

The H1FY17 financial performance for the top eleven cement companies by market capitalization showed robust YoY improvement at all levels. The aggregate sales for this group was higher by 8.8 per cent YoY and Dalmia Bharat led the pack with a 29.7 per cent YoY sales growth, while Ultratech's 0.8 per cent YoY growth brought up the rear. The aggregate performance of the group at the PBITD level showed 33.1 per cent YoY growth, with low power and fuel costs and operational efficiencies aiding in the expansion of aggregate PBITD margins. The aggregate PBITD margins expanded 409 bps YoY in H1FY17. The major beneficiary of this improvement in PBITD margin was Shree Cement which saw its PBITD margin increase 1049 bps, while Orient Cement was the worst performer at the PBITD level showing a margin contraction of 691 bps. In absolute PBITD terms, the best performance from the group for H1FY17 was Birla Corporation's 82.1 per cent YoY improvement in PBITD, while Orient Cement was the only company reporting a loss at the PBITD level that dragged aggregate performance of the group. At the net income level, while Orient continued its poor operating performance at the bottomline level by reporting a net loss of Rs.37 crore, JK Lakshmi turned around from a loss of Rs.38.4 crore during H1FY16 to a net profit of Rs.53.6 crore this year. The aggregate net income grew 68 per cent YoY with Heidelberg Cement showing the largest improvement amongst the group, growing 684.6 per cent YoY due to strong all-round performance at all the three levels.

In terms of valuations, we can see that of the11 major companies considered by us, the highest TTM P/E multiple was clocked by Dalmia Bharat (P/E of 53x) which had the highest sales growth YoY. On the other hand, OCL India, which is a regional player concentrated in the eastern states and particularly Odisha where it is a dominant player, traded at an attractive P/E of 12.2x on TTM earnings numbers.

Going forward, the cement companies' exposure to the realty sector (which is expected to be particularly impacted by demonetisation) and high sales ticket sizes makes the sector particularly vulnerable in the near term. However, the cement industry is a key component in India's economic growth and also stands to gain from the massive infrastructure push by the government. The government's focus on infrastructure development along with an improving fiscal position is expected to allow infrastructure spending to offset the slowdown in realty to a certain extent. Thus, prices and volumes are expected to normalise once the immediate impact of demonetisation dissipates and nascent demand emerges.

However, the rising trend in fuel prices, particularly pet-coke whose price has risen ~78 per cent from its January 2016 low, will likely start to negatively impact operating margins over the next few quarters. Also smaller regional players with high utilization levels that have undertaken capacity addition during the last two quarters are expected to be the best performers in H2FY17E.

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Indian Chemical industry is both capital and knowledge intensive. It ranks third in Asia after China and Japan and sixth in the world considering it's production volume. It plays a vital role in the development of Indian economy and accounts for ~2.11% of GDP. Broadly, the sector's segments constitute ~39% of bulk chemicals, ~20.3% of agrochemicals, ~19.5% of specialty chemicals and remaining are pharmaceutical and biotechnology. It is the most diversified sector containing 80,000+ different commercial products and is the base for industrial and agricultural development in India. It also serves as a building block for several downstream industries like petrochemicals, paints, varnishes, gases, toiletry, perfume, pharmaceuticals, crop care, etc. The sector is growing at a momentous pace and is expected to grow to $200 bn by 2020 from current $145 bn mark.

In H1FY17 the sector noticed two major M & A activities. Firstly, Japanese chemical major Sumitomo Chemical Co. Ltd., acquired 45% stake in Excel Crop Care Ltd. in June 2016, and plans to buy another 30% stake by public offer of Rs.1259 per share. Another, is UPL Ltd.'s merger with its associate Advanta Ltd., in August, 2016.

Chemicals contribute ~12% of total exports and ~10% of total imports. Exports grew marginally by 2.9% yoy while the imports have decrease by 11.5% yoy. This suggests that Indian chemical industries are becoming more efficient in catering to the domestic needs for chemicals.

For past few years, the chemical industry has been thriving. The industry has grown at over 8%. However, in H1FY17 the industry's revenue (top 10 companies by market cap) has marginally declined by ~4% yoy, dragged down by major sales drop in Bayer Cropscience (33%), Tata Chemicals (17.6%) and Gujarat Fluorochemicals (15.9%). However, the net profit has surged ~14% due to decrease in cost of factors of production like power and fuel.

Further in H2FY17 we expect chemical sector to grow due to the reasons below:

1)Speciality Chemicals have witnessed stout growth in past and still is expected to grow at ~10-12% for next few years. This will be due to increasing demand for speciality chemicals as they significantly improve the performance of final products and the companies in this segment are making a niche for products with higher and stable margins. Moreover, this segment has easy penetration and substantially higher consumer base due to increasing purchasing power and globalisation.

2)Petrochemicals is one of the fastest growing segment, growing at ~13%. We expect this trend to continue, triggered by increasing inclusion of petrochemical products in day to day life. Additionally, estimated per capita consumption of polymer (5.2Kgs) is much lower than global average. As the demand is gradually increasing the domestic industry is preparing to spend $25 bn to meet these demands.

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The construction sector in India plays a pivotal role in the country's economic growth as this industry contributes around 8 per cent to GDP. It is the second largest employer and contributor to economic activity, after agriculture sector. It employs more than 3.5 crore people and is a bellwether for associated industries such as cement, steel, paint, construction materials, etc. The Indian construction industry is valued at over USD 126 billion. The construction sector is categorised into three segments, viz. building, infrastructure and industrial. Further, the building segment is sub-divided into residential and commercial building. Currently, the activity in the construction sector appears to be quite slow-paced. The prolonged real estate market slowdown has resulted in high unsold inventories with developers. However, lower interest rates on home loans will lead to reduction in borrowing costs, which is expected to trigger sales.

We have taken into consideration performance of 45 companies to ascertain where the construction industry is heading. The aggregate sales growth of these 45 companies has shown decent traction of 7 per cent in 1HFY17 as against 1HFY16. Out of these companies, Sadbhav Infrastructure Projects came out with stellar growth of 133 per cent in topline in 1HFY17 followed by KNR Construction and Oberoi Realty which posted 74 per cent and 43 per cent growth, respectively.

The sector's aggregate bottomline in 1HFY17 stood at Rs.1,371.2 crore as compared to Rs.1,287 crore in 1HFY16 which resulted in 7 per cent growth. The sector's PBITD margins improved by ~100 bps in 1HFY17 compared to 1HFY16. Phoenix Mills and Somany Ceramics made maximum impact on the sectoral aggregate, posting 94 per cent bottomline growth each in 1HFY17. Also, Indiabulls Real Estate posted a strong 61 per cent bottomline growth in the same period.

Some of the major upcoming infrastructure investments by the government which may augur well for the sector are: 
1) 100 smart cities and 500 AMRUT cities with investments of Rs.200,000 crore (two trillion rupees) in the next five years. Investments to the tune of ~USD 1.2 trillion will be required over the next 20 years across various areas such as transportation, energy, public security etc. to build smart cities in India. 
2) Atal Mission for Rejuvenation and Urban Transportation (AMRUT) will drive investments in providing basic services such as water supply, sewerage, urban transportation, etc. to households and build amenities in cities. 
3) Government's 'Housing for All by 2022' scheme, which aims at construction of more than two crore houses for the poor, would drive infrastructure activity in the country.

This year also saw floating of investment trusts, namely Real Estate Investment Trust and Infrastructure Investment Trust. With this, companies will be able to transfer assets to trusts. This would help companies to concentrate on new projects. However, the demonetisation move announced by the Government of India on November 8 (banning of Rs.500 and Rs.1,000 currency notes) led to a liquidity crunch, which will have an adverse impact on the real estate sector as it has been a sweet spot for black money. This move is expected to create more transparency in the Indian real estate sector.

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Consumer durables has been one of the fastest growing sectors in India and touted to become the fifth largest consumer durables market in the world by 2025. The sector has grown by more than 15 per cent on an annualised basis over the past 5 to 7 years. The consumer durables sector can be categorised into three segments viz., white goods, brown goods, and consumer electronics.

Samsung India, Whirlpool India, LG India, Godrej, Sony and Hitachi are the major players in the segment along with Symphony India. The urban markets account for majority of the share and is the dominant one in the sector. A majority of the production of consumer durables takes place in Delhi and Uttarakhand in the north, West Bengal in the east, Maharashtra and Gujarat in the west and Tamil Nadu in the south. With improved rural electrification, the demand for the durables like refrigerators as well as consumer electronic goods is expected to increase.

In urban markets, the demand for non-essential products such as LED TVs, laptops, split ACs and beauty and wellness products is expected to improve and clock a double-digit growth in the coming years. Various initiatives taken by the Indian government and support to the consumer durables sector, be it in the form of National Electronic Policy and promoting FDI in the sector, Nationl Electronics Mission and digitisation of television and setting up of Electronic Hardware Technology Parks (EHTPs), augur well for the sector.

If one looks at the penetration levels of the consumer durables in India, one can sense the growth opportunity immediately as India indeed remains an under-penetrated market. Refrigerators, washing machines, air-conditioners and microwave ovens have abymal penetration levels at approximately 20 per cent, 8 per cent, 3 per cent and 1 per cent, respectively.

Apart from the government help and initiatives, the growth of the sector will be aided by the rising income levels, increasing urbanisation, implementation of the recommendations of the 7th Pay Commission, awareness on products and availability of electricity across India. The sector that is valued at approximately $10 billion in 2015-16 is expected to grow to $20.6 billion by 2020. India needs to get the import and export balance favourable as the country imports televisions, refrigerators and air conditioners from China and Southeast Asia along with Japan, Indonesia, Malaysia and Taiwan. It is a well-known fact that India imports components such as compressors, evaporators coils, condenser coils , air conditioning and refrigerator chemicals i.e refrigerants, motors, semiconductors, LED and LCD panels and other components.

It is the very lack of such component manufacturers in India that is a key impediment for the consumer durable players in India. The lack of ecosystem for consumer durables sector prevents the sector from pushing the accelerator of growth.

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The electrical equipment industry in India can be broadly classified into generation machinery and transmission & distribution machinery. Generation machinery segment consists of boilers, turbines and generators; while transmission & distribution machinery segment consists of transformers, switch gears, control gear cables, transmission lines and capacitors. Cables with 35.8% accounts for a major chunk of revenue in this sector, followed by switchgears15.9%, Boilers 14.6% and Transformers 11.3%. The electronics sector, which complements the electrical industry is classified into consumer electronics, industrial electronics, computers, communication & broadcasting equipment, strategic electronics and electronic components. Consumer electronics commands the largest chunk with 29.7% market share by volume,followed by Components 21.1%, Industrial Electronics 20.9%, C&B equipment 10%, Computers 9.9% and Strategic equipment 8.3% as per IBEF.

We have considered 21 companies while analysing this sector, out of which 16 are electrical equipment manufacturers, 3 are electronic manufacturers and 2 are cable manufacturers. On an aggregate basis, the sector has posted 12% yoy top line growth, with an impressive 29% yoy growth and an average increase of 37 bps at the operating level. Companies have posted 31% yoy increase in bottom line on an aggregate basis. Top 5 companies by market capitalisation amount to 47% of total revenue for H1FY17, and have posted strong operating performance with a jump of 36% yoy in PBITD, consequent to an margin expansion of ~179 bps. Bharat Electronics, Crompton Greaves Consumer Electricals, and Finolex Cables have posted strong PBITD growth of 58.9%, 85.2% and 28.1% as compared to H1FY16. Small players in the sector have posted better top line growth with an average growth of 55.1% yoy with Ujaas Energy Ltd., posting impressive 233.3% top line growth.

Market-oriented reforms, like "Power for All" and plan to add 88.5 GW of capacity by 2017 and 93 GW by 2022 is expected to drive demand for electrical equipment manufacturers. Incentive for capacity addition in power generation is expected to drive demand for electrical and electronic manufacturers. Indian manufacturers are becoming increasingly competitive in product design and manufacturing which provides export opportunities. A large pool of human resources and adequate availability of skilled workforce are added incentives to invest in this sector. Nuclear capacity expansion, undertaken by the government will provide significant business opportunities to the electrical machinery industry. Rapid increase in infrastructure owing to increased public spending by the government will fuel further growth.

Moreover, we expect 7th Pay Commission recommedation implementations and implementation of GST to drive demand in the electronic products segment. Effective tax rate is expected to reduce to ~18% from current ~23% for the segment, leading to volume traction and margin improvement. Government initiatives like "Housing for All by 2020" will fuel demand going forward. The country's demographic advantage and enhanced investment in infrastructure, manufacturing, education and socio-economic well-being are expected to create new opportunities for growth.

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Engineering industry is diverse and consists of various segments. A company which is a manufacturer of power equipments like boilers and transformers can be classified under this segment. Niche players who are involved in providing eco-friendly solutions like waste water and air pollution treatment plants also come under the engineering sector. The engineering sector, which is closely associated with manufacturing and infrastructure sectors has strategic importance to India's economy. In India the turnover from capital goods & engineering is expected to reach US$ 125.4 billion by FY17. As per the Department of Industries' Industrial Policy and Promotion, foreign direct investment (FDI) inflows into India's mechanical and engineering industries stands at ~USD 3,068.1 million from April 2000 to March 2016. To understand the trend and performance of the Engineering sector we have analysed 58 companies' financial data, which exhibits robust growth in the industry. Aggregate growth of the industry in H1FY17 stands at 4% compared to the same period last year. Texmaco Rail & Engineering has registered the highest growth in the industry, showing ~72.3% topline growth in H1FY17 against H1FY16. Techno Electric & Engineering Company and Va Tech Wabag were also the leaders in the industry, registering a stellar performance of ~40.5% and ~28.2% (in H1FY17) respectively, in topline. However, Inox Wind, Bharat Forge and Thermax acted as laggards by showing ~24.9%, ~20% and ~17.8% de-growth respectively, in H1FY17 compared to H1FY16.

EBITDA of the industry has risen by ~24% in H1FY17 versus same period in previous year. Suzlon Energy outperformed the sector as regards EBITDA level, with 139.9% impressive growth in H1FY17 against H1FY16.

Further, Kirloskar Oil Engines, Ingersoll-Rand (India) and Va Tech Wabag also have beaten the industry EBITDA level by showing growth of ~54.4%, ~53.2% and ~52% respectively in H1FY17 vs H1FY16. However, Inox Wind, Bharat Forge and Thermax show de-growth of ~34.3%, ~26.3% and ~26% respectively, in EBITDA.

Aggregate net profit of the industry has jumped by ~48% in H1FY17, compared to the similiar period in last year. Siemens and Va Tech Wabag have posted an impressive PAT growth of ~570.4% and 515.4% respectively in H1FY17 vs H1FY16.

Additionally, Elgi Equipments, Ingersoll-Rand (India), Techno Electric & Engineering Company and Kirloskar Oil Engines have reported a noteworthy performance with PAT growth of ~111.8%, ~44.6%, ~41.6% and ~41.5% respectively in H1FY17 vs H1FY16. However, Suzlon Energy has reported net loss of ~Rs.22 crore in H1FY17 against ~Rs.866 crore in H1FY16. Moreover, Inox Wind has posted ~51.1% decline in PAT.

Power sector alone contributes approximately 70-75% to the engineering companies' revenues. The government plans to add large-scale generation as well as transmission and distribution (T&D) capacities in view of the paucity of power in the country.There is a huge potential for the engineering majors in both generation and T&D space. Rising demand for energy has led to increasing the capacity addition for power generation, resulting in an increase in demand for power generation equipments.

The engineering sector in India provides immense interest to foreign players as it enjoys a comparative advantage in terms of manufacturing costs, technology and innovation. The above, coupled with favourable regulatory policies such as 100% FDI in the sector, and growth in the manufacturing sector has enabled several foreign players to invest in India. Spending on Engineering services is projected to increase to US$ 1.1 trillion by 2020, which will drive growth in the sector.

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When the fertiliser industry entered FY17, it had two droughts behind it due to the El Nino phenomenon and the channel inventory was at its peak. The industry players knew they were highly dependent on monsoon for performance this year. Thanks to good rainfall, the monsoon was normal in most of the regions in India this year. However, the performance in 1HFY17 for fertilisers fell flat as channel inventories took toll on volume growth. The government has also reduced subsidy for DAP in proportion to the drop in raw material prices. Hence, there was some element of expected volume growth due to lower farm gate prices. Yet the volume growth did not show up in the financial performance even when Kharif sowing picked up.

The main reasons for the drop in sales are as follows: 
1) The decrease in urea consumption was due to the mandatory 100 per cent Neem coating for all urea. The Neem-coat reduced consumption in farms by 30 per cent. The frequency of urea application has reduced from 10 days to 15 days as Neem-coated urea slows the release of nitrogen and crops retain greenness for a longer time. 
2) The double draught had not only weakened the farmers financially but also emotionally. Also, the inadequate credit availability for farmers from PSU banks due to their accounts turning inoperative took its toll. Moreover, it is also assumed that farmers had fertilisers stocked up due to draught conditions, hence the plunge in sales. 

The financial performance of fertiliser companies was mixed. Although sales had declined, the margins and PAT improved due to lower cost of power and fuel. Looking at the top 10 companies by market cap, sales dived 12 per cent YoY from Rs.28,900 crore in H1FY16 to Rs.25,400 crore in H1FY17.

GNFC was the only company to post 12.7 per cent YoY growth in sales. In contrast, Zuari Agro-Chemicals reported highest decline in sales to the tune of ~30 per cent. The performance was much better at PBITD and net profit level which surged 28 per cent and 69 per cent YoY, respectively. The average increase in PBITD margin of these companies was 276 bps, while increase in net profit margin was 258 bps.

This year's normal rainfall has come like silver lining for the farmers. We expect demand for fertilizers to start improving for the Rabi season. To overcome the massive cash crunch due to recent demonetisation and to ensure stress-free supply of fertilisers to farmers, the government has advised the fertiliser companies to extend credit limit of the middlemen by a month. Also, it has directed that non-cash modes of payments such as sales on credit, cheques, credit/debit cards should be accepted from farmers to ensure smooth business transactions. Moreover, the government is also expected to take necessary steps for proper implementation of the Pradhan Mantri Fasal Bima Yojna to encourage farmers to again spend on crop nutrition and supplements.

The financial sector, excluding commercial banks, has been at the forefront of the development story of a country particularly since banks have been struggling under the strain of rising NPAs. While the formal banking sector still dominates the landscape of the financial system, growth of existing financial service firms, entry of new players and regulatory approval for new types of entities like payment banks is steadily narrowing the gap.

The sector gained from increased penetration, especially in rural areas, with regulatory focus on financial inclusion. Companies also benefited from lower borrowing costs with an interest rate cut announced in early March followed by a conducive borrowing environment. Thus, a sturdy loan growth and expansion in credit spreads enabled most companies to post strong growth performances in the six months ended September, 2016.

A number of entities entered our universe by way of listing on the exchanges post their IPOs during H1FY17. This included ICICI Prudential Life Insurance, India's largest private sector life insurer, which raised Rs.6,000 crore in one of the biggest IPOs to hit the market in recent times. Ujjivan Financial Services, a leading microfinance lender, also made its debut with an IPO in late April. Ujjivan, one of the ten entities to receive an ‘in principle' licence to start a small finance bank (SFB), is in the transition stage and is expected to commence banking operations sometime early next year. Besides these, PNB Housing Finance IPO hit the street late in October and was listed on the bourses in early November. Another company operating in the micro-credit segment, Equitas Holdings, which had also received SFB licence, commenced its banking operations at a subsidiary in early September, becoming one of the first amongst the ten entities that were awarded licences to start operations and the only listed SFB currently in the market.

Our universe for the sector consists of 86 companies representing various niches of financial enterprise. To better analyse the performance of the sector, we have focused on a stratified group consisting of the top five companies by market capitalization within the domains of general finance, housing finance, investments, leasing and hire purchase and term lending institutions. On an aggregate basis, sales of this group grew 24.8 per cent YoY with strong performance from the general finance sub-set, particularly ICICI Prudential Life Insurance which showed a 131.1 per cent YoY sales growth. The term lending institutions have been the laggards of the group with IFCI's 18.5 per cent sales degrowth bringing down the group's aggregate performance. At the PBITD level, the aggregate performance of the group fell by 1.7 per cent YoY due to a 1506 bps PBITD margin contraction. However, strong performance was seen at the bottomline level, which showed a 24.1 per cent YoY growth. The best performer at the bottomline level was again from general finance with Bharat Financial Inclusion showing the highest net profit growth of 174.6 per cent YoY. The term lending institutions seem to have performed the worst in the group with IFCI and IDFC lagging the sample group at the topline and bottomline, respectively.

In terms of valuation of the top ten companies from the sector by market capitalisation, we can observe that ICICI Prudential Life Insurance's sector-leading YoY sales growth is well reflected in its valuation with the company trading at a premium TTM P/B multiple of 7.2x. On the other hand, companies like Power Finance Corporation and Rural Electrification Corporation, which posted low single digit sales growth numbers in H1FY17, were trading at relatively lower multiples of 0.9x and 0.8x P/B on TTM earnings.

The outlook for the sector over H2FY17E continues to remain upbeat considering the fast-growing economy, rising incomesavings levels, general under-penetration of financial services and improving life expectancy rates. Rate cuts by the RBI, including the recent 25 bps cut on 4 October and increased takers for bonds amongst banks flush with deposits are expected to usher in an environment of softer interest rates. Hence, most finance companies are expected to show a healthy margin improvement due to lower borrowing costs. However, the most significant catalyst for the sector is expected to be demonetisation of two high value notes. In the short term, the absence of liquidity is expected be a strain on the collection and disbursement cycles of most companies. Microfinance as well as gold and vehicle finance are particularly seen impacted since they are mostly cash-based. Loans against property and housing finance may also see short term stress as collateral values deteriorate due to the slowdown in the realty sector. Over the long term, the demonetization-led slowdown in the economy may put a strain on the business of all players. Although the RBI has extended NPA recognition window by 60 days for loans below Rs.1 crore whose payments fall between November 1 and December 31, 2016, the borrowers that are more than temporarily impacted by demonetisation may add to stressed assets. The future performance of the sector may very well hinge on how soon the squeeze of liquidity resolves and the situation returns to normal.

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Media and entertainment sector's transition to digitisation and companies attempting diversification into the associated segments will act as inflection point that will have long-term positive impact on the sector as a whole. However, companies will have to bear with one time operational costs in the near term.

Major events such as DAS implementation, GST initialisation by the government and the flauntiest merger of Dish TV and Videocon DTH are said to have boosted up the media and broadcasting industry ecosystem. Moreover, rural catchments and bandwidth resolutions have further fuelled the optimism. Meanwhile, the entertainment industry could withstand the reduction in footfalls and occupancy rates on account of increased average ticket price (ATP) during the first half of the fiscal. Moreover, e-auction of existing FM channels, launch of new radio channels and increased internet usage/views fuelled growth in the entertainment industry.

However, considering the financials, it is evident that most of the companies failed to nurture the bottomline growth majorly amid higher operating expenses followed by rising depreciation costs. To analyse the overall performance in the first half of FY16-17, we considered a set of 15 media and entertainment companies. The average sales growth for H1FY17 was 34 per cent. Shemaroo Entertainment and ZEEL posted 20-plus per cent growth led by Shemaroo's increased Youtube usage and ZEEL's sale and transfer of sports broadcasting business, while TV18 Broadcast witnessed revenue degrowth of 62 per cent because of drop in film and production sales. Average net income (except for those turning into net losses) stood flat where TV18 Broadcast, Inox Leisure and ENIL posted degrowth offsetting positive earnings from ZEEL, Sun TV and Shemaroo. However, the bottomline degrowth can be claimed as short-lived. ENIL incurred higher operating expenses on the back of Phase 3 expansion ad spends on launch of Love Network. On similar grounds, during the said period, Inox Leisure (-42 per cent) added 5 multiplex properties with 20 screen capacity which cascaded its costs.

The media and entertainment industry is set to grow exponentially in the wake of digital media and rural India getting digitally connected. The industry topline is rising at a CAGR of ~10-12 per cent amid transition from traditional media (3 per cent per capita consumption) to digital (15 per cent p.a.). The growing demand for HDTV and 4G data made available at reasonable rates say it all. Going forward, as a part of digitisation, with the mandate of government to install set top box for all television viewing families in the metros from Nov 1, the DTH service providers have come up with various packages and discounts for long-term subscriptions. This will reduce client flight to unorganised local cable operators. With a view to give further thrust to entertainment industry, the government plans to take cinemas to regional markets by developing multi-linguistic contents. Additionally, with around 30-35 more movies in the plate in FY16-17, the setting up of promotion fund for movies will prove to be a big boost to production and distribution houses.

The Information Technology (IT) sector accounts for about 67 per cent of the USD 124-130 billion India's export market. India's cost competitiveness in providing IT services, which is roughly 3-4 times cheaper than the US, continues to be the mainstay and its unique selling proposition (USP) in the global sourcing market. However, India is also gaining prominence in terms of intellectual capital with several global IT firms setting up their innovation centres in India.

The Indian IT sector is expected to grow at a rate of 12-14 per cent for FY17 in constant currency terms. The sector is also expected to triple its current annual revenue to reach USD 350 billion by FY25. India's internet economy is expected to touch Rs.10 trillion by 2018, accounting for 5 per cent of the country's GDP. India's internet user base reached over 400 millionmedia users grew to 143 million by April 2015 and smartphones grew to 160 million.

We have analysed 57 companies from the sector. On the financial front, IT sector's topline increased 11.72 per cent to Rs.2.00,415 crore in H1FY17 as compared to the same period in the previous financial year. The industry's PBITD too rose 9.06 per cent to Rs.42,992 crore in H1FY17 on a yearly basis. Its net profit also increased 8.76 per cent to Rs.33,104 crore in H1FY17 as compared to the same period in the previous fiscal year. The IT industry witnessed average EPS growth of 5.69 per cent to Rs.12.26 in H1FY17 on a yearly basis.

Industry major TCS' revenue increased 10.9 per cent to Rs.58,589 crore in H1FY17 on a yearly basis. The company's net profit also rose 8.9 per cent to Rs.12,921 crore in H1FY17 as compared to the same period in the previous financial year. Wipro, another major IT company, saw revenue increment of 10.7 per cent to Rs.27,595 crore in H1FY17 on yearly basis. Wipro's PBITD and net profit reduced 2.04 per cent and 7 per cent to Rs.5,536 crore and Rs.4,122 crore, respectively, in H1FY17 as compared to the same period in the previous financial year.

However, other IT companies such as Mphasis, Polaris Consulting & Services, Geometric, Intellect Design Arena, HCL Infosystem witnessed drop in topline of 0.5, 1.1, 20.4, 2.8, 32.4 per cent in H1FY17 as compared to the same period in the previous fiscal.

The USD is expected to appreciate against Indian Rupee in the near term as the world awaits newly elected US President Trump's economic policies. Though appreciation in the USD will provide a boost to the IT sector, the restrictive H1-B visa rules will act as a hurdle for growth. National Association of Software and Services Companies (NASSCOM) has already cut IT sector's growth to 8-10 per cent for FY17 from earlier estimate of 10-12 per cent.

Infosys, the country's second biggest software exporter, cut its annual revenue growth target last month for a second time inthree months, as local software service exporters felt the pinch of major Western clients holding back on spending. However, Tata Consultancy Services is expecting to do better for rest of the two quarters of the current fiscal year.

Iron and steel are crucial components to modern day industry, and India being the world's third-largest producer of crude steel, is expected to make significant progress towards the second position over the next couple of years.

Price movement has remained the key driver for sectoral performance during H1FY17. While most companies have benefitted from a strong rally in steel prices in Q1FY17, led by the benefits of regulatory measures like minimum import price and anti-dumping duties against cheap imports; nevertheless, the pendulum swung the other way in Q2FY17 as prices came under pressure, giving up a good amount of its earlier gains as larger producers ramped-up production and demand growth remained tepid. Overall, decline in prices of long products was sharper as demand for flat products from the automobile sector has helped bolster prices.

In India there are around 26 companies in the iron & steel sector. In analysing this sector, we considered the aggregate of the top ten companies by market capitalisation whose performance when seen at the top-line and bottom-line basis was largely poor. While aggregate H1FY17 sales for the group declined 1.1 per cent YoY, with Jindal Stainless' 20.1 per cent YoY sales growth leading the group, Welspun Corp's 37.9 per cent YoY decline in sales figures brought up the rear. Welspun Corp continued this poor performance onto the PBITD level as well with a 66.9 per cent PBITD de-growth while the best performance was from JSW Steel which had a PBITD growth of 78 per cent. The poor performance seen at the groups' aggregate sales level continued at the bottom-line as well, with net profit for the group showing a 120.5 per cent decline going from net profit to net loss on an aggregate basis. This was primarily driven by the bad show from Tata Steel whose 161.1 per cent YoY decline in net profit dragged the aggregate numbers down. The best performer at the bottom-line level was Jindal Stainless (Hisar), which reported a net profit of Rs.102.4 cr for H1FY17 versus Rs.4 cr in H1FY16.

In terms of valuation multiples, three of the top ten companies by market capitalisation being considered had negative EPS numbers for the trailing twelve months and so we have omitted showing P/E multiples for these. For the balance seven companies, Gallantt Ispat had the highest P/E multiple of 45.8x while Kalyani Steels' 9.2x was the lowest.

Looking ahead, we expect the sector to remain under pressure from oversupply in the international markets. In the short term demonetisation impact on end user industries like realty, automobiles and white goods are expected to keep prices and volumes under pressure. However, companies like JSW Steel with lesser exposure to long products are expected to perform better. The sector is also expected to see some significant capital expansion undertaking from larger players like Tata Steel and JSW Steel.

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Media and entertainment sector's transition to digitisation and companies attempting diversification into the associated segments will act as inflection point that will have long-term positive impact on the sector as a whole. However, companies will have to bear with one time operational costs in the near term.

Major events such as DAS implementation, GST initialisation by the government and the flauntiest merger of Dish TV and Videocon DTH are said to have boosted up the media and broadcasting industry ecosystem. Moreover, rural catchments and bandwidth resolutions have further fuelled the optimism. Meanwhile, the entertainment industry could withstand the reduction in footfalls and occupancy rates on account of increased average ticket price (ATP) during the first half of the fiscal. Moreover, e-auction of existing FM channels, launch of new radio channels and increased internet usage/views fuelled growth in the entertainment industry.

However, considering the financials, it is evident that most of the companies failed to nurture the bottomline growth majorly amid higher operating expenses followed by rising depreciation costs. To analyse the overall performance in the first half of FY16-17, we considered a set of 15 media and entertainment companies. The average sales growth for H1FY17 was 34 per cent. Shemaroo Entertainment and ZEEL posted 20-plus per cent growth led by Shemaroo's increased Youtube usage and ZEEL's sale and transfer of sports broadcasting business, while TV18 Broadcast witnessed revenue degrowth of 62 per cent because of drop in film and production sales. Average net income (except for those turning into net losses) stood flat where TV18 Broadcast, Inox Leisure and ENIL posted degrowth offsetting positive earnings from ZEEL, Sun TV and Shemaroo. However, the bottomline degrowth can be claimed as short-lived. ENIL incurred higher operating expenses on the back of Phase 3 expansion ad spends on launch of Love Network. On similar grounds, during the said period, Inox Leisure (-42 per cent) added 5 multiplex properties with 20 screen capacity which cascaded its costs.

The media and entertainment industry is set to grow exponentially in the wake of digital media and rural India getting digitally connected. The industry topline is rising at a CAGR of ~10-12 per cent amid transition from traditional media (3 per cent per capita consumption) to digital (15 per cent p.a.). The growing demand for HDTV and 4G data made available at reasonable rates say it all. Going forward, as a part of digitisation, with the mandate of government to install set top box for all television viewing families in the metros from Nov 1, the DTH service providers have come up with various packages and discounts for long-term subscriptions. This will reduce client flight to unorganised local cable operators. With a view to give further thrust to entertainment industry, the government plans to take cinemas to regional markets by developing multi-linguistic contents. Additionally, with around 30-35 more movies in the plate in FY16-17, the setting up of promotion fund for movies will prove to be a big boost to production and distribution houses.

Indian plastics industry made a promising beginning in 1957 with the production of polystyrene. Thereafter, significant progress has been made and the industry has grown and diversified rapidly. The industry spans across the country and hosts more than 2,000 exporters. It employs about forty lakh people and comprises more than 30,000 processing units, 85-90 per cent of which are small and medium-sized enterprises.

The export of plastic and plastic products from India grew by 1.3 per cent year-on-year to USD 4.88 billion in FY16. The sector has been exporting to countries, including the US, China, UAE, UK, Germany, Turkey, Italy, Iran, Nepal, and Bangladesh. The domestic consumption of plastic is expected to touch 17.8 million tonnes (MT) in both organised and unorganised sectors in FY17, up from 14.8 MT in FY16.

Indian plastic industry covers around 55000 plastic processing units, which 75 per cent units are in the small-scale sector. It accounts for about 25 per cent of the total production. The industry consists of 2000 fibre processors, of which 80 per cent are in the small-scale sector. Through under-invoicing most of the readymade plastic products are being dumped in India. In under-invoicing, the importers show lower cost of imports in the invoice and try to save customs, excise and other taxes, which makes these products cheaper. The plastic products are successful in meeting the demands of key user industries like Automobile, Construction, Consumer Durables, etc.

Polymer is the basic raw material for manufacturing plastics like poly propylene (PP), high density poly ethylene (HDPE), low density poly ethylene (LDPE) and poly vinyl chloride (PVC).

We have analysed 18 companies from the plastic sector. On the financial front, the total gross turnover of top 18 plastic manufacturers in India increased 3.93 per cent to Rs.8016 crore on YoY basis in H1FY17. The PBITD too rose 4.19 per cent to Rs.1048 crore in H1FY17 as compared to the same period in the previous financial year. Its net profit also increased 9.22 per cent to Rs.558 crore in H1FY17 as compared to the same period in the previous fiscal. However, plastic sector's average EPS growth declined from 10.48 per cent in H1FY16 to 10.13 per cent in H1FY17. Industry major Supreme Industries' revenue increased by one per cent in H1FY17 on yearly a basis. Its PBITD reduced 4.1 per cent and net profit also declined 0.86 per cent in H1FY17 as compared to the same period in the previous financial year. Astral PolyTechnik's revenue increased 6.3 per cent to Rs.857 crore in H1FY17 on a yearly basis. The company's PBITD too rose 8.2 per cent to Rs.111 crore and net profit by 0.22 per cent to Rs.56 crore in H1FY17 as compared to the same period in previous financial year. Out of the total industry players, three companies, viz. TPL Plastech, Cosmo Films and Wim Plast, witnessed degrowth in H1FY17.

Supreme Industries' group wise turnover from products stands at 54.86 per cent from plastic piping system, 23.42 per cent from packaging products, 14.27 per cent from industrial products, 7.44 per cent from consumer products and 0.01 per cent from composite cylinders in FY16.

The consumption of plastic in India is projected to increase 20 per cent in FY17 to reach 178 lakh tonnes in both organised and unorganised sectors. The plastic industry would greatly benefit after implantation of Goods and Services Tax as the measure would bring uniformity in prices of various products being manufactured in different states. The Indian plastic sector has a huge potential for growth and there is a need for free trade agreement (FTA) and duty inversion to make cost of manufacture in the country cheaper. Also, there is a great scope for consumption of plastic in sectors such as housing, public infrastructure and agriculture.

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Packaging industry is one of the fastest growing industries in India, growing at 22-25 per cent per annum. Increasingly, with initiatives such as Make in India being pushed by the government, India is becoming a preferred hub for packaging industry. The packaging sector is also the fifth largest sector in the Indian economy. The sector is crucial to India as the sector contributes to exports from India.

Packaging players in India are able to gain market share as the cost of processing and packaging food is as low as 40 per cent as compared to their European counterparts. Thus, a cost advantage along with availability of skilled labour in India makes the industry attractive for investment. One of the major reasons why the sector is set to grow is due to high growth visibility for the companies that need quality packaging solution, e.g. processed foods, hard and soft drinks, fruit and marine products, etc. The Indian packaging industry has gained market share in global markets with products such as flattened cans, printed sheets and components, crown cork, lug caps, plastic film laminates, craft paper, paper board and packaging machinery. The industry has been a net importer of tinplate, coating and lining compounds.

For domestic markets in India, the fastest growing segment is laminates and flexible packaging with centrestage being held by PET and woven sacks. Innovation and technology is the key driver for the industry and its fortunes are linked to development of various industries, including pharmaceuticals, food processing, manufacturing, FMCG and healthcare sector in economies such as China, Brazil, Russia and other east European countries.

Organised retail and boom in e-commerce is expected to fuel growth of plastic packaging in India. Indian packaging market is expected to reach $ 73 billion by 2020.The players in the industry, however, have struggled to improve on the growth front as is seen by the decline in the sales growth for most of the packaging player when compared to sales in the previous year. The best performer in the industry has managed to notch up a growth of 38.5 per cent in sales, whereas few of the players have shown a decline in sales by as much as 85 per cent.

Going forward, innovation will remain a key for packaging industry and also for individual packaging players. The demand for packaging products that help brands from protecting themselves against counterfeiting is on rise. The challenge for the industry players is to increase volumes without shrinking the margins. There are very few players in the industry who can improve on volumes and at the same time are able to expand margins.

Apart from couple of companies in the industry viz., Polyplex Corporation Ltd and Everest Kanto Cylinder Ltd, rest of the pack has seen shrinkage in profit margins, thus highlighting the fact that maintaining margins for the industry players has become an uphill task.

Packaging industry constitutes approximately four per cent of the global packaging industry even as the per capita packaging consumption in India is quite low at 4.3 kgs. The per capita consumption for countries like Germany and Taiwan is 42 Kgs and 19 kgs respectively. Thus Indian packaging industry can grow exponentially due to lower base. The definite trigger working in favour for the industry are future potential growth of retailing and boom in e- commerce in the country.

Packaging industry in India is expected to register 18 per cent growth on annualised basis. With flexible packaging and rigid packaging expected to grow annually at 25 per cent and 15 per cent respectively the companies in the sector can show good traction in terms of growth in the coming years.

Personal care product manufacturing companies, with their strategies of heavy advertisement and promotional activity that includes celebrity endorsements, have managed to make their products integral part of today's modernised lifestyle. Personal care industry comprises of hair care, cosmetics and beauty, oral care, skin care and bath products and dominates with 22 per cent of share in FMCG industry.

Marico, which enjoys ~29 per cent share in hair oil, leads the market, Hindustan Unilever leads in the category of skin care and shampoo with ~54 per cent and ~47 per cent market share, respectively. Colgate is the market leader in oral care segment with ~54.9 per cent market share.

To find out the trend in the industry, we have analysed the financial performances of top 11 companies in terms of market capitalisation. Overall, the sector has shown degrowth of one per cent in terms of sales in H1FY17 as compared to the same period previous year. The topline of all companies have shown growth but for Godrej Industries and Bajaj Corp which were laggards in the sector showing degrowth of 25 per cent and 6 per cent, respectively. The outperformers in the sector, Kaya and Emami, showed stellar performance with 16 per cent and 15 per cent growth in topline.

Furthermore, PBITD for the whole sector has gone up by 8 per cent in H1FY17, primarily driven by lower cost of raw materials. Jyothy Laboratories outperform the industry at PBITD level with ~34.6 per cent growth in H1FY17 compared to same period in last year. Further, Kaya and Emami were also the leaders at PBITD level which has grown at 33.8 per cent and 28.5 per cent respectively in H1FY17 versus H1FY16. However, Godrej Industries was the only player in the industry which witness 13.8 per cent decline in its PBITD in H1FY17 as compared to same period in previous year.

Additionally, aggregate net profits have registered 12 per cent growth in H1FY17. Godrej Consumer Products has come up with exponential bottomline growth of 68 per cent in H1FY17. Additionally, Marico and Bajaj Corp have shown growth of 17.6 per cent and 17.2 per cent respectively in H1FY17 against the same period in last year. However, Kaya and Godrej Industries registered a sharp decline of 41.8 per cent and 37 per cent respectively in H1FY17.

Impact of demonetisation and GST

We believe this sector which is driven by cash sales will be impacted by the demonetisation move. This has led to lower footfalls in malls due to deferred discretionary spends. With unsold inventory piling up with wholesalers, who mostly deal in cash to supply to traditional trade, and consumers spending less due to liquidity crunch, producers are bracing themselves for a short-term glitch in sales. However, percolation of new notes is expected to normalise economic activity in the country. Another area that is gaining traction is the shift to natural, herbal and organic products. To cater these opportunities companies are launching several new herbal and ayurvedic. HUL has already started launching herbal products. Last year, it re-launched Lever Ayush for its Ayurvedic range and acquired Kerala-based Ayurvedic hair oil brand Indulekha earlier this year. Colgate is also not far behind in this race; recently company has introduced neem and charchol variants extending Colgate toothpaste into herbal category. Dabur, Emami and Himalaya have deep roots in Ayurvedic products and have gained from their traditional herbal positioning. These companies are extending brands into new and emerging segments to improve profitability. Further, existing players are facing steep competition from new player i.e Patanjali. Major part of revenue of this sector comes from rural area, favourable monsoon after a gap of two years will also drive rural demand resultant in volume growth. The recent clearance of GST by Parliement has been a mixed bag for this sector, as soaps, detergents, hair oils and toothpaste attract 12 per cent to 18 cent tax rates. However, liquid detergents, hair conditioners, body wash and hair colours attract 28 per cent tax rate.

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Acting as a catalyst to other major industries, India has become one of the largest destinations for petroleum consumption in the non-OECD segment. India imports nearly 80% of oil it requires, which accounts for 1/3rd of total imports of the country. Hence, when oil prices fall, import costs too fall and country's Current Account Deficit narrows. Government fixes oil prices at subsidised rates and thereby compensates companies through under recoveries i.e. compensates companies for losses. This in turn adds to the fiscal deficit and thereby leads to buying dollars to repay the bills.

India's petroleum story majorly revolves around the International crude oil prices, which have witnessed a rise of nearly 50% since April 2016, before they stabilised at 51-53 $/barrel levels in the recent days. However, considering the big picture where crude oil slipped nearly 40% during the fiscal, oil marketing companies have reported losses in crude oil inventory.We have evaluated a set of 15 companies to analyse the performance of the Petroleum sector during the first half of FY17 as compared to the corresponding period of last year. Sector's top line has witnessed a straight fall of 10% yoy, majorly led by Aban Offshore and Gujarat Gas, whose H1FY17 revenues have dropped 55% and 24% respectively. An exception to this trend were Deep Industries and Alpha Geo India that have risen exuberantly during the period. The sector's EBITDA has seen a growth of 8%, where Deep Industries, HPCL and GAIL have outperformed the sector. The sector's PAT has seen a double-digit growth of 25% yoy in H1FY17. GAIL has witnessed a turnaround in petrochemical business and reduction in the finance costs. Company has also acquired stake in Mahanagar Gas.

Going forward, the Organisation of Petroleum Exporting Countries (OPEC) and non-OPEC majors like Russia have decided to implement a cutback of nearly 1.8 million barrels/ day by cutting down oil production from the first day of next calendar year (2017). The talks were ongoing, which have led to a fall in petrol and diesel imports and exports during November 2016. However, a cut will help prices of petrol and diesel to rise by 5-8% each in Q4FY17E.

The said rise will have a negative impact for Oil Marketing Companies (OMEs) in India if they are unable to pass on the price hike, and it will result in higher working capital requirements. To safeguard the OMCs, government is likely to rollback excise duty and reduce VAT if prices hit $60/barrel, ultimately dampening the GDP. Major change post demonetisation is the announcement of discount of 0.75% on the cashless sale of petrol and diesel. This may signal a hit of Rs.0.5/litre on petrol and diesel, but OMCs shall be given pricing freedom to offset the total hit. Overall, demonetisation has fuelled demand; deregulation of kerosene and LPG has hiked domestic prices; and the burden of under recoveries has reduced. This is likely to benefit OMCs in the near term at least.

Similarly, oil explorers too are expected to rise owing to OPEC's decision to cut the production. However, the companies may see limited upside, provided Shale Gas starts supplying at higher levels. US is still not a part of oil production cut. Instead it has been adding more oil rigs. Oil production has increased to 8.8 million barrels/day in mid-December. OMCs may retain their glittering performance against explorers as any hike in crude oil price increase will provide them inventory gains with every rise in international crude oil prices.

Crude oil prices may find it difficult to progress in long term with big increase in net long positions. Further strengthening of the Dollar may trigger the Indian markets as a whole, as oil is priced in Dollars. Hence, going forward the major trigger would be the demand and supply conditions, specifically the developments in the Chinese markets. Comments from OPEC members will be monitored closely.

The pharmaceuticals market in India is the third largest in terms of volume and 13th largest in terms of value globally. Branded generics dominate the market with 70 per cent plus share. The country is the largest provider of generic drugs globally with the Indian generics accounting for 20 per cent of global exports in volume terms. In 2015, the market size of the pharmaceutical industry in India was at USD 12.1 billion.

The global pharmaceutical market is expected to touch USD 1.4 trillion by 2020, compared to USD 1 trillion in 2015 as per IMS. Global spending on medicines is expected to reach USD 1.4 trillion by 2020, an increase of USD 349 billion from 2015.

Pharmaceutical spending in developed markets stood at around USD 684 billion in 2015. It is estimated to grow at a compound annual growth rate (CAGR) of 3-6 per cent during 2016-20 to reach USD 870-900 billion by 2020. Developed markets will continue to account for most medicine spending due to both higher prices per unit; and the mix of newer medicines that bring meaningful clinical benefits to patients facing a wide range of diseases.

Demand for pharmaceutical products will be driven by ageing population, life expectancy, rising income, accessibility, affordability and growing chronic diseases.

We have analysed 61 pharmaceutical companies from this sector. On the financial front, the total income from operations of the top 61 pharma companies has seen an increase of 10.38 per cent in H1FY17 at Rs.1,02,698.84 crore as against Rs.93,038.94 crore achieved in H1FY16. Sales have been on the tad lower side, courtesy the government decision of drug pricing by respective governments. Profits before interest, tax, and depreciation (PBITD) for the period in review have been augmented by 11 per cent at Rs.23,976.68 crore in H1FY17 vis-à-vis Rs.21,598.13 crore in H1FY16. Operational performance was on the lower side, indicating higher expenditure that the companies have to incur with respect to R&D spends and remediation expenses due to regulatory concerns related to facilities of the company. Profitability of the 61-drug majors has increased by 13.5 per cent in the first half of the fiscal.

The global healthcare industry is changing rapidly. Product differentiation is becoming a key driver of success in an ever competitive and demanding industry. Going forward, businesses will need to be more innovative as well as highly cost competitive to ensure long-term sustainable value for shareholders. At the same time, with increased expectations of various regulators, cGMP compliance is also becoming a key determinant of future success. However, globally, rising health care costs continue to be a major concern for everyone from patients to policymakers. Population growth, ageing citizens and slower global economic growth are likely to pressurise global healthcare budgets.

The global pharmaceutical spending growth will be driven by brands in the developed markets and enhanced usage in emerging markets, while being partly offset by expiry of patents. Brand spending in developed markets is likely to increase by USD 298 billion in the next five years, driven by new products and price escalation primarily in the US. Future growth is expected to be driven by increasing consumer spending, rapid urbanisation and rising healthcare insurance among others. Going forward, growth in Indian market would also depend on the ability of companies to align their product portfolio towards therapies for chronic diseases that are on the rise.

 

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Power sector has been withnessing a sea change with shift to renewable energy sources, streamlining of supply of fuel after coal block allocation and lower fuel prices of natural gas. Due to this, most of the power companies witnessed share price recovery amid higher EBITDA during the first half of this year.

The year started on a positive note with the auctioning of coal blocks and lower fuel costs. Regular supplies, correction in coal prices and decreased dependency on imported coal fuelled the growth. Coal availability issue refrained companies from lifting monthly coal quota that helped reducing the stockpiling costs. This growth was attained despite fused demand across industries because of global uncertainty and volatility. The Plant Load Factor (PLF) across hydro and nuclear segments saw an upsurge on fuel supply glut and ahead of favourable monsoon. As per the Ministry of Power, average PLF is expected to be 59.17 per cent in FY17E, where state-wise PLF is expected to report the lowest at 52.24 per cent and Central-wise highest at 70.52 per cent.The tariff revision remained moderate at 4 per cent, where 20 (out of a total of 29) states issued tariff orders. The assembly elections held in few states delayed tariff determination, while others denied revision. Only Chhattisgarh saw a reasonable tariff hike of 15.7 per cent. This is expected to pull down topline growth for many companies.

Looking at the financials of the top 15 companies by market capitalisation, the trend looks mixed. Gross turnover of these companies saw a growth of 11 per cent YoY with Reliance Infrastructure posting the highest growth rate of more than 61 per cent on the back of asset monetisation done during the period. The company that witnessed a relative setback was Torrent Power showing a degrowth of 14.8 per cent. The EBIDTA grew comparatively higher with growth rate of 25 per cent YoY driven by robust numbers coming from Voltamp Transformers and Orient Green Power. However, net income of the same set of companies posted a growth of just 8 per cent YoY, with interest costs hitting new highs. Power majors NHPC and Power Grid witnessed exceptional growth on the back of substantial reduction in finance costs during H1FY16.

Going forward, adequate tariff hike in proportion to the power supply price becomes necessary for the sustenance of these companies. Simultaneously, adequate coal availability through coal linkages and e-auction will ensure operational efficiencies of the power generation companies. Ultimately, the life of power generators and their plant utilisation is dependent on electricity offtake by power distribution companies (Discoms). We believe the most talked about UDAY scheme will not work unless Discoms prove their earnings efficiency and allowed periodic tariff revisions. Still, the coal price rise passover to the ultimate consumers is yet to be seen. Power Discoms will require huge capex over FY17-18E to marginally improve credit metrics. The reforms put forth by the government requires successful implementation in 2017 to address financial weakness in Discoms. Moreover, in case government moves to non-thermal power generation as per norms notified by the environment ministry, it would require additional capex, thereby additional charges to the power off-takers.Fearing rapid transition to short term power purchases, owing to uncertainty in power demand, the Central Electricity Regulation Commission proposed hike in transmission charges by ~1.35 times which would equate the long-term power rates. However, the government is promoting short-term, considering increased tariff on long term power purchase agreements. Considering this and the lack of planning from transmitters, all the generators are shifting to spot/short term open access. But the power sector in general will resist this move on the back of power rate cuts in the long-run.

Power sector in general has been more resilient in dealing with the impact of demonetisation. Power utilities and DISCOMS deal in cheques or electronics, majorly under the Jan Dhan Yojna. In fact, the Discoms will benefit from the said practice as SEBs have become cash rich by accepting old currency notes, which has led to a reduction in their NPAs. Moreover, the companies will be able to raise cheap money from the banks.

India's service sector is arguably the fastest growing service sector in the world, clocking growth in the range of 10 per cent YoY for FY16. India's share in global services exports stands at 3.2 per cent, which is twice the growth of merchandise exports from India.

The service sector is the single most important sector for India which contributes more than 60 per cent to the country's gross domestic product (GDP). The service sector contributes most in term of providing employment with figures touted to be in the range of 30 per cent, which explains the importance of the sector.

The Indian service sector managed to attract the highest amount of FDI equity inflows in the previous 16 years, amounting to a whopping US$ 50.79 billion as per the Department of Industrial Policy and Promotion (DIPP).

The growth in YoY sales for the services sector reflects a healthy trend for the sector with majority of the players recording decent gains . The profit margins remained flat for most of the companies in the sector and for a few the growth was negligible.

Going forward, the surge in consumer demand and preference for e-commerce transactions could lead to increased demand for logistics services. All the indicators are pointing to the increased demand for the logistics services and hence this sub-set within the service sector is expected to grow at above normal rate.

Information technology services in the country continue to be the global leader and helps India maintain the global contribution in services at a healthy rate. The IT services dominance is expected to continue within the services sector in India going forward in terms of volumes. However, the growth rates might be under pressure owing to demand pressures from global clients and economies.

Tourism sector, healthcare sector along with medical tourism sector are expected to post double digit growth rates in the years to come and these segments within the services sector could well be the fastest growing ones in India. The Indian telecom services is expected to clock a decent 10 per cent growth YoY in the coming years.

The Indian rupee depreciation augurs well for services exports and IT services could well be the biggest beneficiaries of the rupee depreciation against USD as USD is expected to strengthen further in the coming year. For the sector to further prosper and contribute to India's growth, it will be important to see if policy makers design and implement a services-driven development strategy within a coherent and comprehensive policy framework in line with the national objectives.

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Textile industry is a huge contributor to Indian economy in a way, as it directly provides employment to over 68 million (including indirect employment) people, making it the second largest employable sector in India after agriculture. It is the only sector which provides employment to both skilled and unskilled labourers. The sector contributes ~5 per cent to GDP; and ~10 per cent to manufacturing production. The Indian Textile industry, currently estimated to be around $122 billion, is expected to reach $223 billion by 2021. India accounts for less than 14 per cent of the world's production of textile fibres and yarns and is the largest producer of jute, second largest producer of silk and cotton, and third largest in cellulosic fibre. India has the highest loom capacity including hand looms with 63 per cent of the world's market share.

The textile industry has two broad segments. First, the unorganised sector consists of handloom, handicrafts and sericulture, which are operated on a small scale and through traditional tools and methods and also being labour intensive. The second one is the organised sector, consisting of spinning, apparel and garments' segment, which apply modern machinery and techniques such as economies of scale. The government has opened the doors for Foreign Direct Investment (FDI) and has implied it completely through the automatic route.

Out of top 1000 companies by market capitalisation used to analyse the sector, 59 companies belong to the textile sector. The sector has posted good results in H1FY17. The Revenue and EBITDA have each grown by ~7.3% yoy. While, PAT growth was ~10% yoy. Gloster Ltd., had the highest sales growth by percentage (35.4%); while, Arvind had highest sales growth by numbers (by Rs.691cr). Vardhman Textile had highest PAT growth numbers of Rs.352 cr; while, Filatex India's PAT has tripled from Rs.7 cr in H1FY16 to Rs.21 cr in H1FY17.

The government is taking initiatives to promote the sector by providing tax benefits and schemes like reduction in basic custom duty, Merchandise Exports from India Scheme (MEIS) and Interest Equalisation Scheme. This will further promote the growth in the sector. Moreover, in a bid to improve the share in the global textile market, the Union Finance Minister, Mr. Arun Jaitley on June 22 had announced a package of ~6000 crore with a hope of creating 1 crore new jobs in three years, which is expected to attract ~74,000 crore in investments and generate over $30 bn in export earnings.

This package will provide more flexible labour laws and financial incentives to the sector, triggering positive sentiments in the sector.The package is introduced with an aim to make the industry competitive in terms of costs, and bring in the economies of scale, which in turn will help grab a larger pie of the global market. With key policies being supportive to the sector, India could overtake Vietnam and Bangladesh over a three-year period. Currently India's textile and apparels' exports stand at $46 bn. While welcoming the move, industry experts believe further flexibility in existing labour laws will benefit the garment sector tremendously.