Indian Economy Going Through A Transient Phase

Indian Economy Going Through A Transient Phase 

With a series of reforms in 2017, the Indian economy is going through a transient phase. The economy is grappling with the withering effects of demonetisation and the slowdown brought about by GST implementation. On the other hand, the economy is riding on high hopes for the future. While reforms within the economy such as GST roll-out, introduction of RERA, action through Insolvency and Bankruptcy Code and heavy regulations on the banking sector kept the Indian economy on the guard, the geopolitical tensions and regulatory changes brought by Trump administration also caused some distress in the Indian economy in 2017.

Even as the economy recovered from demonetisation in the second half of FY17, the first half of FY18 witnessed a slump in the economy yet again with the introduction of GST. Amidst all this economic rigmarole, the Indian stock markets rallied, charting fresh highs. BSE Sensex, the barometer of the Indian markets which has recorded a surge of 28 per cent in 2017, recovered to touch a fresh lifetime high of 34k, up by 209 points on the last trading day of 2017. While power, IT, auto and infrastructure stocks recorded significant increase in buying, the beginning of January 2018 series of future and options also added to the continuation in the growth momentum. Equities recorded a record run through the year on the back of optimism on unleashing of more reforms. This is likely to continue in 2018 as BJP's win in Gujarat elections reaffirmed market sentiments.

While India's GDP forecast has been trimmed down and India's sovereign debt is likely to record a notable increase, the positive sentiments among both domestic and foreign investors on successive reforms has kept the stock markets thriving. International credit rating agency Moody's upgradation of India's rating from Baa3 to Baa2 and the World Bank's statement on India's economic growth being an ‘aberration' has come as a validation of the positive sentiments.

The asset quality of banks remained a major cause of concern for H1FY18. The GNPAs for private sector banks remained higher. Major private banks such as Axis Bank, HDFC Bank and Indusind Bank, saw steep rise in GNPAs at 50 per cent-70 per cent YoY for H1FY18, while other private banks such as Karur Vysya Bank, Laxmi Vilas Bank and Yes Bank put up poor performance. All the three banks saw almost two-fold rise in GNPAs for the quarter. Public sector banks showed better performance than private peers as slippages across public banks were contained. IDBI Bank, Oriental Bank of Commerce, Corporation Bank, Union Bank of India saw highest increase in GNPAs in the range of 30 per cent to 70 per cent YoY for H1FY18. However, as compared to total advances, the asset quality of private banks remained stable across the board. Few banks such as Karur Vysya Bank, Yes Bank and Axis Bank saw deterioration in asset quality as their GNPAs for H1FY18 advanced by more than 100 bps, while other banks saw marginal change in GNPAs. The asset quality of public sector banks continued to remain deteriorated as many banks saw increase in GNPAs by more than 300 bps.

Bankex was one of the best performing sectoral index in 2017. Asset quality remained major cause of concern across the sector for H1FY18 . GNPAs for private sector remained elevated . Major private banks such as Axis Bank, HDFC Bank and Indusind Bank, saw steep rise in GNPAs at 50 per cent -70 per cent YoY for H1FY18, while other private banks like Karur Vysya Bank, Laxmi Vilas Bank & Yes Bank put up poor performance. All the three banks saw almost two-fold rise in GNPAs for the quarter. Public sector banks showed better performance than private peers as slippages across public banks were contained. IDBI Bank, Oriental Bank of Commerce, Corporation Bank, Union Bank of India saw highest increase in GNPAs in the range of 30 per cent to 70 per cent YoY for H1FY18. However, as compared to total advances, the asset quality of private banks remained stable across the board. Few banks such as Karur Vysya Bank, Yes Bank and Axis Bank saw deterioration in asset quality as their GNPAs for H1FY18 advanced by more than 100 bps, while other banks saw marginal change in GNPAs. The asset quality of public sector banks continued to remain deteriorated as many banks saw increase in GNPAs by more than 300 bps.

Within the real estate sector, many developers are defaulting on their interest payments. This is due to huge accumulation of land by developers as accumulation of large land banks was expected to help counter competition. Developers started borrowing to buy large parcels of land, which resulted in higher interest burden. Due to demonetisation and implementation of RERA, real estate sector witnessed sluggish demand growth, which led to lower revenue for the developers, thereby resulting in default in interest payments and debt repayments. Compared to the peak sales in FY14, the residential sales volume declined 50 per cent -70 per cent in Mumbai.

When it comes to packaging industry, the recently concluded September quarter (Q2FY18) suggests an increase in the domestic demand for packaging in the near future. This will be largely be driven by the growth in the retail and foods and beverages sectors. In addition to this, the development of lighter packaging with better barrier properties and adaption of sustainable packaging technologies are expected to curtail the costs of materials, thereby raising revenues and profitability.

Considering the statistics for the auto sector for H1FY18, the sales of passenger and commercial vehicles grew by 9.16 per cent and 5.96 per cent, respectively. Three-wheeler segment reported a decline of 9.89 per cent during the period. Auto industry is largely dependent on individual's disposable income. Since 2006, the per capita income growth came in at 7.6 per cent. Favourable budget proposals, e.g., tax rate cuts, support auto industry growth. The auto industry acts as a backbone for various industries, including auto ancillaries, tyres and metals that directly cater to the parent industry. Thus, it is believed that to determine the country's growth, auto industry statistics need to be taken into consideration.

As far as the cement industry is concerned, the government has fixed GST rate of 28 per cent for cement, which was 24 per cent earlier. This slight increase in tax rate led cement companies to hike prices. However, the GST rate for cement's raw material, limestone, has been fixed at 5 per cent. Also, for coal, the GST has been fixed at 5 per cent, which was 11.69 per cent earlier. This cut in tax rate on coal will help cement companies to reduce costs and this will lead to higher profitability in the coming years. However, the reduction in cost for the endconsumer will happen only if the cement companies pass on their savings to the consumers.

Electricity generation during H1FY18 stood at 611.2 BU, clocking a growth of 4.6 per cent over the previous year. In terms of capacity addition, 4.6 GW of new capacity was added, as compared to 3.9 GW of capacity added in H1FY17. The thermal capacity addition stood at 4.3 GW during H1FY18. All India installed capacity grew by 7.5 per cent to 329.3 GW as on Sept. 30, 2017, compared to 306.3 GW as on Sept 30, 2016. All India PLF for thermal plants has improved marginally at 59.8 per cent during H1FY18, which stood at 58.8 per cent in H1FY17.

The print media industry is the second largest contributor to the media and entertainment industry, followed by OOH and radio segments. The print media has seen significant growth as rising income levels and improving lifestyles have driven growth in the magazine segment. Also, national advertisers are entering the market to increase their advertising market share. With rising use of internet, coupled with easy availability of 3G and 4G, OOH segment has witnessed massive growth. Animation and gaming segment has seen growth of more than 20 per cent on account of HD animated movies, kids genre TV channels and mobile gaming.

Indian agriculture sector is the largest economic sector demographically. There are two major agricultural seasons in India, namely, Kharif and Rabi. Kharif season spans from April to September (summer) and Rabi season from October to March (winter). According to the Ministry of Agriculture, total foodgrain production in the country stood at around 273.38 million tonnes in May 2017. According to the advance estimates of MOSPI, agriculture and allied sector recorded a growth of 7.09 per cent CAGR during FY07-17.

Moving ahead, the sectors that are rejoicing under the ambit of GST will continue their surge, whereas, the sectors adversely impacted by the GST roll-out will trace its recovery in the coming quarters. The economy is placed to be on the upward tract in 2018. Despite the rising prices of crude oil and no expectations of an alteration in interest rates, with a streak of recovery across sectors, the economy is likely to grow smoothly in the year 2018. With the reforms across sectors reaching its fruition in 2018, the economy will be provided with more fuel for overall growth. Meanwhile, the Budget session to be held in February 2018 will prove to be a catalyst for the economy as well as the markets in the coming quarters. The expected recovery in the earnings in Q3 and Q4 quarters will be the key determinants of GDP growth and the general economic trajectory of the country.

METHODOLOGY We bring to you the vital financial data of top 1000 companies categorised by market capitalisation. These stocks are the most liquid and they represent a substantial portion of trading value and volume. These companies are then categorised into 25 sectors to provide you insight into the general trend of the financial performance for the first half of FY18. All data has been sourced from DION Global Solutions. The focus of financial data was more on the revenue and profitability as many companies do not provide balance sheet on a half-yearly basis. We hope that our readers will get an overall perspective on different sectors so that they are able to take stock and sectoral calls judiciously. 

Agriculture 

Indian agriculture sector is the broadest economic sector demographically. There are two major agricultural seasons in India, namely, Kharif and Rabi. Kharif season spans from April to September (summer) and Rabi season from October to March (winter). According to the Ministry of Agriculture, total foodgrain production in the country stood at around 273.38 million tonnes in May 2017. According to the advance estimates of MOSPI, agriculture and allied sector recorded a CAGR rise of 7.09 per cent during FY07-17. 

Further, there has been a continous decline in the share of agriculture and allied sector in the GVA (Gross Value Added) from 18.2 per cent in FY13 to 17 per cent in FY16. The agriculture and allied sector share is 17.32 per cent and GVA is around of Rs 23.82 lakh crore. The falling share of agriculture and allied sector in GVA is an expected outcome in a fast growing and structurally changing economy. Agriculture sector is the soul of Indian economy and for the people of India. It employs 48.9 per cent of the workforce. 

On account of robust output of wheat, rice and pulses due to heavy rainfall in 2016, the country’s foodgrain production increased by 8.7 per cent to record high 275.68 million tonnes in FY17. Further, horticulture sector has seen a goodtraction, led by new capital investment subsidy scheme for expansion and construction of cold storage. Horticulture production has seen growth by 5 per cent over FY05-17. 

While analysing the financials of the sector, we took 17 companies as per their market capitalisation. On the financial front, the sales of the agriculture sector for H2FY18 increased moderately by 2.8 per cent YoY, whereas the bottomline has seen jump of 56.2 per cent YoY. KRBL has reported moderate revenue growth of 3.5 per cent YoY. It has registered jump in operating profit and PAT by 35.3 per cent YoY and 21 per cent YoY, respectively. 

Avanti Feeds has posted tremendous growth during H2FY18. It has posted revenue growth of 26 per cent YoY and its EBITDA and PAT has jumped by 200 per cent and 215 per cent, respectively. The company is planning to expand its feed capacity by 45 per cent by the end of FY18. Jain Irrigation Systems has seen growth in terms of revenue and operating profit by 5.9 per cent and 2 per cent, respectively. However, its bottomline has seen decline of 29.2 per cent YoY. Venky's (India) has posted muted revenue growth during H2FY18, whereas its operating profit and bottomline jumped by 46.2 per cent and 91.4 per cent. Further, Kaveri Seed Company Limited (KSCL) has registered good numbers during H2FY18. Its revenue has jumped by 17.5 per cent and operating profit and PAT spiked by 31.6 per cent and 37.7 per cent, respectively. 

To promote innovation and entrepreneurship in agriculture, the government is launching AGRI-UDAAN programme that will guide start-ups and help them connect with potential investors. This scheme will reach out to agri start-ups in different cities like Chandigarh, Ahmedabad, Pune, Bangalore, Kolkata and Hyderabad. The main goal of the scheme is to begin a start-up revolution in agriculture which so far has been limited to the services sector.

Also, the government has allowed 100 per cent FDI under automatic route in storage and warehousing, including cold storages. The FDI policy for agriculture was also amended to allow 100 per cent FDI under automatic route for development of seeds, which will augur well for the industry. With the recent clearance of FDI in multi-brand food retail, the government is looking to double food processing levels to 20 per cent. Moreover, the government has launched the Pradhan Mantri Krishi Sinchai Yojana (PMKSY) with an investment of Rs 50,000 crore. The scheme ensures access to the means of irrigation to all agricultural farms in the country to produce ‘per drop, more crop’, thus bringing much desired rural prosperity. Further, under the Scheme for Agro-Marine Processing and Development of Agro-Processing Clusters (SAMPADA), the government plans to triple food processing sector’s capacity from the current 10 per cent and has also committed investment plan of Rs 6000 crore in mega food parks. 

India is likely to double its farm income by FY2022. Overall, the Indian agriculture sector is in the growth phase and would create better momentum supported by enlarged investments in various agricultural infrastructure such as irrigation facilities, warehousing and cold storage. The government targets to increase the average income of Indian farmer's household at the current prices to Rs 219,724 by 2022-23 from Rs 96,703 in 2015-16. Factors such as declining conveyance cost and improved fiscal incentives would contribute to the sector’s growth. 

A large population and mounting urban and rural demand are the main growth drivers of the agriculture sector. Also, changing lifestyles and increased spending on health and nutritional foods would aid demand. Moreover, the increasing use of genetically modified crops is likely to improve the income of Indian farmers. This would further lead to jump in demand for agricultural inputs such as hybrid seeds and fertilisers. Overall, we see Indian agriculture industry to grow at a healthy pace, led by favourable environmental conditions, coupled with better realisations and improving income of Indian farmers.

AUTO 

Indian auto industry comprises 7.1 per cent of country's GDP. The industry is divided into four segments with two-wheelers holding a market share of 79%, passenger vehicles (15%), commercial vehicles (3%) and threewheeler vehicles (3%) in FY17. According to Society of Indian Automobile Manufacturers (SIAM), the auto industry has reported 5.9% CAGR over FY12-17. Production of passenger vehicles, commercial vehicles, three-wheelers and two-wheelers grew at 5.41 per cent in FY17 to 25,316,044 vehicles from 24,016,599 vehicles in FY16.

Considering statistics for H1FY18, the sales of passenger and commercial vehicles grew by 9.16 per cent and 5.96 per cent, respectively. Three-wheeler segment reported a decline of 9.89 per cent during the period. Growth in the auto industry is largely dependent on the disposable income of individuals. Since 2006, the per capita income growth came in at 7.6%. Favourable budget, e.g., tax rate cuts support the auto industry growth. The auto industry acts as a backbone for various industries, including auto ancillaries, tyres and metals that directly cater to this sector. Thus, it is believed that to determine the country's growth, auto industry statistics need to be taken into consideration.

During this fiscal, some developments have been witnessed in the industry which include major regulatory interventions, such as the accelerated transition from BS IV to BS VI, adoption of electric vehicles, safety rules and stringent vehicle standards, leading to a shift in the vehicle technology. This is creating significant challenges, not only for the automotive industry but also to the related sectors such as energy, oil & gas, transportation, and urban development.

The chief factor is the roll-out of electric vehicles (EV). Governments across countries are shifting focus on EVs to eliminate the high combustion vehicles due to climate change concerns. Accordingly, the Indian government too has set 2030 as a deadline for a total shift to EVs to meet emission norms.Tata Motors recently came up with order win from EESL tender on delivering electric vehicles. This is will help the company to gain its market share. Other automakers also deployed substantial capex investments in the EV space. These include Maruti Suzuki (Rs.3,900 cr), Hero MotoCorp (Rs.205 cr), Mahindra group (Rs.4,000 cr). Moreover, JSW Energy, a complete non-auto company has recently signed an MOU for setting up EV manufacturing company in Gujarat with a capexof Rs.4,000 cr having a capacity of 2,00,000 EV every year.

To encourage EV sales, the GST rate on EVs have been kept at 12 per cent as against 28 per cent on petrol/diesel vehicles. Other factors that affected were the deadline for sales of BS-IV vehicles, combined with roll-out date of BS-VI emission norms. The de-stocking of BS-IV vehicles at massive discounts also impacted the topline of the auto industry.

The steel prices, one of the principal factors affecting the margins of the auto industry, has witnessed a massive increase in recent times. According to reports, prices have increased across the world. China, the largest steel manufacturer, hiked prices by 4.4 per cent as against 0.1 per cent last year. Indian steelmakers too have hiked prices by Rs.6,000 per tonne over the last few months. This price hike has affected industry margins, thereby impacting the profit margins. Hike in product prices has been announced by various automakers for the H2 period to offset the steel price hike in H1FY18.

We have taken top 15 companies by their market cap to analyze the performance of the industry. Maruti Suzuki, Hyundai and Mahindra combine, contribute 74 per cent market share in the car (fourwheeler) segment. For the H1FY18 period, the topline growth reported was 12.6 per cent. Major contributors in PV segment were Maruti Suzuki (20 per cent), Mahindra and Mahindra (9.9 per cent). Eicher Motors (25.9 per cent), TVS Motors (18per cent) and Bajaj Auto (1.9 per cent) were added in two-wheeler segment. In the commercial segment, Ashok Leyland (15.8 per cent), Force Motors (2.2 per cent) added to its topline.

As alluded, steel prices have severely impacted the operating margins of companies. Those affected includes Bajaj Auto (-230bps), Maruti Suzuki (-160bps) and Hero MotoCorp (-50bps). Considering PAT levels, Tata Motors reported 83.4 per cent, Eicher Motors 23.8 per cent, TVS Motors 14.7per cent, Escorts 79.2 per cent. Maruti Suzuki dominates the auto industry with a market share of more than 50 per cent, indicating that of every two cars sold, one belongs to Maruti Suzuki.

India is emerging as a priority market for global automotive companies. It holds a cost advantage position which saves ~15-20 per cent on operations vis-à-vis Europe and Latin America. Also, auto industry here is supported by various factors such as cheap labour and robust R&D centers. Automobile Mission Plan 2026 and NEMMP 2020 will augur well for the industry's growth. Innovation is likely to intensify in the engine technology and alternative fuels space. To conclude, going forward, the auto industry remains optimistic, considering the sizeable market segments combined with technological innovations.

AUTO ANCILLARIES 

Auto ancillary (components) industry contributes around 2.3 per cent to India's GDP. Indian auto component industry can be broadly classified into organised and unorganised sectors. The organised sector caters to OEMs (original equipment manufacturer) with its high value precision instruments. On the other hand, the unorganised sector comprises of low value components which caters to aftermarket (replacement) category. The sector employs nearly 3 million employees.

The auto ancillary industry is wholly dependent on the auto Industry. The performance of the sector is determined by its parent (auto) industry. Auto ancillary has been growing in tandem with the country's auto industry. Over the last decade, the sector has witnessed a whopping growth of 14 per cent CAGR. With such a massive growth, India is now considered a global manufacturing hub for component production, backed by strong technological innovation, lower costs and government's support.

Considering the better fuel emission as compared to BS-IV, the government announced the roll-out of BS-VI emission norms by 2020, bypassing the BS-V norms. This will necessitate modification in engines, multiple engineering combined with more electrical fittings. Auto ancillary is largely to benefit with the implementation of BS-VI, considering its robust research and development investments. For analysis, we have sampled top 55 companies based on their market capitalisation. Considering the average, the companies have reported topline growth of 9.6 per cent during H1FY18 period. The major contributors were Motherson Sumi (29%), Minda Industries (22%) and Exide Industries (13.6%). Motherson Sumi Systems, the largest company, reported PAT of Rs.941 crore, a growth of 2.3 per cent, driven by its increasing borrowings. Bosch, on the other hand, reported PAT of Rs.656 crore, a decline of 39 per cent.

Various acquisitions were made to diversify the organic business and to tap into inorganic segments. Buoyant growth in domestic automotive sector has encouraged several multinational manufacturers to establish facilities in India. Investments in auto component sector have reached a record high to Rs.2418 crore during FY17. Motherson Sumi acquired PKC Group to penetrate into the markets of America and Europe. Spark Minda acquired El Labs to integrate its technology into existing products. Bosch, on account of capacity expansion, capitalised greenfield project in Karnataka. The government, through its Automotive Mission Plan, has targeted four-fold growth in the automobile sector. The 100 per cent foreign equity investment is considered as a favourable policy for auto industry. The Department of Heavy Industries and Public Enterprises has created a fund of Rs.1300 crore to provide interest subsidy on loans and investments in new plants to modernise auto components.

Indian auto components industry is set to become the third largest in the world by 2025. The export revenues are expected to account for as much as 26 per cent of the total market by 2021. Automobile Component Manufacturers Association forecasts exports to reach US$ 70 bn by 2026 from US$10.9 bn in FY17. Considering the technological innovations in the organic segment combined with inorganic expansions, we see an untapped potential in the industry.

BANKS 

Banking industry is considered to be the life blood of the economy, which has witnessed significant changes in H1FY18, ranging from the aftermath of demonetisation and GST (Goods & Services Tax) to massive recapitalisation plan of public sector banks. The changes were also reflected in banking sector with respect to tighter norms and improved banking system. However, asset quality remains a greater concern for the industry and the whole economy.

Moreover, public sector banks were focused on containing NPA accretion and lowering slippages, while private sector banks achieved steady advances growth across the board. RBI also made its stance clear on the saddling NPA problem by declaring more stressed accounts facing the brunt of NCLT proceedings. Also, banks continued to make provisions for stressed assets, thereby tapering their profitability. However, operational performance of the banks saw little improvement due to low fresh slippages and low cost of funds available through abundant CASA deposits. Overall, the NPA accretion level was low largely due to muted growth in public sector NPAs at 0.1% in the quarter and more than expected rise in private banks' NPA problems.

Over the period, banks have adopted diversification in their lending portfolio, as large number of stressed assets came from corporate accounts. Banks shifted their focus on low ticket and low delinquency RAM segment (Retail, Agri& SME). Rising disposable incomes and improving credit quality improved the lending process for the bank. Further, retail and SME assets showed better performance and improved the earnings of the banks. Many regulatory and overlooking bodies have warned India on rising NPA problem. IMF in its Financial Stability Report has stated that public sector banks are still vulnerable due to declining asset quality and rising provisions. Also, elevated provisions and large number of loan write-offs further shrinks the capital base of the banks. However, CRAR (Capital to risk weighted assets ratio) improved in H1FY18 to 13.9% as against 13.6% in the same period previous year.

Overview on financials Our analysis of 37 banking stocks show private sector banks performed well in terms of earnings for H1FY18, whereas public sector banks were rattled with declining asset quality. NII for the private sector banks for H1FY18 rose by 10% YoY, which was largely led by private banks like Yes Bank, DCB Bank, Indusind Bank, Laxmi Vilas Bank, Federal Bank. All these banks saw rise in NII in the range of 25% to 35% YoY, while public sector banks saw marginal rise in NII for H1FY18 at 2% YoY. All major public sector banks, including State Bank of India, Bank of Baroda, Andhra Bank, Punjab National Bank, saw tepid growth in the range of 2%-10% YoY in H1FY18. Also, many PSU banks such as Allahabad Bank, Bank of India, Bank of Maharashtra, Corporation Bank, Dena Bank, IDBI Bank saw decline in NII for six months ended September 2017.

for H1FY18 . GNPAs for private sector remained elevated . Major private banks such as Axis Bank, HDFC Bank and Indusind Bank, saw steep rise in GNPAs at 50%-70% YoY for H1FY18, while other private banks like Karur Vysya Bank, Laxmi Vilas Bank & Yes Bank put up poor performance. All the three banks saw almost two-fold rise in GNPAs for the quarter. Public sector banks showed better performance than private peers as slippages across public banks were contained. IDBI Bank, Oriental Bank of Commerce, Corporation Bank, Union Bank of India saw highest increase in GNPAs in the range of 30% to 70% YoY for H1FY18.

However, as compared to total advances, the asset quality of private banks remained stable across the board. Few banks such as Karur Vysya Bank, Yes Bank and Axis Bank saw deterioration in asset quality as their GNPAs for H1FY18 advanced by more than 100 bps, while other banks saw marginal change in GNPAs. The asset quality of public sector banks continued to remain deteriorated as many banks saw increase in GNPAs by more than 300 bps. Profitability across the board showed mixed performance as provisions jumped in private as well as public sector banks. Private banks like Yes Bank and Karur Vysya Bank saw steep rise in provisions, thereby severely impacting their bottomlines, while other private banks increased their provisioning in the range of 20% to 80% across the board for H1FY18.

However, the bottomline performance of the banks was strong despite increase in provisioning. DCB Bank, Federal Bank, HDFC Bank, Yes Bank saw net profit growth of 30%, while Laxmi Vilas Bank, South Indian Bank, ICICI Bank saw decline in net profits by 30%-50% for H1FY18. Public sector banks saw many turnarounds in bottomline. Allahabad Bank, Bank of India saw positive turnaround in bottomline, while Andhra Bank, Corporation Bank, IDBI Bank, Oriental Bank of Commerce, etc. posted loss in their bottomlines for H1FY18.

The way ahead Stability of the banking system depends on external factors such as economic stability, industrial growth, rising agricultural output, etc. Going ahead, we see recovery in the stability of the economy and improving agricultural production to aid better supply of food. Thereby, we see inflation is likely to come down, making way for possible rate cut.

The government's massive recapitalisation will definitely prove to be a major thrust to public sector banks. Also, private sector banks are expected to raise more capital for providing necessary cushioning to provisioning. Also, banks are expected to remain more vigilant in providing credit and improving the asset quality of overall system. We may also see more deleveraging by the government in public sector banks, thereby increasing the participation of private capital in the banking system. Also, revival in the economy and the much-needed recapitalisation move will re-ignite credit growth in the banking system.

CEMENT 

Indian cement industry is the second largest cement producer in the world after China; ahead of the US and Japan, with a total cement production capacity of ~420 million tonnes per annum (MTPA) as of June 2017. This accounts for 6.7 per cent of world's total cement output.

The top 210 large plants in India alone contribute 83 per cent of total capacity. Out of these 210 plants, 77 are situated in Andhra Pradesh, Rajasthan and Tamil Nadu. Further, private sector companies contribute majorly in the total production capacity with over ~98 per cent share and the remaining ~2 per cent contributed by public sector companies. Top 20 cement companies account for almost 70 per cent of the total production of cement.

Coming to the price trend in cement industry, overall retail cement prices have witnessed a hike of Rs.12 per bag in Q2FY18. This was led by jump in the price by Rs.36 in western region and Rs.15 in the southern region. The prime factor leading to such a hike was the increasing production cost, i.e. rise of 13 per cent in pet coke price.

Rising pet coke prices and change in regulations led to higher raw material costs Almost 65 per cent of the pet coke in India is consumed by the cement industry of which 40 per cent were imported. The recent government ban on usage of pet coke in some states, which was later lifted, caused a disruption in cement production and efficiency. Also, import duty on pet coke was increased to 10 per cent from 2.5 per cent to reduce its usage. This hike is expected to affect the operating margins of cement companies, including Ambuja (62% usage), Ultratech (74%), India Cement (73%), JK Lakshmi (80%), Shree Cement (100%).

The distress had led few cement makers to change their raw material from pet coke to coal for better power and fuel usage efficiency. Moreover, this shift had led to steep increase in its power and fuel costs (15-25% increase).

Sand shortage further led to margin pressure Further, shortage in sand availability has led to an increase in sand prices. This triggered illegal mining and government has imposed a ban on river sand mining which is affecting the supply significantly. However, in MP, the government has permitted sand mining at selected sites, whereas in Bihar and Uttar Pradesh, the sluggish demand is still persisting.

GST rate increase and Rera further impacted companies The government has fixed GST rate of 28 per cent for cement, which was 24 per cent earlier. However, the GST rate for cement's raw material, limestone, has been fixed at 5 per cent. Also, for coal, the GST has been fixed at 5 per cent, which was 11.69 per cent earlier. This cut in tax rate on coal will help cement companies in cost reduction and will lead to profitability in coming years. However, reduction in cost for the end-consumer will happen only if the cement companies pass on their savings to their consumers.

Financial performance In our analysis, we have considered 29 cement companies according to their market capitalisation. During H1FY18, the industry reported 20% topline growth. The major cement companies which reported topline growth included Birla Corporation (46%), JK Cement (18%), Ultratech Cement (13%) and Shree Cement (12%). The cement major, Ultratech Cement reported 13% YoY growth in terms of its revenue and 11.5% YoY growth in operating profit in H1FY18. However, it has witnessed decline in its bottomline by 5% YoY. Shree Cement, on the other hand, has posted disappointing numbers. It has posted 12% YoY rise in revenue. However, operating profit and PAT has declined by 8.6% YoY and 18.5% YoY, respectively. The company is concentrating on robust capacity expansion in the East and North and is planning to expand its capacity by 42% by FY2019 (current capacity 23.6MTPA). Dalmia Bharat Limited has reported de-growth in its revenue by 2% YoY. However, EBITDA has increased by 4.6% YoY and PAT has jumped significantly by 114% YoY during H1FY18. The company is planning for acquisitions to penetrate in markets of Europe, Russia and Bangladesh. Also, it is focusing on product diversification and plant modernisation by investing around Rs.80-100 crore in the coming years.

Ramco Cements has registered mixed performance during H1FY18 while Birla Corporation has registered tremendous revenue growth of 45.6% YoY during H1FY18 as well as EBITDA growth of 25% YoY. However, in terms of bottomline, it has witnessed sharp decline of 72% YoY.

Outlook in the coming years 

Key projects - ‘Bharatmala', the government is considering building 83,000 km roads by investing Rs.7 lakh crore in the coming years. Also, bitumen is likely to be replaced by cement considering durability and cost effectiveness of cement roads. 

As per IBEF report, total cement production capacity is expected to reach 550 million tonnes by FY2025, driven by demand from the housing sector, which contributes around 67 per cent to the total demand. 

Growth expected in Commercial and industrial construction driven by rail metros, airport upgradation etc. 

Overall, we expect cement industry to grow at a steady pace supported by developing economy and supportive government policies.

Chemicals 

The chemical industry in India is a key constituent of the Indian economy, covering more than 70,000 commercial products and accounting for more than 2 per cent of the GDP. The chemicals sector also acts as a key enabling industry and provides support for variety of other sectors, such as agriculture, construction, leather etc. Indian chemical sector is presently worth USD 150-155 billion and is growing at 8-10 per cent annually. According to government estimates, the sector is expected to double its size to USD 300 billion by 2025. Its sub-sectors, such as speciality chemicals and agro- chemicals, are growing at a higher pace. 

The Indian specialty chemicals industry is dominated by family-owned small and medium-sized companies having limitations in terms of finances, management and technology. In a bid to remain competitive in the face of weakened industry fundamentals, the chemical companies are exploring inorganic growth avenues through mergers and acquisitions. Global companies will also look for M&As with smaller companies to gain access to Indian markets. While commodity chemicals will likely comprise most of the M&A activities, significant volumes are expected in specialty and agricultural chemicals segments. 

In H1FY18, the industry’s revenue (top 10 companies by market cap) has marginally improved by 0.5 per cent YoY. The major contributor was Himadri Speciality Chemicals, which reported an increase in sales of 54.3 per cent in the corresponding period. Also, the net profit of the industry soared over 18 per cent YoY during the period.The government is working on a draft chemical policy which would focus on meeting the rising demand of chemicals from domestic industry and reduce dependence on imports. Also, India’s per capita consumption of chemicals is lower as compared to western countries, which provides immense scope and opportunities for new investments. Indian chemical companies can take the lead in identifying potential outbound deal opportunities and expand their global presence in new consumer markets by strengthening their product development capabilities and creating a robust in-house R&D architecture. There is a huge scope for the chemical industry to chart the next growth curve.

CONSTRUCTION 

Construction industry is considered as a vital contributor to the economic development of a country. This is because the growth of any industry depends on the physical infrastructure available in the country. The construction industry consists of building, infrastructure and industrial segments. Out of this, infrastructure dominated the industry with ~50 per cent share in the construction industry. In FY17⠀ 18, NHAI has completed 1566 km length of the projects under implementation till November 2017 (5,060 lane km). The average in the last five years of road length constructed by NHAI is 2,175 km, with 2,628 km constructed in FY2016⠀ 17. This year, NHAI is targeting to construct 3,500 km. Further, real estate sector witnessed muted performance as sales during the first half of FY2018 were at a standstill. This was due to introduction of RERA, Benami Act and the GST, with demonetisation adding to the strain in the real estate sector.

Within the real estate sector, many developers are defaulting on their interest payments. This is due to huge accumulation of land by developers as accumulation of large land banks was expected to help counter competition. For this purpose, developers started borrowing which resulted in higher interest burden. Due to demonetisation and implementation of RERA, developers witnessed sluggish demand growth, which led to lower revenue, thereby resulting in default in debt repayments. Compared to the peak sales in FY14, the residential sales volume declined 50%-70% in Mumbai.

To understand the performance of the overall industry, we analysed financial performance of of 62 companies. Looking at the aggregate sales of these companies, we found that the sector grew by ~7% in the first half of FY2018, as compared to same period last year. There were few outperformers who registered impressive sales growth, namely, Welspun Enterprises which registered ~437 per cent YoY growth in revenue, Bharat Road Network posted ~221% YoY growth while Peninsula Land and PSP Projects registered growth of 166% and 80.4% YoY, respectively.

Also, looking at these companies' bottomline, we found that there were number of companies which posted strong growth in PAT. Hubtown recorded ~1671 per cent yoy growth in PAT in H1FY18, Orient Bell recorded ~535 per cent YoY growth while infrastructure player DilipBuildcon posted ~321 per cent YoY growth.

Going forward NHAI is making all-out efforts to achieve its target of awarding 10,000 km during 2017-18, as set by the Ministry of Road Transport & Highways. The authority is also gearing up to meet its target of completing Phase I of the recently approved "BharatmalaPariyojana" within the next five years, that is, up to 2021-22. During the last five years NHAI's average award has been 2,860 km, with 4,335 km awarded in FY2016-17.

The Ministry of Road Transport & Highways has estimated a fund requirement of about Rs 6.92 lakh crore for the development of national highways in the country during the next five years. To meet these requirements, the government is likely to take measures such as monetisation of national highway through TOT (toll-operatetransfer) model, external borrowings by NHAI and private investment, toll remittance and the Central Road Fund. The government has envisaged increasing the existing national highway network of 1.15 lakh km in the country to 2 lakh km.

Under the newly introduced toll-operate-transfer (ToT) model, the rights of collection of toll on selected national highway built through public funding will be monetised and assigned to a concessionaire for a period of 30 years, as against an upfront payment of a lump sum amount to the government. The concessionaire will also be responsible for the operation and maintenance of the national highways during the tenure.

Furthermore, under the skill development initiative of the Ministry of Road Transport & Highways, 2,800 highway construction workers have been trained and 3.5 lakh workers are proposed to be trained under the Bharatmala project. This initiative will help to meet requirement for skilled labour for undertaking projects in sectors like road transport, shipping water resources and river development. Notably, under the Bharatmala project, the government is likely to spend around Rs 7 lakh crore for construction of highways. Also, the Sagarmala project for setting up of 14 coastal economic zones, enhancing port connectivity and strengthening of ports will propel growth of the infrastructure sector.

A weakening market (from the peak of FY14) combined with impact of RERA, Bankruptcy & Insolvency Code and GST implementation are likely to maintain pressure on the real estate market. Moreover, firms such as Unitech, Jaypee Infratech and Amrapalli are being pursued by banks and home buyers who had paid them advances but have not received their houses and have turned to the courts. Also, a Pune-based real estate developer is facing the prospect of being arrested for defaulting in payments to the home buyers and investors since January 2017.

Now, with the implementation of RERA, most of the developers will be focusing on completing their ongoing projects rather than launching new projects. With these new regulatory development, we expect new projects launches, especially in the mid-level and luxury segments, would slow down. However, government's push for affordable housing will see increase in launch of affordable housing projects.

CONSUMER DURABLES 

The consumer durables sector overall has witnessed decent performance in the first half of FY2018. This was due to uptick in rural demand led by favourable monsoon, as also the festive season that aided in overall growth of the sector as most of the Indians tend to buy goods on auspicious days of festivals. Further, pre-GST sale aided the sales growth of domestic appliances. Traditionally, consumer durables have huge cash component and, after demonetisation. the sector was affected. But now, the sector has recovered from the demonetisation blues and in H1FY18 the sector recorded impressive growth. Consumer durables constitute white goods which mainly include air conditioners, refrigerators, washing machines, audio equipments and speakers. Also, consumer durables include brown goods, which mostly include kitchen appliances such as chimneys, electric fans, grinders, iron, microwave ovens, mixers and varied other cooking ranges. Consumer durables also include consumer electronics goods such as,DVD players, MP3 players, mobile telephones, telephones, VCD players etc.

To further understand the performance of the consumer durable sector, we analysed performance of 15 companies. The aggregate sales of these companies rose by 17 per cent YoY in the first half of FY2018. During the same period, EBITDA of these companies surged by ~18 per cent YoY. With improvement in operational performance, the bottomline of these companies witnessed sharp increase of ~123 per cent YoY in the first half of FY2018.

Out of these 15 companies, Titan registered highest sales growth of 36 per cent YoY in H1FY18, followed by market newbie Dixon Technologies, which recorded ~33.7 per cent YoY growth during the same period. Also, electronic appliance firm IFB Industries recorded impressive growth of ~30.6 per cent.

In terms of bottomline, Leel Electricals recorded an eyepopping growth of 1263 per cent yoy in H1FY18. Also, cooking ware manufacturer TTK Prestige recorded remarkable growth of ~195 per cent YoY in PAT during the same period. Titan also shined in terms of bottomline and recorded growth of ~80 per cent YoY.

Rising urbanisation and standard of living and the government's effort to increase income of farmers are expected to contribute to the growth of consumer durables sector. Thus, in rural markets, durables such as refrigerators and consumer electronic goods are expected to witness growing demand in the coming years. Rural and semi-urban markets are growing at 25 per cent CAGR and these are expected to contribute around 50 per cent to the overall consumer durable market in the coming years. Further, white goods like washing machines and refrigerators have only 0.5 and 2 per cent penetration in the rural market, which provides enormous opportunity for growth of the consumer durables market.

Increasing awareness, easier access to goods through developing retail channels, increasing availability of consumer finance and changing lifestyles have been the key growth drivers for consumer durables market. The government's policies and regulatory frameworks such as relaxation of licence rules and approval of 51 per cent foreign direct investment (FDI) in multi-brand and 100 per cent in single brand retail are some of the major growth drivers for the consumer durables market.

The long-term growth will also be aided by the implementation of the GST. Moreover, India's more than 125 crore and growing consumers will play a vital role in growing the durables market. Besides, hike in allowances of government employees will also boost demand for consumer durable goods.

Increasing nuclear families and women joining the workforce will drive demand for products like washing machines, kitchen appliances and dishwashers. More than 50 per cent of India's population is under 25 years, which provides a huge opportunity to tap the first-time buyers.

Above all, GST implementation will lead to formalisation of an economy, which will be beneficial for the organised players as there will be demand shift from unorganised to organised players. Also, this will help to bring down logistics cost.

ELECTRICAL & ELECTRONICS 

Due to rapidly increasing demands, the electronics and electrical Industry is experiencing a high growth rate in APAC countries - mainly India, China, South Korea and Japan. The electronic market in India, being one of the largest in the world, is expected to reach $400 billion by 2020. Owing to the enabling policies and initiatives by the government, such as Make in India and Digital India, local manufacturing in the sector is a hot topic. The electrical equipment industry in India can be broadly classified into generation machinery, transmission machinery and distribution machinery segments. The generation machinery segment consists of boilers, turbines and generators; while transmission and distribution machinery segment consists of transformers, switchgears, control gear cables, transmission lines and capacitors. Cables, with about 35 per cent market share, accounts for a major chunk of revenues in this sector, followed by switchgears, boilers and transformer segments, respectively, in the order. The electronics industry, which complements the electrical industry, is classified into consumer electronics, industrial electronics, computers, communications and broadcasting equipments, strategic electronics and electronic components. As per IBEF, the consumer electronics segment commands the largest chunk of market share, followed by electronic components, industrial electronics, C&B equipments and strategic equipment segments respectively.

Indian electrical and industrial electronics industry posted 4.25 per cent growth in FY17 over the previous year on the back of higher exports. The sluggish demand and higher imports is still hampering the industry's growth. There are high imports of HV switchgears (GIS), insulators, AC motors and generators. Data issued by Indian Electrical and Electronics Manufacturers' Association showed that the growth in exports is helping the industry grow, especially in power transformer and high voltage switchgear products and cables.

The sales of low voltage switchgears registered a growth of 22 per cent due to revival in growth of realty, infrastructure and other manufacturing industries. The demand for distribution transformers and energy meters declined by 12 per cent and 10 per cent, respectively, due to poor off-take from distribution utilities due to delay in finalisation of orders under Central schemes such as Deen Dayal Upadhyaya Gram Jyoti Yojana (DDUGJY) and Integrated Power Development Scheme (IPDS). The policy changes and various initiatives undertaken by the industry and government are eventually showing signs of revival in the sector.

To promote indigenous manufacturing of electronic goods, many steps have been taken by the present government in the last three years, including rationalisation of the tariff structure with extension of differential excise duty dispensation on specified electronic equipments and withdrawal of duty exemption, etc. In the Union Budget 2017-18, with the aim of creating an ecosystem to make India a global hub for electronics manufacturing, the allocation for incentive schemes like Modified Special Incentive Package Scheme (M-SIPS) and Electronics Development Fund (EDF) were significantly increased to Rs 745 crore.

We analysed financial data of 16 companies from the sector to understand the trend and performance of the sector in the first half of the current financial year. The sector's topline increased 12.63 per cent to Rs 17,263 crore in H1FY18 as compared to Rs 15,327 crore in the same period last year. The industry's EBITDA too rose 7.99 per cent to Rs 2068 crore in H1FY18 on a yearly basis. The sector registered a decline in net profit by over 55 per cent to Rs 435 crore in H1FY18, as compared to Rs 973 crore in the same period lprevious year. This was majorly due to CG Power and Industrial Solutions Ltd. which reported a loss of Rs 556 crore in H1FY18. The industry witnessed an EPS de-growth of 48 per cent to Rs 4 in H1FY18 on a yearly basis. The top 5 companies by market capitalisation amounted to 68 per cent of total revenue for the period under consideration. V-Guard Industries Ltd and Bharat Electronics Ltd posted strong EBITDA growth of 85.2 per cent and 46.5 per cent, respectively, as compared to the same period last year. Eleven of the sixteen companies reported a negative growth in their EBITDA margins in the period under consideration, whereas only three companies posted a positive growth in their PAT. Bharat Electronics Ltd and HPL Electric & Power Ltd reported an increase of 40.6 per cent and 49.8 per cent in PAT, respectively in the period under consideration.

The total production of electronics hardware goods in India is expected to reach US$ 104 billion by 2020. The cumulative FDI inflows into the electronics sector, including computer hardware and software, increased at a CAGR of 14 per cent, with the value increasing from USD 9.8 billion in FY10 to USD 24.53 billion in FY17. Also, 100 per cent FDI is allowed under the automatic route in the electronics systems design and manufacturing sector. In case of electronics items for defence, FDI up to 49 per cent is allowed under the government approval route, whereas anything above 49 per cent is allowed through the approval of the Cabinet Committee on Security.

Power transmission in India, which is currently carried out largely in 220 KV and 400 KV range, is expected to move up to a higher range of 765 KV and high-voltage direct current. This presents a significant opportunity to manufacturers with capabilities in high-voltage to develop technology that can handle the need of such high voltages in the country.

Thus, growth in the power industry is expected to drive growth in the electrical equipments industry which, in turn, is forecasted to reach US$ 100 billion by FY22 from US$ 21 billion in FY17.

ENGINEERING 

The Indian engineering sector is of strategic importance to the economy owing to its close integration with other industry segments. The sector has been delicensed and enjoys 100 per cent FDI. The sector has witnessed a remarkable growth over the last few years, driven by increased investments in infrastructure and industrial production. India exports its engineering goods mostly to the US and Europe, which accounts for over 60 per cent of the total exports. Sri Lanka, Nepal and Bangladesh have also emerged as major destinations for India's engineering exports. According to data from the Engineering Export Promotion Council of India, engineering exports from India grew 11.33 per cent year-on-year to reach US$ 65.23 billion in FY17.

The engineering sector in India attracts immense interest from foreign players as it enjoys an advantage in terms of manufacturing costs, technology and innovation. This, coupled with favourable regulatory policies and growth in the manufacturing sector, has enabled several foreign players to invest in India. As per the data released by the Department of Industrial Policy and Promotion, the FDI inflows into India's miscellaneous mechanical and engineering industries during April 2000 to June 2017 stood at around US$ 3.34 billion.

To understand the trend and performance of the engineering sector, we analysed financial data of 59 companies. The sector's topline increased marginally by 1.91 per cent to Rs 60,535 crore in H1FY18 as compared to the same period in the previous financial year. The industry's EBITDA rose 0.29 per cent to Rs 7,795 crore in H1FY18 on a yearly basis. However, its net profit decreased by over 31 per cent to Rs 3,428 crore in H1FY18 as compared to Rs 5,027 crore in the same period of the previous financial year. The industry witnessed an average EPS growth of 9.15 per cent to Rs 11.1 in H1FY18 as compared to Rs 10.2 in H1FY17. HEG Ltd posted strong EBITDA growth of 716.8 per cent, whereas Ramkrishna Forgings Ltd posted 1452 per cent increase in PAT in the period under consideration. The government is planning to merge six engineering consulting PSUs to create a mega consultancy firm that can take up projects across sectors and compete with majors like Larsen & Toubro. Also, the spending on engineering services in India has been projected to increase to US$ 1.1 trillion by 2020, which will drive growth in this sector going forward.

FERTILISERS 

Indian fertiliser sector has witnessed tremendous growth over the past decades. The country is one of the prominent producers as well as consumers of fertilisers in the world. While the country produces a high amount of nitrogenous and phosphatic fertilisers, Indian demand for potash is majorly met through imports. With a rapidly growing market for fertilisers, both globally and domestically, coupled with good monsoon in the current year, the market for fertilisers is expected to thrive. According to the reports of the Food and Agriculture Organisation, the global demand for nitrogenous fertilisers is set to increase at about 5.6 per cent to 119.4MT in the coming four years through 2018. While most of this demand is likely to be driven by the Asian countries, China and India are expected to be the foremost drivers of demand of fertilisers.

The withdrawal of production ceiling for urea, imposed on the production beyond reassessed capacity during 2016-17, will starkly increase the domestic production of urea that was curbed earlier. Urea is highly subsidised by the Indian government and remains the only ‘controlled fertiliser' in the domestic market. Urea has recorded a stable growth of 1.74 per cent CAGR between FY13 and FY17. The domestic production in the urea segment has been significantly increasing and is thus expected to result in import substitution in the coming period. The quantity of urea imported has markedly reduced by 27 per cent on a yearly basis between FY16 and FY17. The import dependency in the urea segment has notably declined from 26.3 per cent in FY13 to 18.5 per cent in FY17. Meanwhile, the production in the segment has increased from 73.7 per cent in FY13 to 81.5 per cent in FY17, with India heading towards self-sufficiency in meeting urea demand.

The DAP that formed a significant portion of imports in the fertiliser sector has witnessed a robust growth of CAGR 4.41 per cent between FY13 and FY17. While the raw materials required for DAP production, including rock phosphate and phosphoric acid, have witnessed a slump in their prices, the domestic production of the fertiliser has recorded a growth of 14.4 per cent during FY13 and FY17 period. This development has led to a decline of 27 per cent in its total imports during FY16 to FY17. Meanwhile, the production of DAP fertiliser has increased significantly from 39 per cent in FY13 to 49.7 per cent in FY17.

We have analysed top 11 companies from the fertiliser sector. In comparison with the first half of FY17, the sector has gathered significant positive traction in H1Y18. The 11 companies have in the aggregate posted an increase of 30 per cent in the total profit after tax on a yearly basis, with Mangalore Chemicals & Fertilisers recording the highest surge of 148 per cent in its profits on a yearly basis. Mangalore Chemicals and Fertilisers is followed by National Fertilisers with an increase of 101.7 per cent in its profit for H1FY18 and Coromandel International with a growth of 89.2 per cent in its profit for the corresponding period. Coromandel International also posted the highest profit amongst the 11 companies with a profit after tax of Rs.418 crore for H1FY18. Gujarat Narmada Valley Fertilisers & Chemicals and Chambal Fertilisers & Chemicals posted PAT of Rs.233 crore and Rs.282 crore, respectively, for the corresponding period. Three among the 11 companies witnessed a drop in their profits, while Fertilisers & Chemicals Travancore and Nagarjuna Fertilisers & Chemicals recorded losses.

The total sales of the 11 fertiliser companies witnessed a growth of 6.7 per cent from Rs.28,345 crore in the first half of FY17 to Rs.30,244 crore in H1FY18. The sales in the sector was led by Coromandel International with sales worth Rs.5,880 crore, followed by Chambal Fertilizers & Chemicals and National Fertilizers with sales of Rs.4,063 crore and Rs.4,004 crore, respectively. However, Chambal Fertilisers & Chemicals also posted a slight decline of 1.9 per cent in the sales for H1FY18 on a year-on-year basis. Fertilisers and Chemicals Travancore recorded the highest decline in sales with a drop of 17.1 per cent on a yearly basis. The total EBITDA of the 11 companies witnessed an increase of 7.7 per cent in H1FY18 on a year-onyear basis. While Southern Petrochemicals Industries Corporation recorded the highest increase in EBITDA, up by 63.3 per cent, Coromandel International posted the highest EBITDA of Rs.770 crore. Coromandel International and Gujarat Narmada Valley Fertilisers posted the highest EPS of 14.3 per cent and 15 per cent, respectively, on a yearly basis during H1FY18.

The fertiliser production in India, which is growing at a steady pace of 4 per cent CAGR is likely to hit a production range of 460-470 LMT by 2020. While the imports of fertilisers have witnessed reduction, the domestic production of fertilisers have been on the rise since last 3 years. Two consequent years of good monsoons will not only prove to be a relief for the farmers but will also lead to increase in demand for fertilisers in the domestic market. A low tax slab of 5 per cent for fertilisers under the GST will give a boost to the sector, but the 18 per cent GST rate on the raw materials may upset the manufacturers. The government's increased focus on the agriculture sector and the introduction of gas pooling of urea in 2017, along with higher investments of PSUs for the revival of fertiliser plants and increased initiatives under New Urea Policy, will keep the sector booming.

FINANCE 

Non-banking financial sector is becoming a major pillar of the Indian economy with its deep penetration in the rural markets. When commercial banks are rattled by rising stressed asset problem and rising capital deficiency, the non-banking finance companies (NBFCs) are gaining market across segments which are not serviced or under-serviced by the banks. However, NBFCs have also faced the brunt of demonetisation and the GST after effects as they witnessed poor credit demand. NBFCs have created deep-rooted networks in rural areas with their diversified product lines and less regulatory requirements. The H1FY18 also witnessed strong vehicle sales growth aiding strong credit demand for NBFCs. As commercial banks were busy managing stressed assets, NBFCs saw strong retail credit growth of 16% YoY as of September as against 15% in FY17. Housing finance and personal loans are the new areas where NBFCs are seen gaining strong foothold due to their unique product structure. Apart from lending,

NBFCs have also seen robust earnings in asset management, life insurance, broking business due to rising investor participation in the Indian economy. The year 2017 has witnessed tremendous increase in new listings and has also given hefty returns to the investors. With low bank interest rates, investors were lured by the attractive returns on new listings and secondary equity markets. Mutual funds saw Rs.1.69 lakh crore of investments during FY17, which is the highest so far. This gave the necessary thrust to asset management and broking business of finance companies.

Overview of H1FY18 H1FY18 saw robust earnings growth for NBFCs across the board. Some of the companies such as Aditya Birla Capital and Motilal Ostwal Financial Services saw the highest growth in revenues in the range of 60%-150% YoY. Both the companies are engaged in very diversified business activities, which aided their better performance in H1FY18. Also, companies like Emkay Global Financial Services, Capital First, Muthoot Finance Services, PNB Housing Finance, IIFL hHoldings, Edelwiess Finance Services, SBI Life Insurance, Canfin Homes, M&M Financial Services also posted strong revenue growth in 20%-60% range. Vehicle finance companies like Bajaj Finance, M&M Finance Services, Shriram Transport Finance witnessed strong revenue growth due to rising disposable incomes and strong demand for tractors and vehicles.

The operational performance of NBFC companies has been better, with major expenses being employee costs and other borrowing costs. SBI Life Insurance, SREI Infra, Aditya Birla Capital witnessed steady improvement in operating profits in the range of 30%-40% for H1FY18. Other financial companies such as AU Small Finance, Edelweiss Financial Services, MAS Financial Services, Can-Fin Homes also witnessed 20% growth in H1FY18. Housing finance companies such as GRUH Finance, GIC Housing Finance and LIC Housing Finance, witnessed steady demand due to rise in housing credit. In terms of bottomline, companies with diversified businesses like Edelweiss Financial, Motilal Ostwal and Aditya Birla Capital have posted steep jump in their PAT. Also, companies in home finance such as PNB hHousing Finance, CanFin Homes, Gruh Finance, Indiabulls Ventures saw bottomline growth in the range of 30%-90% over the first half of the current financial year.

Outlook NBFCs have seen steady growth during previous years, supported by various factors including economic growth, increasing rural income, realty sector growth, etc. Going forward, we see NBFCs gaining larger market share in the total credit of the economy owing to number of reasons. Firstly, rising disposable income will aid increasing vehicle and housing demand, leading to more credit demand. The home mortgage segment in India is underpenetrated with just 17 million families having home loan, indicating potential housing credit demand. Secondly, NBFCs enjoy widespread networks across the economy where commercial banks do not reach or avoid lending due to their delinquency and low-ticket size. Also, NBFCs provide unique line of products suitable for rural borrowers and especially the low-income group. Further, NBFCs enjoy special advantage over banks due to their widespread network in rural India. We expect the government's recapitalisation of PSU banks is expected to have limited impact on NBFC lending activity. Moreover, due to NBFCs' widespread network across the economy, we expect NBFCs to continue their growth story in the coming years, strongly aided by healthy macroeconomic factors and under-utilised potential of Indian economy.

HOTEL 

The Indian hospitality and tourism industry is one of the key drivers of growth among the services sector in India. The sector has significant potential in India, considering the rich cultural and historical heritage, and topography of the country. The sector is also a large employment generator and a major source of foreign exchange earner for the country.

The tourism and hospitality sector is among the top 10 sectors in India that attracts highest foreign direct investments (FDI). According to the data released by Department of Industrial Policy and Promotion (DIPP), the hotel and tourism sector attracted around US $ 10.48 billion of FDI between April 2000 and June 2017.

Tourism in India accounts for 9.6 per cent of the GDP. The direct contribution of travel and tourism to GDP is expected to reach US$ 148.2 billion by 2027. During January-October 2017, India has earned foreign exchange of US$ 22.089 billion from tourism. Foreign exchange earnings (FEEs) in October 2017 were US$ 2.205 billion as compared to US$ 1.812 billion in October 2016 and US$1.621 billion in October 2015. The growth rate in FEEs in October 2017 over October 2016 was 21.7 per cent, compared to 11.8 per cent in October 2016 over October 2015.

The Indian government has estimated that India would emerge with a market size of 1.2 million cruise visitors by 2030-31. The government is planning to set up five cruise terminals in the country. In October 2017, a total of 176,000 foreign tourists arrived on e-tourist visa, in comparison with 69,000 foreign tourists in October 2016, registering a growth of 67.3 per cent over the previous year. India has been recognised as a destination for spiritual tourism as well for the domestic and international tourists.

Recently, Maharashtra Tourism Development Corporation (MTDC) has come up with a unique tourism experience of visiting the open cast coal mine of Gondegaon and underground coal mine of Saoner, near Nagpur, and is a part of Western Coalfields Limited. The Airports Authority of India also aims to start operating 250 airports across the country by 2020.

Mid-hotel segment in India is expected to receive investments of Rs.6,600 crore (excluding land) over the next five years, with major hotel chains like Marriott, Carlson Rezidor and ITC planning to set up upscale, budget hotels in state capitals and tier-II cities. International hotel chains will account for around 47 per cent share in the tourism and hospitality sector of India by 2020 and 50 per cent by 2022, increasing from 44 per cent in 2016.

Berggruen Hotels is also planning to add around 20 properties under its mid-market segment 'Keys Hotels' brand across India by 2018. Hilton plans to add 18 hotels pan-India by 2021, along with 15 operational hotels under its various brand names.

Also, Marriott International plans to open 30 new luxury hotels. As of November 2017, the company operated 93 hotels in India. Also, hospitality majors are entering into tie-ups to penetrate deeper into the market. Taj and Shangri-La entered into a strategic alliance to improve their reach and market share by launching loyalty programme aimed at integrating rewarded customers of both hotels.

To understand the trend and performance of the sector, we analysed financial data of 12 companies. The sector's topline decreased marginally by 2.78 per cent to Rs.12,425 crore in H1FY18 as compared to the same period in the previous financial year.

The industry's EBITDA rose 14.54 per cent to Rs.1493 crore in H1FY18 on a yearly basis. Its net profit soared by over 311 per cent to Rs.593 crore in H1FY18, as compared to the same period previous financial year. This was due to Cox & Kings Ltd, which reported a 198 per cent increase in profit. Also, Royal Orchid Hotels Ltd, India Tourism Development Corporation Ltd and Thomas Cook (India) Ltd reported PAT growth of 92.30, 85.40 and 73.00 per cent, respectively in the period under consideration.

The industry witnessed an average EPS growth of 24.84 per cent to Rs.3.8 in H1FY18 as compared to Rs.3.1 in H1FY17. Royal Orchid Hotels Ltd, Cox & Kings Ltd and Westlife Development Ltd posted strong EBITDA growth of 45.1 per cent, 41.30 per cent and 33.90 per cent, respectively in the period under consideration.

Due to the seasonal nature of the business, the industry generally records a lower EPS in the first half of every fiscal as compared to the second half. The asset light business model, operational efficiency, healthy debt-to-equity ratio and higher interest coverage ratio led to higher PAT and eventually higher EPS for these companies.

The tourism industry is also looking forward to the expansion of e-visa scheme, which is expected to double the tourist inflow into India. The government's collective spending is expected to increase to Rs.320.1 billion by 2027.

Also, tax incentives are in place for establishing new hotels in the 2-star category and above, across India. The government has also set up a Hospitality Development and Promotion Board, which will monitor and facilitate hotel project clearances and approvals.

Domestic expenditure on tourism has grown steadily at a CAGR of 13 per cent from 2008 to 2016 and is expected to reach Rs.23,943 billion by 2027 from Rs.11,239 billion in 2016. These factors are expected to drive the growth of the sector going forward.

INFORMATION TECHNOLOGY 

India's IT industry contributed around 7.7 per cent to the country's GDP last year. The sector employs nearly 3.9 million people in India, of which more than 170,000 were added in FY17. Of the total revenue, about 80 per cent is contributed by 200 large and medium players. Large players with a wide range of capabilities are gaining ground as they move from being simple maintenance providers to full service players, offering infrastructure, system integration and consulting services.

The domestic revenue of the IT industry is estimated at US$ 38 billion and export revenue is estimated at US$ 117 billion in FY17. The revenue for the domestic market is projected to grow at 10-11 per cent in 2017-18. The Indian IT exports are projected to grow at 7-8 per cent in 2017-18.

The export of IT services has been the major contributor, accounting for 56.41 per cent of total IT exports (including hardware) during FY17. The US has traditionally been the biggest importer of Indian IT exports; however, Indian IT companies are facing reverses in the US market. Nevertheless, the IT companies have opportunity for providing software support and make innovative use of AI in China since China (with its strength in hardware) is now focusing on IoT that would automate machinery with cyber and data power. National Association of Software and Services Companies (NASSCOM) will be establishing a platform to help Indian IT companies to obtain contracts in China. The e-platform expects to help about 25 Indian firms find business opportunities in China in the first year.

We analysed financial data of 50 companies from the sector to understand the trend and performance of the sector in the first half of the current financial year. The IT sector's topline increased 4.1 per cent to Rs.2,23,992 crore in HIFY18, as compared to the same period in the previous financial year. The industry's EBITDA too rose 2.33 per cent to Rs.51,848 crore in HIFY18 on a yearly basis. Its net profit improved marginally by 0.86 per cent to Rs.33,984 crore in HIFY18, as compared to the same period of previous financial year. The industry witnessed an EPS growth of 3.5 per cent to Rs.14.2 in HIFY18 on a yearly basis.

Industry bellwether TCS reported a 2.6 per cent increase in its revenue to Rs.60,125 crore in H1FY18 on a yearly basis. However, the company's net profit declined 4 per cent to Rs.12,410 crore during the corresponding period. Among the top 10 companies in the sector in terms of market cap, only Wipro and Mindtree reported marginal degrowth of 2 per cent and 0.1 per cent, respectively, whereas only TCS and Mphasis reported decrease in net profit in the period under consideration.

The Indian IT industry is facing uncertainty as US President Donald Trump considers tougher US visa policy, raising fears of higher labour costs as companies look to hiring more expensive US workers. But the industry is also expected to benefit from positive factors, such as improvement in financial services and digital businesses, with focus on increasing investments in digitisation and automation. With BRICs expected to provide US$ 380-420 billion opportunity by 2020, emerging geographies are expected to drive the next growth phase for IT firms in India.

IRON & STEEL 

India is one of the largest steel producers in the world. The sector has been a major contributor to the total manufacturing output of the country, with the domestic production of steel driven by easy availability of raw materials such as iron ore and cheap labour. The Indian crude steel output recorded a growth of 10.7 per cent on a yearly basis to 25.76 million tonnes during the January-March 2017 period, while in April 2017 alone, the crude steel output grew by 5.4 per cent.

In India, there are around 35 companies in the iron and steel industry. The industry showed a revival trend in H1FY18 with its aggregate losses declining by over 20 per cent as compared to the same period in the previous fiscal. While JSW Steel posted highest profit after tax of Rs.1,460 crore in H1FY18, Bhushan Steel and the governmentowned Steel Authority of India Ltd (SAIL) saw increase in their losses to Rs.1,954 crore and Rs.1,340 crore, respectively, for H1FY18. Lloyds Metals & Energy posted the highest surge in net income for the period, with an extraordinary growth of 1140.7 per cent, while MD Inducto Cast also posted a growth in net income by 366.4 per cent, Tata Sponge Iron by 118.8 per cent and Tata Metaliks by over 90 per cent. The aggregate sales for H1FY18 for the iron and steel companies stood at Rs.111,795 crore, considerably higher as compared with sales of Rs.88,201 crore for the same period in the previous fiscal. JSW Steel posted the highest sales of Rs.31,517 crore during H1FY18, SAIL posted the second highest sales of Rs.25,197 crore, followed by Jindal Steel & Power with sales of Rs.11,792 crore. Meanwhile, Shrikalahasthi Pipes and Tata Metaliks posted the highest increase in sales figures on a yearly basis with increase of 70.3 per cent and 67.8 per cent, respectively. Orissa Sponge Iron and Steel Company was the worst performing company among the group, with a 100 per cent decline in its sales and a loss of Rs.41 crore in the H1FY18 period.

In terms of valuation, among the top ten companies by market capitalisation being considered, four companies had negative EPS in the first half of FY18. Among the remaining six companies, Ratnamani Metals & Tubes and Maharashtra Seamless recorded EPS of nearly 10.6 per cent for the period. The lowest EPS was of Jindal Steel & Power at a negative 9.1 per cent for the corresponding period.

While the increased public sector spending is likely to increase the domestic steel demand, the introduction of National Steel Policy, 2017, will further drive the growth of the sector. Aiming to make India's steel industry globally competitive, the NSP 2017 is targeting to accomplish 300 million tonnes steel-making capacity and per capita steel consumption of 160 kg by 2030. The setting up of a research facility ‘Steel Research and Technology Mission of India' by the Ministry of Steel with an initial corpus of Rs.200 crore will spur innovations and upgradations in the sector.

In the private sector, steel manufacturing mammoths such as Jindal Stainless, JSW Steel, Tata Steel and ArcelorMittal SA are looking forward to significant expansion in the coming year. While Jindal Stainless has signed an agreement with the Defence Research and Development Organisation to manufacture high nitrogen steel for armour application. JSW Steel will set up two manufacturing units of 10 million tonnes each to increase the company's production output to 40 million metric tonnes by 2030. Tata Steel in agreement with the Creative Port Development will be developing the 10 million tonnes per annum capacity Subarnarekha port in Balasore district in Odisha. Luxembourg-based ArcelorMittal is likely to establish a joint venture with SAIL to produce high end steel products for defence and satellite industries. On account of the positive developments in the sector, the Indian iron and steel sector is expected to become the second largest steel producer in the world.

Media 

The Indian media and entertainment sector is one of the fastest growing sectors growing at a CAGR of 11.6 per cent during FY11-16. It is mainly divided into television, radio, print, films, digital advertising, music, OOH (Out Of Home), Animation & VFX, gaming and theme parks. The major contributor to the media and entertainment sector is the television segment, which enjoys 46 per cent market share, followed by print and films. 

The Indian television industry is four times larger than the Indian film industry. This segment is currently in a boom phase led by increasing digitisation. The phase I and phase II of digitisation has been already completed, which has given thrust to the industry. The industry's phase III and phase IV digitisation are in progress, which will generate enormous opportunities for the industry. The total number of subscribers stood at 183 million in 2017. 

The print media industry is the second largest contributor to the media and entertainment industry, followed by OOH and radio segments. The print industry has seen significant growth as rising income levels and improving lifestyles have driven growth in the magazine segment. Also, national advertisers are entering the market to increase their advertising market share. With rising use of internet, coupled with easy availability of 3G and 4G, OOH segment has witnessed massive growth. Animation and gaming segment has seen growth of more than 20 per cent on account of HD animated movies, kids genre TV channels and mobile gaming. 

In the radio segment, a total of 243 FM channels (21 from phase I and the remaining from phase II) are already operative. Further, the Union cabinet has granted permission to 135 FM channels under phase III. The Indian film industry has grown considerably led by digitisation. Further, YouTube hopes to grow its user base in India to 500 million as rising internet penetration and smartphone ownership in the rural areas enable access to online videos. Similarly, other online video platforms, both Indian and international, are currently looking forward to ramp up their presence in the country and capitalise on the massive shifts in consumer behaviour. 

To analyse the overall performance in the first half of FY18, we have considered a set of 20 media and entertainment companies. The average revenue growth for H1FY18 was nearly around 2.8 per cent. Zee Entertainment Enterprises Limited (ZEEL) has registered decline in terms of revenue by 4.4% YoY. However, operating profit and PAT have increased significantly by 40% YoY and 85% YoY, respectively, supported by declining operating costs during H1FY18. The company’s subscription revenue is likely to grow supported by improving ARPU and digitisation. Sun TV Networks has reported moderate growth in terms of revenue, operating profit and PAT by 5.5%, 4.7% and 6.5%, respectively, during H1FY18. Its advertising revenue is likely to improve on the back of improving market share in the near term. Also, subscription revenue is likely to grow on account of commencement of digitisation in Tamil Nadu. Dish TV has posted disappointing numbers. Its revenue has declined by4.5% and operating profit has declined by 21%. Moreover, its bottomline has turned negative in H1FY18. Dish TV has received approval for merger with Videocon d2h. The management expects the combined entity to derive synergy benefits of Rs 180 crore in the current fiscal and Rs 510 crore by FY19E. 

TV18 Broadcast has posted muted revenue growth during H1FY18. Its operating profit and PAT continued to be negative. However, its net loss has declined during the aforesaid period. PVR has reported mixed set of numbers for H1FY18. Its revenue has increased by 6 per cent and operating profit has increased marginally by 1 per cent, whereas its bottomline has registered a decline of 3.2 per cent. PVR is planning to add around 75 screens by FY18E, targeting to increase its total capacity to around 650 screens with focus on tier II and tier iii cities. 

We expect media and entertainment industry to grow at a healthy pace, supported by encouraging government initiatives like Make in India, Skill India and Digital India. Also, increasing digitisation and rising usage of internet over the last couple of years is expected to augur well for the industry. Furthermore, increasing spends on advertising is likely to lead to significant growth in the overall advertising revenue in the coming years. The rapidly growing demand for HD and easy availability of 4G data would further aid growth of the industry. As per IBEF, the Indian media and entertainment industry is expected to grow at ~13.9 per cent CAGR over FY16-21E. Also, TV advertising sector is likely to grow at ~11.1 per cent CAGR over FY16-21E. Overall, we see media and entertainment industry to remain on the growth path over the long term.

Plastics 

India’s plastics sector has evolved remarkably over the years. The sector employs over 4 million people and comprises over 85-90 per cent of the small and mediumsized enterprises. Being a significant exporter, the plastic sector exported goods worth USD 7.64 billion in FY16. The major importers of Indian plastic products include the US (USD 652.28 million), China (USD 480.8 million), UAE (USD 368.16 million), UK (USD 271.67 million) and Germany (USD 256.2 million), among other countries. 

The sector is likely to capitalise on the slowed Chinese economy and is expected to touch domestic consumption of 20 million metric tonnes by 2020. The plastic industry manufactures and exports a wide variety of raw materials, plastic-moulded extruded goods, polyester films, mould luggage items, writing instruments, plastic bags and medical ware, among other products. The manufacturing capacity, infrastructure and skilled manpower provides an edge to the Indian plastic sector in comparison with other countries. The Indian plastics sector incubates a large number of polymer producers, plastic process machinery and mould manufacturers. 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). The availability of these raw materials in the country enable the domestic manufacturers of plastics to be less reliant on imports for plastic production. 

We have analysed 17 companies from the plastics sector. On the financial front, the total gross sales of the top 17 plastic manufacturers in India increased 44.5 per cent on a year-onyear basis in H1FY18. Fiberweb (India) posted an extraordinary increase in its sales by 230.3 per cent on a year-on -year basis to Rs 116 crore in the first half of FY18. Kingfa Science & Technology posted a growth of 33 per cent in its sales, whereas, Shaily Engineering Plastics and Safari Industries recorded increase in sales by 19 per cent and 16 per cent, respectively. The EBITDA of the 17 companies also witnessed a rise of over 45 per cent to Rs 1,439 crore for the H1FY18 period, as against Rs 990 crore for the same period in the previous fiscal. 

The total net profit of the 17 companies increased by 22.17 per cent to Rs 573 crore for the H1FY18 period, as against Rs 469 crore for the same period in the previous fiscal. Fiberweb (India) recorded the highest increase of 215.3 per cent in its PAT to Rs 16 crore for the corresponding period. Following Fiberweb (India), Safari Industries and PPAP Automotive recorded 113.2 per cent and 71.4 per cent increase in PAT, respectively, for the H1FY18 period. Industry major Supreme Industries’ revenue increased by 7 per cent for the H1FY18 period on a yearly basis, however, the PAT of the company witnessed a decline of 9 per cent during the period. Other plastic majors including Astral Poly Technik and VIP Industries posted increase of 12.9 per cent and 31.2 per cent in their PAT for H1FY18. Among the top 17 plastic companies, Arrow Greentech, Plastibends India and Responsive Industries recorded a decline in PAT by 40.1 per cent, 50.4 per cent and 65.8 per cent, respectively. Among the top 17 companies, six companies recorded a drop in PAT in H1FY18, including Supreme Industries, Nilkamal, Responsive Industries, Mold-Tek Packaging, Plastibends India and Arrow Greentech. 

Due to the increasing consumption of plastic products, plastic manufacturers are bullish regarding the growth prospects of the sector for the coming quarters. The polymers segment, which already commands a market of Rs 1.2 lakh crore, is expected to record a growth of 10-12 per cent in FY18. The plastic processing industry, which has recorded a growth of 10 per cent CAGR in volume terms from 8.3 MMTPA in FY10 to 13.4 MMTPA in FY15, will further grow at a CAGR of 10.5 per cent from 13.4 MMTPA in FY15 to 22 MMTPA in FY20. In terms of value, the plastic processing industry has grown at 11 per cent CAGR from Rs 35,000 crore in FY05 to Rs 100,000 crore in FY15. The rapid developments in the plastic machinery sector along with the developments in the petrochemical sector will in turn boost the plastic processing sector, facilitating the plastic processing sector to service both domestic as well as the overseas markets. 

The growth momentum in the Indian plastic industry will further increase with the growth in major sectors, including automotive, construction, electronics, healthcare, textiles, and FMCG. Agriculture, infrastructure and packaging industries are expected to be the key growth drivers for the sector. Introduction of advanced agriculture technology, strengthening distribution channels, and refrigerated storage in the agriculture industry will spur the demand for plastic products in the near term. The government’s increased focus on infrastructure and increase in building and construction activities with initiatives including AMRUT, Swachh Bharat Mission and Housing For All by 2022 will further increase the domestic demand for plastic products. As a result, the Indian plastic pipe market will see a stark rise in demand, resulting in a growth of 10.4 per cent CAGR till 2021. However, the packaging industry is expected to effectively drive domestic demand for plastic products, especially with the innovative developments in the flexible packaging and food packaging arena. Meanwhile, with widespread environmental awareness, the sector will be growing towards tapping markets for plasticulture, key end-use industries and bio-plastics in India.

Packaging 

The Indian packaging industry constitutes about 4 per cent of the global packaging industry. Post-GST implementation, the rising demand for logistics led the packaging industry to a sweet spot of growth. Indian packaging industry consists both organised medium to large players as well small players. The industry is all set to revive in coming years with the rising demand in its consumer industries such as FMCG, pharma, etc. 

The recently concluded September quarter (Q2FY18) suggests an increase in the domestic demand for packaging in the near future. This will be largely driven by the growth in the retail and foods and beverages sectors. In addition to this, the development of lighter packaging with better barrier properties and adaption of sustainable packaging technologies are expected to curtail the costs of materials, thereby nurturing the revenues and profitability. 

If we look at the trends in the packaging industry, it seems to be driven by innovation, which is expected to lead the industry growth. Indian packaging industry has developed various advanced packaging methodologies, such as active packaging, intelligent packaging which enhances the shelf life and safety of the packaged product. Also, flexible packaging and sustainable packaging have been evolutionary innovations for the Industry. 

The changing product formats are playing a key role in innovations in product extensions in the packaging industry. If we look at the recent product extensions in the consumer industries, we can observe that variations in product features like availability in solid and liquid formats are leading to new innovative launches of different types of packs in India. For example, detergents used for laundry purpose have become available in flexible packaging, folding cartons, as well as liquid detergents have led to packaging in plastic bottles. Similarly, the trend can be seen in the products like air fresheners which are available in metal cans, plastic bottles and strip packs. 

Going ahead, despite growing disposable incomes, consumers will seek value for money and are expected to remain price conscious. Owing to this, light-weight packs, which are cheaper to transport and produce, are going to be preferred, which will provide cost-savings that can be further passed on to end-users. In addition to this, with the changing distribution pattern,s we expect the demand for light-weight packaging will also increase in the near future

With the flexibility and low cost to match multiple sizes and shapes as compared to rigid plastics, flexible packaging has seen traction in the first half of FY18. Going ahead, we see improvement in the market size and revenues from flexible packaging in the near future, driven by increasing demand from household care and cosmetics. Also, with the increasing demand and consumption of cold drinks and soft drinks, coupled with canned foods and beverages, we expect rigid packaging to grow at a steady pace in the coming years. 

Further, the government initiatives such as 100% FDI and commencement of logistic parks augur well for the industry.

To evaluate the financial performance of the sector, we have considered top ten players as per market capitalisation. At the aggregate level, packaging industry has performed well on the sales front with 8% YoY increase during H1FY18. Along with this, PAT for H1FY18 rose by 15.6% YoY. 

During the H1FY18, Oricorn Enterprises performed well among the sector players. The company witnessed significant PAT growth during the quarter, i.e. 237% YoY. Mankasia Industries and Time Technoplast has reported sales growth of 29% YoY and 10% YoY, respectively. Also, Cosmo Films, one of the leading packaging film manufacturers, reported a sales growth of 17% YoY. Overall, post-GST implementation, all the packaging companies have witnessed sales growth at a steady pace. Going ahead, integrated warehousing and increasing size of fleets and increasing logistics are expected to aid topline of packaging companies. 

In the coming years, we expect packaging sector to perform well due to increasing awareness about food safety, as well as increasing demand for sustainable packaging to increase the life of packaged foods to reduce wastage. Further, in order to reduce the production cost, the end-user industries have started using flexible packaging which is expected to grow at healthy pace. Also, boom in e-commerce industry will directly aid growth in packaging due to the standardisation of packaging. 

With the increasing capex to cater to the increasing demand from the end-user industries, the PAT level during the quarter remained capped. However, top players like Time Technoplast and Uflex have managed to report PAT growth. In the coming years, Indian packaging sector is expected to register 18% annual growth rate, where the flexible packaging and rigid packaging are expected to grow at 25% and 15%, respectively. 

Personal Care 

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 over 20 per cent share in FMCG industry. The Indian personal care ingredients market is currently estimated at US $350 million. The home and personal care industries are reaping the benefits of India's demographic dividend. The number of people in the middle class with considerable disposable incomes creates a significant opportunity for the personal care sector. Increasing urbanisation will further drive markets, as will the untapped potential of rural markets. This will be aided by the steady entry of modern retail formats. Also, regulatory trends and customer preferences are adding a new dimension to the many challenges, compelling companies to reformulate and ensure use of safe and 'green' ingredients. The industry typically uses specialty chemicals such as surfactants, fragrance compounds, polymeric compounds and UV filters as active ingredients. Growing demand is leading to the development of high end specialty active ingredients, with a stronger emphasis on organic (natural) ingredients. The herbal cosmetics industry is also driving growth in this segment in India. The Indian cosmetics industry has a plethora of herbal cosmetic brands like Forest Essentials, Biotique, Himalaya, Blossom Kochhar, VLCC, Dabur, Lotus and many more. 

To understand the trend and performance of the personal care sector, we analysed financial data of 11 companies. The sector’s topline increased marginally by 2.68 per cent to Rs 32,736 crore in H1FY18 as compared to Rs 31,880 crore during the same period last year. The industry’s EBITDA rose 7.01 per cent to Rs 6,805 crore in H1FY18 on a yearly basis. Its net profit soared over 8 per cent to Rs 4,351 crore in H1FY18, as compared to the same period last financial year. This was due to JHS Svendgaard Laboratories Ltd, which reported 1153 per cent increase in profit. Also, Godrej Industries Ltd. and Zydus Wellness Ltd reported PAT growth of 54.3 per cent and 13.1 per cent, respectively, during the period under consideration. The industry witnessed an average EPS de-growth of 17.01 per cent to Rs 5.2 in H1FY18 as compared to Rs 6.2 in H1FY17. 

Growth Drivers: 

The Indian economy is on a high growth path, which means that consumption power and the willingness to spend are on the rise. The growth drivers of the industry include: 

1) Growing population: The industry is directly aligned with the population base. With the average age at 25 years, India is amongst the world’s youngest countries, as compared to the average age of 43 years in Japan and 36 years in the US. In addition, India’s population base of 1.25 billion is estimated to grow to 1.5 billion by 2030. The growing trend of urbanisation will also rise by 45 per cent in the next 30 years.

2) Growing per capita Income: The middle class in India is projected to reach 583 million by the year 2025. Simultaneously, the per capita income of India is anticipated to rise by about 18 times by 2039, while disposable incomes of the households is estimated to grow three times by 2025, according to the Emerging Market Forum. 

3) Rising consumer spending patterns: According to Boston Consulting group, consumer expenditure in emerging cities and metropolises is rising by about 14 per cent and 12 per cent, respectively, due to growing affluence and changing lifestyles. 

4) Evolving product mixes: The companies in the segment are constantly strengthening their portfolios by adding variants to existing categories. To suit consumption across different levels of purchasing power, FMCG companies are coming out with variety of products in different price ranges. 

5) Rising e-commerce: According to Google, the Indian e-commerce market will be worth $ 120 million by 2020. Companies like Flipkart, Amazon and Snapdeal are creating an ideal platform for the companies in the segment to boost sales and revenues. 

6) Government policies: The roll-out of GST could level the playing ground for the organised players by reducing costs due to cascading effect of indirect taxes. This is expected to drive sales as the consumers will be benefited. Moreover, the green signal for 51 per cent FDI in multi-brand retail and 100 per cent FDI in single brand retail is also expected to drive consumption. 

According to the Associated Chambers of Commerce and Industry of India (ASSOCHAM), one of the apex trade associations in India, the market size of India's beauty, cosmetic and grooming market will reach $ 20 billion by 2025 from the current $ 6.5 billion (approx) on the back of rising disposable income of the middle class and growing aspirations of people to look good and live a good life. 

The rural population too is joining the mainstream with improvement in connectivity with the cities by roads, telecommunication and the firms reaching out to the people in villages and small towns. These trends are anticipated to boost the personal care market in India and raise the consumption of personal care products and services, thereby offering extensive opportunities for domestic and international players.

Petroleum 

India is the world’s fourth largest energy consumer, of which oil and gas account for 35.61% of total energy consumption in India. The demand for primary energy in India is expected to increase three-fold by 2035 to 1,516 million tonnes of oil. Indian Oil is going to invest Rs 1.8 trillion over the next five to seven years to expand its refining capacity. The government expects to get investments worth USD 40 billion in India’s oil exploration and production sector over the next four to five years. 

Production of crude oil has dipped due to poor performance of fields under Production Sharing Contracts (PSC). Indian crude oil basket has been rising on account of rising oil prices globally as well. For the coming months, Care Ratings believes that there will not be much of a pick-up in production of domestic crude oil and, thus, it is expected that the prices of crude oil would be in the range of $55-$57/barrel till FY18 due to production cut by OPEC countries and Russia. However, there is no imminent danger to demand for oil and the demand is forecasted to grow at least until 2040. 

The domestic production of natural gas seems to have commenced on a positive note for the current financial year as there has been a 5% rise from the domestic production, compared to the corresponding period last year. The reason for the increase in production could be attributed to the favourable policies aimed at enhancing domestic exploration and production of oil and natural gas as also to reduce import dependency by 10% by 2022. India is also moving towards shifting to a gas-based economy. Care Ratings has estimated the overall gas production for FY18 at 32.6 BCM. So far, till H1FY18, the production has been 16 BCM and prices for H2FY18 have already been determined at $2.89/MMbtu on a GCV basis. 

In our analysis, we have considered 18 companies in the oil and gas sector, ranked as per their market capitalisation. The performance of almost all companies has been better in Q1FY18 as compared to H1FY17. Alphageo has performed exceptionally well, with growth of 133.4% in revenue on a YoY basis. Its EBITDA and PAT has grown by 151.5% and 182.4% respectively in H1FY18. Confidence Petroleum and Bharat Petroleum Corporation’s topline grew 27.5% and 20.5%, respectively. However, Jindal Drilling & Industries' revenue declined by 60.8% YoY. Hindustan Oil Exploration’s EBITDA has grown by 76.2% although its revenue has increased marginally. Also, Confidence Petroleum’s PAT has posted exceptional growth of 322.4% YoY. 

Robust expansion plans have been drawn up by the government, which would be implemented by the companies in the near term. The government-run energy companies Bharat Petroleum, Hindustan Petroleum and Indian Oil Corp plan to spend US$ 20 billion on refinery expansions by 2022. Oil companies are focusing on vertical integration for the next stage of growth. For instance, oil producer Oil India Ltd is planning to build and operate refineries, while Indian Oil is planning to enter oil and gas exploration. 

India has large coal, crude oil and natural gas reserves. Thus, abundant raw material with increasing demand for natural gas, massive gas pipeline network, favourable policies, huge investments are some of the growth drivers for the oil and gas sector. 

On an overall basis, the outlook of oil and gas industry seems to be stable and positive. As per Moody's, the E&P business is likely to grow by more than 10% in 2018, while the earnings in drilling and oil field services will rise by 10-12%. Moody’s expects the midstream segment to grow by 8-10% and the refining and marketing sector to grow by 5-7% in 2018.

PHARMA & HEALTHCARE 

Indian pharmaceutical industry is known for its generic drug manufacturing and large market. It generates approximately 70% of its revenues from the generic drugs and ~50% of its revenues from exports. Indian pharmaceutical industry holds a unique position by contributing 10% of the world's production volumes. In value terms, Indian pharma industry holds share of 2.4% globally. After facing various regulatory issues and pricing pressures in FY17, the pharma sector is all set to provide relief to its investors with robust growth going forward.

With channel restocking post-GST, we expect an increase in domestic market demand and export volumes to the North American and South African markets. With this, we expect robust growth in profits and revenues. Indian pharma industry was worth USD 16.4 billion in FY17 and is expected to reach USD 20 billion by FY20.

With increasing availability and affordability of healthcare facilities, we expect domestic market to see a steady growth in the coming years. Also, increasing per capita income, increasing presence of chronic diseases and growing penetration of health insurance bode well for the domestic market.

With the implementation of the GST, the logistics cost is expected to decline. Also, with the removal of inter-state taxes, the warehousing cost for the companies is also reducing. Post-GST implementation, most of the medicines are covered under the tax rate category of 12%, whereas essential drugs including insulin come under the rate category of 5%.

Indian pharma companies are associating with the overseas players to sustain in a competitive environment with immense pricing pressures. Glaxosmithkline's association for the HiB vaccine with Bio-mangunihos in Brazil., Sun Pharma's integration with Ranbaxy to derive opportunities and synergies through partnership and Cipla's alliance with Serum Institute to sell vaccines in South Africa are the best examples of the recent M&A activities.

Going ahead, major players of the pharma industry are increasing their R&D efforts to increase their sustainability in a competitive market. Also, initiatives by the Indian government such as Pharma Vision 2020, reduction in approval time for facilities and drug price control orders from NPPA (National Pharmaceutical Pricing Authority) are expected to boost investment as well as make medicines affordable in the near future.

Further, with the relaxation in FDI norms and permission for 100% FDI, the industry is attracting more investments from foreign investors. Moreover, under EPCG (Export Promotion Capital Goods) Scheme, the government is offering zero duty TUF loan to pharma companies. Additionally, it is exempting excise duty and customs duty fully for HIV/AIDS drugs and kits under NACP (National Aids Control programme).

We have analysed about 59 major players on the basis of market capitalisation from pharmaceutical sector. With the GST restocking, the pharmaceutical industry has managed to post sales growth of 3.3 percent on an aggregate level in H1FY18 as compared to H1FY17. The pharma sector's EBITDA increased by 8 per cent in H1FY18 as compared to H1FY17 with the reduction in logistics cost and other operational expenses. The net profit increased by 94 per cent in H1FY18 as compared to H1FY17. which was largely driven by companies such as AstraZeneca Pharma India, Claris Lifesciences, Marksans Pharma, Medicamen Biotech, etc. These companies have reported exceptional growth in their PAT.

During H1FY18 Marksans Pharma, IOL Chemicals and Pharmaceuticals, AstraZeneca Pharma India, Medicamen Biotech, Bliss GVS Pharma, Caplin Point Laboratories, Healthcare Global Enterprises, Natco Pharma remained the industry performers with sales growth of 32%, 29%, 5%, 34%, 46%, 41%, 18%,6% respectively. These companies have reported exceptional growth in their PAT, with growth of 1508% ,333%, 192%, 127%, 123%, 86%, 60% and 56% respectively.

With restocking post-GST implementation, reducing costs and increasing domestic demand, the pharma sector is expected to shine in the coming years.

POWER 

India is the third largest producer and fourth largest consumer of electricity in the world, with its installed power capacity reaching 331,117.58 GW by October 2017. The country also has the fifth largest installed capacity in the world. In June 2017, the government had announced intentions to set up an asset reconstruction company for handling the stressed assets in power sector.

Electricity generation during H1FY18 stood at 611.2 BU, clocking a growth of 4.6% over the previous year. In terms of capacity addition, 4.6GW of new capacity was added in comparison to 3.9GW of capacity added in H1FY17. Thermal capacity addition stood at 4.3GW during H1FY18. All India installed capacity grew by 7.5% to 329.3 GW as on Sept. 30, 2017, compared to 306.3 GW as on Sept 30, 2016. All India PLF for thermal plants has improved marginally at 59.8% during H1FY18, which stood at 58.8% in H1FY17.

We have analysed top 26 companies by market capitalisation in the power sector. The performance of these companies in H1FY18 has been mixed. Jaiprakash Power Ventures, PTC India and GE T&D recorded growth in revenues of 28%, 26% and 23%, respectively, on a YoY basis, while the revenues of Transformers and Rectifiers and GVK Power & Infrastructure de-grew by 31.5% and 26.3%, respectively, in H1FY18 on a YoY basis. The EBITDA of certain companies such as NLC India, Jaiprakash Power Ventures and Torrent Power have grown by 43.8%, 39.9% and 38.1%, respectively, although the growth in their revenues has not been so strong. While the growth in PAT of Torrent Power and KEC International's has been exceptionally strong at 181% and 58.8%, respectively, in H1FY18 on a YoY basis, Transformers & Rectifiers' PAT declined by 97.7% YoY in H1FY18.

Going forward, the implementation of SAUBHAGYA scheme would contribute to growth in demand for electricity in the next 12 months. The issue of disruption in power generation due to coal shortages is expected to be addressed during H2FY18. While at an all India level, the demand for power is estimated to remain tepid at ~6% over FY18-22 owing to reduction in electricity intensity in the GDP, rising efficiency and reducing technical losses. India's power demand is expected to increase up to 1,905 TWh by FY22.

The impact of GST will be positive for the power sector as it will enjoy reduction in indirect taxes — from about 30% to 18%. Recently, India has announced a major initiative to achieve an all-electric vehicle (EV) regime by 2030. Towards this, the GST rate of 12% for EVs compared with 28% for diesel and petrol vehicles and hybrids is a significant step.

Recently, the rating agencies Moody's Investors Service and ICRA stated that the outlook for power sector is stable for the upcoming 12-18 months. India will witness change in energy mix and would have focus on renewables on the back of climate change and prevention of pollution and safeguarding the environment. India's greater funding diversity will help the power companies to expand capacities and add renewable capacities, although corporate-type debt funding will remain dominant for power companies. While the medium to long-term outlook for renewable energy is positive, in the near-term, capacity additions in the wind energy sector will likely be adversely affected due to the transition in the tariff regime to a bid-based from a feed-in-based framework.

Power sector companies have come out with IPOs since last 7-8 years to raise money for business. From FY10 up to the end of H1FY18, around 14 companies have issued IPOs to raise about Rs 43,921 crore. Power sector tops the list in terms of amount raised though IPOs from FY10 till date. This depicts the rate at which the power sector is developing. Electrification in India is the next huge project for which the government and the companies are striving hard.

We expect to see revival in demand for the power sector in 2018 on the back of various government initiatives. Focus on the infrastructure and construction sector and the growing need of household and commercial electrification, demand for power is bound to rise going forward. Renewables will also prove to be the efficient source and will be the fastest growing energy source in India.

TEXTILE 

One of the oldest and the most potent Indian industries, the Indian textile industry is the largest contributor to India's exports, with a share of 13 per cent in the total Indian exports. The industry provides employment to about 45 million people directly and 20 million people indirectly. Providing a plethora of products, the industry constitutes hand-spun and hand-woven textiles as well. The decentralised powerloom industry and knitting industry have grown to be the most integral part of Indian textiles sector, while the deep-rooted connection of Indian textiles to agriculture, ancient culture and tradition sets the sector apart from the textile sector in other countries.

The textile sector, estimated to be around USD 120 billion at present, is expected to grow up to USD 230 billion by 2020. The sector contributes 2 per cent to the country gross domestic product, 10 per cent to manufacturing production and 14 per cent to the overall index of Industrial Production (IIP). The sector has witnessed significant growth in FY17 with the Indian Khadi products sales rising by 33 per cent on a yearly basis to USD 311.31 million by 2016-17. The Khadi products sale is further expected to increase to USD 776.33 million by FY19, according to the Khadi and Village Industries Commission.

We have analysed 46 companies in the textile sector. On the financial front, while the performance of the sector has experienced a setback in H1FY18 with over 15 per cent decline in the total profit after tax of the 46 companies on a yearly basis, textile giants such as SVP Global Ventures, Raymond and Welspun India have recorded an increase of 608.4 per cent, 412.5 per cent and 321.1 per cent in their PAT, respectively. The total sales of the 46 companies recorded a growth of 4.2 per cent on a yearly basis to Rs 44,896 crore in H1FY18. Gujarat-based Arvind Limited posted highest sales at Rs 5,103 crore during the H1FY18 period, whereas Alok Industries, Welspun India, Vardhman Textiles, Raymond, SRF, Trident and JBF were the top textile companies in terms of sales. Meanwhile, Vishal Fabrics recorded the highest growth in sales, with a surge of 177.1 per cent in H1FY18.

The export of lifestyle products, including textiles which constitute a significant part of the total Indian exports, have witnessed a compound annual growth of 10 per cent from 2013 to 2016. The government is further eyeing exports of textiles and garments worth USD 45 billion for 2017-18. The sector has recorded a high influx of investments in the last five years. Among major developments, Future Group will be expanding its reach with 80 new stores under Fashion at Big Bazar in 2018 along with a sales target of 230 million units. Textile major Raymond, in partnership with Khadi and Village Industries Commission, will be entering the Khadi market with Khadimade readymade garments and fabric in KVIC and Raymond stores across the country.

While the GST implementation has adversely impacted businesses for a number of textile firms, the government's allocation of funds worth USD 36.6 billion to the Mudra Bank, and an allocation of USD 330 million for skill upgradation in the sector under the Union budget 2017-18 will provide the much needed boost to the sector. In the year 2018, as the economy leaves behind the disruptive effect of demonetisation and GST implementation, the sector will experience a higher growth in demand. The apparel market in India is estimated to grow at 11.8 per cent CAGR to reach USD 180 billion by 2025.

SERVICE 

The services sector contributes significantly to India's GDP growth and, thereby, it is a key driver of the country's economy. The sector majorly contributes to India's export income and enables large-scale employment in the country. The sector has contributed about 62 per cent to the country's gross value-added growth in 2016-17, whereas, despite demonetisation and GST implementation, the services sector recorded a growth of 7.7 per cent in 2016-17. The sector had witnessed a growth of 9.7 per cent in 2015-16. The sector includes a wide variety of activities, including trade, hospitality, transport, logistics and warehousing, communication, finance and real estate, among others.

In recent times, the services sector has recorded moderate growth. This moderation is largely brought about by a deceleration in the growth at 7.8 per cent in trade, hospitality, transport, communication and broadcasting services segments of the sector and a slowdown in the growth rate at 5.7 per cent in the financial, real estate and professional services segments of the sector. The disruptions in the economy has also dampened the FDI inflow in the sector in 2016-17, with declining FDI equity inflows in the sector. The sector had recorded a significant growth in FDI equity inflows till FY16. However, the share of services sector in the total gross capital formation at the current prices has been constantly rising, growing from 53.3 per cent in FY12 to 60.3 per cent in FY16. Furthermore, with the benefits of GST implementation accruing, the sector is likely to begin its surge again.

In 2016-17, the sector recorded a positive growth of 5.7 per cent in exports, with growth in important sectors such as transportation, business services, financial services and travel. However, exports in software services, accounting for nearly 45.2 per cent of total services, witnessed a marginal drop of 0.7 per cent during the corresponding year. Despite a subdued overall performance of the services sector in 2016-17, the improvement in performance of telecom segment with the entry of Reliance Jio, rise in domestic travel giving an impetus to the aviation segment, increase in tourism resulting in higher inflow of foreign exchange earnings and improvement in information technology business process management has kept the sector on top.

The government's initiatives to spur tourism with e-visa facility for the citizens of 161 countries, promotion of India as a 365-day destination, the launch of multilingual tourist infoline and Swachh Paryatan mobile app is likely to increase tourism and foreign exchange inflow in the coming fiscal. The improvement in healthcare sector and medical tourism will also contribute to increased foreign exchange earnings through tourism, which grew by 8.8 per cent in 2016. Even as the reforms in the US laws have dampened the growth in the IT sector, the export growth in the segment is projected at 7-8 per cent for FY18. The Indian healthcare IT industry which has been an important driver of growth for the services sector, is likely to grow 1.5 times by 2020, wchemhereas its domestic revenue may chart a growth of 10-11 per cent in 2017-18.

The financial services segment has grown at a rapid pace with capital markets, insurance sector and non-banking finance companies growing manifold in the past one year. The mutual fund schemes recorded a growth in total inflows of 44 per cent on a year-on-year basis, with investments in systematic investment plan (SIPs) reaching a fresh high of USD 711.17 million in May 2017. The increased digitisation, mobile penetration and evolving consumer behaviour in the financial markets will give further boost to the financial services segment.

The retail and e-commerce sector, which is expected to grow to USD 1 trillion by 2020, is also likely to create greater opportunities for the services sector. The logistics industry, with extended benefits from GST, is also expected to chart a complimentary growth trend in tDue to rapidly increasing demands, the electronics and electrical Industry is experiencing a high growth rate in APAC countries he coming period. The GST will provide a reduction in the logistics cost and boost the organised logistics industry in the next 3-4 years. The education services sector, which is presently valued at USD 100 billion, is expected to grow five times by 2047. The tertiary age population in the country will be the driving force for the industry which is already witnessing consistent growth. The services sector is rapidly evolving with the addition of new avenues and constant evolution in artificial and new age technologies. Despite the setback in the short term, the sector is set to lead the economy with its usual vigour.