Market outlook:

Market at crossroads February 15, 2016

Market outlook:On the one hand, macroeconomic variables like current account deficit,inflation and a benign interest rate environment augur well for an economicupturn. However, at the same time, a fall in global commodities has made itextremely difficult to gauge the earnings trajectory of BSE Sensex ascommodity dependent sectors like metals (2.9% weight) and oil & gas(10.4% weight) will see huge volatility in reported earnings for next fewquarters (until commodity prices stabilise) thereby making it extremely

CY 2016 started with sharp decline across the asset classes, reminiscent of2011/ 2008 to many. The current decline has strong linkages to the enginefor global growth – “China”. As china started to slow down the weaknesspercolated to commodities and other asset classes. Hardest hit were thecommodity exporting countries, which saw sharp decline in their equity andcurrency markets as well. Many of these commodity exporting countrieslike middle-east, which were dependent on commodity revenues. With the quarters (until commodity prices stabilise), thereby making it extremely

challenging to fathom earnings.

From a sectoral perspective, financials space (26.9% weight in index) will beplagued with recognition of NPAs and increased provisioning which willmake predictability of earnings a difficult task, going ahead. Same is ourstance on sectors like Metals and Oil & gas where earnings visibility is stillhazy. Hence, a 19.7% YoY rise in Sensex EPS over FY17E should be read asan caveat as this can be further upgraded/downgraded based on movement

like middle east, which were dependent on commodity revenues. With thedecline in the commodity prices the fiscal imbalances grew and thesecountries adopted fire-fighting mode. Specifically the oil rich commodityexporting countries who had amassed the oil wealth in form of SWF(Sovereign wealth Fund) started to liquidate their holdings (case in point isAbu Dhabi Investment company).

The risk which was initially confined to commodities space started to spillt i iti d tl l b i ti th dit an caveat as this can be further upgraded/downgraded based on movement

of commodity and pace of economic recovery in FY17E.

However, on the positive/neutral side, sectors like Auto. Consumer, CapitalGoods, Cement, IT, FMCG are expected to deliver stable growth withrelatively lower chances of downgrades in the current economic milieu.

While, the government revised its FY16 fiscal deficit target to 3.9% vs. 3.6%pre-planned earlier, we expect the government to re-visit its target of FY17

over to currencies, equities and recently was also been impacting the creditmarkets as gauged by financial conditions and high yield bond market. Theworsening condition is visible in rising credit default swap of countries likeBrazil and companies like Deutsche Bank. As a result the there is flight tosafety and safe heavens like developed market sovereign bonds (even whenthere is negative yield) and gold.

This prevailing risk-off sentiment has dampened the Hawkish Fed, whoseon similar lines, given the low headroom for non-tax revenue growth likedisinvestments, spectrum auctions coupled with additional burden of|73650 crore (w.r.t. 7th Pay commission). This in turn may impactborrowing costs and affect debt servicing burden of private sector as well.

Considering the government is already walking on a tight rope, it still needsto be seen whether it will rely more on asset sales, spectrum auctions,internal savings, reforms etc to bridge the budget shortfall or pursue a tight

p g p ,dot plot was suggesting four rate hikes during the year. There is now astriking disconnect with Fed’s four rate hike expectations. Infact as themarket implied rate, the probability on rate hike even in December 2016 ispushed lower to 29%. Hence market is factoring just one rate hike at best.The same is getting captured in the bond yields (the Yield on US 10-yr hassharply moved lower to 1.7%) and Dollar index (has declined from 99 to 96levels). This suggests the chances of multiple rate hikes during 2016 has g , g g p g

fiscal policy that could impact growth adversely

In such an scenario, one needs to be careful and not get tempted to catch afalling knife given many chips have corrected sharply over the last few days.We believe volatility will keep rattling risky assets for the next few months asmore of global news flows with respect to FED’s direction of interest rateson one hand, events in Chinese economy, movement of emerging marketcurrencies and stability/recovery in global commodities come by. Till then

reduced substantially, which bodes well for the emerging market assetclass.

Going ahead if the proactive central banks are able to control cross assetvolatility then the current contagion might halt. However with many ofcentral banks trying their hand on Negative interest rates, a new andunexplored era has been started by central Banks.

currencies and stability/recovery in global commodities come by. Till thenone can take advantage of volatility and start nibbling but not go outaggressively make commitments.

1

Deal Team – At Your ServiceIndia marred by global sell-off…

Chinese economy (contributing ~33% to incremental world GDP growth rate) BRICS currencies react to this weakness by depreciating sharplyChinese economy (contributing ~33% to incremental world GDP growth rate)embraces itself for lowest GDP growth in last two decades…

BRICS currencies react to this weakness by depreciating sharply…

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Chinese Yuan Indian Rupee Russian Ruble S A Rand Brazilian Real

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Chinese slowdown, dollar strength lead to plunge in key commodity prices… Equity market, in particular, witnesses sharp correction since start of 2016…Developed markets see average decline of 15% already, while in Emerging Markets (BRICS), China witnesses sharp decline (down ~23% on YTD’16 basis)

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Source: Bloomberg, ICICIdirect.com Research

Deal Team – At Your ServiceSovereign Wealth funds (SWF)…fiscal imbalances leading to some exits!

Out of the total professionally managed assets globally sovereign wealth Against usual trend of increase in investment in India QoQ by these SWFs inOut of the total professionally managed assets globally, sovereign wealthfunds (SWF) comprise a prominent 9.5% share. With 56% of the SWF originlinked to oil-based economies, any change in their investment pattern can havewide implications. It has been observed that on the back of subdued crude oilprices globally and fiscal imbalances in the domestic economy the oil basedSWF’s have started exiting some of their positions in the equity marketsglobally with India being no exception.Drop in crude price; muted fiscal situation in oil originates in SWF’s economy

Against usual trend of increase in investment in India QoQ by these SWFs inthe past, it is being observed, that some of these SWFs actually started makingsome exits. Major exits have been undertaken by Abu Dhabi InvestmentAuthority (UAE). A major exit was witnessed in the large cap space i.e.Reliance Industries to the tune of ~| 2600 crore. Summary of SWF fund flowactivity in Sep-Dec’15 quarter, as per new data accessible till date showsoutflow from SWF of Abu Dhabi & inflows from SWFs of Norway & Singapore

Drop in crude price; muted fiscal situation in oil originates in SWF s economyA sharp decline in crude oil prices has strained the fiscal situation in oil-basedeconomies globally. Hence, oil producers are now reporting budgetary fiscaldeficits. The fiscal break-even crude price and current fiscal deficits of major oilproducing countries are as follows:

CountryFiscal break-even crude

price ($/barrel)Fiscal deficit (% of

GDP)Oil production (million

barrels/day)

Key macroeconomic variables of oil producing countries

239

-2572

1233

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ore

Top current holdingsTop current holding of the two most important oil originated SWFs in Indiasusceptible to a sell-off in case SWFs wind up their positions from India are:

Country price ($/barrel) GDP) barrels/day)Kuwait 46.7 1.2 2.8Qatar 62.1 4.5 0.7UAE 68.9 -5.5 3.0Iraq 75.3 -23.1 3.7Iran 98.0 -2.9 3.3Saudi Arabia 98.3 -21.6 10.1Algeria 110 2 13 9 1 2 S No Company Investment Value (| crore) Mcap (| crore) Holding (%)

Abu Dhabi Investment Authority – SWF UAE

-3000Norway Abu Dhabi Singapore

SWFs’ (oil originating) investments in Indian equity marketsGovernment Pension fund (Norway), Abu Dhabi Investment Authority (UAE) &Kuwait Investment Authority (Kuwait) are active investors in Indian equitymarkets. Their investments in India have increased 63% in last seven quartersto | 34509 crore as of September 2015 vs. | 21222 crore as of December 2013.

Algeria 110.2 -13.9 1.2Libya 142.2 -79.1 0.4

Government pension fund global – SWF Norway

S.No Company Investment Value (| crore) Mcap (| crore) Holding (%)1 Infosys 6521 266000 2.52 Reliance Industries 3277 290000 1.13 HDFC 2539 191000 1.34 L&T 1367 135000 1.05 Dr Reddy's 1355 71000 1.9

Based on >1% Shareholding disclosed to Stock Exchanges on Quarterly Basis

SWF Units Dec'13 Mar'14 June'14 Sept'14 Dec'14 Mar'15 June'15 Sept'15SWF- Norway | crore 8087 9451 11418 10287 12089 12932 13552 12934SWF-Kuwait | crore 0 0 108 152 159 517 278 301SWF - Abu Dhabi | crore 13135 12760 12546 13786 14670 16617 18233 21274Total Investments | crore 21222 22211 24072 24225 26918 30066 32063 34509

SWF's investments in India S.No Company Investment Value (| crore) Mcap (| crore) Holding (%)1 Axis Bank 1641 118000 1.42 Bajaj Auto 1022 67000 1.53 Tech Mahindra 843 54000 1.64 Ashok Leyland 605 26000 2.35 Hero MotoCorp 528 48000 1.1

p g y

3

Source: IMF, Capitaline, ICICIdirect.com Research

Deal Team – At Your ServiceCredit default swap of commodity centric countries/companies exploding …

CDS is essentially a default protection (like a Put option) against the possible The latest victim of the commodity rout is financials. As shown in first chartCDS is essentially a default protection (like a Put option) against the possibledefault by issuer (corporate or sovereign) in return for a small premium. This isgood gauge to check credit worthiness. In the trailing two months, the CDS ofcommodity centric companies/countries have shot up drastically. The risk hasspread to companies like financials (e.g. Deutsche Bank) and countries (e.g.Brazil and South Africa), which have high component of commodity exposure.

Commodity exporters: Brazil, South Africa, Malaysia see sharp CDS surge

The latest victim of the commodity rout is financials. As shown in first chartbelow, financial conditions index (that encapsulates money, bond, equitymarkets) is suggesting worsening of financial conditions. Current reading of -1is one of the worst since August & May 2015. In the second chart, the highyield bond market (that has major exposure to commodity, energy companies)is collapsing sharply, suggesting growing stress in these companies.

US financial conditions: Deteriorating at rapid pace, worst since 2012

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Societe Generale Credit Suisse Deutsche Bank* The above is the price of High yield bonds Their Yields have moved up sharply

4

Source: Bloomberg ICICIdirect.com Research

* The above is the price of High yield bonds. Their Yields have moved up sharply

Deal Team – At Your ServiceUS Fed rate hike expectations receding fast…key trigger for reversal

With the US Fed lifting rates for the first time in a decade it is very important Bond market already factoring in falling chances of rate hikeWith the US Fed lifting rates for the first time in a decade, it is very importantto see what the Fed path of further rate hike will be, especially keeping in mindthe negative interest rate policy of ECB, BoJ, SNB to help revive the economy.Interestingly, the US Fed voting member’s projection (December 2015meeting dot plot) for 2016 year end rates is at 1.44% while the market isfactoring in a rate of no more than one (one rate hike odds are alsodiminishing sharply as suggested by market implied probability that is at 10%for December especially post dovish statement from US Fed Chair on Feb 11.

Bond market already factoring in falling chances of rate hikeUS 10 year heading lower on account of lower rate hike expectations

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p y pFed fund rate: Growing disconnect between Fed vs. market expectations...

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The yield spread between sub investment grade (Baa) and US 10 year G-Secyield is at highest level since 2009, suggesting growing credit risk..

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29 13 27 10 24 8 22 5 19 2

Deal Team – At Your ServiceFlight to safety…Developed market sovereign debt and gold seeing buying …

Developed market sovereign bonds seeing risk aversion money flow even with Developed market sovereign bonds falling into quicksand of negative yields atDeveloped market sovereign bonds seeing risk aversion money flow even withlow, negative yields ..Risk-off sentiment that started with commodity sell-off has spilled over to thehigh yield bond market and financials. As a result, banks/investors are noweyeing the US$23 trillion sovereign bond market, which offers principalprotection (even when in some cases bonds are negative yielding.Countries commanding 90% weight in US$23 trillion Sovereign bond index

Developed market sovereign bonds falling into quicksand of negative yields atexponential pace

.

Sovereign Weight 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10YJapan 29.7%Sweden 0.3%Switzerland 0.4%Belgium 1 8%

Developed Market Bond yields across maturities ...

ITALY7%

JAPAN30%

FRANCE7%

GERMANY5%

SPAIN4%

Belgium 1.8%Germany 5.1%Netherlands 1.6%France 6.8%Austria 1.1%Finland 0.4%Denmark 0.4%United states 29.3%U it d ki d 7 8%

UNITED STATES30%

UNITED KINGDOM

8%

United kingdom 7.8%Italy 6.6%Spain 3.8%Canada 1.4%Australia 1.2%Ireland 0.6%Portugal 0.5%Singapore 0.3%

With the risk-off sentiment picking up pace, more and more participants are lapping up these bonds and pushing yields lower (negative in some cases)

Value of negative yielding bonds has increased tenfold since 2015to US$7 trillion

New zealand 0.2%Norway 0.2%Slovakia 0.2%Greece 0.1%Hong kong 0.1%Slovenia 0.1%Luxembourg 0.0%

Gold surges from 1060 to 1200 on demand for safer assets…After making the lows below 1050, safe haven gold has witnessed a sharp upmove towards $1200 in the current year itself gaining more than 13%. In thelast week, holdings of SPDR gold shares, the world's largest gold-backed ETF,rose more than 4%, its biggest weekly rise since March 2009. As gold hasmoved towards $1200, fresh additions were seen at April OTM 1250 Call strikesuggesting expectations of a move towards $1250 in days to come.

6

Source: Bloomberg ICICIdirect.com Research

On the one hand macroeconomic variables like current account deficit inflation and a benign interest rate environment augur well for an economic upturn

Delay in recovery, commodity debasement make earnings trajectory volatile

On the one hand, macroeconomic variables like current account deficit, inflation and a benign interest rate environment augur well for an economic upturn.However, at the same time, a fall in global commodities has made it extremely difficult to gauge the earnings trajectory of BSE Sensex as commoditydependent sectors like metals (2.9% weight) and oil & gas (10.4% weight) will see huge volatility in reported earnings for next few quarters (until commodityprices stabilise), thereby making it extremely challenging to fathom earnings. In the financials space (26.9% weight in index) recognition of NPAs andincreased provisioning will also make predictability of earnings a difficult task, going ahead. Hence, a 19.7% YoY rise in Sensex EPS over FY17E should beread as an caveat as this can be further upgraded/downgraded based on movement of commodity and pace of economic recovery in FY17E. However, onthe positive side, sectors like pharma, IT, FMCG and auto (cumulatively 50.6% weight) are expected to deliver stable growth with relatively lower chances ofdowngrades in the current economic milieu

GDP growth & EPS growth: Correaltion trend

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downgrades in the current economic milieu.

Historically, in the last decade, nominal GDP growth has averagedbetween 13% and 16% while over the last year with ongoing

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Sensex Earnings Growth Nominal GDP (RHS)

commodity correction the same has contracted to 8.6% in FY16E.The relationship of EPS growth with the above variable mirrors thesame movement. Going ahead into FY17E, we expect nominal GDPgrowth at 11% whereas Sensex EPS growth is expected at 19.7%

Trend in downgrade in EPS over the last 5 quarters

15851 674

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Optically, Sensex EPS growth of 19.7% indicates a robustperformance but at the same time one has to take cognizance ofthe fact that over Q3FY15-Q3FY16, the forward EPS of FY17E has

13251,462

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,been downgraded from | 1972 to | 1585 thereby indicating theunpredictability of earnings in a volatile environment (commoditydebasement, adverse cross currency movements for exporters,rising NPAs for banks and other one-offs like asset impairments)

7

Source: Capitaline, ICICIdirect.com Research

Caveat Emptor: Quality of earnings vs. optical growth illusion

Sectors where earnings visibilty is reasonable

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Sectors where earnings predictability is still challenging

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IT FMCG Auto Pharma

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Oil and Gas Capital Goods Metals andMining

PSU Banls Power

FY15 FY16E FY17EFY15 FY16E FY17E FY15 FY16E FY17E

• Going ahead, we believe sectors that command reasonable earningsvisibility with strong cash flow profile will find flavour amonginvestors during uncertain times

• We are positive/ neutral on sectors like IT wherein we believe the lastyear of underperformance has been well discounted and valuations

• Bottom up estimates suggest sectors like capital goods, metals, oil &gas and PSU banks will deliver double digit growth rate in FY17E. Butthe same is an optical illusion. We believe ascertaining movement ofcommodity prices and NPA recognition will be challenging. Thereexists strong risks of significant downgrades to these estimates

• Though we are positive on the capital goods space optical numbersy pare at attractive levels. Also, a depreciating rupee will cushionmoderation in constant currency growth

• On the pharma side, we expect recent USFDA approvals for variousproducts to see decent revenue accretion going into FY17E. Key riskslike USFDA warning letter have affected the performance in H2FY16and are well priced in

• Though we are positive on the capital goods space, optical numberslook good as a leading power equipment maker is expected to postsprofit from a loss reported in FY16E . The profit is highly dependenton timely order inflows and execution by the company that is againhazy at this point in time

• On the oil & gas front, a lot depends on average realisations of crudein FY17E, which are a function of global factors. A quick sensitivity of

• The upcoming Seventh Pay Commission, lower input costs and abenign base of FY16E will provide reasonable fillip to domesticconsumption based sectors like auto and FMCG. Recent correction inthe same provides attractive entry point from two to three year’sperspective

, g q yEPS of ONGC at $35 crude and $45 crude/barrel indicates hugeswings in profitability figures that can, hence, impact overall SensexEPS . Same is the case for Tata Steel wherein the performance ofCorus can have a significant bearing on the performance

• In case of banking, quantum of NPA recognition and provisioning canalso create stark differences in reported and estimated profitability

8

Source: Bloomberg, Reuters, ICICIdirect.com Research

Don’t catch a falling knife: Banking sector pain far from over ….• The country’s banking sector is reeling under severe asset quality pressure(stressed asset of the system at 12.2% of loans). Absolute GNPAs of large

banks ha e inc eased bet een 30% and 65% since thei FY15 le els No espite is e pected soon Banks ill contin e to ecognise st essed assets asbanks have increased between 30% and 65% since their FY15 levels. No respite is expected soon. Banks will continue to recognise stressed assets asidentified by the RBI under “Asset quality review” (AQR)

• Further, credit growth will stay constrained (~11% YoY as on January 2016) ahead owing to focus on cleaning up of balance sheet and lack of largeticket lending opportunities. Bond yields are not yet moderating to provide windfall gains to soothe bank’s earnings. All these factors will keep sector’sprofitability and outlook remaining bleak

• Top banks incorporated 50% of NPA while the balance will flow to Q4FY16 requiring similar provisions. Accordingly, the cleaning process is expectedto continue in the near term offering an opportunity for investors to take a call on the banking sectorto continue in the near term offering an opportunity for investors to take a call on the banking sector

Banking stress rising but still more to come …

(| crore), Q3FY16 NNPA RA 5/25 scheme SDR Total Stress NW Stress % of Adv Stress % of NW

SBI 40249 48597 10900 16500 116246 129554 8 90SBI 40249 48597 10900 16500 116246 129554 8 90

PNB 22983 35000 7000 7000 71983 42203 18 171

BOB 21806 17135 5427 2400 46768 39970 11 117

BOI 19979 17270 1900 1140 40289 29941 11 135

Axis Bank 2514 7745 3100 500 13859 51067 4 27

GNPA picture getting murkier

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9

Source: Capitaline, RBI, ICICIdirect.com Research

Deal Team – At Your ServiceGlobal oil market to continue to remain in surplus

Global Oil Surplus

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World's oil supply (mbpd)

Brent crude oil prices have undergone a dramatic downturn in recent times,falling steeply from the highs of ~ $112/barrel in Q2FY15 to ~$30/barrelcurrently, equating to a loss of more than 70%. The fall in oil prices can beattributed to an increase in global oil surplus from 0.9 million barrels per day(mbpd) in 2014 to 1.8 mbpd in 2015. A host of macro factors both on thecrude oil supply and demand side contributed to the decline

On the demand side, the slowdown in the Chinese & European economy and

World oil demand World oil supply

Other OPEC countries, 25.7

US, 12.9

Russia, 11.1

Other Non-OPEC countries, 33.7

Total non-OPEC countries, 57.63

On the demand side, the slowdown in the Chinese & European economy andthe strong build-up of US crude inventories (impacting US oil imports) led toslower growth in crude oil consumption. On the supply side, the rise in shaleoil & gas production in the US and increase in crude oil production bytraditional suppliers with Saudi Arabia, in particular, to defend their marketshare contributed to the decline in crude oil prices

With the fall in oil prices, non-Opec oil production is expected to decline in2016 However the end of economic sanctions against Iran and continued

Saudi Arabia, 10.1

Iran, 2.9

Source: IEA OPEC ICICIdirect com Research

2016. However, the end of economic sanctions against Iran and continuedhigh oil production from other Opec countries to defend their market shareare expected to keep the global oil market in surplus

As per International Energy Agency (IEA), the oil surplus for 2016 willcontinue to remain high at 1.8 mbpd, anticipating slower demand growth andstrong supply growth

10

Source: IEA, OPEC, ICICIdirect.com Research

Deal Team – At Your ServiceSectoral Outlook

d l kIndustries Sector Outlook

Auto

We remain positive on the automobile space. New product launches, higher discretionary spending & positive impact of the Seventh Pay Commission (16.6% incremental demand over next two years) will drive demand for OEMs. Export oriented companies will face some headwind in the near term as the impact of rupee depreciation will be offset by asubdued demand scenario & currency volatility. Further, the sector will benefit from benign input cost in the near term, thus boosting their profitability. In the OEM space, weprefer four-wheelers while in the ancillary space we prefer companies that have the capability to deal with regulatory changes (emission norms)

Aviation Passenger growth for CY15 remains robust (up 20% YoY 8.1 crore). Further, a sharp fall in ATF prices (down 27% YoY) will help airline companies clock healthy double digit marginsin the coming quarters. We remain positive on the sector and prefer Jet Airways

Capital GoodsThe key ordering opportunities for EPC based capital goods companies will be from power T&D, road, defence and renewable segment. We believe even in a subduedenvironment, 8-10% order inflow is envisaged whereas companies dependent on power BTG will find sporadic opportunities. Revenue growth is expected to be in the range of 12-14% for EPC and product based companies in FY17E with margin and interest costs benefits compared to FY16E. We prefer product based companies owing to a strong balancesheet profile and high sensitivity of earnings growth to a recovery in demand

Cement

Demand revival from the rural segment is a key thing to watch for, going forward. Higher infra spend by the government and a benign interest environment should help in revivingcement demand, going forward. We expect cement demand to improve with CAGR of ~6% to 311 MT over the next three years vs. 4% in the past two years Regionwise, weCementexpect south to benefit from increased investment in Amaravathi (capital city of Andhra Pradesh) and telangana coupled with pricing discipline in the region. Our top pick amongcement companies is Ultratech.

Construction/ building material

With the government's renewed focus to drive the capex recovery (already visible in the tendering activity of the last 18 months – 99% contributed by thgovernment and mainlyin road space - ~35%), we believe our construction universe order inflow will grow at a CAGR of 38.9% at ~| 33,700 crore. Consequently, topline, bottomline are expected to growat a CAGR of ~15% in FY15-18E

Financial Overall, the banking sector is expected to deliver a sudued performance ahead as it is plagued by asset quality, growth and margin issues.We expect systems loan growth to stayl b 10% Y Y hil d (GNPA d ) ld b 100 200 b hi h h l l f 12 2% f l PSU b k h ddi i l i fServices low at sub 10% YoY while stressed assets (GNPA + restructured assets) could be 100 to 200 bps higher than current levels of 12.2% of loans. PSU banks have additional issue ofcapital raising apart from their severely stressed balalnce sheet, which would keep investors away despite aparently cheap valuations

FMCG, Consumer

We believe margins in FMCG & consumer companies would continue to remain at elevated levels in the medium term on the back of benign commodity prices. However, volumegrowth recovery in FMCG staples would be slower (4-6% in FY17E & FY18E)) due to subdued urban demand. However, we expect continued robust volume growth (11-13% inFY17E & FY18E) in paints companies mainly on the back of a shift towards premium products. We also expect a decline in realisation as companies are passing on commodity dipbenefits in terms of price cuts. Electrical consumer goods companies are expected to witness sales growth of 11-12% mainly due to the positive impact of the Seventh PayCommission

IT Revenue growth could moderate to 10-12% YoY in FY17E but so have valuations at 15x FY17E earnings. Returns will be in line with earnings growth. Stick to large caps

LogisticsThe growth rate of the industry has been pegged at 2x the GDP. Revenues for logistics companies are expected to grow at a CAGR of ~15% in the near term. The recovery in thesubdued trade environment would bring in higher volumes for logistic companies. Though there has been a delay in GST, the same has not been phased out. The implementationof the same would bring in operational effeciences for logistic companies

MetalOn account of slowing down of the Chinese growth engine, we have an underweight stance on the metal sector. Muted growth in China has led a majority of metals to go to thesurplus zone, which has put downward pressure on prices. Going forward, we expect the subduded performance from domestic companies to continue on account of weak prices

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Deal Team – At Your ServiceSectoral Outlook

The earnings of PSU oil companies are expected to decline sharply if Brent oil prices continue to stay at current subdued levels However if the subsidy burden is

Oil & gas

The earnings of PSU oil companies are expected to decline sharply if Brent oil prices continue to stay at current subdued levels. However, if the subsidy burden islowered/removed and cess levy is changed from fixed rate of | 4500/tonne ($9.5/bbl) to ad-valorem basis (8% of oil price), then it may provide some respite to oil companies. Inthe medium term, OMCs may report a decent performance given the deregulation of diesel prices and higher refining & marketing margins. After years of subdued volumes, weexpect volume growth to pick up in gas utilities space due to lower LNG prices and also due to favourable policies by the government (higher demand from power companies). Weestimate earnings of gas utilities will increase 30.6% in FY17E assuming lower gas prices We prefer CGD companies and lubricants within the sector due to lowering of raw materialcosts

We expect pharma universe revenue, EBITDA and PAT to grow at a CAGR of 15.6%, 17.2% and 20.9%, respectively, in FY16-18E. Compliance issues and currency volatility in

Pharma emerging markets are likely to be mitigated by acceleration in US approvals (148 ANDAs in CY15 vs. 105 in CY14) (expect to grow at a CAGR of 19.4% in FY16-18E) and sustainablegrowth in domestic formulations (expect to grow at a CAGR of 16.9% in FY16-18E). We continue to maintain our positive view on the sector on the back of earnings visibility,consistent operating cash flows, healthy operating margins, relatively low leverage and strong return ratios

Power

The recent iniatives or reforms undertaken by the government like UDAY, New Tariff Policy, renewable focus, coal ordinance and auctioning, gas pooling, etc are likely to evadevarious sectoral constraints like fuel availability and price, environmental clearances and SEB's ailing financial health. This, in turn, would rebuild investor's interest and attractfresh investment in the sector. With improved fuel availability, the PLF across station is likely to improve to 70%+ compared to the current subdued level of ~60%. Furthermore,with higher focus on renewable space & Make in India, the capacity addition across solar and wind sector is likely to grow at a CAGR of 53% and 15%, respectively over FY15-22,which would bring in robust foreign and domestic investment within the sector

TelecomWe expect Jio launch concerns to weigh on sector sentiments in the near term. Furthermore, concerns like expensive 700 MHz spectrum and call drop penalty also linger, whichcontinue to weigh on valuations despite a sharp correction in stock prices across the telecom space. On a long term basis, though, we believe that Bharti Airtel, being a leader withsuperior operational matrix and spectrum portfolio, will emerge as the winner

Source: IEA OPEC ICICIdirect com Research

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Source: IEA, OPEC, ICICIdirect.com Research

Pankaj Pandey Head Research pankaj pandey@icicisecurities comPankaj Pandey Head – Research pankaj.pandey@icicisecurities.com

ICICIdirect.com Research Desk,ICICI Securities Limited,1st Floor, Akruti Trade Centre,Road No 7 MIDCRoad No 7, MIDCAndheri (East)Mumbai – 400 093research@icicidirect.com

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Disclaimer

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