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1QFY17 Results Preview

RESULTS PREVIEW

Growth outlook is improving

Watch out for Outlook Recommendations

Positives Negatives Apr-Jun 2016 Qtr

FY17 vs FY16 Top BUYs Top SELLs

Agri/Chemicals Growth guidance

New launches Regulatory changes Channel inventory

PI Industries, SRF Limited

Rallis India

Automobiles Operating leverage Rising commodity prices

Tata Motors -

Aviation Strong passenger growth Rising supply and competition - Interglobe Aviation

Banking - Loan growth, NIMs and

credit costs IndusInd Bank Punjab National Bank

Building Material Coal costs Volumes, Realisation

Orient Cement -

Capital Goods - Slow-down in industrial demand

Greaves Cotton BHEL

Cement Realisation Volumes, Power and fuel costs Ramco

Consumer/ Retail Margin expansion Weak volume growth

ITC, Berger, Titan, Trent Colgate, Bata, Jubilant Foods

E&C Uptick in execution; stable

WC Improvement in outlook BEL, SIPL, TEEC L&T

Healthcare Product-specific upsides in US

Adverse currency, intensifying competition in US Cadila Dr. Reddy

Media Volume growth Content inflation Dish TV Hathway Cable, Zee

Entertainment Metals/Mining Higher steel realisations Lower coal production / offtake

Coal India Tata Steel

NBFCs Growth Asset quality

CIFC, MGMA MMFS

Oil and Gas Healthy marketing margins,

inventory gains Moderating GRM, weak

gas demand IOCL -

Technology - Impact of Brexit Tech Mahindra -

Utilities Strong demand growth Decline in imported

coal prices Tata Power JSWE

Source: Ambit Capital research

A hopeful start A positive surprise in 4QFY16, unlikelihood of an economic deceleration in FY17 and improvement in consumption trends (more so in Urban and less in rural) are drivers of our positive outlook for nearly all sectors (except O&G and Aviation) for FY17. For 1QFY17 results season, our outlook is evenly split with weak outlook mainly for Autos, Cement, Consumer and Technology. Whilst we have downgraded our FY17 estimates for Banking, we are presently ahead of consensus in nearly half of our coverage with Autos, Home Building, O&G and Media having most estimates ahead of consensus. Whilst we are not building a major economic recovery, we take cognisance of the recent efforts of RBI and Bank Boards Bureau and now have a Mar-17 end Sensex target of 29,500, 19X FY17eps; however, adverse global developments continue to pose risks.

GDP growth unlikely to accelerate in FY17, rate cuts unlikely as well On a relative basis, consumption appears more resilient than investment. Within consumption, rural consumption has begun showing early signs of improvement. Even as private capex remains weak Government capex continues to grow at a faster clip. Drag created by lack of private capex, reduced PE/VC inflows and suffocation in the provision of bank credit will unlikely accelerate economic growth in FY17. We reiterate that the scope for rate cuts will be limited in FY17 as risks to inflation are firmly on the upside.

29,500 Sensex but risks remain, stick to G&C Although the possibility of Sensex 22K remains real, it is no longer our base case. We reiterate our Tenbagger 5.0 (long term) and G&C 10.0 (medium term) portfolios whilst pointing to 12 stocks that can profit from Modi and Rajan‘s structural resets; ITC, HUL, Tata Motors, Marico, Berger Paints, Page, CIFC, TVS Motors, City Union Bank, Mahindra CIE, Finolex Cables and DCB.

TOP SELLs: L&T, PNB, BHEL, Dr Reddy’s, Jubilant Foods, Interglobe Aviation

Research Analysts

Nitin Bhasin +91 22 3043 3241 [email protected]

Research Team +91 22 3043 3000 [email protected]

mailto:[email protected]



July 08,2016 Ambit Capital Pvt. Ltd.

Material revisions to estimates and valuations ahead of earnings season (more than 5%) Exhibit 1:

Company New EPS estimate (%) Change in EPS estimates

(%) Valuation Stance

FY17E FY18E FY17E FY18E New Old Change (%) Rallis 8.4 10.6 8.0 9.0 160 135 18.0 SELL

IndusInd Bank 49.1 62.7 3.0 3.0 1,240 1,125 10.0 BUY

Punjab National Bank 16.2 18.4 (12.0) (22.0) 82 82 0.0 SELL

Bank of India 11.5 23.4 (20.0) (25.0) 80 80 0.0 SELL

Union Bank 25.4 25.8 (6.0) (20.0) 110 110 0.0 SELL

Karur Vysya Bank 44.6 61.1 (9.0) 15.0 475 450 6.0 SELL

City Union Bank 8.8 10.8 5.0 3.0 136 120 14.0 BUY

Greaves Cotton 8. 2 9.1 9.3 7.0 193 198 (2.5) BUY

Bajaj Electrical 13.8 17.9 (6.7) (2.1) 270 277 (2.6) SELL

APNT IN 22.3 27.9 1.0 8.0 1,117 1,000 12.0 BUY

CIFC 47.0 63.5 3.0 4.0 996 905 10.0 BUY

Dish TV 2.4 3.7 2.2 3.6 115 107 8.0 BUY


Sectoral snapshot ahead of results Exhibit 2:

FY17 estimate revisions before

results Compared to FY17 consensus Stance

Up Down

Higher Lower

BUY SELL

Agri - - PI Industries, SRF Rallis PI Industries, SRF Rallis

Automobiles - Bajaj Auto, Hero MotoCorp, TVS

Motor

Ashok Leyland, Tata Motors, Eicher

Motors, TVS Motor, Balkrishna Industries,

Hero MotoCorp, Mahindra & Mahindra

Exide Industries, Bajaj Auto, Maruti Suzuki, Mahindra

CIE

Tata Motors, Maruti Suzuki, Ashok

Leyland, Mahindra CIE, TVS Motor

Hero MotoCorp, Eicher Motors, Exide

Industries, Bajaj Auto, Balkrishna

Industries, Mahindra and Mahindra

Aviation - - - Interglobe Aviation - Interglobe Aviation

Banking City Union Bank

Punjab National Bank, Bank of

India, Union Bank of India, Karur

Vysya Bank

ICICI Bank, Federal Bank, City Union

Bank

State Bank of India, Karur Vysya Bank

Axis Bank, IndusInd Bank, Bank of Baroda,

City Union Bank

ICICI Bank, State Bank of India,

Punjab National Bank

Building Material - Bajaj Electrical

Havells, V-Guard, Finolex Cables Bajaj Electricals

Havells, V-Guard, Finolex Cables, Bajaj

Electrical

Crompton Consumer

Capital Goods Greaves Cotton -

Greaves Cotton, BHEL

Thermax, Inox Wind, Cummins

Greaves Cotton BHEL, Thermax, Inox Wind, Cummins

Construction - -

PGCIL, TEEC L&T, BEL, AIAE,, VATW, ASBL

PGCIL, BEL, AIAE, EIL, VATW, SADE, TEEC,

ASBL, SIPL L&T

Consumer/Retail - -

PAG, HUVR, MRCO, BRGR, TTKPT

JUBI, BATA, SKB, DABUR, TTAN,

TRENT HUVR, ITC, BRGR, PAG, TTAN, TRENT JUBI, SKB, DABUR

Healthcare - - Lupin, Cadila Dr. Reddy Lupin, Cadila Dr. Reddy

Media Dish TV Zee Entertainment

Hathway Cable & Zee Entertainment Dish TV

Dish TV Hathway Cable &

Zee Entertainment

Metals & Mining - -

Coal India, Nalco Hindalco, Tata Steel, SAIL

Coal India Hindalco, Nalco, Tata Steel, SAIL

NBFCs CIFC , BAF -

CIFC LICHF, MMFS, BAF

CIFC, MGMA, SCUF, MOFS

LICHF, MMFS, SHTF, BAF

Oil and Gas - -

PLNG, IGL, BPCL, IOCL GAIL, HPCL,GSPL

HPCL, BPCL, IOCL,

GSPL, IGL GAIL, PLNG

Technology

TCS, Infosys, Wipro, TechM,

Mindtree, Persistent, eClerx

HCLT

TechM TCS, Infosys, Wipro,

HCLT, Mindtree, Persistent, eClerx

TCS, Infosys, HCLT, TechM

Wipro, Mindtree,Persistent,

eClerx

Utilities

Tata Power JSWE, NTPC

Tata Power, NTPC, JSWE




Sector views Exhibit 3:

Sector Views Estimate revisions for FY17

Agri/Chemicals Expect industry to witness healthy double digit growth in the quarter and FY17 Monsoon has started on a good note and sowing is likely to pick up which should drive a better year Unchanged

Automobiles Volume growth in 2Ws to witness an uptick led by normal monsoon/low base MHCV to moderate but clock healthy 15% growth; new launches to drive 12% PV volume growth Rising commodity prices to impact margins; offset to some extent by favorable operating leverage

Down

Aviation Domestic seat capacity to grow at 16% CAGR in FY17 as well as FY17-20E Yields to decline due to strong supply, lower price points to attract demand and foray of global, cost-

focused airlines Unchanged

Banking Loan growth slowdown and asset quality pressure likely to continue in the near term. Banks with stronger balance sheets and liability franchises are better placed. Unchanged

Building Materials Slow-down in rural housing will hurt volume growth even if infra demand picks up in FY17 Pricing discipline has failed in large markets such as North and West India Estimates will undergo further cuts in front-line cement companies to reflect on-ground realities

Unchanged

Capital Goods Slowdown in BTG execution Declining order book for BTG Deceleration in demand for gensets on YoY basis

Unchanged

Cement Rising consolidation and end of the capex cycle to push incumbents towards discipline Rural impetus to add 1.5-2% to the demand growth run-rate in the next 2 years Expect earnings upgrades by consensus to account for pricing mean reversion in key regions

Unchanged

Consumer/Retail Expect FMCG volume growth at ~5% YoY for 1QFY17 vs 5.5%/5.5% in 4QFY16/1QFY16 Discretionary companies will report ~200bps moderation in revenue growth rates vs 4QFY16 Expect gross margin expansion of ~100bps YoY in 1Q; tailwind to moderate in FY17

Unchanged

E&C Government led infra spends driving order book and execution uptick; unlikely to change Private sector capex remains in the doldrums Working capital remains under pressure and will be a key indicator of any recovery

Healthcare

Revenue growth to be muted due to decline in domestic offset by one off product revenue in th US EBITDA margins to compress largely due to lower domestic business and incremental competition in key

products Adverse currency movements could impact profitability

-

Media Moderation of advertising revenue growth Digitisation-aided pickup in volume growth for MSOs and DTH. Unchanged

Metals & Mining Overcapacity in aluminium coupled with high inventory keep price outlook muted Despite levy of safeguard duties and MIP, further steel price hikes unlikely Coal offtake to rise to 10% CAGR in FY17-20E vs 1.6% over FY10-14

Unchanged

NBFCs Loan growth to marginally improve even as asset quality stress is likely to be elevated Positive

Oil and Gas OMCs to benefit from healthy marketing margins and inventory gains GAIL to see better profits on a QoQ basis from turnaround in petrochemicals plant CGD companies will benefit from increased thrust on cleaner fuels

Unchanged

Technology As digital adoption matures, Indian IT firms to regain competitive advantage compared to firms with

consulting expertise and/or niche global technology firms. Pricing pressure to be offset by lower wage hikes (higher bargaining power vs. employees)

Positive

Utilities Pick-up in power demand from industrial states Declining prices of imported coal Dearth of PPA

Unchanged




TOP BUY RECOMMENDATIONS Recommendation Upside (%) Rationale/catalysts

ITC

21 Expect cigarette volumes to grow ~3% YoY in FY17 (~5% in 1QFY17) Government’s hawkish stance against cigarette taxation is not sustainable We expect 9-10% excise duty hike and 12-14% YoY EBIT growth over FY17-20

(ITC IN)

CMP: Rs244

TP: Rs295

Coal India

30 Offtake growth to revive to 10% CAGR in FY17-20E vs 1.6% CAGR recorded over FY10-14 Volume growth coupled with rising mix of contracted labour to provide operating leverage CIL trades at FY17 P/E of 11.2x, at a marginal discount to historical average of 12.7x

(COAL IN)

CMP: Rs310

TP: Rs400

Cadila

19

Remediation at its Moraiya facility is closer to completion and we expect bunched up product approvals in FY18E post remediation

Margin expansion to be led by increase in complex generics revenue from the US market and launch of biosimilars in India and EMs

Loss making RoW subsidiaries to be rationalized and provide margin tailwind of 200-300bps Strong positioning in the IBAS frameworks comforts us on the sustainability of earnings and quality of

growth

(CDH IN)

CMP: Rs 330

TP: Rs401

Tata Motors

19 Strong volume growth (13% CAGR over FY16-18) led by new launches Higher EBITDA margin in FY17 (15.4% vs 14.9% in FY16) led by operating leverage, lower discounts Trading at attractive valuation of 9.4x normalised FY18 net earnings.

(TTMT IN)

CMP: Rs451

TP: Rs535

IOCL

16 Refining profits to benefit significantly from stabilisation of Paradip refinery Stabilisation of marketing margins makes a strong case for multiple rerating Attractive valuations of 1.3x FY18E BV, a discount of 15%/40% vs HPCL/BPCL

IOCL IN

CMP 477

TP 550

IndusInd Bank

12 Low exposure to stressed assets/sectors places the bank favourably in a tough environment. Income momentum to sustain thanks to CASA growth and improving CV growth. Trading at a valuation of 17.7x FY18E EPS, along with forecast EPS CAGR (FY16-18E) of ~28%.

(IIB IN)

CMP: Rs 1,108

TP: Rs1,240

Bharat Electronics

14

In a high growth defence sub-segment; BEL has a significant scale, repertoire advantage over peers Will continue to win orders on a nomination basis due to its legacy relationships Valuation of 19x FY18 EPS is reasonable given the sustainability of indigenization led earnings growth

(BHE IN)

CMP: Rs1,272

TP: Rs1,450

Berger Paints

15 Recent initiatives to result in improvement in working capital cycle and EBITDA margins Likely to gain 500bps market share over FY16-25 and ~300bps EBITDA margin expansion We expect 18.2%/26.2% revenue/EPS CAGR over FY16-19; ROCEs rising from ~20% to ~30%

(BRGR IN)

CMP: Rs 281

TP: Rs 324

Tata Power

40 RoE to improve from 9% in FY16 to 14% in FY18 led by ~50% of the capex in lucrative Mumbai circle Receipt of compensatory tariff hike With likely clearance of US$20bn defence projects, Tata SED could emerge as meaningful beneficiary

(TPW IN)

CMP: Rs74

TP: Rs104

Dish TV

15

Subscriber-driven growth as Dish TV is well equipped for growth in phase III/IV markets Content renewals, a near-term pain, tided over by robust revenue growth Trading at attractive valuation of 9.4x FY18E EBITDA as ROCE improves to 11% in FY18

(DITV IN)

CMP: Rs100

TP: Rs115

SRF

24 Specialty chemicals revenues of SRF should get a boost from addition of pharma clients. Improving performance of technical textiles and packaging films will drive RoEs to 20% by FY17. TP of Rs1650 implies 15x FY17E EPS given PAT CAGR of 29% over FY16-18 ond FY18 ROEs of 20%.

SRF IN

TP 1650

CMP 1330



Recommendation Upside (%) Rationale/catalysts

Trent

12 Better sales density will lead to EBITDA margins improving by 340bps over FY16-19. Trent Hypermarket’s store expansion will reduce losses emanating from corporate costs. Increased acceptance of Zara in smaller towns as fast fashion gathers acceptance.

(TRENT IN)

CMP: Rs1,789

TP: Rs2,009

Sadbhav Infra Projects

30 Sensible bidding, timely completion and no financial duress set apart SIPL’s portfolio. Improving bargaining power with lenders—refinancing and tenure extension in four assets. Valuation implies 1.5x restated equity invested, inexpensive for a portfolio with 15%+ IRR.

(SINP IN)

CMP: Rs99

TP: Rs129

Greaves Cotton

39 Pick-up in demand over FY16-18 led by recovery in cargo vehicles Signing-up of at least one large OEM in FY17 in the 4W space Increase in market share in gensets over FY16-18

(GRV IN)

CMP: Rs139

TP: Rs193

Magma Fincorp

27 MGMA has revamped its organizational architecture and increased focus on higher-margin segments. RoEs would improve to 14% by FY18E due to improving operating efficiencies and margins. Current valuations at 1.1x 1yr fwd P/B do not factor in such RoE improvement.

(MGMA IN)

CMP: Rs108

TP: Rs138

Source: Bloomberg, Ambit Capital research



TOP SELL RECOMMENDATIONS Recommendation Downside (%) Rationale/catalysts

Larsen & Toubro

21 Aggressive order inflow focus, civil-oriented order book should cap EBITDA margin at 10.5% Stake sales in non-core businesses could boost investor sentiment but not the final SOTP valuation Current multiple of 20x FY18 core earnings factor in the ‘halo’ effect of India’s largest EPC player

(LT IN)

CMP: Rs1,576

TP: Rs1,250

Dr. Reddy

19

Issues raised in the warning letter are serious in nature and do not rule out an import alert Investment in innovation are yet to yield results and past failures in innovation concern long term

sustainability Margins to remain muted at ~17% as investments in R&D increased and no commensurate increase in

revenue FY18E PE is at 19.2x as compared to our implied multiple of 17.0x due to structural issues in its

business

DRRD IN

CMP: Rs 3510

TP: Rs 2876

Zee Entertainment

18

Ad growth outlook moderates as competitive pressures escalate Risks to subscription revenue growth on account of lower yields in rural markets Trades at elevated 26.4x FY18E P/E as our estimates imply 31% EPS CAGR over FY16-18.

(Z IN)

CMP: Rs462

TP: Rs380

Interglobe Aviation

13

16% domestic industry capacity growth to result in decline in yields and unitary profitability Profits on sale and lease back of A320neo to come under pressure due to lower crude prices The stock trades at FY17 EV/EBITDAR of 8.7x, higher than European/American peer average of

7.4x/4.4x.

(INDIGO IN)

CMP: Rs1017

TP: Rs890

Tata Steel

43 Overcapacity in iron ore and steel globally will keep global steel price outlook muted We do not expect any further steel price hikes in India The stock is trading at FY17 EV/EBITDA of 6.9x, a premium to the historical average of 6x

(TATA IN)

CMP: Rs310

TP: Rs175

Petronet LNG

5 End-use gas demand remains limited despite cheaper prices Competition from Mundra (expected to start in CY17) will take away a share in spot volumes Current valuations of 2.9x FY17E P/B fully factor in future volume ramp-up opportunities

PLNG IN

TP 285

CMP 295


28 Stressed assets (NPA + restructured) stand high at 18% of loans with provision coverage of just 29%. Elevated credit cost to keep RoE subdued at below 10% for some years. Capital adequacy is weak with tier-1 capital of 8.4%.

(PNB IN)

CMP: Rs114

TP: Rs82

M&M Finance

21 MMFS’ recovery will disappoint as improvement in rural economy will be slower than earlier levels. MMFS will deliver EPS growth of 27% CAGR versus 40% EPS growth built in its current valuations. Earnings disappointments will test premium cross-cycle valuations at ~2.8x one-year forward P/B.

(MMFS IN)

CMP: Rs353

TP: Rs276

Jubilant Foodworks

24

Sustained price increase (10% CAGR FY11-16) will weigh on SSG as value proposition erodes. Near-term disruption by food tech companies to weigh on SSG. Delay in ramp-up of new stores coupled with increased competition.

(JUBI IN)

CMP: Rs1,230

TP: Rs931

Bata India

29 Increased promotions from FY17E. FY17E earnings to be impacted by inventory write-downs. Increased competition from e-commerce is a threat to at least 12% of Bata’s FY17E revenues.

(BATA IN)

CMP: Rs563

TP: Rs397

Rallis

26 Valuation of 20x FY18 EPS inline is expensive in comparison to PI Industries and Dhanuka Agritech. Rallis will see a healthy EPS growthin FT17 post extremely weak two year patch. However, valuations need to correct a franchise which is loosing market share consistently

RALI IN

CMP: Rs 173

TP: Rs 160

Hathway Cable

0 Supply chain challenges prevent sharp subscription growth Broadband unlikely to be a saviour as investments intensify Sharp risk to estimates and faces dilution risks. Trades at 7.5x FY18 EV/EBITDA

(HATH IN)

CMP: Rs34

TP: Rs34




Economy GDP growth unlikely to accelerate in FY17 In our 23rd May note, we made the point that the pick-up in economic activity in 4QFY16 is not likely to sustain. Data for 1QFY17 (QTD) is now suggesting that economic growth in all probability decelerated. On a relative basis, consumption as a theme appears more resilient than investment. Within consumption, rural consumption has begun showing early signs of improvement. Within investment, even as private sector capex remains weak Government sector capex continues to grow at a faster clip. Going forward, we continue to believe that the drag created by slowing private capex growth, reduced PE/VC inflows and suffocation in the provision of bank credit will mean that economic growth in FY17 is unlikely to accelerate. We reiterate our point of view that the scope for rate cuts will be limited in FY17 as risks to inflation are firmly on the upside.

In our note dated 17th June 2016, “The 4QFY16 growth spurt may fizzle out,” we made the point that data on 16 high frequency indicators suggests that 8 out of 16 indicators decelerated in 1QFY17 (QTD) as compared to 4 of 16 decelerating in 4QFY16, indicating slowing economic momentum overall. Performance of India’s Keqiang Index (IKI) QTD 1QFY17 suggests this gauge is returning to negative territory after recording a spurt in 4QFY16 (see exhibit A in the right hand margin). Furthermore, it is worth noting that the recent pick-up in sales of passenger vehicles (PVs), commercial vehicles (CVs), two-wheelers (TWs) and light electricals seems to be the result of three ‘substitution effects’ as opposed to being the result of buoyancy in the underlying economy.

An analysis of high frequency indicators combined with the last results season suggests that consumption as a theme continues to do well relative to investment growth. Within consumption, rural consumption has begun showing early signs of recovery. Within investment, private sector capex appears to remain depressed even as Government-driven capex activity (in the roads segment in particular) appears to be growing at a healthy clip.

The drag created by moderate Government capex and slowing private sector capex growth, reduced PE/VC inflows, and suffocation in the provision of bank credit to the real economy make us believe that economic growth in FY17 will be flat compared to FY16. Specifically, we expect GDP growth in FY17 to be recorded at 6.8% YoY, i.e. unchanged from GDP growth recorded in FY16 (see exhibit B on the right hand side).

Monetary policy implications

In our note dated 23rd Jun 2016, “Risks to inflation are firmly on the upside”, we made the point that there are considerable upside risks to food inflation in FY17 emanating from low buffer stocks of the Government and rising global agricultural commodity prices. Our modelling process suggests that CPI inflation will average at ~5.8% YoY in FY17 (see exhibit C on the right hand side) which is higher than the RBI’s projection of ~5% YoY by end-FY17.

We reiterate our point of view that scope for rate cuts will be limited in FY17. This is because: (1) there is a high likelihood that inflation remains sticky at high levels owing to higher food inflation; and (2) it would make sense for the RBI to signal to the Central Government (by not cutting rates) that its fiscal maths appears overly ambitious. Specifically, we expect rate cuts to the tune of 0-25bps to be administered in the rest of FY17.

Exhibit A: QTD data suggests India’s Keqiang Index lost steam in 1QFY17

Source: CEIC, Ambit Capital research

Exhibit B: We expect GDP growth in FY17 to be recorded at 6.8% YoY


Exhibit C: We expect CPI inflation to average at 5.8% YoY in FY17


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http://reports.ambitcapital.com/reports/Ambit_Economy_Update_KeqiangIndexAGlimmerofHope_23May2016.pdf

http://reports.ambitcapital.com/reports/Ambit_Economy_Insight_The4QFY16growthspurtmay_17Jun2016.pdf

http://reports.ambitcapital.com/reports/Ambit_Economy_Riskstoinflation_23Jun2016.pdf



Agri Inputs/Chemicals We expect a good 1QFY17 after a weak FY16. 1Q started on a weak note with delayed monsoon and decline in sowing acreages; however, channel placement picked up later in anticipation of a strong season. We expect most agri-inputs players to report a strong quarter as Q1 is a placement quarter and not reflective of real end-demand. SRF will see a relatively slow start to the year with ~20% EPS growth in Q1FY17. While the year is likely to be strong, we believe valuations of ~18x FY18 estimates for Rallis India (upgrading TP to Rs160) are stretched given it has been consistently witnessing market share loss. PI Industries (upgrading TP to Rs800) remains our top pick in agri space with expected PAT growth of 20% over FY16-18. SRF remains our top idea with a TP of Rs 1650 implying 15x FY18 estimates.

Expect domestic agrochemicals industry growth of 14-15% in Q1

We expect 14-15% industry growth during the quarter vs. consensus ecpectations of ~20% as a) comparable base for the industry is not very weak as monsoons had started on a good note last year; b) this year’s monsoon was delayed, which was also reflected in sowing being down 23%. That said dealer sentiment revived towards end-June, driving inventory placements towards the end of the month. 1Q is usually inventory placement season and hence this quarter is more of a placement season. However, the industry prospects look bright as monsoon, though delayed, has been good across key agriculture belts in India. We are building in 15% growth for Rallis and 20% growth for PI Industries.

Sowing data has been weak but should pick up

Due to delayed monsoons, acreages have declined significantly. Total sowing area as on 1 July 2016 stands at 216 lakh hectares, a decline of 23% over the previous year. The decline was primarily due to a steep fall in cotton and oilseeds acreages, which declined by 49% and 47% respectively. The decline in cotton acreages can be attributed to white fly attack last year that caused heavy crop losses. Rice acreages remained steady at 48 lakh hectares, a minor uptick over the previous year. Cotton acreages (14% of agrochem demand) have seen the worst hit while rice (28% of agrochem) and corn acreages (low single digit share) are likely to go up.

Export business facing challenges owing to a weak environment

After a muted FY16, we believe export demand is likely to see a gradual pick-up from 1QFY17. Last year, we saw sharp challenges in agrochemicals offtake due to heavy currency depreciation across Europe and Latin America + drought conditions in the US and India. Our channel checks suggest export demand is on an uptrend; however, the real impact on growth will happen from 2Q. We are building in 20% growth in SRF’s chemicals business and 17% growth in PI’s CSM business.

PI – CSM growth likely to sustain; domestic business to remain steady

We expect PI to report healthy numbers with a combined revenue growth of 19% driven by 20% growth in domestic revenues and 17% growth in CSM business. We expect a gradual uptick in EBITDA margins of 50bps YoY due to better mix and operating leverage. Domestic business growth is likely to be ~20%, driven by good performance of new products such as Keefun and Vibrant. Nominee is not likely to see a significant dent due to delayed launch of generics. Our channel checks suggest that new products like Keefun and Vibrant are also gaining traction. We estimate overall PAT growth of 23% YoY for the company.

SRF – Chemicals and packaging to drive healthy earnings growth

We expect SRF to deliver 17% top-line growth led by 20% growth in chemicals and flat revenues in technical textiles and packaging films. We expect growth in chemicals to be led by higher exports in pharma and pick-up in global demand for agrochemicals. We expect EBITDA margin expansion of 85 bps led by: (a) positive mix impact from higher-margin chemicals business, (b) improving profitability of technical textiles and packaging films; (c) higher leverage on fixed assets (primarily from fixed assets).

Stock Performance

(%) 3-month

Absolute Rel to Sensex

PI Industries 27 18

Rallis India 24 15

SRF Ltd 6 (3)

Mar’16E Qtrly EPS

(Rs) Ambit Consensus

PI Industries 7.8 NA

Rallis India 2.6 NA

SRF Ltd 25.5 NA

FY17E EPS


PI Industries 28.4 26.5

Rallis India 8.43 8.98

SRF Ltd 92.1 87.6



Rallis – Strong quarter off a weaker base

We expect Rallis to report 15% growth in agrochem business (domestic + exports) as well as Metahelix. We expect flat margins for Metahelix and improvement of 123bps in blended margins in the standalone business.

Ambit vs consensus

Based on limited consensus data for 1QFY17, our earnings estimates are ahead of consensus for most stocks except Rallis (where our estimates are below consensus estimates). Our FY17 EPS estimates are ahead of consensus estimates for most of the stocks except Rallis.

Preparing for the earnings

We increase Rallis’ revenue/PAT estimates by 3%/8% for FY17 and FY18 given expectations of a better monsoon and full consolidation of Metahelix. Our new TP of Rs160 (Rs135 earlier) implies 15x FY18E EPS and RoEs of 20% reflecting a weakening franchise. For PI, we marginally increase in PI’s revenue/PAT growth estimates by 2%/3% for FY17 and FY18 given better monsoons and pickup in global agrochemical demand. We upgrade our TP to Rs800, implying 24x FY18 EPS and RoEs of 27%.

Kharif crop sowing (lakh hectares) Exhibit 1:

Crop Area sown in 2016-17 Area sown in 2015-16 YoY(%)

Rice 47.77 47.62 0.3%

Pulses 19.85 22.25 -10.8%

Coarse Cereals 37.15 43.72 -15.0%

Oilseeds 28.71 54.24 -47.1%

Sugarcane 44.38 43.68 1.6%

Jute & Mesta 7.43 7.6 -2.2%

Cotton 30.59 60.16 -49.2%

Total 215.87 279.27 -22.7%

Source: Government of India



Detailed Jun’16E quarterly estimates Exhibit 2:

Rs mn Jun'16 Jun'15 Mar''15 YoY QoQ Comments

Rallis India

Standalone (Rs mn) 2,806 2,440 3,072 15% -9%

Metahelix (Rs mn) 2,526 2,209 348 14% 625%

Sales (Rs mn) 5,366 4,683 3,483 15% 54% We expect overall sales growth of 15% primarily due to a soft base and expectations of a better monsoon

EBITDA (Rs mn) 713 565 419 26% 70%

EBITDA Margin 13.3% 12.1% 12.0% 123 127 We expect some improvement driven by lower technical prices supporting standalone margins and operating leverage.

PBT (Rs mn) 552 420 418 32% 32%

PAT (Rs mn) 502 331 323 52% 56%

PI Industries

Domestic (Rs mn) 3,260 2,717 1,929 20% 69% We expect domestic business to report 20% growth

CSM (Rs mn) 3,305 2,825 3,920 17% -16% On the CSM business, we believe growth to revive to ~17%

Sales (Rs mn) 6,601 5,548 5,848 19% 13%

EBITDA (Rs mn) 1,650 1,358 1,073 22% 54%

EBITDA Margin 25% 24% 18% 52bps 665bps We expect margins to improve driven by higher share of high-margin CSM business and operating leverage

PBT (Rs mn) 1,530 1,302 967 18% 58%

PAT (Rs mn) 1,071 873 953 23% 12% PAT growth of 23% driven by steady margin expansion

SRF Ltd.

Technical Textiles Business 4,925 4,925 3,973 0% 24% Chemicals & Polymers Business 4,558 3,798 4,320 20% 5% We expect the chemicals business to grow by 20% led by better

pharma revenues Packaging Films 3,528 3,528 2,873 0% 23%

Sales (Rs mn) 13,010 12,072 10,931 8% 19%

EBITDA (Rs mn) 2,985 2,666 2,232 12% 34% We expect the overall EBITDA margin to improve as operating leverage kicks in and the packaging films unit improves realisations

EBITDA margin (%) 22.9% 22.1% 20.4% 85bps 252bps Increase in EBITDA margin due to improvement in margins of the chemicals segment

PBT (Rs mn) 1,980 1,650 1,356 20% 46%

Adjusted PAT (Rs mn) 1,465 1,132 1,088 29% 35% We expect PAT to grow at around 29% on a YoY basis driven by EBITDA margin expansion

Source: Company, Ambit Capital research

Change in estimates Exhibit 3:

New estimate Old estimate Change (%)

FY17E FY18E FY17E FY18E FY17E FY18E

Rallis Recommendation SELL SELL TP 160 135 Revenues (Rs mn) 18,610 21,269 18,140 20,662 3% 3%

EBITDA (Rs mn) 2,886 3,343 2,789 3,221 3% 4%

EBITDA margin (%) 15.5% 15.7% 15.4% 15.6% PBT (Rs mn) 2,340 2,900 2,165 2,673 8% 8%

PAT (Rs mn) 1,684 2,117 1,558 1,951 8% 8%

EPS (Rs) 8.4 10.6 7.8 9.8 8% 9%

PI Industries Recommendation BUY BUY TP 800 750 Revenues (Rs mn) 24,857 29,814 24,439 29,123 2% 2%

EBITDA (Rs mn) 5,484 6,654 5,351 6,433 2% 3%

EBITDA margin (%) 22.1% 22.3% 21.9% 22.1% - -

PBT (Rs mn) 5,089 6,070 4,956 5,845 3% 4%

PAT (Rs mn) 3,867 4,552 3,766 4,384 3% 4%

EPS (Rs) 28.2 33.2 27.7 32.2 3% 4%




Automobiles Demand has moderated in 1QFY17 compared to 4QFY16 for MHCVs. For PVs and 2Ws, demand has been relatively stable during the quarter. All companies are expected to report increase in revenue YoY. Margins are likely to deteriorate QoQ across companies due to increase in commodity prices, but offset to some extent by favourable operating leverage. The highest YoY decline in margins will be for Ashok Leyland (~220bps). Mahindra and Mahindra, on the other hand, is expected to report the highest YoY increase in margins (~160bps). Tata Motors is our TOP BUY.

Revenue growth stable: Demand for medium and heavy commercial vehicle (MHCV) volumes moderated during Q1FY17 (15% YoY growth as compared to 26% in 4QFY16). However, the demand for 2Ws (13% YoY growth as compared to 12% in 4QFY16) and 4W (4% YoY growth as compared to 6% in 4QFY16) was stable. PV industry growth was also impacted due to fire at Subros (Maruti’s largest AC supplier) and consequent production disruption at Maruti. We expect highest revenue growth to be recorded by Eicher Motors (31% YoY, strong sales at Royal Enfield and VECV) and TVS Motor (17% YoY, higher volumes – revival in moped and Victor launch). Amongst auto ancillary stocks, Balkrishna Industry (BKT) and Mahindra CIE’s revenues are expected to grow by 5%. Exide is expected to report 8% revenue growth on the back of higher inverter sales.

Rising commodity prices to impact margins QoQ: We expect margins for most auto companies to decline QoQ due to increase in commodity prices. This will be partly offset by higher volumes reported by many auto OEMs. Ashok Leyland is expected to report the sharpest QoQ fall in EBITDA margin (~220bps) due to seasonal moderation in volumes. Maruti would also see decline in EBITDA margin (~80bps) due to unfavourable currency movement (yen appreciation vs INR). On the other hand, Mahindra & Mahindra is expected to report QoQ improvement in margin (~160bps) due to sharp increase in tractor volumes. Among the auto ancillary stocks, BKT is expected to report sharp decline in EBITDA margin (~340bps) due to increase in rubber prices.

Preparing for the forthcoming results

We have downgraded FY17 net earnings for TVS and Bajaj Auto by 2% and 1% respectively driven by lower export volumes. Further, for Hero MotoCorp, we have downgraded the domestic scooter market share in line with recent monthly trends, resulting in 1% net earnings downgrade. However, we roll-forward our target price to 1 July 2017, which results in marginal valuation upgrades for most auto companies.

Ambit vs consensus

Based on the limited consensus data for 1QFY17, our earnings estimates are lower than consensus for stocks except Hero MotoCorp, Tata Motors and BKT (where our estimates are lower than consensus estimates). Our FY17 EPS estimates are ahead of consensus estimates for most stocks except Bajaj Auto, Maruti Suzuki, Exide Industries and Mahindra CIE.

Recommendations

Tata Motors is our top BUY in the auto sector. We expect JLR volumes to clock 15% growth in FY17 (April-May 2016 at 23%) on the back of strong response to new/recent launches (Jaguar F-Pace, Discovery Sport etc). We expect EBITDA margin at 15.4% in FY17 (vs 15.4% in FY16) on the back of operating leverage from healthy revenue growth and lower discount on newer vehicles.

Stock Performance

(%) 3-month


Ashok Leyland (15) (24)

Bajaj Auto 9 0

Hero MotoCorp 5 (4)

Maruti Suzuki 17 8 Mahindra and Mahindra 20 11

Tata Motors 24 15

Eicher Motor 4 (5)

TVS Motor (2) (12)

Exide Industries 26 17

Mahindra CIE (5) (14)

Balkrishna Ind. 8 (2)

Jun’16E Qtrly EPS


Ashok Leyland 0.7 1.1

Bajaj Auto 33.3 34.5

Hero MotoCorp 42.2 41.2

Maruti Suzuki 36.8 48.6 Mahindra and Mahindra 15.1 21.8

Tata Motors 6.5 5.6

Eicher Motor 131.4 141.3

TVS Motor 2.6 2.8

Exide Industries 2.2 2.3

Mahindra CIE 2.0 2.1

Balkrishna Ind. 14.0 13.3

FY17E EPS


Ashok Leyland 5.5 5.4

Bajaj Auto 137.7 142.1

Hero MotoCorp 174.0 172.9

Maruti Suzuki 186.8 196.3 Mahindra and Mahindra 63.4 62.2

Tata Motors 57.0 46.5

Eicher Motors 626.4 602.5

TVS Motor 13.9 13.0

Exide Industries 8.0 8.0

Mahindra CIE 9.5 10.1

Balkrishna Ind. 59.3 55.5




Detailed Jun'16E quarterly estimates Exhibit 4:

Company Jun'16E Jun'15 Mar‘16 YoY QoQ Comments

Ashok Leyland

Sales (Rs mn) 41,158 38,412 59,553 7% -31% Volumes (ex-Dost) have increased by 12% YoY but down 32% QoQ (due to seasonal factors). We expect sales realisation to grow by 0.5% QoQ due to price hike.

EBITDA (Rs mn) 4,308 3,887 7,531 11% -43% Increase in commodity prices and lower volumes to adversely impact QoQ margin. YoY increase in margin mainly on account of positive operating leverage benefits. EBITDA margin (%) 10.5% 10.1% 12.6% 35 (218)

PBT (Rs mn) 2,807 2,349 6,071 19% -54% Decline in EBITDA to result in sharp QoQ decline in net earnings. On the other hand, YoY net earnings to remain strong due to EBITDA trends. PAT (Rs mn) 2,002 1,593 4,563 26% -56%

Bajaj Auto

Sales (Rs mn) 63,759 56,512 54,559 13% 17%

Total volumes up 2% with strong growth in domestic 2W and 3W volumes (up 16%) offset by weak exports (down 15% YoY). However, strong growth in sales realisation (product mix) to result in healthy revenue growth. QoQ revenue growth led by volume growth (17%).

EBITDA (Rs mn) 13,491 11,774 11,960 15% 13% Higher commodity prices and lower 3W share to impact EBITDA margin on a QoQ basis. EBITDA margin (%) 21.2% 20.8% 21.9% 33 (76)

PBT (Rs mn) 14,335 14,933 11,686 -4% 23% YoY net earnings impacted by lower ‘other income’. Higher EBITDA coupled with higher other income to improve PAT by 25% QoQ. PAT (Rs mn) 9,630 10,101 7,721 -5% 25%

Hero MotoCorp

Sales (Rs mn) 76,342 69,553 75,122 10% 2% Revenue growth largely driven by volume growth (6% YoY and 1% QoQ).

EBITDA (Rs mn) 11,938 10,479 11,758 14% 2% YoY margin improvement on the back of operating leverage benefit. On a QoQ basis, higher raw material costs to be offset by moderation in ‘other expenses’ (4Q figures impacted by higher R&D/advertising spends). EBITDA margin (%) 15.6% 15.1% 15.7% 57 (1)

PBT (Rs mn) 11,819 10,463 11,623 13% 2% PAT growth in line with growth in EBITDA growth

PAT (Rs mn) 8,424 7,503 8,142 12% 3%

Maruti Suzuki

Sales (Rs mn) 150,197 134,249 153,057 12% -2% 2% YoY revenue growth led by increase in volumes and 9% increase in sales realisation (higher sales of newly launched models 'Baleno and 'Brezza''). QoQ revenue decline led by 2% volume decline.

EBITDA (Rs mn) 21,840 21,891 23,440 0% -7% YoY margin hit due to unfavorable currency movement (yen appreciation vs INR) and increase in commodity prices. QoQ decline due to Yen movement. EBITDA margin (%) 14.5% 16.3% 15.3% (177) (77)

PBT (Rs mn) 15,911 16,705 16,841 -5% -6% Net earnings trend to be reflective of EBITDA trend.

PAT (Rs mn) 11,126 11,929 11,276 -7% -1% Mahindra & Mahindra

Sales (Rs mn) 107,161 94,371 101,602 14% 5% YoY revenue growth to be driven by 21% YoY growth in tractor volumes and 13% YoY growth in UV volumes, but offset to some extent by lower sales realisation (low priced vehicles).

EBITDA (Rs mn) 14,408 13,530 11,994 6% 20% QoQ margin expansion led by higher sales mix of tractors. YoY margin impacted by lower margin in automotive (excise benefit expiration and lower margin products). EBITDA margin (%) 13.4% 14.3% 11.8% (89) 164

PBT (Rs mn) 11,773 11,488 8,607 2% 37% Higher EBITDA and higher 'other income' to led to 29% QoQ increase in PAT

PAT (Rs mn) 8,599 8,311 6,681 3% 29%

Tata Motors

Sales (Rs mn) 628,521 610,195 806,844 3% -22% Despite 13% growth in JLR volumes, equity method of accounting for China JV volumes/performance to result in flat YoY revenue growth in JLR; QoQ decline in revenues led by seasonally lower volumes at JLR and standalone (CV).

EBITDA (Rs mn) 84,471 91,088 120,287 -7% -30% Lower QoQ margins due to lower volumes at both JLR and standalone entity (due to seasonal factors). EBITDA margin (%) 13.4% 14.9% 14.9% (149) (147)

PBT (Rs mn) 27,743 44,754 65,982 -38% -58% Higher depreciation and tax rates to further impact net earnings.

PAT (Rs mn) 20,807 29,052 51,370 -28% -59%

Eicher Motor

Sales (Rs mn) 38,097 29,167 37,649 31% 1% Strong volume growth in both Royal Enfield and CV business to drive robust revenue growth.

EBITDA (Rs mn) 6,282 4,316 6,399 46% -2% Consolidated EBITDA margin to decline QoQ due to increase in commodity prices. YoY margin expansion led by strong operating leverage benefits at both RE and CV businesses. EBITDA margin (%) 16.5% 14.8% 17.0% 169 (51)

PBT (Rs mn) 5,601 3,573 5,585 57% 0% Net earnings performance to mirror EBITDA level performance.

PAT (Rs mn) 3,562 2,218 3,345 61% 6%



Company Jun'16E Jun'15 Mar‘16 YoY QoQ Comments

TVS Motor

Sales (Rs mn) 30,604 26,212 28,154 17% 9% Revenue growth driven by volume growth (13% YoY and 9% QoQ).

EBITDA (Rs mn) 2,221 1,637 1,785 36% 24% QoQ margin expansion led by operating leverage benefits, better product mix (higher share of Victor) and one-off expenses in 4QFY16. EBITDA margin (%) 7.3% 6.2% 6.3% 101 92

PBT (Rs mn) 1,689 1,180 1,380 43% 22% YoY net earnings to mirror EBITDA level performance. QoQ expansion lower due to one-off tax benefit in 4QFY16. PAT (Rs mn) 1,241 902 1,178 38% 5%

Exide Industries

Sales (Rs mn) 19,375 17,995 17,614 8% 10% Revenue to grow by 8% YoY due to improvement in the inverter segment volumes.

EBITDA (Rs mn) 3,104 2,660 2,674 17% 16% YoY improvement in margin on the back of lower lead prices. QoQ margin expansion led by higher sales of inverter. EBITDA margin (%) 16.0% 14.8% 15.2% 124 84

PBT (Rs mn) 2,772 2,660 2,674 4% 4% Higher tax rates to impact QoQ net earnings growth.

PAT (Rs mn) 1,905 1,552 1,776 23% 7%

Mahindra CIE

Sales (Rs mn) 13,960 13,346 13,269 5% 5% Growth in domestic business (6% YoY) and subsidiaries (4% YoY) drive consolidated revenue growth.

EBITDA (Rs mn) 1,587 1,474 1,420 8% 12% EBITDA margin of the European entities to improve QoQ (due to full benefit of Jeco plant closure) EBITDA margin (%) 11.4% 11.0% 10.7% 32 67

PAT (Rs mn) 635 666 535 -5% 19% Net earnings performance to mirror EBITDA performance. However, on a YoY basis, higher tax rate will lead to negative PAT growth.

Balkrishna Industries

Sales (Rs mn) 9,057 8,694 9,509 4% -5% Revenue growth driven by 4% YoY growth in volumes and flat realisation YoY. QoQ revenue growth impacted by lower volumes.

EBITDA (Rs mn) 2,646 2,456 3,103 8% -15% Sharp QoQ decline in EBITDA margin due to higher rubber prices.

EBITDA margin (%) 29.2% 28.2% 32.6% 97 (341)

PBT (Rs mn) 2,025 2,244 2,424 -10% -16% YoY net earnings performance to trail EBITDA-level performance due to lower ‘other income’. PAT (Rs mn) 1,358 1,520 1,550 -11% -12%

Source: Company, Ambit Capital research.



Revisions ahead of earnings season Exhibit 5:

New Estimates Old Estimates Change

Comments FY17E FY18E FY17E FY18E FY17E FY18E

Bajaj Auto

Recommendation SELL SELL

We have downgraded Bajaj’s exports volumes in line with recent trend. This has resulted in 1% downgrades to our revenue, EBITDA and PAT estimates. Despite the downgrades, TP increases by 1% due to roll-forward of DCF target to 1 July 2017.

TP (Rs) 2,520 2,489

Revenues (Rs mn) 249,009 285,625 251,429 288,870 -1% -1%

EBITDA (Rs mn) 53,951 61,027 54,475 61,721 -1% -1%

EBITDA margin (%) 21.7% 21.4% 21.7% 21.4% - -

PBT (Rs mn) 58,791 67,741 59,328 68,478 -1% -1%

PAT (Rs mn) 39,496 45,509 39,857 46,004 -1% -1%

EPS (Rs) 136 157 138 159 -1% -1%

Hero MotoCorp


We have downgraded Hero MotoCorp’s domestic scooter market share in line with recent trends. This has resulted in 1% downgrades to revenue, EBITDA and PAT estimates. Despite the downgrades, the TP increases by 1% due to roll-forward of DCF target date to 1 July 2017.

TP (Rs) 2,820 2,790

Revenues (Rs mn) 323,732 360,577 326,179 363,448 -1% -1%

EBITDA (Rs mn) 49,218 54,820 49,590 55,256 -1% -1%

EBITDA margin (%) 15.2% 15.2% 15.2% 15.2% (0) (0)

PBT (Rs mn) 48,390 53,790 48,760 54,219 -1% -1%

PAT (Rs mn) 34,492 37,653 34,755 37,953 -1% -1%

EPS (Rs) 173 189 174 190 -1% -1%

TVS Motor

Recommendation BUY BUY

We have downgraded TVS Motors’ export volume performance in line with recent trend. This has resulted in 2% downgrades to revenue, EBITDA and PAT estimates. This downgrade impact is offset by the roll-forward of the target price to 1 July 2017.

TP (Rs) 340 340

Revenues (Rs mn) 132,860 157,304 133,699 158,681 -1% -1%

EBITDA (Rs mn) 10,757 14,385 10,954 14,710 -2% -2%

EBITDA margin (%) 8.1% 9.1% 8.2% 9.3% (10) (12)

PBT (Rs mn) 8,758 12,351 8,954 12,674 -2% -3%

PAT (Rs mn) 6,437 8,955 6,581 9,189 -2% -3%

EPS (Rs) 13.5 18.8 13.9 19.3 -2% -3%

Maruti Suzuki


We have maintained our FY17-18 estimates. The 2% increase in TP is due to roll-forward of DCF target date to 1July 2017.

TP (Rs) 4,500 4,400

Revenues (Rs mn) 661,835 763,956 661,835 763,956 0% 0%

EBITDA (Rs mn) 97,952 113,065 97,952 113,065 0% 0%

EBITDA margin (%) 14.8% 14.8% 14.8% 14.8% - -

PBT (Rs mn) 77,316 97,383 77,316 97,383 0% 0%

PAT (Rs mn) 56,440 72,063 56,440 72,063 0% 0%

EPS (Rs) 187 239 187 239 0% 0%

Mahindra and Mahindra



TP (Rs) 1,295 1,285

Revenues (Rs mn) 438,256 494,600 438,256 494,600 0% 0%

EBITDA (Rs mn) 12.8% 12.9% 12.8% 12.9% 0% 0%

EBITDA margin (%) 57,883 66,444 57,883 66,444 - -

PBT (Rs mn) 13.2% 13.4% 13.2% 13.4% 0% 0%

PAT (Rs mn) 49,535 56,562 49,535 56,562 0% 0%

EPS (Rs) 36,183 41,315 36,183 41,315 0% 0%





Tata Motors



TP (Rs) 535 530

Revenues (Rs mn) 3,256 3,605 3,256 3,605 0% 0%

EBITDA (Rs mn) 463 498 463 498 0% 0%

EBITDA margin (%) 14.2% 13.8% 14.2% 13.8% - -

PBT (Rs mn) 263 262 263 262 0% 0%

PAT (Rs mn) 194 193 194 193 0% 0%

EPS (Rs) 57.0 56.8 57.0 56.8 0% 0%

Exide Industries



TP (Rs) 140 137

Revenues (Rs mn) 75,071 84,079 75,071 84,079 0% 0%

EBITDA (Rs mn) 10,960 12,276 10,960 12,276 0% 0%

EBITDA margin (%) 14.6% 14.6% 14.6% 14.6% - -

PBT (Rs mn) 9,852 11,212 9,852 11,212 0% 0%

PAT (Rs mn) 6,770 7,705 6,770 7,705 0% 0%

EPS (Rs) 7.96 9.06 7.96 9.06 0% 0%

Balkrishna Industries



TP (Rs) 660 647

Revenues (Rs mn) 37,323 41,495 37,323 41,495 0% 0%

EBITDA (Rs mn) 10,872 11,548 10,872 11,548 0% 0%

EBITDA margin (%) 29.1% 27.8% 29.1% 27.8% - -

PBT (Rs mn) 7,805 8,425 7,805 8,425 0% 0%

PAT (Rs mn) 5,734 6,269 5,734 6,269 0% 0%

EPS (Rs) 59.3 64.9 59.3 64.9 0% 0%

Eicher Motors



TP (Rs) 17,575 17,205

Revenues (Rs mn) 171,655 207,709 171,655 207,709 0% 0%

EBITDA (Rs mn) 29,625 35,829 29,625 35,829 0% 0%

EBITDA margin (%) 17.3% 17.2% 17.3% 17.2% - -

PBT (Rs mn) 27,513 33,800 27,513 33,800 0% 0%

PAT (Rs mn) 16,991 20,709 16,991 20,709 0% 0%

EPS (Rs) 624 760 624 760 0% 0%




Aviation In Apr-May 2016, domestic industry ASK grew 21% YoY and Indigo has reported above industry ASK growth of 25% YoY. Industry domestic PLF was 85.3%, flat YoY, over the period. However, Indigo’s capacity utilisation declined to 86.6% from 88.8% in Apr-May 2015. Rising domestic supply (21% for industry and 25% for Indigo) is likely to pressurise yields. We expect Indigo to report ASK growth of 24% in 1QFY17 and average PLF of 86.5%, resulting in RPK growth of 22% YoY. We believe Indigo’s yields will decline by 6% YoY in 1QFY17. This coupled with lower utilisation are likely to result in 7% lower RASK YoY and decline in PBT/ASK to Rs0.77/ASK from Rs0.81/ASK in 1QFY16. We reiterate SELL on Indigo as the stock already factors in FY17-26E ASK CAGR of 16%, stable margins of Rs0.54/ASK as seen in FY16 (2x of FY10-15 average), and sustained profits from sale and leaseback, leaving little scope for upside.

ASK growth: In 1QFY17, Indigo has got deliveries of 2 new A320neos, resulting in 1QFY17-end aircraft fleet of 109 (vs 97 at the end of 1QFY15, up 12% YoY and 107 at the end of 4QFY16, up 2% QoQ). For Apr-May 2016, Indigo reported 25% ASK growth YoY, half of which is driven by new planes and the rest from higher aircraft utilisation. In 2MFY17, industry domestic seat capacity grew 21% YoY. We expect Indigo to report ASK growth of 24% in 1QFY17.

Load factors and RPK growth: For Apr-May 2016, industry domestic PLF remained 85.3%, flat YoY. However, Indigo’s capacity utilisation for Apr-May 2016 declined to 86.6% from 88.8% in Apr-May 2015. We factor in average PLF of 86.5% for Indigo in 1QFY17 (vs 87.9% in 1QFY15) and resultant RPK growth of 22% YoY.

Crude prices: In 1QFY17, average India ATF prices have risen by 9-15% QoQ. On a YoY basis, average India ATF prices are lower by 14-19%.

Realisations and profitability: Rising domestic supply (21% for industry and 25% for Indigo) would create pressure on yields. We factor in Indigo’s yields to decline by 6% YoY in 1QFY17. This coupled with lower utilisations are likely to result in 7% YoY decline in RASK and decline in PBT/ASK to Rs0.77/ASK from Rs0.81/ASK in 1QFY16.

Preparing for the upcoming results

Key factors to watch for: (a) impact of rising supply on pricing power; (b) ability to pass through rise in crude prices to customers; (c) updates on market value of A320neo and resultant profits from sale and leaseback of 2 A320neos in 1QFY17.

Ambit vs consensus: Based on limited consensus data, our 1QFY17 PAT for Indigo are lower than consensus by 9%.

Recommendations

We reiterate our SELL stance on Indigo as the stock price already factors in FY17-26E ASK CAGR of 16%, stable margins of Rs0.54/ASK as seen in FY16 (2x of FY10-15 average), and sustained profits from sale and leaseback, leaving little scope for upside surprises.


Company Jun'16E Jun'15 Mar'16 YoY QoQ Comments

Interglobe Aviation Sales (Rs mn) 48,629 42,115 40,907 15 19

We expect revenues to increase 15% YoY as 24% increase in ASK is likely to be partially offset by 6% decline in average yields YoY. Despite 7% decline in RASK YoY, 13% fall in ATF prices would result in EBITDA/ASK decline of only 7% YoY. As a result, Indigo’s EBITDA/PAT are also expected to rise by 15%/13% YoY.

EBITDA (Rs mn) 11,212 9,724 8,050 15 39

EBITDA margin (%) 23.1% 23.1% 19.7% -3 bps 338 bps

PBT (Rs mn) 10,817 9,253 8,108 17 33

PAT (Rs mn) 7,248 6,404 5,793 13 25


Stock Performance

(%) 3-month


Interglobe Aviation 4.5 (4.7)

Jun’16E Qtrly EPS (Rs) Ambit Consensus

Interglobe Aviation 20.1 1 22.1

FY17E EPS (Rs) Ambit Consensus

Interglobe Aviation 59.4 64.4



Banking 1QFY17 is likely to be muted for the banking sector on most fronts given muted balance sheet growth, NIM pressure, and elevated credit costs. Credit growth would stay subdued (10-12% for the entire banking system); low growth is resulting in intensifying competition on pricing. Banks are likely to continue to report elevated NPA addition. This, combined with aging of past NPAs, will keep credit costs high. Overall, we estimate net profit decline of 10% YoY (vs 120% decline in 4QFY16) for banks in our coverage universe in the quarter, with new-gen private sector banks’ profits growing by 7% YoY. Our top pick is IndusInd Bank (earnings momentum with stable asset quality). We are negative on most PSU banks as we believe elevated credit costs and weak operating performance would keep financial performance subdued.

Credit growth to stay muted: RBI data shows muted system-level loan growth of ~8.7% as of mid-June 2016. Corporate credit growth has been muted due to weak demand and asset quality stress faced by banks for such loans. PSU banks would grow slower than the system and new private sector banks should, on average, grow by ~19%. Overall, we expect loan growth of 10% during the quarter for banks under our coverage.

Asset quality stress unlikely to ease: Whilst the RBI’s Asset Quality Review (AQR) related NPA recognition has been mostly accounted for in 2HFY16, NPA recognition would stay elevated as indicated by various banks’ watchlist disclosures and regulator’s and the Government’s push for balance sheet clean-up. Thus, credit costs would be higher owing to the combined impact of fresh NPA formation, restructured loans slipping to NPAs, and incremental provisions on aging NPAs. PSU banks with significantly sized restructured books and low provision coverage are at a particular disadvantage. We expect 5% QoQ increase in gross NPAs (up 94% YoY), following ~30% QoQ increase in 4QFY16.

NIMs to come under pressure: Interest reversal due to addition to NPAs, slowing loan growth and pressure on yields will sustain margin pressure for most of the banks. Overall, for banks under our coverage, we do not expect any revival in income growth and build in NII growth of 8% YoY as compared to average of ~11% in the last 8 quarters.


We highlight trends in fresh NPAs, slippage from pool of restructured loans to NPLs, NIMs and loan mix for various banks as the key variables to monitor in 1QFY17.

Ambit vs consensus

Our earnings estimates for the quarter are ~3% lower than consensus and ~3% lower for FY17 and FY18. The divergence is predominantly due to weaker loan growth forecasts, NIM pressure, our higher slippage assumptions, and weaker upgrades/recovery forecasts.

Recommendations

Consolidated net profit for banks in our coverage universe is likely to decline by 10% YoY, compared to 120% YoY decline in 4QFY16. Consolidated RoAs are likely to be ~0.8% (down 8bps YoY; up 96bps QoQ). New private sector banks are likely to deliver an average RoA of 1.59% compared with PSU banks’ ~0.34%. We are BUYers of IndusInd Bank (IIB IN, US$9.8bn, TP Rs1,240, 12% upside) and Axis Bank (AXSB IN, US$19.3bn, TP Rs610, 12% upside). We are SELLers on all PSU banks under our coverage, except Bank of Baroda, as we believe elevated credit costs and weak operating performance would keep financial performance subdued. We are SELLers on Kotak Mahindra Bank (KMB IN, US$20.3bn, TP Rs530, 29% downside) due to its expensive valuation and the market’s lofty earnings expectations, which the bank would find difficult to meet.

Stock Performance

(%) 3-month


HDFC Bank 10 1

ICICI Bank 9 -1

Axis Bank 25 16

Kotak Mahindra Bk. 11 2

IndusInd Bk. 16 7

State Bk. of India 21 12

Bank of Baroda 10 1

Punjab National Bk. 38 28

Bank of India 17 8

Union Bk. of India 4 -5

Federal Bank 37 28

Karur Vysya Bk. 11 2

City Union Bank 29 20

South Indian Bk. 23 14

FY17E EPS


HDFC Bank 58.6 58.9

ICICI Bank 19.4 18.4

Axis Bank 36 36.6

Kotak Mahindra Bk. 24.6 25.1

IndusInd Bk. 49.1 49.7

State Bk. of India 14.6 16

Bank of Baroda 15.3 11.5

Punjab National Bk. 16.2 10.1

Bank of India 11.5 2.2

Union Bk. of India 25.4 22.8

Federal Bank 4.8 4.3

Karur Vysya Bk. 44.6 50.7

City Union Bank 8.8 8.6

South Indian Bk. 2.9 3



Detailed June’16E quarterly estimates Exhibit 7:

Jun'16 Jun'15 Mar'16 YoY QoQ Comment

HDFC Bank

Net Interest Income (Rs mn) 76,979 63,888 74,533 20% 3%

Growth in PAT is in line with growth in assets

Operating Profit (Rs mn) 56,924 48,499 57,349 17% -1%

Cost to income (%) 45.7% 45.2% 44.4% PBT (Rs mn) 49,432 41,219 50,725 20% -3%

PAT (Rs mn) 32,625 26,957 33,742 21% -3%

ICICI Bank


Higher provisions to impact net profit


Cost to income (%) 39.9% 37.8% 32.4% PBT (Rs mn) 34,431 40,824 37,813 -16% -9%

PAT (Rs mn) 24,790 29,762 31,139 -17% -20%

Axis Bank


We expect PAT to decline by 7% due to elevated credit costs.

Operating Profit (Rs mn) 45,290 40,921 43,985 11% 3%


PAT (Rs mn) 18,463 19,784 21,543 -7% -14%

Kotak Mahindra Bank


Standalone bank to deliver an RoA of ~1.6%


Cost to income (%) 52.0% 72.7% 53.0% PBT (Rs mn) 10,843 2,917 9,937 272% 9%

PAT (Rs mn) - standalone 7,566 1,898 6,958 299% 9%

PAT (Rs mn) - consolidated 10,962 5,177 10,548 112% 4%

IndusInd Bank


Growth in PAT lower than operating profits due to credit cost



PAT (Rs mn) 6,387 5,250 6,204 22% 3%

State Bank of India

Net Interest Income (Rs mn) 149,600 137,320 152,908 9% -2%

Expect muted NIM and elevated credit cost.


Cost to income (%) 52.7% 51.1% 45.4% PBT (Rs mn) 29,036 52,024 10,179 -44% 185%

PAT (Rs mn) 19,744 36,924 12,638 -47% 56%

Bank of Baroda

Net Interest Income (Rs mn) 30,822 34,596 33,304 -11% -7%

Elevated credit cost to limit RoAs at 0.4%

Operating Profit (Rs mn) 20,126 22,020 25,725 -9% -22%

Cost to income (%) 54.6% 50.3% 49.6% PBT (Rs mn) 8,691 16,022 -42,852 -46% -120%

PAT (Rs mn) 6,518 10,522 -32,301 -38% -120%


Net Interest Income (Rs mn) 35,807 41,765 28,587 -14% 25%

Expect loan growth of ~8% YoY, NIM compression and elevated credit costs to lead to RoAs of 0.4%.



PAT (Rs mn) 7,107 7,207 -53,671 -1% -113%



Jun'16 Jun'15 Mar'16 YoY QoQ Comment

Bank of India


Decline in loan book and elevated provision, including unamortised provisions sitting on balance sheet, leading to loss after tax of Rs35bn.


Cost to income (%) 55.6% 54.6% 64.0% PBT (Rs mn) 4,789 1,895 -40,062 153% -112%

PAT (Rs mn) 3,832 1,297 -35,871 195% -111%

Union Bank of India

Net Interest Income (Rs mn) 20,139 21,302 20,847 -5% -3%

Muted loan growth (~5% YoY), NIM compression and elevated credit costs to lead loss before tax of Rs1.5bn



PAT (Rs mn) 3,099 5,188 961 -40% 222%

Federal Bank


Expect NIM improvements YoY and moderation in credit costs.


Cost to income (%) 54.5% 54.0% 56.8% PBT (Rs mn) 2,634 2,141 59 23% 4379%

PAT (Rs mn) 1,738 1,414 103 23% 1594%

Karur Vysya Bank


We expect some recovery in margins, but muted loans growth and elevated credit costs to keep RoAs at around 70bps.

Operating Profit (Rs mn) 2,913 2,957 2,589 -2% 13%


PAT (Rs mn) 1,021 1,346 1,380 -24% -26%

City Union Bank


Storng loan book growth of 17% along with superior margins to protect profitability at ~1.6%.



PAT (Rs mn) 1,250 1,116 1,122 12% 11%

South Indian Bank


Elevated cost to income ratio and provisions to lead to muted RoAs of 0.4%.


Cost to income (%) 56.5% 59.3% 56.7% PBT (Rs mn) 979 1,014 1,060 -3% -8%

PAT (Rs mn) 656 653 730 0% -10%







HDFC Bank Recommendation SELL SELL TP (Rs) 1,180 1,140 Net interest income (Rs mn) 336,518 403,121 336,034 401,961 0% 0%

Roll-forward leads to a minor upgrade in our target price.

Operating profit (Rs mn) 261,396 315,627 260,615 313,679 0% 1%

Cost to income (%) 43.5% 42.7% 43.6% 42.9% PBT (Rs mn) 222,850 269,928 221,854 267,733 0% 1%

PAT (Rs mn) 148,195 179,502 147,533 178,043 0% 1%

EPS (Rs) 58.6 71.0 58.4 70.4 0% 1%

ICICI Bank Recommendation SELL SELL TP (Rs) 240 230 Net interest income (Rs mn) 234,872 266,398 230,185 262,233 2% 2%




PAT (Rs mn) 113,071 132,722 112,009 130,880 1% 1%

EPS (Rs) 19.4 22.8 19.3 22.5 1% 1%

Axis Bank Recommendation BUY BUY TP (Rs) 610 600 Net interest income (Rs mn) 190,111 222,752 195,208 230,008 -3% -3%

Revision in estimates to factor the recent trends

Operating profit (Rs mn) 184,245 214,072 188,038 219,843 -2% -3%

Cost to income (%) 39.1% 39.3% 38.6% 38.7% PBT (Rs mn) 128,943 161,335 133,321 167,174 -3% -3%

PAT (Rs mn) 85,747 107,288 88,658 111,170 -3% -3%

EPS (Rs) 36.0 45.0 37.2 46.7 -3% -3%

Kotak Mahindra Bank Recommendation SELL SELL TP (Rs) 530 510 Net interest income (Rs mn) 82,018 98,037 77,918 93,351 5% 5%




PAT (Rs mn) - standalone 30,160 37,159 29,782 36,745 1% 1%

PAT (Rs mn) - consolidated 45,171 54,564 44,257 53,534 2% 2%

EPS (Rs) - consolidated 24.6 29.8 24.1 29.2 2% 2%

IndusInd Bank Recommendation BUY BUY TP (Rs) 1,240 1,125 Net interest income (Rs mn) 57,070 70,691 55,900 68,123 2% 4%

Revision in estimates and valuation to factor the recent trends



PAT (Rs mn) 29,221 37,327 28,425 36,123 3% 3%

EPS (Rs) 49.1 62.7 47.8 60.7 3% 3%



New Estimates Old Estimates Change Comments


State Bank of India Recommendation SELL SELL TP (Rs) 180 175 Net interest income (Rs mn) 625,881 692,787 622,054 690,518 1% 0%




PAT (Rs mn) 113,657 156,272 109,282 154,029 4% 1%

EPS (Rs) 14.6 20.1 14.1 19.8 4% 1%

Bank of Baroda Recommendation BUY BUY TP (Rs) 175 170 Net interest income (Rs mn) 140,680 165,034 139,646 163,449 1% 1%




PAT (Rs mn) 35,236 54,006 35,076 53,502 0% 1%

EPS (Rs) 15.3 23.4 15.2 23.2 0% 1%

Punjab National Bank Recommendation SELL SELL TP (Rs) 82 82 Net interest income (Rs mn) 171,976 181,334 188,654 206,823 -9% -12%

Reduction in estimates to factor the recent trends



PAT (Rs mn) 31,852 36,168 36,035 46,132 -12% -22%

EPS (Rs) 16.2 18.4 18.4 23.5 -12% -22%

Bank of India Recommendation SELL SELL TP (Rs) 80 80 Net interest income (Rs mn) 119,553 130,475 121,524 136,147 -2% -4%




PAT (Rs mn) 9,366 19,140 9,544 24,899 -2% -23%

EPS (Rs) 11.5 23.4 14.3 31.4 -20% -25%

Union Bank of India Recommendation SELL SELL TP (Rs) 110 110 Net interest income (Rs mn) 90,540 91,804 92,727 100,929 -2% -9%




PAT (Rs mn) 17,453 17,707 18,639 22,101 -6% -20%

EPS (Rs) 25.4 25.8 29.3 32.2 -13% -20%





Federal Bank Recommendation SELL SELL TP (Rs) 49 47 Net interest income (Rs mn) 28,469 32,688 28,696 32,961 -1% -1%




PAT (Rs mn) 8,202 10,854 8,352 11,035 -2% -2%

EPS (Rs) 4.8 6.3 4.9 6.4 -2% -2%

Karur Vysya Bank Recommendation SELL SELL TP (Rs) 475 450 Net interest income (Rs mn) 19,683 22,020 18,626 20,366 6% 8%


Operating profit (Rs mn) 12,000 14,578 12,810 13,825 -6% 5%

Cost to income (%) 56.5% 52.9% 50.8% 51.5% PBT (Rs mn) 7,253 9,923 7,972 8,576 -9% 16%

PAT (Rs mn) 5,440 7,442 5,979 6,432 -9% 16%

EPS (Rs) 44.6 61.1 49.2 52.9 -9% 15%

City Union Bank Recommendation BUY BUY TP (Rs) 136 120 Net interest income (Rs mn) 11,446 13,661 11,446 13,661 0% 0%

Upgrades in estimates to factor the recent trends



PAT (Rs mn) 5,282 6,471 5,035 6,258 5% 3%

EPS (Rs) 8.8 10.8 8.4 10.5 5% 3%

South Indian Bank Recommendation SELL SELL TP (Rs) 19.0 19.0 Net interest income (Rs mn) 16,777 18,884 17,214 19,902 -3% -5%

No change in target price

Operating profit (Rs mn) 10,121 11,782 9,975 12,089 1% -3%

Cost to income (%) 55.1% 53.7% 56.2% 53.9% PBT (Rs mn) 5,741 7,662 5,722 8,165 0% -6%

PAT (Rs mn) 3,904 5,210 3,891 5,552 0% -6%

EPS (Rs) 2.9 3.9 2.9 4.1 0% -6%




Building Materials After a reasonably strong 4QFY16 performance, we expect volume growth for most building material categories to moderate in 1QFY17 as new unit construction remains muted alongside stuffed channels. Paints companies will report 9-10% revenue growth, driven largely by economy products. Electricals growth will be in single digits though top brands like Havells, Crompton and V-Guard would post 10-16% revenue growth led by market share gains. Pipes revenue growth is likely to be ~5% due to moderation in volume growth. Plyboard volume growth will be in single digits but leading brands will continue to gain market share from unorganised players in the economy segment. Whilst short-term demand recovery remains uncertain, we believe certain companies offer longevity of growth through category expansion and market share gains. Retain BUY on Asian Paints, Berger Paints, Supreme Industries Century Plyboards, Havells and V-Guard.

Paints: Revenue growth moderation to 9-10%; margin tailwinds to continue

We expect 9-10% decorative paints revenue growth for paints companies in 1QFY17, similar to the run-rate reported in 2HFY16. Whilst Apr 2016 was a very weak month for volume growth, this was offset by stronger growth in May and June. Given 2-3% YoY decline in price realisations, zero price hikes in the quarter, and greater growth momentum in economy paints products compared to premium products, revenue growth will be largely volume-led. We expect 11-12% volume growth for both Asian Paints and Berger Paints, which continue to gain market share from Kansai and Akzo Nobel. New initiatives like construction chemicals, express painting service, and value-added services being offered by Asian and Berger appear to be gaining good traction from customers, painters and dealers. Soft input costs will result in gross margin expansion of 70-220bps in 1QFY17.

Asian Paints revenue growth to moderate but Exhibit 9:EBITDA margin to improve


Berger Paints revenue growth to improve with Exhibit 10:expansion of EBITDA margin


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Stock Performance

(%) 3-month


Asian Paints (3) 2

Berger Paints (9) (4)

Havells 15.5 8.1

Bajaj Electricals 19.0 11.0

Supreme Industries 9.6 17.7

Century Plyboards (4.3) 3.8

Finolex Cables 28.0 20.0

V-Guard 59.0 52.0

Crompton NA NA

Jun’16E Qtrly EPS


Asian Paints 5.4 5.2

Berger Paints 1.5 NA

Havells 2.4 NA

Bajaj Electricals 1.9 NA


Century Plyboards 1.6 NA

Finolex Cables 3.4 NA

V Guard 13.1 NA

Crompton 1.2 NA

FY17E EPS


Asian Paints 22.3 21.8

Berger Paints 7.3 6.5

Havells 10.6 10.1

Bajaj Electricals 13.8 14.8


Century Plyboards 8.0 8.1

Finolex Cables 19.2 17.5

V Guard 47.6 46.1

Crompton 4.2 4.3



Pipes- volume growth moderates

We expect the pipe segment’s volume growth to moderate to 5-6% in 1QFY17 due to weak agri demand and stuffed retail channels as dealers had stocked up inventory in anticipation of further price hikes. We expect realisation to decline by 2% YoY, as against a 6% YoY decline in FY16. We expect Supreme’s EBITDA margin to contract sharply in 1QFY17 (~450bps YoY) due to inventory adjustments. Note that in the corresponding quarter, last year, strong margins were supported by inventory gains.

PVC resin prices have stagnated in the last four Exhibit 11:months

Source: Company, Reliance, Ambit Capital research

Supreme’s volume growth has improved in Exhibit 12:recent quarters, but likely to moderate in 1QFY17


Light Electricals

Demand has moderated in 1QFY17 compared to 2HY16 led by: (a) deceleration in industrial demand due to slowdown in the pace of construction projects; and (b) marginal slowdown in consumer spending. However, seasonal products such as stabilisers and fans have seen strong growth due to intense summer.

We expect revenue growth of 10% and 15% YoY for Havells (strong lighting/fans sales due to market share gain/intense summer) and V-Guard (strong stabilisers and fans sales due to intense summer). However, we expect only 1% YoY revenue growth for Finolex given 12% YoY decline in realisation. For Bajaj Electrical, we expect revenue decline of 4% YoY led by 8% YoY decline in consumer durables as the restructuring of sales team and distribution network in Apr 2016 in tier II and III cities have temporarily impacted sales. For Crompton we expect volume growth of 16% led by strong growth in fans due to intense summer alongside improvement in focus due to change in management.

We model EBITDA margin expansion of 210bps, 160bps, and 40bps YoY for Havells (discontinuation of royalty + gross margin expansion + operating leverage), V-Guard (higher share of high margin stabilisers + operating leverage in non-South) and Finolex (benefits of lower commodity prices not passed partially) respectively. For Bajaj, we expect EBITDA margin decline of 60bps YoY to 5.4% led by unfavourable operating leverage in consumer durables. For Crompton, we expect EBTIDA margin decline of 280bps YoY due to ramp-up in ad-spend (spent Rs0.4bn on IPL in 1QFY17 vs NIL in 1QFY16) alongside increase in corporates overheads consequent to demerger

We continue to like all the stocks in the electrical sector except Crompton given consumer demand is likely to improve in FY17 on the back of (a) Seventh Pay Commission payouts, which would benefit low-ticket categories like small appliances, and (b) pick-up in demand from the industrial sector (industrial cables volume grew ~17% in 2HFY16 vs ~5% in 1HFY15). In terms of valuations, we like Finolex Cables, Bajaj, V-Guard and Havells in that order of preference. We do not like Crompton due to expensive valuation (trading in-line with Havells) alongside margin headwinds.

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Snapshot of growth across light electrical products Exhibit 13:

Product categories Volume growth YoY (%) Value growth YoY (%) Market share in 4QFY16

1QFY17E 4QFY16 FY16 1QFY17E 4QFY16 FY16 Gainer Loser

Cyclical products

Construction wires 10% 13% 8% -1% 2% -1% Havells, V-Guard Polycab

Switchgears 3% 7% 1% 3% 7% 1% Havells Schneider, Legrand

Lighting 12% 16% 11% 9% 11% 8% Syska, Eveready Philips, Bajaj, unorganised

Pumps 15% 16% 10% 15% 16% 10% Consumer products

Small appliances 7% 10% 6% 9% 12% 8% Havells Philips, Bajaj

Water heaters 5% 7% 10% 6% 10% 13% V-Guard, Crompton AO Smith, Racold, Bajaj

Seasonal products

Fans 12% 9% 9% 13% 11% 11% Crompton, Havells Usha, Bajaj

Stabiliser 20% 23% 10% 23% 26% 13% No major change

Source: Ambit Capital research; Note: We have estimated industry growth rate across the products for 1QFY17, 4QFY16, and FY16 based anecdote data

Average copper prices are down 19% YoY, but flat QoQ Exhibit 14:


Plyboards: growth to be driven by market share gains

Whilst the plyboard volumes continue to decline, we expect single-digit volume growth for the large players driven by market share gains from unorganised players in the low-mid plyboard segment. Whilst core timber and adhesive prices remain benign, increase in timber royalty in Myanmar has led to higher cost of face veneer. Century’s access to face veneer in Laos will offset higher face veneer cost in Myanmar and hence we expect the company will continue to report elevated EBITDA margin of 17% in 1QFY17 (down 70bps YoY but up 30bps QoQ).

Revenue growth for plyboard majors remains significantly lower than Exhibit 15:median growth rates

Source: Company, Ambit Capital research. We aggregate revenues of Century and Green to calculate the revenue of the plyboard industry

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Assumptions for the quarter Exhibit 16:

Supreme Industries Jun'16 Jun'15 Mar'16 YoY QoQ Comments

Plastics Sales (Rs mn) 12,887 12,467 11,914 3% 8% We expect volume growth to moderate to 5% YoY in 1QFY17

Total Income (Rs mn) 12,927 12,780 12,003 1% 8% We do not expect any contribution from real estate sales

Plastics EBITDA (Rs mn) 1,902 2,395 2,152 -21% -12% Lower margins are a function of inventory losses Plastics EBITDA margin

(%) 14.8% 19.2% 18.1% (445) (331)

EBITDA (Rs mn) 1,902 2,579 2,152 (0) (0) EBITDA margin (%) 15% 20% 18% (547) (322) PBT (Rs mn) 1,452 2,124 1,686 -32% -14%

PBT/PAT decline is on account of no revenue contribution from real estate and lower margins PAT (Rs mn) 990 1,598 1,146 -38% -14%

EPS 12,887 12,467 11,914 3% 8%



Century Plyboards Mar'16E Mar'15 Dec'15 YoY QoQ Comments

Sales (Rs mn) 4,080 3,709 4,547 10% -10% We expect only marginal revenue growth given a bleak demand environment

EBITDA (Rs mn) 694 655 760 6% -9% EBITDA margin to decline marginally on a high base of last year EBITDA margin (%) 17.0% 17.7% 16.7% (64) 30

PBT (Rs mn) 484 447 549 8% -12%

Earnings decline is largely a function of a higher tax rate PAT (Rs mn) 363 397 405 -8% -10%

EPS 2 2 2 -8% -10%



Company name Jun'16E Jun'15 Mar'15 YoY QoQ Comment

Havells

Sales (Rs mn) 13,910 12,671 14,754 10% -6% Double-digit revenue growth is led by strong growth in fans (strong summer), lighting (market share gain in LED) alongside pick-up in industrial demand.

EBITDA (Rs mn) 2,026 1,583 2,201 28% -8% Margin improvement led by: (a) cessation of royalty payment to promoter (impact 90bps); (b) gross margin improvement by 50bps YoY due to benefits of lower commodity prices; and (c) favourable operating leverage (impact 70bps) EBITDA margin (%) 14.6% 12.5% 14.9% 210bps -30bps

PBT (Rs mn) 2,096 1,496 4,232 40% -50% Trickle down impact of higher EBITDA

PAT (Rs mn) 1,488 1,097 1,635 36% -9% We expect tax rate to increase from 28.2% in 1QFY16 to 29% in 1QFY17

Bajaj Electricals

Sales (Rs mn) 9,701 10,091 13,572 -4% -29%

Restructuring of sales team and distribution network for ramping-up ToC coverage in rurban areas during this quarter has temporarily disrupted consumer durable sales (likely to decline by 8% YoY). Lighting is likely to decline by 2% due to weak sales under EESL. E&P is likely to remain flat.

EBITDA (Rs mn) 523 602 744 -13% -30% Margin decline led by unfavourable operating leverage

EBITDA margin (%) 5.4% 6.0% 5.5% -60bps -10bps

PBT (Rs mn) 300 347 532 -13% -44% Trickle-down impact of lower EBITDA

PAT (Rs mn) 198 203 347 -3% -43% We expect tax rate to decline from 41% in 1QFY16 to 34% in 1QFY17

V-Guard

Sales (Rs mn) 5,750 4,993 5,133 15% 12% Led by strong demand for seasonal products such as stabilisers and fans due to strong summer.

EBITDA (Rs mn) 595 434 634 37% -6% Margin expansion led by: (a) benefits of lower raw material prices; (b) strong revenue growth in stabilisers which is margin-accretive; and (c) favourable operating leverage in non-South.

EBITDA margin (%) 10.3% 8.7% 12.4% 160bps -210bps

PBT (Rs mn) 564 372 605 52% -7% PBT and PAT growth is higher than EBITDA growth due to decline in interest expense

PAT (Rs mn) 391 251 420 56% -7%




Finolex Cables

Sales (Rs mn) 5,961 5,883 6,807 1% -12% We expect flat revenue in electrical cables and wires given 12% YoY decline in realisation. We expect strong volume growth of 12%.

EBITDA (Rs mn) 762 730 1,311 4% -42% Expect margins to improve as the benefits of lower copper prices have not been entirely passed on. EBITDA margin (%) 12.8% 12.4% 19.3% 40bps -650bps

PBT (Rs mn) 693 653 1,106 6% -37% Trickle down impact of higher EBITDA

PAT (Rs mn) 520 480 1,026 8% -49% We expect tax rate to decline from 26.5% in 1QFY16 to 25% in 1QFY17

Crompton consumer

Sales (Rs mn) 11,255 9,708 10,016 16% 12% Led by strong growth in fans due to intense summer alongside improvement in focus in business due to change in management

EBIT (Rs mn) 1,299 1,387 1,239 -6% 5% Margin decline led by ramp-up in ad-spend (spent ~Rs0.4bn on IPL vs NIL in 1QFY16) and increase in overheads due to demerger. EBIT margin (%) 11.5% 14.3% 12.4% -280bps -90bps

PBT (Rs mn) 1,149 NA 1,079 NA 6% Sequential growth led by higher EBIT

PAT (Rs mn) 770 NA 759 NA 1% We expect tax rate to increase from 29.7% in 4QFY16 to 33% in 1QFY17

Source: Company, Ambit Capital research, Note – for Crompton we take EBIT as EBITDA for 1QFY16 not available; also PBT and PAT for 1QFY16 are not available

Change in Estimates Exhibit 19:

Rsmn unless specified New Estimates Old Estimates Change in

estimates Comments FY17E FY18E FY17E FY18E FY17E FY18E

Bajaj Electricals

Recommendation BUY BUY TP (Rs) 270 277 -2.6%

Consequent to cut in FY17/FY18 EBITDA by 5%/2% partly offset by rollover of TP by 3 months.

Revenues (Rs mn) 50,778 56,853 51,900 58,112 -2% -2% Led by cut in consumer durables and lighting revenue due to sales disruption in 1QFY17 on ramping-up ToC coverage to tier II and III cities.

EBITDA (Rs mn) 3,031 3,629 3,205 3,710 -5% -2% Cut in margin in FY17 led by unfavourable operating leverage. EBITDA margin (%) 6.0% 6.4% 6.2% 6.4% -20bps 0bps

PBT (Rs mn) 2,109 2,740 2,260 2,798 -7% -2%

Trickle down impact of cut in EBITDA PAT (Rs mn) 1,392 1,808 1,492 1,847 -7% -2%

EPS (Rs) 13.8 17.9 14.8 18.3 -7% -2%

Finolex Cables


TP (Rs) 414 400 3.6%

Consequent to rollover of TP by 3 months and increase in the market price of investment in Finolex Industries from Rs400/share to Rs445/share (we give holding company discount of 25%)

Revenues (Rs mn) 29,646 33,214 29,646 33,214 0% 0%

No change

EBITDA (Rs mn) 3,787 4,241 3,787 4,241 0% 0%

EBITDA margin (%) 12.8% 12.8% 12.8% 12.8% 0bps 0bps

PBT (Rs mn) 3,921 4,516 3,921 4,516 0% 0%

PAT (Rs mn) 2,940 3,387 2,940 3,387 0% 0%

EPS (Rs) 19.2 22.1 19.2 22.1 0% 0%




Capital Goods Demand across various sub-sectors in 1QFY17 is likely to be weak given deceleration in industrial capex and weak execution of orders due to liquidity challenges. Except Greaves Cotton (GRV), all companies are likely to report decline in profitability. Whilst BHEL could slip into losses due to high share of imported components, Thermax is likely to report 14% YoY decline in PAT due to decline in order book. Inox Wind should report PAT decline of 14% YoY due to margin contraction. Whilst we expect Cummins (KKC) to report 9% decline in PAT due to decline in exports, Greaves is likely to report 14% YoY growth in PAT led by higher other income. Our top BUY is Greaves and top SELL KKC.

Disappointing revenue growth: We expect decline in revenue for all companies in our coverage except Inox Wind and Greaves (GRV). We expect BHEL and Thermax to report 3% and 8% YoY revenue decline led by slowdown in execution. We expect Inox’s revenue to grow by 10%, led by pick-up in the pace of execution. We expect KKC’s revenue to grow by 5% YoY led by 25% YoY decline in exports given weak global demand scenario. For GRV, we model 2% YoY growth led by growth in gensets/agri equipment (auto volumes are likely to remain flat).

EBITDA margin contraction: We expect EBITDA margin contraction for all companies under our coverage. We expect BHEL’s EBITDA margin to decline by 290bps YoY to -7.7% led by high share of imported components and unfavourable operating leverage. For Thermax, we expect 70bps YoY decline in margin due to unfavourable operating leverage. For Inox, we expect 140bps YoY decline in margin led by unfavourable operating leverage given doubling of installed capacity. We expect margin decline of 70bps and 90bps YoY for KKC (pricing pressure alongside unfavourable operating leverage) and GRV (unfavourable operating leverage) respectively.

Where do we go from here?

We remain negative on the BTG sector due to over-supply. We are concerned about wind equipment companies given the strong competition from solar and likelihood of incentives available to wind getting withdrawn post FY17. For engines, we have a mixed outlook. Whilst the near-term outlook for power gensets remains weak given the slowdown in industrial capex, we expect a recovery in 2HFY17 on the back of a recovery in corporate capex. However, we are positive on 3W and 4W small commercial vehicle auto engine manufacturers as the penetration of 3W vehicles remains weak and the trend for outsourcing 4W engines is expected to pick-up over the next 3 years given rollout of GST.

Ambit vs consensus: Currently there are no credible consensus estimates available for all companies under coverage.

Recommendations

BHEL (SELL, TP Rs128/share, 8% upside):

Aside from the orders from the state electricity boards (SEBs), there are no new orders in the system. Whilst one reason for poor ordering is the large number of orders under construction, the other reason is the lack of investments by the private sector. Pricing is under a great deal of pressure; BHEL took the NTPC-SAIL EPC order at Rs32mn per MW vs Rs55mn per MW earlier. Pricing is unlikely to improve with overcapacity in the sector (30GW installed capacity vs annual demand of 8GW-10GW). Increase in share of imported components of orders under execution will continue to impact BHEL’s margin (gross margin declined 540bps YoY in FY16). Stock is trading at FY18 book value despite FY17 and FY18 RoE at 2% and 5% significantly lower than CoE of 14%. On P/E, the stock is trading at 14x FY18 P/E despite the structural decline in demand.

Stock Performance

(%) 3-month


BHEL 18 11

Thermax 10 3

Inox Wind (9) (17)

Cummins (1) (9)

Greaves Cotton 9 1

June’16E Qtrly EPS


BHEL (0.6) NA

Thermax 4.4 NA

Inox Wind 0.6 NA

Cummins 6.9 NA

Greaves Cotton 1.7 NA

FY16E EPS


BHEL 4.2 3.3

Thermax 21.2 24.9

Inox Wind 17.9 24.1

Cummins 28.8 29.8

Greaves Cotton 8.2 7.2



Greaves Cotton (BUY, TP Rs193/share, 39% upside): Greaves’ auto business would see recovery in volume growth over FY16-18 (we model revenue growth of 9% over FY16-18 vs flat over FY13-16), led by pick-up in demand for cargo vehicles (40% of FY15 volumes) due to: (a) softening interest rates; and (b) reduction in foreclosure inventory of LCVs with bankers. Strong focus on product development would result in Greaves adding at least one large OEM in the 4W space in addition to Multix announced last year. Moreover, with renewed focus in the power genset business, the company is expected to gain market share over FY16-18. Greaves is trading at 15x FY18E P/E despite FY18E RoE of 23% and EPS CAGR of 13% over FY16-FY18. At CMP, the auto business’ low valuation (FY18E P/E of 15x, a 40% discount to peers) ignores the 21% margin and 30% RoE generated by this business.

Detailed December ’15E quarterly estimates Exhibit 20:


BHEL

Sales (Rs mn) 41,436 43,617 100,048 -5% -59% Decline in revenue led by weaker execution due to meagre PLF of 64% of operational power plants given the weak demand scenario

EBITDA (Rs mn) (4,973) (2,093) 3,638 NA NA EBITDA loss is likely to increase led by unfavourable operating leverage and increase in share of imported components under the Joint Deed Undertaking for super-critical boilers EBITDA margin (%) -12.0% -4.8% 3.6% -720bps -1560bps

APBT (Rs mn) (3,179) 373 5,209 NA NA Consequently, we expect BHEL to slip into losses

APAT (Rs mn) (3,179) 339 3,655 NA -187%

Thermax

Sales (Rs mn) 9,211 10,012 12,932 -8% -29% Decline in revenue led by lower opening order book at Rs37bn (down 15% YoY) in 1QFY17.

EBITDA (Rs mn) 771 910 1,182 -15% -35% Whilst we expect gross margin improvement of 140bps YoY due to fall in commodity prices, we expect EBITDA margin to decline by 70bps YoY given the unfavourable operating leverage EBITDA margin (%) 8.4% 9.1% 9.1% -70bps -70bps

PBT (Rs mn) 787 919 1,524 -14% -48% Trickle-down impact of lower EBITDA

PAT (Rs mn) 527 617 1,112 -14% -53%

Inox Wind

Sales (Rs mn) 6,995 6,358 18,287 10% -62% Revenue growth led by faster execution

EBITDA (Rs mn) 944 946 3,011 0% -69% Led by increase in operating expenses due to commissioning of facility in Madhya Pradesh EBITDA margin (%) 13.5% 14.9% 16.5% -140bps -300bps

PBT (Rs mn) 717 769 2,852 -7% -75% Led by doubling of depreciation expense

PAT (Rs mn) 208 182 872 14% -76% Expect tax rate to increase from 24% in 1QFY16 to 29% in 1QFY17

Cummins

Sales (Rs mn) 12,453 13,143 10,654 -5% 17%

We expect exports to decline 25% YoY given weak global demand scenario and high base impact (up 36% in 1QFY16). We expect domestic powergen growth to decelerate from 18% in FY16 to 5% in 1QFY17 as market share trajectory has peaked.

EBITDA (Rs mn) 1,976 2,180 1,708 -9% 16% Trickle down impact of pricing pressure in domestic market alongside unfavourable operating leverage EBITDA margin (%) 15.9% 16.6% 16.0% -70bps -10bps

PBT (Rs mn) 2,348 2,575 2,013 -9% 17% Trickle-down impact of lower EBITDA

APAT (Rs mn) 1,914 2,107 1,642 -9% 17%

Greaves Cotton

Sales (Rs mn) 3,920 3,806 4,051 3% -3% We expect flat auto volumes (in line with SIAM data for April-May'16) and 10% growth in gensets and agri-equipment.

EBITDA (Rs mn) 611 622 632 -2% -3% Margin contraction led by unfavourable operating leverage

EBITDA margin (%) 15.6% 16.3% 15.6% -70bps 0bps

APBT (Rs mn) 607 583 646 4% -6% Increase in PBT led by higher other income due to increase in cash and current investments.

APAT (Rs mn) 419 360 450 16% -7% We expect tax rate to decrease from 34% in 1QFY16 to 31% in 1QFY17




Changes in estimates Exhibit 21:

Rsmn unless specified New Estimates Old Estimates Change in

estimates Comments FY17E FY18E FY17E FY18E FY17E FY18E

Greaves Cotton

Recommendation BUY BUY TP (Rs) 193 198 -2.5% Consequent to cut in FY17/FY18 EBITDA by 2%/4%

Revenues (Rs mn) 17,835 19,907 18,150 20,652 -2% -4% Cut led by slow growth in 3W auto production volume

EBITDA (Rs mn) 2,877 3,201 2,937 3,348 -2% -4%

EBITDA margin (%) 16.1% 16.1% 16.2% 16.2% -10bps -10bps No change

PBT (Rs mn) 2,900 3,229 2,652 3,017 9% 7% Led by upgrade in other income due to higher opening cash and cash equivalent in FY17.

PAT (Rs mn) 2,001 2,228 1,830 2,081 9% 7% Trickle-down impact of higher PBT

EPS (Rs) 8.2 9.1 7.5 8.5 9.3% 7.0%


Change in target price due to rollover by three-month Exhibit 22:

Company Target Price (Rs/share)

Upgrade (%) Previous Revised

BHEL 126 128 1.9%

Thermax 607 607 0.0%

Cummins 559 575 2.8%

Inox Wind 230 231 0.5%




Cement After stellar industry volume growth in 4QFY16 (+13% YoY), we expect volume growth to taper to 5% due deceleration in infrastructure construction and muted rural demand. However, strong pricing in North/Central India will drive 6-7% QoQ realisation increase for pan-India players and Shree Cement. Realisation is likely to remain flat sequentially for South players due to price cuts in AP and Karnataka in the first half of the quarter. Increase in petcoke costs will marginally dilute power and fuel cost savings given low-cost inventory from 4Q (+4% QoQ). Realisation improvement and no major cost escalation will drive 17% YoY and 5% QoQ increase in EBITDA/tonne. Shree and UltraTech volume growth will continue to outpace peers (8% and 22% YoY growth), whereas Ambuja/ACC are likely to report 4% YoY volume growth. South-based companies will post double-digit volume growth led by strong volume growth in AP. We are BUYers on pan-India cement companies but expensive valuations limit upside.

Industry volume growth recedes to mid-single digits

Cement volume growth receded to ~5% in 1QFY16 as against 13% in 4QFY16. Our checks suggest that demand growth has tapered due to continued weak rural demand (especially in Maharashtra, which is facing a drought) and slowdown in the pace of infra execution due to unavailability of water. The only states where volume growth has been strong are AP and Telangana due to execution of state-sponsored programmes such as irrigation (~2mn tonne volumes sold in Apr-May as against 1.2-1.3mn tonnes last year) Our checks suggest that demand has been flat in North India but declined in West India.

For 1QFY17, we build in 11% volume growth for the companies under coverage. Shree Cement and UltraTech’s volume growth will be relatively higher (21% and 7% YoY respectively). Ambuja and ACC will grow marginally lower than industry growth (~4% as against 5% volume growth of the industry). We expect Ramco’s volumes to grow by 15% led by better volumes in Tamil Nadu on a low base of last year and Orient to post 45% growth led by dispatches from recently added capacity in Karnataka and ramp-up in volume growth in AP/Telangana.

Volume growth to be largely driven by Shree Cement and Orient Cement Exhibit 23:

Source: Company, Ambit Capital research. Volume growth data is for covered companies – UTCEM, ACEM,ACC, SRCM,TRCL and ORCMNT

We reiterate our view that cement demand growth will be in the range of 6-7% in FY17 due to pick-up in execution of government programmes (roads, railways, etc) and spending on rural schemes wherein allocation has been increased significantly (+35% YoY) in FY17 (IAY, MNREGA and PMGSY)

-0.9%2.7% 2.8%

6.3%

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YoY volume growth

Stock Performance

(%) 3-month


UltraTech 7 (1)

Shree Cement 21 14

Ambuja 7 0

ACC 14 7

Ramco Cement 43 35

Orient Cement 21 14

Jun’16E Qtrly EPS


UltraTech 24.7 25.7

Shree Cement 65.5 66.5

Ambuja 1.9 1.8

ACC 13.3 7.3

Ramco Cement 6.1 NA

Orient Cement 0.8 NA

FY17E EPS


UltraTech 130.2 112.1

Shree Cement 373.8 351.3

Ambuja 11.1 7.6

ACC 50.9 47.8

Ramco Cement 25.4 24.6

Orient Cement 4.4 6.4



Pricing improves in most regions

Prices improved in North, Central and some parts of West India during the quarter as manufacturers maintained discipline rather that fighting for market share. Prices in North India are currently at Rs300-Rs310/bag as against ~Rs240/bag in Jan-Mar16, similarly prices in Central India improved to Rs280-300/bag as against Rs250/bag in Jan-Mar16. Whilst prices in South Indian states remained weak in April, discipline improved in the latter half of the quarter; hence we expect realisation for the South India companies to remain flat QoQ. We are building only 5%-6% QoQ realisation growth for UltraTech, ACC, Ambuja players and Shree Cement.

Prices were hiked sharply in North and Central India Exhibit 24:

Source: Primary Checks, Ambit Capital research

Petcoke benefits starting to diminish

Petcoke prices corrected by 40% over Apr15-Jan16 due to: (a) speculation over ban on high sulphur petcoke in China (>3% sulphur content; https://goo.gl/Q9tkfo), which led to a significant reduction in Chinese petcoke imports; b) rising imports from Saudi Arabia, which were earlier not used due to very high sulphur content of 8-8.5% as against 5-5.5% of supplies from the US. Petcoke use was one of the major avenues of price savings for cement companies in FY16. However, petcoke prices have risen sharply from the lows of Jan-16 – Rs4,650/tonne in May-16 vs Rs3,600/tonne in Jan-16. Our checks suggest that prices have risen further and are now at Rs4,950/tonne.

Key things to note:

The procurement cost of petcoke from the US increased to US$57-58/tonne by end of May from US$52/tonne on 6th May. Inventory of petcoke with Indian refineries reduced to 40,000-50,000 tonnes now from 170,000-180,000 tonnes in April.

Reduction in supply from Saudi Arabia: Petcoke offers from Saudi-based refineries to India have reduced since they are booked till June. Moreover, costs have risen to US$47/tonne from the lows of US$36/tonne in February.

Coal India’s concerns on petcoke usage: The government has imposed a Rs400/tonne clean energy cess on coal; but no such duty is applicable on petcoke. As per industry sources, CIL is lobbying for a similar levy on petcoke usage since petcoke is much more damaging for the environment given 9% sulphur content. CIL is lobbying to limit usage of petcoke in India by cement firms also because rising petcoke usage has led to lower sales of CIL’s high-grade coal. CIL has come out with notifications to levy penalties and encash bank guarantees if cement makers do not lift the agreed amount of coal.

When will cement companies shift back to coal? Our checks suggest that for petcoke to be a viable fuel there should be at least a 15% price/kcal difference over imported steam coal. For example, South African coal (6,000 kcal) and petcoke (7,500 kcal) have similar prices, but the gross calorific value difference is 25%, of which 10% is used to burn the additional sulphur (hence net savings = 15%). South African coal prices are ~US$60/tonne currently while petcoke costs ~US$58/tonne. If prices of petcoke increase to US$65/tonne, the difference of price/GCV would reduce to 7-8%, which could prompt some of the companies to shift back to coal.

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https://goo.gl/Q9tkfo),



However, note that despite the sharp QoQ increase in petcoke prices, it remains ~20% lower than last year’s average. Hence, we do not see a major risk to our assumption of a 6-7% YoY decline in power & fuel costs for cement companies under our coverage.

Whilst we expect a 13% YoY decline in power and fuel costs for the cement companies under coverage. We expect a 4% sequential increase since higher procurement costs of petcoke will be offset by low-cost inventory from the last quarter.

Petcoke costs increased by 40% since the lows Exhibit 25:of Feb-16

Source: ICMW, Ambit Capital research

P&F costs likely to increase by 4% QoQ Exhibit 26:

Source: Company , Ambit Capital research, P&F data is for covered companies – UTCEM, ACEM,ACC, SRCM,TRCL and ORCMNT

Freight costs: For the first time in last 10 years, the Government has kept rail freight rate unchanged in its budget. As against 11% rail freight realisation CAGR over FY10-13 realisations have been at 3% over FY13-FY16 and are likely to recede further due to the lack of hike in freight rates. On the flip side, diesel prices have increased by 23% in last 4 months, which will dilute some freight cost savings.

We expect freight costs to remain flat QoQ but expect a 7% YoY decline for the cement companies under coverage.

No more incremental savings in diesel prices Exhibit 27:

Source: ICMW, Ambit Capital research. Freight data is for covered companies – UTCEM, ACEM,ACC, SRCM,TRCL and ORCMNT

Diesel prices have increased by 23% in last Exhibit 28:four months


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Strong pricing and no major cost inflation will lead to strong EBITDA/tonne

We expect EBITDA/tonne for the 6 companies under coverage to improve by 17% YoY and 5% QoQ, led by strong pricing during the quarter and lower costs.

EBITDA/tonne is likely to improve by 17% YoY for the 6 companies under Exhibit 29:our coverage

Source: Company, Ambit Capital research. Unitary EBITDA data is for covered companies – UTCEM, ACEM,ACC, SRCM,TRCL and ORCMNT

Where do we go from here? Three key themes to watch for We are not convinced that a demand super-cycle is in the making for the next 12-18 months as urban housing construction remains lacklustre due to slowdown in institutional real estate and clamp-down on black money. Similarly, corporate capex will remain weak given over-capacity across key sectors. Hence, we do not see more than a 6-8% volume growth (best case) in the next 12-18 months. However, our optimism regarding the recovery in sector’s earnings and RoCE profile emanates from the following three key themes: #1: End of the cement capex cycle: The last super-cycle (FY05-08) drove de-leveraging and strong FCF generation for the sector, followed by unbridled scale aspirations/capacity expansions (Rs120bn-140bn annual capex over FY07-15). The capex cycle is likely to end as the top-5 players (60% of capex over FY10-15) shift focus from scale to RoCE expansion and smaller players focus on FCF growth to reduce leverage. Sector RoCE/EBITDA margins are 500/700bps lower than 15-year average. They should mean-revert by FY18 as capital employed stops increasing and margins expand due to efficiency initiatives (especially power and fuel and logistics) and discipline-led pricing improvement. #2: Consolidation for the first time in a decade: Jaypee’s emergence as the third-largest cement group in India was a classic illustration of rising fragmentation – 10% capacity held by a volume-focused tier II brand gaining scale. Several small players added capacities and fought for market share, impacting pricing (1% CAGR over FY13-15, lowest in the past decade). UltraTech’s acquisition of Jaypee will not only reduce tier II competition in large markets of North, Central and East India but also reduce its greenfield capex (0.6X D/E). Rising challenges in securing limestone mines will fend off new competition and expansions by the smaller players #3: Pick-up in rural demand on a low-base: Rural demand is likely to pick up from a low base and execution of road and railway projects could also contribute to improvement in volume growth. Other segments will take some time to recover and, hence, restrict overall volume growth for the industry. The real estate slowdown and aversion of Indian corporates to invest (either due to leverage or over-capacity) will be deterrents to runaway volume growth over the next 2-3 years. In the recent Budget, the NDA Government increased allocation for rural welfare schemes (IAY, PMGSY and MNREGA) by Rs20bn. This would directly/indirectly impact rural housing, notwithstanding the benefits of a normal monsoon. Our calculations suggest that these schemes could add 160bps to overall cement demand growth in India.

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Sector earnings to finally grow over FY16-18 After 5 years of no EBITDA growth (vs 36% CAGR over FY05-10), earnings of the sector should recover over FY16-18. While volume growth may hover at 6-8% (compared with hopes of 10-12%), pricing stability (6-7% CAGR) and lower costs (flat to 1-2% growth) will boost earnings growth. We expect 36% CAGR over FY16-18E for the 6 covered companies. Consensus estimates suffer from recency bias and display little predictive power; our FY17/FY18 EBITDA estimates are 10-25% higher than those of consensus. Recent rally limits upside in most names We turned positive on our call on the cement sector on 16th Mar 2016. Stock prices of large-cap cement companies ACC, Ambuja and UltraTech rose by 31%, 23% and 15% respectively since then. Moreover, our top pick in mid-caps, Orient Cement, returned 35% due to volume revival in AP. After this run-up, we do not see any major upside in these stocks. We highlight that most of the large-cap names now trade at a 25-30% premium to 5-year average EV/EBITDA. We prefer Ambuja and UltraTech over ACC on current valuations.

Our EBITDA estimates are 10-20% higher than consensus in FY17 for UltraTech, ACC and Ambuja and we do not see any scope for further earnings upgrades. Given limited upsides in the near term, we advise investors to BUY these pan-India players after an 8-10% correction, a highly likely outcome if demand continues to dwindle.

Summary of 1QFY17 results Exhibit 30:

Company name Jun-16 Jun-15 Mar-16 YoY QoQ Comments

UltraTech Cement

Cement despatches (mn tonnes) 13.0 12.1 13.6 7.0 (4.4) We expect 7% YoY volume growth for UltraTech, higher than industry growth rate due to utilisation ramp up at existing capacities

Realisation (Rs/tonne) 4,976 4,974 4,739 0.0 5.0

Sales (Rs mn) 65,315 60,975 65,037 7.1 0.4

EBITDA (Rs mn) 13,788 11,519 13,527 19.7 1.9 We expect 12% YoY improvement in EBITDA/tonne due to improved pricing discipline in key markets EBITDA margin (%) 21.1 18.9 20.8 222 31

EBITDA (Rs/tonne) 1,061 949 996 11.9 6.6

PBT (Rs mn) 9,688 8,308 9,301 16.6 4.2

PBT growth is broadly in-line with EBITDA. PAT (Rs mn) 6,781 5,908 6,814 14.8 (0.5)

EPS (Rs) 24.7 21.6 24.9 14.8 (0.5)

Ambuja Cement Cement despatches (mn tonnes) 6.1 5.9 5.9 4.0 4.4

We expect Ambuja to grow marginally lower than the industry (4% against industry growth of 5%) Realisation (Rs/tonne) 4,374 4,239 4,127 3.2 6.0

Sales (Rs mn) 26,972 25,105 24,446 7.4 10.3

EBITDA (Rs mn) 4,983 3,838 4,498 29.8 10.8 Sharp YoY growth in EBITDA/tonne due to better pricing in North and West India EBITDA margin (%) 18.5 15.3 18.4 319 8

EBITDA (Rs/tonne) 815 653 768 24.8 6.2

PBT (Rs mn) 4,403 3,094 4,202 42.3 4.8 PAT growth is higher than EBITDA due to better depreciation and interest coverage PAT (Rs mn) 2,994 2,264 3,038 32.3 (1.4)

EPS (Rs) 1.9 1.5 2.0 32.3 (1.4)

ACC Cement despatches (mn tonnes) 6.4 6.2 6.4 3.0 0.4

We expect 3% volume growth for ACC as against industry growth of 5% Cement Realisation (Rs/tonne) 4,606 4,547 4,345 1.3 6.0

Sales (Rs mn) 31,677 30,153 29,906 5.1 5.9

EBITDA (Rs mn) 4,784 3,335 4,328 43.4 10.5 Sharp YoY growth in EBITDA/tonne due to better pricing in North and Central India and improving cost efficiencies EBITDA margin (%) 15.1 11.1 14.5 404 63

EBITDA (Rs/tonne) 749 538 681 39.3 10.1

PBT (Rs mn) 3,559 1,771 3,220 101.0 10.5 PAT growth is higher than EBITDA due to better depreciation and interest coverage PAT (Rs mn) 2,491 1,314 2,322 89.6 7.3

EPS (Rs) 13.3 7.0 12.4 89.6 7.3



Company name Jun-16 Jun-15 Mar-16 YoY QoQ Comments

Ramco Cement Cement despatches (mn tonnes) 2.1 1.8 2.1 14.0 (1.0) Cement Realisation (Rs/tonne) 4,595 5,021 4,688 (8.5) (2.0) We expect 14% YoY volume growth for Ramco due to strong

volume growth in South India, especially AP, on a low base Sales (Rs mn) 9,841 9,509 10,149 3.5 (3.0)

EBITDA (Rs mn) 2,963 2,514 3,454 17.9 (14.2) Unitary EBITDA to plateau on a high base of last year

EBITDA margin (%) 30.1 26.4 34.0 368 (392)

EBITDA (Rs/tonne) 1,434 1,386 1,655 3.4 (13.4) PBT (Rs mn) 1,928 1,377 2,386 40.1 (19.2)

Sharp PAT growth is a function of lower tax rate PAT (Rs mn) 1,446 975 2,043 48.3 (29.2)

EPS (Rs) 6.1 4.1 8.6 48.3 (29.2)

Shree Cement Cement despatches (mn tonnes) 5.3 4.4 5.5 21.6 (3.2)

We expect Shree to significantly grow ahead of the industry (due to market share gains) and rising despatches in East India Cement Realisation (Rs/tonne) 3,528 3,483 3,297 1.3 7.0

Sales (Rs mn) 20,666 17,246 20,174 19.8 2.4

EBITDA (Rs mn) 5,306 3,568 5,050 48.7 5.1 Strong YoY improvement in EBITDA/tonne due to better pricing in North India and YoY decline in petcoke costs EBITDA margin (%) 25.7 20.7 25.0 499 64

EBITDA (Rs/tonne) 802 675 714 18.8 12.3

PBT (Rs mn) 2,536 1,314 2,182 93.0 16.3 Strong PAT growth on account of higher EBITDA and lower depreciation (last year depreciation was higher due to accelerated depreciation on recently commissioned capacities)

PAT (Rs mn) 2,283 1,281 2,234 78.2 2.2

EPS (Rs) 65.5 36.8 64.1 78.2 2.2

Orient Cement Cement despatches (mn tonnes) 1.4 1.0 1.4 45 1.7 We expect 45% volume growth due to volume ramp-up from

recently commissioned capacities and pick-up in volume growth in AP/Telangana

Cement Realisation (Rs/tonne) 3,306 3,595 3,242 (8.0) 2.0

Sales (Rs mn) 4,660 3,494 4,493 33.4 3.7

EBITDA (Rs mn) 691 597 617 15.8 12.1 YoY decline in EBITDA/tonne is on account of weak pricing in Maharashtra EBITDA margin (%) 14.8 17.1 13.7 (225) 110

EBITDA (Rs/tonne) 490.4 613.9 445.0 (20.1) 10.2

PBT (Rs mn) 191 465 107 (58.9) 78.5 Sharp decline in PAT this quarter is due to high interest and depreciation expense PAT (Rs mn) 163 279 194 (41.7) (16.2)

EPS (Rs) 0.8 1.4 0.9 (41.7) (16.2)




Consumer 1QFY17 saw no revival in broader consumption demand. The FMCG sector is likely to report median volume growth of ~5% YoY in 1QFY17 vs 5.5%/5.5% in 4QFY16/1QFY16 for our coverage universe. Categories like decorative paints, kitchenware and light electricals are likely to report moderation in YoY revenue growth of ~200bps vs 4QFY16. Exceptions to this trend are categories like ACs and fans, which benefited from temporary factors like an intense summer. Channel partners hope for consumption revival in 2HFY17 led by: a) normal monsoon; b) Seventh Pay Commission impact; and c) Government’s rural initiatives like DBT. Margin benefits from softening input costs will continue to support earnings growth for FMCG/paints/kitchenware companies in 1QFY17. Our top BUYs in expectation of reasonable 1QFY17 results are ITC and Berger.

Weak demand persists in 1QFY17: Key takeaways from our channel checks - Overall demand environment remains weak: There was no reported recovery

in overall footfalls for categories like FMCG, kitchenware, paints and jewellery in 1QFY17 vs 4QFY16. Consumption was significantly weaker in rural parts of the country compared to urban areas.

Channel liquidity remains constrained: Working capital cycle of distributors remains stretched in 1QFY17 as: a) retailers are not meeting their payment timelines due to poor overall consumer demand; and b) Government’s clampdown on black money over the past 18 months has led to drying up of black money investment circles which could have either been the source or target of funds for distributor.

Recovery in demand for seasonal categories: Due to an intense summer and delayed monsoon, categories such as fans and air conditioners are likely to have seen a strong but temporary recovery in revenue growth rates.

Advancement of End of Season Sale (summer): Similar to the experience of 2HFY16, pan-India retailers have started their EoSS earlier than normal (see table below).

EoSS was advanced by a week this year Exhibit 31:

Brand Date of commencement of summer sale in FY17

Date of commencement of summer sale in FY16

Shoppers Stop 01/07/2016 11/07/2015

Lifestyle 27/06/2016 11/07/2015

Zara 23/06/2016 02/07/2015

H&M 23/06/2016 -

Puma 21/06/2016 29/06/2015

Pantaloons 27/06/2016 04/07/2015

Westside 01/07/2016 02/07/2015

Bata 27/06/2016 03/07/2015

Arrow 24/06/2016 11/07/2015

US Polo 24/06/2016 11/07/2015

Louis Philippe 25/06/2016 12/07/2015


Potential triggers lined up for 2HFY17 Industry experts and channel partners are hoping for a revival in urban as well as rural consumption in 2HFY17 due to the possibility of the following triggers:

Seventh Pay Commission payout: With the Union Cabinet having approved the recommendations of Seventh Pay Commission on pay and pensionary benefits amounting to ~Rs840bn (US$13bn) to be paid to ~10mn individuals. Whilst the Sixth Pay Commission payout had led to a significant surge in big-ticket consumer durables like automobiles, the Seventh Pay Commission benefits are likely to support demand for small-ticket durables like kitchenware, footwear, light electricals, etc.

Stock Performance

(%) 3-month


HUL 2 (5) Britannia 7 (1) Colgate 10 3 Dabur 23 16 GCPL 15 8 GSK Consumer 2 (5) Marico 9 2 Nestle 15 7 ITC 12 4 Asian Paints 13 5 Berger Paints 15 7 Page Industries 15 8 TTK Prestige 6 (2) Jubilant Foodworks (3) (10) Bata India 8 0 Titan 18 10 Trent 12 5 Jun’16E Qtrly EPS

Company Ambit Consensus HUL 5.4 5.3 Britannia 17.8 16.8 Colgate 5.1 5.5 Dabur 1.7 1.7 GCPL 7.7 7.4 GSK Consumer 41.2 40.1 Marico 2.1 NA Nestle 25.8 NA ITC 2.1 NA Asian Paints 5.4 5.2 Berger Paints 1.5 NA Page Industries 66.3 NA TTK Prestige 24.6 NA Jubilant Foodworks 5.7 5.3 Bata India 5.0 NA Titan 2.1 2.4 Trent 6.8 NA

FY17E EPS

Company Ambit Consensus HUL 22.9 21.4 Britannia 80.0 78.9 Colgate 25.0 23.9 Dabur 8.0 8.2 GCPL 40.1 40.0 GSK Consumer 170.2 180.9 Marico 7.2 6.6 Nestle 125.5 124.2 ITC 9.3 9.0 Asian Paints 22.3 21.8 Berger Paints 7.3 6.5 Page Industries 272.4 260.2 Jubilant Foodworks 21.8 23.2 Bata India 15.7 16.2 Titan 9.07 9.6 Trent 59.1 NA



Normal monsoon: A good monsoon is likely to support rural household incomes. While crop harvest will be carried out in October, some management teams in the consumer sector suggest that there could be a sentimental benefit to rural household consumption in Aug-Sept in anticipation of a good harvest.

Impact of the Government’s rural initiatives: As highlighted in our recent note (09 Mar 2016) our ground level checks in Andhra Pradesh on BAPU (Biometrically Authenticated Physical Uptake) implementation suggest that: a) beneficiaries are receiving full quota of food grains vs lesser or no allocation earlier; b) there is a possible correlation between higher FMCG sales and implementation of BAPU. Also, Government is pilot-testing Aadhaar-enabled fertiliser delivery. Land record digitisation has been achieved and will help DBT for fertiliser subsidy and crop insurance subsidy. DBT for pensions has also begun; beneficiaries receive pensions in bank accounts. Pan-India rollout of such initiatives over the next 6 months is likely to result in a significant rise in disposable household income levels (over 20% increase in household income for rural areas).

Summary of our sector-specific channel checks FMCG/staples: Muted volume growth; input cost headwinds dampen profit growth Consumer demand has been subdued during the quarter with expectations of revival only from Sep-Oct’16 led by adequate rainfall. While overall macro acted as a headwind, there were several company-specific actions taken during the quarter to revive demand: a) HUL increased the number of distributors, b) GSK Consumer re-launched its product portfolio, c) Marico focused on deepening rural distribution by using LUPs (Low-Unit Packs), d) ITC changed its portfolio mix by reducing length of cigarettes, and e) Nestle and Colgate focused on new product launches. While Patanjali continues to do well in toothpaste and ghee, there are signs of supply chain issues leading to stock-outs and absence of seasonal products from retail shelves. We expect ~3% price-led growth as the impact of higher excise duty is annualised by most companies. ITC (+5% YoY volume growth) is our top pick. Overall, for 1QFY17, we expect median volume growth of ~5% YoY vs 5.5%/5.5% for 4QFY16/1QFY16 for our coverage universe. If the Kharif crop does well, rural demand should pick up from Sep-Oct 2016.

Paints: Revenue growth moderation to 9-10%; margin tailwinds to continue We expect 9-10% decorative paints revenue growth for paints companies in 1QFY17, similar to the run-rate reported in 2HFY16. Whilst Apr 2016 was a very weak month for volume growth, this was offset by stronger growth in May and June. Given 2-3% YoY decline in price realisations, zero price hikes in the quarter, and greater growth momentum in economy paints products compared to premium products, revenue growth will be largely volume-led. We expect 11-12% volume growth for both Asian Paints and Berger Paints, which continue to gain market share from Kansai and Akzo Nobel. New initiatives like construction chemicals, express painting service, and value-added services being offered by Asian and Berger appear to be gaining good traction from customers, painters and dealers. Soft input costs will result in gross margin expansion of 70-220bps in 1QFY17. Kitchenware: No change to revenue growth momentum in 1QFY17 vs 4QFY16; margin tailwinds to continue Channel checks in the kitchenware industry suggest that 1QFY17 started with weak footfalls in April. There has been some recovery in growth momentum witnessed in May. Overall, we expect TTK Prestige to report 9-10% YoY growth in revenues for the quarter with market-share gains continuing against Hawkins in the North and Gandhimathi in the South. There have been no material price hikes taken by TTK Prestige on its products over the past 12 months. In terms of promotions, traction in TTK’s annual exchange offer which runs in 1Q is likely to have been weaker than normal since in some parts of the country this exchange offer was also rolled out during Dec/Jan 2016. With some input cost tailwinds likely to have continued in 1QFY17, we expect gross margin expansion of 50bps YoY with EBITDA margin expansion of 140bps over this year.

FMCG volume growth muted, input cost tailwinds moderate. ITC to report positive surprise on volumes

200bps moderation in YoY volume growth for paints vs 4QFY16; Asian and Berger continue to gain share

Weak retail footfalls for kitchenware; no price hikes taken in the last 12 months

http://reports.ambitcapital.com/reports/Ambit_ConsumerStaples_BAPUOngroundcheckpoint_09Mar2016.pdf



Jewellery: Regulatory headwinds to near-term earnings Demand for gold remained tepid throughout this quarter partly due to spillover effect of (1) jewellers strike (first 15 days of April); and (2) continuing uptick in gold prices. At the industry level, festivals like Gudi Padwa/Ugadi/Akshay Tritiya didn’t seem to have stimulated much demand as customers preferred holding cash in anticipation of price corrections. However, Tanishq stores witnessed growth at Akshay Tritiya. The quarter seems to be mixed given some stores in North India witnessed lower footfalls while in other parts of India footfalls/conversions have been decent and Golden Harvest Scheme (‘GHS’), as expected, has been driving the recovery. Some store staff were of the view that ticket sizes have reduced due to new PAN regulations. We are BUYers of Titan as it is best placed to gain market share and continues asset-light expansion of stores.

Preparing for the forthcoming results In consumer staples, we have kept our FY17 estimates broadly unchanged and continue to expect a recovery in demand momentum from 3QFY17. Amongst discretionary consumer companies, we have raised our earnings for firms such as Asian Paints (better-than-expected margin profile), and TTK Prestige (factoring in the recent acquisition) whilst keep estimates for other companies unchanged.

Ambit vs consensus for FY17 and FY18 In consumer staples, we are ahead of consensus forecasts for stocks like HUL, Marico, Nestle, and Colgate largely due to our revenue forecasts factoring in benefits from implementation of Government’s welfare schemes such as DBT of food subsidies. In consumer discretionary, we are ahead of consensus for most stocks largely due to better operating efficiencies for stocks like Asian Paints, Berger and Page Industries resulting in higher EBITDA margins.

Recommendations We believe 1QFY17 results are likely to act as a positive catalyst for firms like ITC and Berger Paints. For ITC, where we expect 5% volume growth vs consensus expectation of 2%, hence 1QFY17 is likely to be a positive catalyst. Berger currently trades at 31x FY18 P/E, at a 20% discount against Asian Paints, and is likely to report over 30% YoY growth in earnings on the back of better operating efficiencies. We expect a moderation in the benefit from lower input costs from 1QFY17 onwards. We expect gross margin expansion of ~100bps YoY and EBITDA margin expansion of ~50bps YoY in 1QFY17 for FMCG. Our top BUYs are ITC (21% upside) and Berger Paints (15% upside).

Barring Titan, most of the other jewellers witnessed negative growth during Akshay Tritiya.



Detailed Jun ’16 quarterly estimates (Rs mn) Exhibit 32:

Particulars Jun'16E Jun'15 Mar'16 YoY QoQ Comments Staples HUL Sales 87,462 81,051 79,457 8% 10% Assuming 5% volume growth and 3% price/mix led growth EBITDA 16,730 15,064 14,668 11% 14% Lower input costs to support gross margin expansion by ~100bps YoY

offset partially by higher A&P spends resulting in ~50bps YoY EBITDA margin expansion EBITDA margin (%) 19.1% 18.6% 18.5% 54 67

PBT 17,080 15,400 14,615 11% 17% Margin expansion to drive PAT growth ahead of sales growth

PAT 11,614 10,494 10,466 11% 11% Dabur Sales 22,549 20,695 21,613 9% 4% Assuming volume growth of 5% YoY and 4% price/mix led growth EBITDA 3,618 3,218 4,154 12% -13% Expect GM to be 100bps higher YoY due to input cost deflation; employee

cost and A&P spend to be higher YoY as percentage of sales, partially offsetting gross margin gains EBITDA margin (%) 16.0% 15.5% 19.2% 50 (317)

PBT 3,738 3,253 4,226 15% -12% PAT growth to be ahead of revenue growth due to EBITDA margin expansion of 50bps YoY PAT 2,943 2,611 3,319 13% -11%

Marico

Sales 18,657 17,832 13,070 5% 43% Assuming volume growth of 9% YoY to be offset by price deflation and promotions

EBITDA 3,847 3,253 2,166 18% 78% Expect gross margin to expand by 500bps YoY due to copra price correction of ~40% YoY. A&P spends are expected to be ~190bps higher YoY EBITDA margin (%) 20.6% 18.2% 16.6% 238 405

PBT 3,722 3,223 1,974 15% 89% EBITDA margin expansion of ~240bps YoY is expected to drive PAT growth of 16% YoY PAT 2,655 2,282 1,309 16% 103%

GCPL

Sales 24,543 20,977 22,691 17% 8% Assuming 17% YoY revenue growth driven by ~7% domestic volume growth and acquisition of SON

EBITDA 3,829 3,168 4,493 21% -15% Assuming ~100bps YoY expansion in gross margin due to lower raw material costs; higher A&P spend to offset gross margin expansion EBITDA margin (%) 15.6% 15.1% 19.8% 50 (420)

PBT 3,404 2,834 4,100 20% -17% PAT growth to be ahead of sales growth due to EBITDA margin expansion of ~50bps YoY PAT 2,723 2,272 3,124 20% -13%

GSK Consumer Sales 11,500 10,450 11,086 10% 4% Assuming 4% volume and 6% price/mix led growth EBITDA 2,246 1,989 2,343 13% -4% Expect moderation in gross margin expansion to 50bps YoY due to lower

input prices EBITDA margin (%) 19.5% 19.0% 21.1% 50 (160) PBT 2,664 2,383 2,773 12% -4% Auxiliary income expected to grow 20% YoY, helping PAT grow at 12%

YoY, ahead of sales growth PAT 1,734 1,550 1,807 12% -4% Nestle Sales 23,894 19,570 23,025 22% 4% We expect Maggi Noodles sales to revive to ~65% of pre-crisis levels

driving ~22% YoY sales growth on a low base. EBITDA 4,316 3,750 4,783 15% -10% Expect gross margin to contract by ~80bps due to higher YoY sales of

Maggi Noodles in this quarter; EBITDA margin will be impacted further due to higher A&P spends to drive Maggi Noodles sales EBITDA margin (%) 18.1% 19.2% 20.8% (110) (271)

PBT 3,766 3,331 4,202 13% -10% Expect PAT to grow only by 13% YoY due to margin compression

PAT 2,486 2,198 2,588 13% -4% Colgate Sales 11,162 10,102 10,988 10% 2% Assuming 4.5% volume and 6% price/mix-led growth. EBITDA 2,208 2,018 2,412 9% -8% Expect gross margin to expand only ~30bps YoY; higher A&P spends of

13% YoY to impact EBITDA margin EBITDA margin (%) 19.8% 20.0% 22.0% (20) (217) PBT 1,988 1,853 2,229 7% -11%

PAT growth is expected to grow by only 4% due to margin contraction PAT 1,382 1,331 1,459 4% -5% Britannia Sales 22,025 20,186 22,114 9% 0% Assuming 9% YoY revenue growth driven by higher volumes EBITDA 3,301 2,884 2,912 14% 13% Expect gross margin to contract by ~30bps YoY due to rising input costs;

EBITDA margin expansion of ~70bps YoY due to operating efficiencies EBITDA margin (%) 15.0% 14.3% 13.2% 70 182 PBT 3,131 2,785 2,831 12% 11% PAT is expected to grow by 12% ahead of top-line due to EBITDA margin

expansion PAT 2,129 1,897 1,902 12% 12% ITC Sales 95,061 85,877 101,687 11% -7% Assuming 11% YoY revenue growth driven by cigarette volume growth of

5% YoY EBITDA 37,663 33,859 36,871 11% 2%

Expect marginal EBITDA margin expansion EBITDA margin (%) 39.6% 39.4% 36.3% 19 336 PBT 38,753 34,322 38,315 13% 1%

We expect PAT growth of 13% led by cigarette EBIT growth of 11-12% YoY PAT 25,577 22,654 24,952 13% 3%



Particulars Jun'16E Jun'15 Mar'16 YoY QoQ Comments Discretionary Asian Paints Sales (Rs mn) 40,221 36,235 39,713 11% 1% Expect 13% volume growth with 2% YoY decline in price realisation. EBITDA (Rs mn) 7,722 6,835 7,037 13% 10% Expect gross margin to expand by ~70 bps YoY and EBITDA margin to

expand by 34bps due higher other expenditure. EBITDA margin (%) 19.2% 18.9% 17.7% 34 148 PBT (Rs mn) 7,724 6,788 6,476 14% 19% Expect PAT growth of 14% YoY ahead of top-line due to EBITDA margin

expansion PAT (Rs mn) 5,319 4,674 4,223 14% 26% Berger Paints

Sales (Rs mn) 12,333 11,212 11,297 10% 9% We expect Berger Paints to report 10% revenue growth YoY due increase in distribution efforts leading to market share gains in the quarter especially from Kansai and Akzo.

EBITDA (Rs mn) 1,899 1,494 1,594 27% 19% Expect EBITDA margin expansion of 207bps due to better operating efficiency. EBITDA margin (%) 15.4% 13.3% 14.1% 207 129

PBT (Rs mn) 1,634 1,225 1,404 33% 16% Expect PAT growth to be ahead of EBITDA growth due to lower depreciation expense and interest burden. PAT (Rs mn) 1,062 773 928 37% 15%

TTK Prestige

Sales (Rs mn) 4,192 3,486 3,077 20% 36% Horwood acquisition’s inorganic growth contribution will result in revenue growth of ~20% YoY. We assume no change in Indian revenue growth momentum vs 4QFY16 at ~9% YoY.

EBITDA (Rs mn) 519 382 338 36% 54% Expect gross margins to expand by ~50bps YoY due to lower input cost. We expect EBITDA margin to expand by ~140bps due to better operating efficiency. EBITDA margin (%) 12.4% 11.0% 11.0% 140 140

PBT (Rs mn) 415 354 303 17% 37% Expect PAT growth of 17% YoY to be lower than EBITDA growth due to higher interest burden on account of Horwood acquisition. PAT (Rs mn) 287 245 216 17% 33%

Page Industries Sales (Rs mn) 5,299 4,465 4,356 19% 22% Expect revenue growth of 19% YoY; slightly ahead of 4QFY16 as new

product launches helped improve sales growth momentum. EBITDA (Rs mn) 1,182 1,014 915 16% 29% Lower cotton prices would lead to increase in gross margin by ~150bps

but increase in other expenditure will offset that benefit to EBITDA margin. EBITDA margin (%) 22.3% 22.7% 21.0% (42) 131

PBT (Rs mn) 1,120 962 814 16% 38% Lower interest charges will help in marginal expansion of PAT margin compared to EBITDA margin. PAT (Rs mn) 739 632 573 17% 29%

Titan

Sales (Rs mn) 30,568 27,086 24,563 13% 24% Revenue growth expected to be ~13% due to return of GHS and launch of new collections like Niloufer.

EBITDA (Rs mn) 2,812 2,228 2,101 26% 34% EBITDA margins to expand by 100bps due to operating leverage.

EBITDA margin (%) 9.2% 8.2% 8.6% 100 60 PBT (Rs mn) 2,537 2,036 1,981 25% 28%

PAT expected to grow due to higher other income. PAT (Rs mn) 1,827 1,511 1,841 21% -1% Trent Sales (Rs mn) 3,952 3,497 3,815 13% 4% Increased revenues led by LTL of 7%. EBITDA (Rs mn) 371 315 38 18% 876% EBITDA margins to expand by 40bps as share of losses from Landmark

reduces. EBITDA margin (%) 9.4% 9.0% 1.0% 40 840 PBT (Rs mn) 332 240 181 38% 83%

PAT margins expected to expand by 110bps due to higher other income. PAT (Rs mn) 226 161 173 40% 31% Bata

Sales (Rs mn) 7,723 6,805 5,447 13% 42% Revenues expected to grow by 13% due to early monsoons and advancement of EoSS.

EBITDA (Rs mn) 1,097 864 554 27% 98% Expect EBITDA margins to expand by 150bps due to expansion of gross margins. EBITDA margin (%) 14.2% 12.7% 10.2% 150 400

PBT (Rs mn) 964 744 447 30% 116% PAT, before adjustment for exceptional items, is expected to grow by 30% YoY. PAT (Rs mn) 646 922 279 -30% 132%

Jubilant Foodworks

Sales (Rs mn) 6,730 5,707 6,180 18% 9% We expect 4.5% SSG led by heavy promotions during the quarter, which included IPL.

EBITDA (Rs mn) 888 705 751 26% 18% Gross margins are expected to remain flat and EBITDA is expected to expand by 80bps on the back of positive SSG. EBITDA margin (%) 13.2% 12.4% 12.2% 80 100

PBT (Rs mn) 559 430 439 30% 27% Expect PAT to grow by 27% due to margin expansion.

PAT (Rs mn) 374 295 295 27% 27%







Staples

HUL

Recommendation BUY BUY TP (Rs) 990 960 3% Revenues (Rs mn) 363,066 418,467 363,512 418,988 0% 0%

We roll forward our TP and marginally adjust estimates after the release of the annual report

EBITDA (Rs mn) 66,813 80,265 66,733 80,269 0% 0%

EBITDA margin (%) 18.4% 19.2% 18.4% 19.2% 4 2

PBT (Rs mn) 70,636 85,692 72,089 88,067 -2% -3%

PAT (Rs mn) 49,650 60,176 50,653 61,814 -2% -3%

EPS (Rs) 22.5 27.3 23.0 28.1 -2% -3%

Dabur

Recommendation SELL SELL TP (Rs) 292 250 17% Revenues (Rs mn) 96,543 113,009 96,154 112,689 0% 0%

We roll forward our estimates and factor in higher rural-led sales growth from FY18 due to DBT-led demand pick-up and strong rural distribution

EBITDA (Rs mn) 17,508 20,551 17,368 20,411 1% 1%

EBITDA margin (%) 18.1% 18.2% 18.1% 18.1% 7 7

PBT (Rs mn) 17,909 21,354 17,769 21,214 1% 1%

PAT (Rs mn) 14,148 16,656 14,037 16,547 1% 1%

EPS (Rs) 8.0 9.5 8.0 9.4 1% 1%

Marico


We have rolled forward our TP and marginally increased our margin estimates for FY17

EBITDA (Rs mn) 13,465 16,388 12,898 16,057 4% 2%

EBITDA margin (%) 19.0% 19.8% 18.2% 19.4% 80 40

PBT (Rs mn) 13,161 16,463 12,872 16,420 2% 0%

PAT (Rs mn) 9,230 11,574 9,025 11,544 2% 0%

EPS (Rs) 7.2 9.0 7.0 8.9 2% 0%

GCPL

Recommendation SELL SELL TP (Rs) 1,116 958 16% Revenues (Rs mn) 107,281 121,025 100,781 114,070 6% 6%

We have rolled forward our estimates and revised our long-term growth assumption for the international business

EBITDA (Rs mn) 19,210 21,792 19,233 22,226 0% -2%

EBITDA margin (%) 17.9% 18.0% 19.1% 19.5% (118) (148)

PBT (Rs mn) 18,129 20,975 18,153 21,409 0% -2%

PAT (Rs mn) 14,140 15,731 14,159 16,485 0% -5%

EPS (Rs) 40.1 44.5 40.2 46.8 0% -5%

GSK Consumer

Recommendation SELL SELL TP (Rs) 5,650 5,500 3% Revenues (Rs mn) 45,626 52,540 45,626 52,540 0% 0%

We have rolled forward our TP.

EBITDA (Rs mn) 7,053 8,227 7,053 8,227 0% 0%

EBITDA margin (%) 15.5% 15.7% 15.5% 15.7% - -

PBT (Rs mn) 10,927 12,488 10,927 12,488 0% 0%

PAT (Rs mn) 7,157 8,180 7,157 8,180 0% 0%

EPS (Rs) 170.2 194.5 170.2 194.5 0% 0%





Nestle


We have rolled forward our TP and changed expectations of revival in Maggi Noodles sales; expect noodles sales to reach ~70% of pre-crisis level by end-CY16 and 100% by end-1HCY17.

EBITDA (Rs mn) 20,048 25,654 19,706 25,273 2% 2%

EBITDA margin (%) 21.2% 22.7% 21.2% 22.7% 0 0

PBT (Rs mn) 18,055 23,531 17,130 22,489 5% 5%

PAT (Rs mn) 12,097 15,766 11,477 15,067 5% 5%

EPS (Rs) 125.5 163.5 119 156 5% 5%

Colgate

Recommendation SELL SELL TP (Rs) 895 850 5% Revenues (Rs mn) 47,240 54,662 47,240 54,662 0% 0%


EBITDA (Rs mn) 10,696 12,732 10,696 12,732 0% 0%

EBITDA margin (%) 22.6% 23.3% 22.6% 23.3% - -

PBT (Rs mn) 9,838 11,965 9,838 11,965 0% 0%

PAT (Rs mn) 6,788 8,017 6,788 8,017 0% 0%

EPS (Rs) 25.0 29.5 25.0 29.5 0% 0%

Britannia


We have rolled forward our TP and factored in higher DBT-led rural sales growth from FY18

EBITDA (Rs mn) 14,628 16,986 14,628 16,986 0% 0%

EBITDA margin (%) 14.6% 14.7% 14.6% 14.7% - -

PBT (Rs mn) 14,194 16,884 14,194 16,884 0% 0%

PAT (Rs mn) 9,590 11,407 9,590 11,407 0% 0%

EPS (Rs) 80.0 95.1 80.0 95.1 0% 0%

ITC

Recommendation BUY BUY TP (Rs) 295 277 7% Revenues (Rs mn) 412,506 477,270 420,782 472,083 -2% 1%

We have rolled forward our TP and marginally adjusted our estimates following annual report release

EBITDA (Rs mn) 159,662 182,201 159,865 180,746 0% 1%

EBITDA margin (%) 38.7% 38.2% 38.0% 38.3% 71 (11)

PBT (Rs mn) 168,625 190,834 176,437 199,085 -4% -4%

PAT (Rs mn) 111,293 125,950 116,448 131,396 -4% -4%

EPS (Rs) 9.2 10.4 9.7 10.9 -5% -5%

Discretionary

Asian Paints

Recommendation BUY BUY TP (Rs) 1,117 1,000 12% Revenues (Rs mn) 178,038 213,578 178,099 212,056 0% 1%

We have rolled forward our TP and increased our long-term revenue estimates for Asian Paints.

EBITDA (Rs mn) 33,132 40,633 32,736 37,768 1% 8%

EBITDA margin (%) 18.6% 19.0% 18.4% 17.8% 23 121

PBT (Rs mn) 31,931 39,830 31,480 36,885 1% 8%

PAT (Rs mn) 22,032 27,482 21,721 25,451 1% 8%

EPS (Rs) 22.3 27.9 22.0 25.8 1% 8%





Berger Paints


No change in our estimates.

EBITDA (Rs mn) 8,341 9,775 8,341 9,775 0% 0%

EBITDA margin (%) 15.6% 15.3% 15.6% 15.3% - -

PBT (Rs mn) 7,433 8,956 7,433 8,956 0% 0%

PAT (Rs mn) 5,054 6,090 5,054 6,090 0% 0%

EPS (Rs) 7.3 8.8 7.3 8.8 0% 0%

Page Industries

Recommendation BUY BUY TP (Rs) 15,500 14,787 5% Revenues (Rs mn) 22,004 28,554 22,004 28,554 0% 0%


EBITDA (Rs mn) 4,715 6,281 4,715 6,281 0% 0%

EBITDA margin (%) 21.4% 22.0% 21.4% 22.0% - -

PBT (Rs mn) 4,469 6,018 4,469 6,018 0% 0%

PAT (Rs mn) 3,039 4,092 3,039 4,092 0% 0%

EPS (Rs) 272.4 366.9 272.4 366.9 0% 0%

TTK Prestige


TP (Rs) 5,420

5,228

4%

Revenues (Rs mn) 19,753 23,793 17,741 21,646 11% 10%

We have rolled forward our TP and increased our revenue estimates on Horwood acquisition.

EBITDA (Rs mn) 2,732 3,558 2,508 3,308 9% 8%

EBITDA margin (%) 13.8% 15.0% 14.1% 15.3% (31) (33)

PBT (Rs mn) 2,472 3,252 2,382 3,273 4% -1%

PAT (Rs mn) 1,705 2,244 1,643 2,258 4% -1%

EPS (Rs) 146.5 192.8 141.2 194.0 4% -1%




Engineering & Construction EPC companies are likely to witness an uptick in revenue momentum in this seasonally weak quarter. We expect most companies in our universe to show improvement in top-line growth vs the previous quarter. L&T (10% YoY) and PGCIL (24%) will sustain their 4QFY16 momentum. Smaller peers like VATW (18%), Ashoka (6%) and AIAE (5%) will witness improvement in growth. However, the main focus this quarter should be on the shift to IND-AS and the impact it will have on EBITDA margins. The impact of provisioning for debtors will drive the main margin surprises. We have built in margin improvement for most companies though there is scope for negative, accounting-led surprises here. Recent increase in share prices makes valuations levered in favour of a cyclical uptick. Disappointments may lead material downside. Stick to segments where Government intent is translating into action (Sadbhav, Ashoka, PGCIL and BEL)

Strong revenue growth for sector-specific leaders: L&T’s revenue growth (10% YoY) factors in the renewed execution momentum of 4QFY16 (up 11%). Order inflow of Rs290bn is also likely to increase at a similar peg. PGCIL’s momentum in growth is likely to sustain; we expect PAT growth of 14% YoY. Revenue growth momentum may witness an uptick for smaller players – VATW (18%), AIAE (5%) and Ashoka (6%) may report better growth than the previous quarter. As shown in the exhibit below, revenue growth for EPC players has accelerated over the last few quarters. EIL’s top-line decline will continue driven by its low-margin LSTK business; expect a strong order inflow quarter for EIL.

Revenue growth has accelerated for the EPC companies Exhibit 34:

Source: ACE Equity, Ambit Capital research

Steady margins: The sharpest margin improvement will be for Engineers India (up 5ppt YoY) driven by a revenue mix change towards consulting. Mix change will negatively impact Sadbhav’s margins (down 130bps). Barring L&T (50bps improvement) and Ashoka (70bps), we expect margins to remain stable for all other companies. Margins will be the most susceptible to negative surprises this quarter driven by the adoption of new accounting standards. Provisioning for doubtful debtors and effective interest rate has been highlighted as one of the main drivers of potential margin decline since it will impact SG&A expenses and may increase interest cost.


We have not made any changes to our annual estimates in preparation for the results. We will change our estimates for Engineers India and Ashoka. Consensus estimates are sparse for all companies in our coverage for the quarter. For FY17, our estimates are behind consensus for most companies bar PGCIL and Techno where our EPS expectations are 4%/27% higher. We are 9-10% below consensus EPS estimates for L&T (standalone) and VATW.

-15%

-10%

-5%

0%

5%

10%

15%

Dec

-12

Feb-

13

Apr

-13

Jun-

13

Aug

-13

Oct

-13

Dec

-13

Feb-

14

Apr

-14

Jun-

14

Aug

-14

Oct

-14

Dec

-14

Feb-

15

Apr

-15

Jun-

15

Aug

-15

Oct

-15

Dec

-15

Feb-

16

Revenue growth(Top-38 EPC companies, YoY)

Total Total ex L&T

Stock Performance

(%) 3-month


L&T 9 17

PGCIL 19 12

BEL 6 (1)

AIAE 8 1

EIL 23 15

SADE (4) (11)

TEEC 12 3

SINP (3) (10)

VATW 15 8

ASBL (1) (8)

Jun’16E Qtrly EPS


L&T 8.4 NA

PGCIL 3.0 NA

BEL 2.7 NA

AIAE 11.3 NA

EIL 2.2 NA

SADE 1.2 NA

TEEC 5.5 NA

VATW (2.0) NA

ASBL 1.4 NA

FY17E EPS


L&T 53 58

PGCIL 15 14

BEL 60 61

AIAE 41 44

EIL 10 10

SADE (2) NA

TEEC 37 29

VATW 24 26

ASBL 2 6



Recommendations

The recent uptick in valuations leaves little room for error since consensus has started factoring in a cyclical uptick. Indeed, as shown in the exhibit above, there has been an improvement in growth rates for EPC companies. Whilst a capex cycle recovery hopes persist, note that public sector infra spending remains the main driver with little to no inputs from private capex (which is the bulk of the capex). Stick to segments of public infra where the Central Government intent is translating into action (roads, railways, T&D, defence). BEL and SIPL are our top picks.

Quarterly earnings estimates Exhibit 35:

Company name Jun'16 Jun'15 YoY Mar'16 QoQ Comments

Larsen & Toubro (standalone)

Sales (Rs mn) 117,812 107,102 10% 210,613 -44% Revenue growth uptick witnessed in 4QFY16 should sustain; order inflows should be Rs290bn, a similar YoY growth; management to maintain growth guidance of 12-15%

EBITDA (Rs mn) 11,310 9,746 16% 31,932 -65% Margins should expand due to the higher execution pace; any margin outperformance will be key for material upgrades EBITDA margin (%) 9.6% 9.1% 50 bps 15.2% -560 bps

PBT (Rs mn) 11,865 9,946 19% 32,780 -64% Higher EBITDA flows through to the PBT/ PAT level

PAT (Rs mn) 8,305 7,010 18% 26,164 -68%

Power Grid Corp (standalone)

Sales (Rs mn) 58,314 47,176 24% 57,601 1% We expect revenue growth to sustain at 24% YoY led by strong capitalisation pace in the second half of FY16; commentary on capitalisation progress in FY17 will be key

EBITDA (Rs mn) 51,141 41,375 24% 50,288 2% Margins to remain largely stable

EBITDA margin (%) 87.7% 87.7% 00 bps 87.3% 40 bps

PBT (Rs mn) 19,569 17,293 13% 20,572 -5% Higher EBITDA flows through to the PBT and PAT; mitigated partially by higher interest cost PAT (Rs mn) 15,558 13,665 14% 16,230 -4%

Bharat Electronics (standalone) Sales (Rs mn) 12,023 10,953 10% 32,149 -63% Revenue growth momentum seen in 4QFY16 should sustain

EBITDA (Rs mn) (30) (54) -44% 9,988 -100% EBITDA margin expansion should stall and margins should stabilise as the company may start to provision for Pay Commission payout EBITDA margin (%) -0.3% -0.5% 20 bps 31.1% -3130 bps

PBT (Rs mn) 840 798 5% 10,816 -92% Other income is the main driver of profits in 1Q

PAT (Rs mn) 638 607 5% 7,945 -92%

AIA Engineering

Sales (Rs mn) 5,541 5,271 5% 5,920 -6% Revenues to grow after three consecutive quarters of decline. We have factored in 18% YoY volume growth in the mining segment (flat sequentially)

EBITDA (Rs mn) 1,496 1,459 3% 1,713 -13% Margins will decline marginally; but given that the company has not yet embarked on aggressively pushing its volumes, erosion will be limited EBITDA margin (%) 27.0% 27.7% -70 bps 28.9% -190 bps

PBT (Rs mn) 1,545 1,487 4% 1,727 -11% PBT and PAT to increase in line with the EBITDA growth

PAT (Rs mn) 1,066 1,029 4% 1,346 -21%

Engineers India (standalone) Sales (Rs mn) 3,150 3,905 -19% 2,864 3,150 Revenues to decline due to weakness in the LSTK segment; we expect

the consultancy business to grow by 22% YoY EBITDA (Rs mn) 395 284 39% 394 395 EBITDA margins will expand materially due to lower share of the LSTK

business in the revenue mix EBITDA margin (%) 13% 7% 530 bps 14% 13%

PBT (Rs mn) 930 885 5% 997 930 Despite strong growth, other income will contribute more than half of the PBT, thus limiting PAT growth PAT (Rs mn) 623 568 10% 699 623




Quarterly earnings estimates Exhibit 36:

Company name Jun'16 Jun'15 YoY Mar'16 QoQ Comments

Sadbhav Engineering (standalone)

Sales (Rs mn) 7,750 8,293 -7% 8,580 -10% Revenues to decline; mix of revenues to shift towards EPC roads as BOT order book winds down

EBITDA (Rs mn) 736 894 -18% 814 -10% Margin pressure to sustain driven by higher mix of irrigation revenue and lower BOT construction revenue EBITDA margin (%) 9.5% 10.8% -130 bps 9.5% 00 bps

PBT (Rs mn) 263 496 -47% 525 -50% Negative operating leverage results in a material decline in profits

PAT (Rs mn) 197 395 -50% 356 -45%

Techno Electric (consolidated)

Sales (Rs mn) 2,601 2,015 29% 3,260 -20% Top-line growth acceleration led by better PLFs in the wind segment; expect a 25% growth in the EPC business

EBITDA (Rs mn) 646 450 44% 506 28% EBITDA margin expansion led by shift in revenue mix towards wind; core business profitability to remain largely flat EBITDA margin (%) 24.8% 22.3% 250 bps 15.5% 930 bps

PBT (Rs mn) 451 288 57% 350 29% Higher EBITDA translates into superior PBT/ PAT

PAT (Rs mn) 316 210 50% 274 15%

VA Tech Wabag Sales (Rs mn) 5,387 4,565 18% 8,588 -37% Execution of orders won in FY16 should enable high revenue growth

EBITDA (Rs mn) 162 123 31% 1,189 -86% Margins likely to remain steady.

EBITDA margin (%) 3.0% 2.7% 30 bps 13.8% -1080 bps

PBT (Rs mn) (13) 0 NA 995 NA Net profit unlikely to increase despite higher EBITDA due to higher interest expenses PAT (Rs mn) (13) 9 NA 675 NA

Ashoka Buildcon Sales (Rs mn) 6,652 6,302 6% 7,292 -9% Uptick in construction revenue as land issues in large projects are

resolved; BOT revenue growth should slow EBITDA (Rs mn) 1,984 1,836 8% 2,054 -3% Increasing proportion of BOT revenue would lead to higher margins

on a YoY basis EBITDA margin (%) 29.8% 29.1% 70 bps 28.2% 170 bps

PBT (Rs mn) 199 211 -6% 422 -53% Higher depreciation impacts PBT/ PAT

PAT (Rs mn) (51) (41) NA (384) NA




Media The Pay TV industry should report healthy 18% revenue growth in 1QFY17 led by all-round growth for broadcasters. Growth for television content distributors will be driven by volumes (set top box addition), albeit at a slower pace than 4QFY16 as judicial push for phase III digitisation eased. We expect ZEEL to sustain >20% advertising revenue growth due to sporting events, success in film production and improving viewership for &TV and regional channels. Dish TV’s ARPU trends will remain muted as subscriber addition moderates on a sequential basis. We expect strong margin expansion for Pay TV companies due to operating leverage and low base for ZEEL, which had launched &TV in comparison period. Watch for commentary on content cost inflation, where ZEEL is pitted against Dish TV and Hathway. Implementation of Hathway Connect for streamlining collections is key for Hathway. Dish TV remains our preferred pick on the back of robust volume-led growth.

Zee Entertainment (ZEEL): Industry discussions point to television industry advertising growth of 13-14% during the quarter. ZEEL’s advertising growth (22% YoY in 1QFY17E) will better industry on account of: (1) improved viewership share of regional channels and &TV; and (2) sporting events, as the quarter saw the telecast of India’s tour of Zimbabwe (three ODIs and three T20Is). 4QFY16 had also seen ZEEL sign deals with MSOs for phase III subscribers, which will provide declaration-led push to subscription income. DTH too has seen steady growth, driving subscription revenue growth of 18% in 1QFY17E. The company’s other operating income is also likely to record robust growth (40% QoQ/5% YoY) driven by the success of Marathi film ‘Sairat’ that ZEEL co-produced. Margin improvements on a low base will result in 41% EBITDA growth while PAT growth would be subdued, at 25%, due to lower other income.

Dish TV: We expect Dish TV to record 10% YoY revenue growth driven by commensurate volume growth (net subscriber addition). ARPU continues to face pressures of service tax increases and we assume it to be flat YoY. On a sequential quarter basis, we expect the Mar 2016 package price hikes to be negated by lower activation income as gross additions decline 20% QoQ in 1QFY17E (seasonality). We expect continued operating leverage owing to stable content linkages. Key monitorables are volume growth and commentary on content inflation, where significant renewals are due in Sept 2016.

Hathway: Subscription income growth will be muted as the company is now focused on system upgrades, viz. rollout of Hathway Connect portal for LCOs. Hathway’s aggression in the broadband business continues, but isn’t enough to swing EBITDA meaningfully on account of content cost escalation.

Ambit vs consensus: Due to limited availability of consensus estimates, we refrain from comparing our numbers with consensus.

Recommendations

We highlight Dish TV as our top BUY idea in the media sector. We expect the results to reaffirm our thesis of strong subscriber addition for the company.

Gross digital subscriber addition… DTH to take the lead Exhibit 37:

(mn) Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17E

Den Networks 0.2 0.2 0.2 0.2 0.4 0.9 0.9 0.7

Hathway Cable 0.3 0.1 - 0.1 0.1 0.9 1.0 0.9

Siti Cable 0.6 0.3 0.5 0.2 0.3 1.1 1.1 1.0

Airtel DTH 0.5 0.6 0.6 0.6 0.6 0.8 0.9 0.7

Dish TV 0.6 0.7 0.7 0.7 0.7 0.6 0.8 0.7

VDTH 0.6 0.7 0.6 0.6 0.6 0.7 0.8 0.6

Total 2.8 2.4 2.6 2.3 2.6 4.9 5.5 4.5


Stock Performance

(%) 3-month


Dish TV 13 5

Hathway Cable (12) (20)

Zee Entertainment 17 10

Jun’16E Qtrly EPS


Dish TV 0.8 0.9

Hathway Cable (0.1) (0.4)

Zee Entertainment 3.1 2.8

FY17E EPS


Dish TV 2.4 3.1

Hathway Cable (1.0) (1.1)

Zee Entertainment 14.3 13.4



Detailed Jun’16 quarterly estimates Exhibit 38:

Jun'16 Mar'15 Mar'16 YoY QoQ Comments

Zee Entertainment (Consol)

Sales (Rs mn) 15,965 13,399 15,316 19% 4% Advertising growth of 22% YoY and subscription growth of 18%

EBITDA (Rs mn) 4,403 3,112 4,136 41% 6% Sharp EBITDA margin improvement driven by base effect. EBITDA margin (%) 27.6 23.2 27.0 435bps 58bps

PBT (Rs mn) 4,673 3,608 4,278 29% 9% PAT (Rs mn) 3,045 2,438 2,606 25% 17%

Dish TV (Consol)

Sales (Rs mn) 8,136 7,367 7,994 10% 2%

We expect net subscriber addition of 0.4mn (11% YoY volume growth) to drive revenue growth. Notwithstanding price increases in Mar'16, we expect flat ARPU QoQ as subscriber addition has moderated (owing to seasonality)

EBITDA (Rs mn) 2,663 2,368 2,608 12% 2% EBITDA margin improvement to continue led by operating leverage. EBITDA margin (%) 32.7 32.1 32.6 59bps 11bps

PBT (Rs mn) 755 542 799 39% -5% PAT (Rs mn) 496 542 4,828 -8% -90%

Hathway (Standalone)

Sales (Rs mn) 3,129 2,644 3,399 18% -8% Sales growth of 29% YoY and 1% QoQ driven by activation income, a one-time, lumpy windfall due to STB deployment linked to phase III digitisation.

EBITDA (Rs mn) 425 327 798 30% -47% EBITDA boosted by activation income and broadband, which is expected to continue growing at >50% YoY. EBITDA margin (%) 13.6 12.4 23.5 121bps -988bps

PBT (Rs mn) (506) (442) (96) NM NM PAT (Rs mn) (506) (439) (459) NM NM





Zee Entertainment Recommendation SELL SELL TP (Rs) 380 380 Revenues (Rs mn) 69,467 81,666 69,192 81,398 0% 0%

We have marginally changed our other income and tax estimates reflecting in 1/2% EPS change for FY17/18

EBITDA (Rs mn) 19,716 25,550 19,699 25,530 0% 0%

EBITDA margin (%) 28.4% 31.3% 28.5% 31.4% -9bps -8bps

PBT (Rs mn) 20,978 26,940 20,788 26,958 1% 0%

PAT (Rs mn) 13,763 17,649 13,908 18,012 -1% -2%

EPS (Rs) 14.3 18.4 14.5 18.8 -1% -2%

Dish TV Recommendation BUY BUY TP (Rs) 115 107 Revenues (Rs mn) 34,798 39,433 34,370 38,796 1% 2%

We increase FY17/18 volume growth estimates by 2% and also moderate cost estimates aligning ourselves to management guidance.

EBITDA (Rs mn) 11,633 13,292 11,066 12,407 5% 7%

EBITDA margin (%) 33.4% 33.7% 32.2% 32.0% 124bps 173bps

PBT (Rs mn) 3,866 6,036 3,564 5,780 8% 4%

PAT (Rs mn) 2,552 3,984 2,353 3,815 8% 4%

EPS (Rs) 2.4 3.7 2.2 3.6 8% 4%




Metals & Mining In 1QFY17, aluminium realisations should rise by 6% QoQ due to 4% higher LME prices and 2% INR depreciation. Alumina prices have risen by ~21% QoQ which is likely to benefit Nalco. However, we expect Hindalco’s standalone EBITDA to be negatively impacted due to higher transfer price of alumina from subsidiary Utkal to Hindalco. For domestic steel players, we expect realisations of to rise by 8-10% in 1QFY17 as full benefit of price hikes post MIP passes through to P&L. However, this would not be enough to curb losses of steel players and we expect Tata Steel and SAIL would continue to report PAT losses. For Coal India, we expect revenues to remain flat YoY as a 3% decline in blended realisations (due to weaker e-auction realisations) would be offset by 3% offtake growth. With the adoption of Ind AS, CIl would not be providing for overburden removal provision (OBR) going forward. Adjusting for this, we expect CIL’s EBITDA and PAT to decline 21-23% YoY due to decline in realisations.

Aluminium: Average LME aluminium prices for 1QFY17 were US$1,572/tonne, 4% higher than the 4QFY16 average of US$1,514/tonne. Average alumina prices for 1QFY17 were at US$253/tonne, up 22% QoQ. Marginally higher aluminium realisations (4%) coupled with rupee depreciation (2%) are likely to increase aluminium realisations by 5-6%.

Steel: We expect average long as well as flat steel prices to be higher by 8-10% in 1QFY17 as the full quarter benefit of price hike post imposition of Minimum Import Price (MIP) in Feb 2016 is likely to flow through. Contracted coking coal cost for the quarter increased marginally to ~US$84/t from ~US$81/t in 4QFY16.

Coal: Given weak production/offtake in 2MFY16 (flat YoY), we expect Coal India to report offtake volume growth of 2.7% YoY. We expect e-auction realisations of ~Rs1,550/t in 1QFY17, down 6% QoQ and 30% YoY, mainly due to weaker premiums as well as inferior grade mix. Lower e-auction realisations (partially offset by higher FSA realisation due to price hike) are expected to result in blended realisation of Rs1,416/t (down 3% YoY). The 3% lower realisations would be offset by 3% volume growth YoY, resulting in flat revenues YoY. We expect EBITDA (ex OBR) to decline to Rs318/t from Rs415/t in 1QFY16.

Preparing for the upcoming results

Key factors to watch out for: (a) impact of MIP for steel on realisations and margins of steel players; (b) demand and pricing outlook for the domestic steel industry; (c) commentary on Tata Steel’s European business restructuring; (d) impact of FSA price hikes on Coal India’s margins.

Ambit vs consensus

Based on limited consensus data, our 1QFY17 earnings estimates are higher than consensus for Nalco, SAIL and Coal India and lower than consensus for Hindalco and Tata Steel.

Recommendations

We reiterate our BUY stance on Coal India (CIL), as: (a) we expect 9% production CAGR over FY15-20E, higher than CIL’s historical CAGR of 5%; (b) non-power linkage auction over the next 6 months; and (c) partial completion of three key railway lines over the next 3-4 years. The stock is trading at FY17 P/E of 11.2x (vs historical average of 12.7x).

We reiterate our SELL stance on Hindalco and Nalco driven by our muted outlook for aluminium prices and premiums (global overcapacity and high inventory). Further, with the de-allocation of captive coal blocks and partial win-back of coal resources at market prices, we expect RoCEs of aluminium smelters to remain in low single digits. Hindalco trades at 7.6x FY17 EV/EBITDA, a premium to the historical average of 6x.

Stock Performance

(%) 3-month


Nalco 15.2 6.1

Hindalco 45.6 36.5

Tata Steel 6.8 (2.3)

SAIL 11.9 2.7

Coal India 17.0 7.8

Jun’16E Qtrly EPS


Nalco 0.82 1.04

Hindalco 1.17 1.29

Tata Steel (3.31) (0.23)

SAIL (1.51) (2.61)

Coal India 5.47 5.86

FY17E EPS


Nalco 3.35 2.99

Hindalco 3.25 9.07

Tata Steel 4.97 16.5

SAIL 0.24 (2.22)

Coal India 26.0 24.7



After the imposition of safeguard duty and MIP, domestic steel prices have increased by 10-12%, which are likely to marginally improve the margins of steel players in 1QFY17. Whilst this is factored into our estimates, we do not expect further steel price hikes as we expect MIP to be withdrawn in Aug 2016 and given domestic prices are similar to import parity prices. We reiterate our SELL stance on Tata Steel and SAIL. Tata Steel currently trades at FY17E adjusted EV/EBITDA of 6.9x, a discount to SAIL which is trading at 11.5x.


Company Jun'16E Jun'15 Mar'16 YoY QoQ Comments

Nalco Sales (Rs mn) 17,961 14,913 18,744 20 (4) We expect revenues to decline 4% QoQ as higher aluminium

/alumina realisations would be offset by lower alumina volumes (4QFY16 had a delayed shipment from 3QFY16. Sequentially, aluminium realisations are likely to rise ~6% QoQ whereas alumina realisations are likely to rise 23% QoQ. We expect alumina sales of 290kt vs 399kt in 4QFY16 (down 27% QoQ as 4Q had an extra shipment delayed shipment) and aluminium sales of ~100kt vs 97kt in 4QFY16. We expect EBITDA of Rs2.8bn, up 17% QoQ, mainly due to higher aluminium and alumina realisations.

EBITDA (Rs mn) 2,793 2,237 2,387 25 17

EBITDA margin (%) 15.5% 15.0% 12.7% 55 bps 282 bps

PBT (Rs mn) 3,143 2,555 2,812 23 12

PAT (Rs mn) 2,106 1,647 2,079 28 1

Hindalco

Sales (Rs mn) 89,230 85,753 86,675 4 3 Revenues to rise ~2% QoQ on the back of higher aluminium realisations. We build in aluminium production of 309kt (vs 307kt in 4QFY16) and copper production of 100kt (up 3% QoQ). We expect EBITDA of Rs10.5bn, down 9% QoQ, mainly due to sequentially higher alumina prices. We expect Hindalco to report PAT of Rs2.4bn, lower than Rs3.5bn reported in 4QFY16.

EBITDA (Rs mn) 10,561 8,773 11,664 20 (9)

EBITDA margin (%) 11.8% 10.2% 13.5% 160 bps -162 bps

PBT (Rs mn) 3,111 1,381 4,547 125 (32)

PAT (Rs mn) 2,414 1,072 3,563 125 (32)

Tata Steel

Sales (Rs mn) 297,635 303,003 295,076 (2) 1 We expect India business sales volumes of 2.35mt, up 10% YoY. We expect Europe business sales volumes of 3.5mt, flat YoY. We expect Indian EBITDA/tonne to improve to ~Rs9,035/t vs Rs7,891 in 1QFY16 and Rs7,954/t on the back of rise in steel realisations. We factor in EBITDA of US$5/t in 1QFY17 vs loss of US$15/t in 4QFY16.

EBITDA (Rs mn) 24,759 27,742 22,053 (11) 12

EBITDA margin (%) 8.3% 9.2% 7.5% -84 bps 85 bps

PBT (Rs mn) 2,759 3,951 847 n.a. n.a.

PAT (Rs mn) (871) (923) (3,559) n.a. n.a.

SAIL

Sales (Rs mn) 106,655 95,028 113,714 12 (6) We expect sales volumes of 3.2mt, up 19% YoY, as SAIL’s new capacities are gradually ramped up. We expect blended steel realisation for SAIL to rise 10% QoQ on the back of benefit of rise in steel prices post MIP. We expect EBITDA loss of Rs65/tonne, lower than loss of Rs2,980/tonne reported in 4QFY16, on the back of sequentially higher realisations.

EBITDA (Rs mn) (208) (817) (11,236) (75) (98)

EBITDA margin (%) -0.2% -0.9% -9.9% 66 bps 969 bps

PBT (Rs mn) (11,820) (7,766) (23,407) 52 (50)

PAT (Rs mn) (6,217) (3,217) (12,310) 93 (50)

Coal India

Sales (Rs mn) 188,261 189,558 207,595 (1) (9) Coal India reported offtake of ~133mt in 1QFY17, up 2.7% YoY. Of this we expect ~10% volumes to be sold in regular e-auction (we build in e-auction volumes of 13.5mt in 1QFY17 (similar to 14mt in 4QFY15). Further, we expect ~9mt to be sold in special forward auction for power sector. We expect e-auction realisations to decline to Rs1,550/t in 1QFY16 vs Rs1,648/tonne in 1QFY17 due to lower premiums and inferior grade mix. Lower e-auction realisations are likely to result in a 3% decline in blended realisation. Stronger volumes offset by lower e-auction realisations are likely to result in flat revenue growth and 23% decline in PAT.

EBITDA (Rs mn) 42,264 53,671 69,196 (21) (39)

EBITDA margin (%) 22.4% 28.3% 33.3% -586 bps -1088 bps

PBT (Rs mn) 51,579 65,163 76,481 (21) (33)

PAT (Rs mn) 34,558 44,735 55,674 (23) (38)

Source: Company, Ambit Capital research; Note: * Quarterly estimates for Nalco, Hindalco and SAIL are for parent operations; CIL numbers are excl. OBR provisions



NBFCs Despite improving growth, improvement in profitability will be seen only for select NBFCs owing to structurally persistent pressures on asset quality and margins for the rest in the space. MMFS (SELL) will disappoint the street as the rural economy will not return to its high growth days of 2003-13. We prefer Cholamandalam Finance (RoE improvement + key beneficiary of pick-up in LCVs and used CVs) and Magma Fincorp (cheaply valued turnaround play).

Growth to improve (ex HFCs)

With continued robust MHCV sales and stabilising trends in tractors, PVs, 2-wheelers and LCVs, we should see improvement in AUM trends for prominent auto NBFCs (13-23% YoY) in 1QFY17. However, Magma will be an exception as internal restructuring would cause AUM to decline by 7% YoY. Loan growth of SCUF should also improve due to continued market share gains in its 2-wheeler financing book and growth of SME book outside legacy states. BAF should continue to demonstrate 35%+ AUM growth as slowdown in LAP segment is offset by faster growth in unsecured segments like personal and business loans. LICHF would continue to see growth gradually declining due to tepid real estate prices and increasing competition.

Margin trends mixed

Declining wholesale rates and room to realign the liability mix towards cheaper wholesale borrowings will be favourable for the funding cost of NBFCs. That said, intense competition from banks in prime categories (car loans) means that the benefit of lower funding costs would be passed on, thereby limiting NIMs expansion of NBFCs having high exposure to such products (MMFS). NBFCs with meaningful presence in segments with lower competitive intensity (used CV, LCV financing) should see their margins expanding (CIFC, SHTF, MGMA). Mortgage financer LICHF should see margins declining marginally (2bps QoQ) as declining yields (due to pressure on incremental spreads and full pass-on of pricing cut on its floating rate portfolio (~40% of AUM) in 3Q16), should offset benefits from lower ocst of funds. Asset quality challenges to persist albeit with lower intensity

1Q is seasonally a bad quarter for NBFCs’ asset quality and hence we expect sequential deterioration in asset quality for all NBFCs under our coverage. However, the pace of asset quality deterioration should abate YoY as early delinquency trends have improved since last year, as per our channel checks. That said, stress in tractor loans remains high as a substantial turnaround in rural economy remains elusive. We expect M&M Finance’s asset quality to revert to its downward trend after a strong 4QFY16. Whilst 1Q is weak for collections for HFCs too, we believe the best of the asset quality trends are behind and declining real estate prices and muted real estate sales would result in increased delinquency levels in LAP and developer loan portfolios.

Preparing for the forthcoming results As we continue to scan for signals of a full-fledged economic recovery, growth and asset quality would be the key metrics to watch for. Overall, we expect YoY earnings growth to be in a broad range of 7% to 41% for our coverage universe. Our 1QFY17 earnings estimates for NBFCs are about 14% lower than consensus estimates primarily due to lower growth and higher credit cost estimates.

Summary of our segment-specific recommendations Auto NBFCs: BUY LCV financer (CIFC) & turnaround (MGMA); SELL MMFS Pick-up in auto sales, declining cost of funds and stabilizing asset imply that most auto-NBFCs should demonstrate some improvement in growth and profitability from a very moderated base. However, two structural headwinds will dilute the longer term narrative of these lenders: i) intense competition from private banks (on increasing rural reach and pricing) and PSU banks (improving service quality and pricing); and ii) hostile regulatory environment evident from tougher securitisation, priority sector funding and NPA provisioning norms. Valuations of MMFS have re-rated meaningfully in hopes of significant improvement in earnings growth, with recovery from 2 previous downcycles setting the precedent. However, our analysis (click here) indicates that

Stock Performance

(%) 3-month


LIC Hou Finance 7 (3)

M & M Finance 50 40

Shriram Transport 33 24

Magma Fincorp 41 32

Bajaj Finance 20 11

SCUF 18 9

Motilal Oswal 39 30

Chola 30 21

Mar’16E Qtrly EPS


LIC Hou Finance 9.9 10.1

M & M Finance 2.5 2.0

Shriram Transport 18.7 18.6

Magma Fincorp 2.1 NA

Bajaj Finance 70.4 75.4

SCUF 24.9 28.9

Motilal Oswal 2.8 NA

Chola 9.4 NA

FY17E EPS


LIC Hou Finance 36.0 39.3

M & M Finance 16.6 18.7

Shriram Transport 71.2 71.4

Magma Fincorp 11.3 11.5

Bajaj Finance 271.4 307.5

SCUF 98.4 98.2

MOFS 15.8 15.8

CIFC 45.8 46.6

http://reports.ambitcapital.com/reports/Ambit_M&MFinancialServices_CompanyInsight_Thistimeitsdifferent_06Jun2016.pdf



earnings growth of MMFS will be lower than Street expectations and we reiterate a high conviction SELL on MMFS. We prefer Cholamandalam Finance (click here) in the space as it is a key beneficiary of pick-up in LCV and used CV sales and less vulnerable to the above mentioned headwinds. Magma Fincorp is a cheaply valued turnaround play, which should see earnings growth improving on the back of improving operating efficiencies and economic recovery. Whilst we are sellers on SHTF due to increasing competitive pressures in the used CV business, SHTF can positively surprise the street on earnings on the back of improved collections in used CE financing business. SME financers: Prefer sustainability over rapid growth; BUY SCUF; SELL BAF In SME loan financing, whilst BAF would deliver better near-term earnings growth than SCUF, we prefer the latter. Our preference is driven by SCUF’s more sustainable earnings growth given its competitive strengths in small ticket loans versus BAF’s vulnerabilities to competitive pressures in the fiercely competitive large ticket SME financing market. However, lack of clarity on future strategy due to shareholding change and excess capital it is sitting on continue to be the key overhangs on SCUF. HFCs: LICHF will disappoint – SELL; watch out for ‘Aspire’ – BUY MOFS Amongst mortgage lenders, we reiterate SELL on LICHF as it is likely to meaningfully disappoint on consensus expectations of continued robust growth and sustained NIMs, which we believe are fully built into current valuations.

Detailed Jun’16 quarterly estimates Exhibit 41:

Company name Jun'16 Jun'15 Mar'16 YoY QoQ Comment

LIC Housing Finance

Net Interest Income (Rs mn) 8,451 6,589 8,214 28% 3% NIMs will improve ~28bps from a very low base of 1Q16. Yields should decrease by ~15bps YoY due to wafer thin spreads on incremental book and PLR cuts in 3QFY16. With a moderating 15% loan book growth, NII growth should be of 27% YoY. Marginal improvement in credit costs will drive PAT growth of 31% YoY.


Operating margin (%) 95% 95% 89% PBT (Rs mn) 7,745 5,790 6,943 34% 12%

PAT 4,998 3,821 4,480 31% 12%

Bajaj Finance


We expect ~10bps NIM improvement along with 38% AUM growth to result in NII growth of 38% YoY. We expect provisioning costs to increase by ~20bps YoY to 1.4% to result in PAT growth of 39% YoY.



PAT 3,824 2,756 3,151 39% 21%

SCUF


AUM growth should improve to 18% YoY. We expect NIMs to decline by ~40bps YoY and credit costs to decrease by ~20bps. PAT will demonstrate a modest 11% YoY growth.


Operating margin (%) 57% 60% 55% PBT (Rs mn) 2,456 2,244 864 9% 184%

PAT 1,646 1,477 555 11% 197%

Magma Fincorp

Net Interest Income (Rs mn) 3,243 3,018 3,324 7% -2% Impact of declining AUM (due to operational restructuring) should be broadly offset by NIM expansion of ~100bps to drive total income growth of 7% YoY. However, a mild increase in operating costs (up ~15bps YoY) and credit costs (up ~50bps YoY) should result in a moderate 7% YoY PAT growth.


Operating margin (%) 55% 48% 60% PBT (Rs mn) 754 573 1,015 31% -26%

Consol. PAT 483 453 652 7% -26%

M&M Finance


We factor in AUM growth of 12% YoY and flat margins YoY. We expect credit costs to decrease to ~330bps (down ~40bps YoY) to result in consolidated earnings improving by 35% YoY.


Operating margin (%) 64% 64% 68% PBT (Rs mn) 1,858 1,376 5,706 35% -67%

Consol. PAT 1,407 1,074 4,100 31% -66%

http://reports.ambitcapital.com/reports/Ambit_AutoNBFCs_Thematic_MultipleHeadaches_08Oct2015.pdf



Company name Jun'16 Jun'15 Mar'16 YoY QoQ Comment

Motilal Oswal Financial Services

Total Income (Rs mn) 1,948 1,778 2,054 10% -5% We expect MOFS’ total income (ex-HFC) driven by 10% YoY improvement in brokerage revenues. AMC revenues should increase by 44% YoY driven by similar increase in AUM. However, increase in operating costs (up 11% YoY) should result in PAT growth (ex-HFC) being modest at 3% YoY. However, rapid scale-up in housing finance business (HFC PAT up by 300%) should drive consolidated PAT growth to 41% YoY.

Operating Profit (Rs mn) 444 420 499 6% -11%

Operating margin (%) 23% 24% 24% PBT (Rs mn) 354 345 409 3% -13%

Consol. PAT 398 283 472 41% -16%

SHTF


We factor in improving AUM growth of 25% YoY. Expanding NIMs (up ~70bps YoY) should lead to 32% YoY PAT growth.



Standalone PAT 4,244 3,211 1,439 32% 195%

CIFC

Net Interest Income (Rs mn) 6,160 4,863 5,994 27% 3% We factor in an improving AUM growth of 19% YoY and margin improvement of ~50bps YoY to result in NII growth of 27% YoY. Marginally improving operating costs should offset increase in credit costs and result in 34% YoY PAT growth.


Operating margin (%) 60% 57% 66% PBT (Rs mn) 2,281 1,705 2,962 34% -23%

Standalone PAT 1,483 1,103 1,920 34% -23%





LIC HF Recommendation SELL SELL TP (Rs) 396 382 4% Net Revenues (Rsmn) 33,842 36,941 33,001 36,659 3% 1%

Roll-forward leads to a minor upgrade in our EVA-based valuation.

Operating Profit (Rsmn) 28,335 30,510 27,696 30,437 2% 0%

Operating margin (%) 84% 83% 84% 83% PBT (Rsmn) 27,093 29,147 26,473 29,084 2% 0%

PAT (Rsmn) 18,153 19,528 17,737 19,486 2% 0%

EPS (Rs) 36.0 38.7 35.1 38.6 2% 0%

Cholamandalam Recommendation BUY BUY TP (Rs) 996 905 10% Net Revenues (Rsmn) 25,959 32,767 25,664 32,332 1% 1%

Our FY17/18 PAT upgrades by ~4% are primarily driven by factoring in higher operating leverage driven by pick-up in LCV sales. Along with roll-forward, this leads to a 10% upgrade in our EVA-based valuation.



PAT (Rsmn) 7,398 10,006 7,210 9,615 3% 4%

EPS (Rs) 47.0 63.5 45.8 61.1 3% 4%





Motilal Oswal Financial Services

Recommendation BUY BUY TP (Rs) 381 367 4% Net Revenues (Rsmn) 9,202 9,628 9,202 9,628 0% 0%




PAT (Rsmn) 2,220 2,676 2,220 2,676 0% 0%

EPS (Rs) 15.8 19.1 15.8 19.1 0% 0%

Bajaj Finance Recommendation SELL SELL TP (Rs) 4327 4171 4% Net Revenues (Rsmn) 56,725 70,812 54,053 67,170 5% 5%

Our FY17/18 PAT upgrades by ~4% are primarily driven by increase in our growth estimates. Roll-forward leads to a minor upgrade in our EVA-based valuation.



PAT (Rsmn) 15,223 18,569 14,875 18,201 2% 2%

EPS (Rs) 274.7 335.1 263.0 321.8 4% 4%

Shriram Transport Recommendation SELL SELL TP (Rs) 843 813 4% Net Revenues (Rsmn) 61,651 73,237 61,651 73,237 0% 0%




PAT (Rsmn) 16,147 20,188 16,147 20,188 0% 0%

EPS (Rs) 71.2 89.0 72.5 90.7 2% 2%

Magma Fincorp


TP (Rs) 138 133 4%

Net Revenues (Rsmn) 13,788 15,429 13,788 15,429 0% 0%



Operating margin (%) 54% 56% 54% 56%

PBT (Rsmn) 3,959 5,297 3,959 5,297 0% 0%

PAT (Rsmn) 2,652 3,549 2,652 3,549 0% 0%

EPS (Rs) 11.3 15.1 11.3 15.1 0% 0%




Oil & Gas OMCs and gas companies should see healthy earnings momentum in 1QFY17. OMCs continue to be in a sweet spot as earnings would benefit from healthy volume growth and inventory gains supporting GRMs, but would see marginal moderation after a stellar 4Q. In the gas space, PLNG will continue to benefit from resumption of RasGas long-term volumes and shutdown of competing Dabhol terminal. GAIL will benefit from improved profitability of petchem and LPG business due to lower gas prices. IGL is expected to witness strong volume growth aided by regulatory drives such as even-odd rule, conversion of cabs to CNG aiding volumes, and better offtake in the PNG segment due to lower costs. We remain positive on OMCs given sustained volume growth, marketing margins and steady GRMs. Healthy cash flow generation and sustained trajectory of price hikes should support re-rating for OMCs.

OMCs - stronger volumes and steady margins

We expect 1QFY17 to be a strong quarter for OMCs despite weak Asian benchmark GRMs of $5/bbl. We are building in GRMs of 5.5/5.5/6.5 for BP/HP/IOC. We expect the Indian refiners to beat the Asian benchmark due to significant inventory gains (Brent increased by 33% QoQ). Average net marketing margins for petrol and diesel have moderated sequentially and seem to stabilise at 80 paise/litre. OMCs have been able to fully pass on the recent crude increase, which gives us more confidence on the sustenance of price deregulation. We expect EBITDA of Rs34bn/Rs13bn/Rs34bn for BP/HP/IOC. Trends on Paradip utilisation and profitability would be key for IOC. Improved profitability for subsidiary refineries Bhatinda and Bina should bode well for HP and BP respectively. For BPCL, commentary on Kochi refinery upgradation and development of Mozambique assets would be critical.

Expect good quarter for gas stocks

We expect gas volumes to be healthy YoY, however we don’t see much increase on a sequential basis. While a fall in domestic prices has led to some uptick in LNG volumes, overall volumes remain flat. LNG demand has been healthy and will aid GAIL and PLNG. GAIL’s transmission volumes are also likely to grow 3-4% QoQ due to higher LNG imports. Transmission tariffs are likely to remain flat YoY.

Petronet LNG – expect another strong quarter

We expect PLNG to report a strong quarter driven by resumption of RasGas volumes and shutdown of the Dabhol terminal. PLNG competes on spot volumes to Dabhol, which had resumed operations in 3QFY16. Since total imports have remained flat on a sequential basis, Dahej volumes should increase sequentially given volume gains from Dabhol which was being used by GAIL for spot volumes. We take overall volumes at 161 TBTUs, up 26% YoY and 5% QoQ. Higher volumes, operating leverage and lower energy costs will drive EBITDA growth of 30% YoY. We expect PAT of Rs2.5bn (up 46% YoY).

IGL – even-odd rule to boost CNG volumes

IGL volumes would continue to benefit from: a) accelerated rate of conversion to CNG for 4-wheelers as CNG vehicles are exempt from the even-odd rule in Delhi; b) we see new buses in the next 6-24 months even after accounting for some delays; c) conversion of Ola and Uber cars to CNG; and d) improved traction in industrial/commercial PNG given lower LNG prices and gradual reduction in fuel oil usage as regulations become stricter. We expect the company to deliver PAT of Rs1,233mn (up 21% YoY). We have assumed: (a) CNG volume of 289mmscm (7% YoY growth) and PNG volume of 87mmscm (10% YoY growth); and (b) margin (EBITDA/scm) improvement of 5% due to lower domestic gas prices.

Stock Performance

(%) 3-month


PLNG 21 12 GAIL (India) 14 5 GSPL (1) (10) IGL 9 (0) HPCL 29 20 BPCL 23 14 IOCL 19 10

Jun ’16E Qtrly EPS

(̀ ) Ambit Consensus

PLNG 3.4 3.93

GAIL (India) 6.8 6.32

GSPL 1.9 2.21

IGL 8.8 8.19

HPCL 35.6 22.3

BPCL 28.0 29.5

IOCL 14.0 9.99

FY17E EPS

(̀ ) Ambit Consensus

PLNG 17.4 15.7 GAIL (India) 26.2 27.1 GSPL 8.7 9.8 IGL 37.2 36.4 HPCL 105.0 111.8 BPCL 110.4 92.3 IOCL 52.7 51.0



Key things to watch for: a) GAIL’s commentary on transmission tariff revision order by PNGRB; b) demand outlook for gas consumption in FY17; c) BPCL commentary on development in Mozambique; and d) subsidiary performance and debt reduction of OMCs. Ambit vs consensus Based on the limited consensus data for 1QFY17, our earnings estimates are ahead of consensus for GAIL, IGL, IOCL and HPCL. Our FY17 EPS estimates are ahead of consensus estimates for Petronet LNG, IGL, BPCL and IOCL.

We haven’t made any changes to our estimates. Where do we go from here?

In our Oil & Gas universe, we continue to prefer OMCs over gas stocks as the latter fully price in the catalysts (cheaper spot LNG prices, renegotiation of RasGas contracts) over the next 2-3 years. OMC stocks should continue to do well due to good earnings visibility and healthy return ratios. Healthy ROEs of 24%/17%/15% for BP/HPCL/IOCL should continue to drive re-rating of OMC multiples. We remain BUYers on all three names, but like them in the following order –BPCL (better ROE, efficient refining/marketing operations, and partly hedged for higher crude prices by increase in value of upstream assets), IOCL (inexpensive valuations and volume/GRM improvement from Paradip commissioning), and HPCL (volume share gain, but getting into heavy capex cycle).

Detailed Jun '16 quarterly estimates Exhibit 43:

Jun'16E Jun '15 Mar '16 YoY (%) QoQ (%) Comment

PLNG

Sales (` mn) 48,976 83,772 60,653 (41.5) (19.3) Assumed regas volume at 161TBTU, up 26% YoY, due to boost in demand on decline in domestic production. We expect EBITDA growth to be much higher given operating leverage on a YoY basis. Our PAT estimates imply 46% YoY growth.

EBITDA (` mn) 4,612 3,611 4,466 27.7 3.3

EBITDA margin (%) 9.4 4.3 7.4 511 bps 205 bps

PBT (̀ mn) 3,712 2,531 3,517 46.6 5.5

PAT (` mn) 2,561 1,751 2,393 46.3 7.0

GAIL (India)

Sales (` mn) 142,512 125,653 117,324 13 21 Transmission volume likely to be marginally higher QoQ at 97mmcmd as muted domestic volumes negate the impact of higher LNG volumes. We expect transmission tariff of Rs1,100/tcm aided by increased tariifs for Cauvery and KG basin pipelines.

EBITDA (` mn) 15,545 10,439 12,237 49 27

EBITDA margin (%) 10.91 8.31 10.43 260bps 48bps

PBT (̀ mn) 12,572 6,511 9,399 93 34

PAT (` mn) 8,297 4,241 7,700 96 8

GSPL

Sales (` mn) 2,348 2,591 2,319 (9.4) 1.3

Volume to remain flat QoQ at 25mmcmd. Weighted average transmission tariff assumed at Rs1,070/tcm flat on QoQ basis

EBITDA (` mn) 2,037 2,271 2,049 (10.3) (0.6)

EBITDA margin (%) 86.8 87.6 88.3 (88.7) 157.4

PBT (̀ mn) 1,499 1,738 1,538 (13.7) (2.5)

PAT (` mn) 990 1,128 997 (12.2) (0.8)

IGL

Sales (` mn) 9,484 9,018 8,856 5.2 7.1 Assumed CNG volume of 284 mmscm and PNG volume of 87mmscm, implying a YoY volume growth of 7% in CNG and 10% in PNG.

Expect margins (EBITDA/scm) to increase by 5% on the back of decline in domestic gas prices.

EBITDA (` mn) 2,238 1,961 1,969 14.1 13.6

EBITDA margin (%) 23.59 21.74 22.24 185bps 136bps

PBT (̀ mn) 1,868 1,596 1,627 17.1 14.8

PAT (` mn) 1,233 1,018 1,076 21.0 14.5

IOC

Net Sales (` mn) 1,219,584 1,013,068 804,496 20% 52% We expect IOCL to report strong numbers aided by inventory gains due to higher crude prices (33% QoQ). We build in GRMs of $6.5/bbl higher than the Asian benchmark GRMs of $5/bbl. While marketing margins will see sequential moderation, the segment will benefit from better volumes and adventitious gains on product inventory.

EBITDA (` mn) 64,142 101,006 40,443 -36% 59%

EBITDA margin (%) 5.3% 10.0% 5.0% -471 23

PBT (̀ mn) 50,942 91,999 22,146 -45% 130%

PAT (` mn) 33,960 64,357 12,356 -47% 175%



Mar'16E Mar '15 Dec '15 YoY (%) QoQ (%) Comment

BPCL

Net Sales (` m) 510,805 519,661 441,971 -2% 16% We expect BPCL to report moderation in refining profits due to decline in benchmark GRMs. Marketing margins would also see a decline on a QoQ basis but will be aided by healthy adventitious gains. Profits will also be aided by healthy marketing volume growth. We expect GRMs of $5.5/bbl in 1QFY16 vs $6.3/bbl in 4QFY16

EBITDA (` m) 32,196 38,180 34,896 -16% -8%

EBITDA margin (%) 6.3% 7.3% 7.9% -104% -159%

PBT (̀ m) 29,696 34,962 34,973 -15% -15%

PAT (` m) 20,235 23,762 25,491 -15% -21%

HPCL

Net Sales (` m) 428,491 518,033 421,952 -17% 2% We expect HPCL to report moderation in refining profits due to decline in benchmark GRMs. Marketing margins would also see a decline on a QoQ basis but will be aided by healthy adventitious gains. Profits will also be aided by healthy marketing volume growth. We expect GRMs of $5.5/bbl in 1QFY16 vs $7.5/bbl in 4QFY16

EBITDA (` m) 24,607 30,630 26,613 -20% -8%

EBITDA margin (%) 5.7% 5.9% 6.3% -17% -56%

PBT (̀ m) 18,001 24,204 22,025 -26% -18%

PAT (` m) 12,060 15,880 15,529 -24% -22%




Technology Jun-16 preview: All eyes on Brexit impact commentary Technology companies are likely to have a seasonally stronger quarter in terms of revenue growth, but we expect margins to decline QoQ (by 70-200bps) due to wage hikes, visa costs, INR appreciation, and costs related to acquisitions for some companies (HCLT: Volvo; Persistent: IBM). Key things to watch for: (1) commentary on demand environment, especially impact of Brexit; (2) demand outlook for European banking sector (stock prices of leading European banks signal stress in the sector); (3) pricing environment and productivity improvement due to automation; (4) digital strategy of different companies and their progress so far. Given the June quarter’s importance in setting the pace for FY17 revenue growth, we believe any material misses on consensus estimates are likely to drive significant stock price movement. We maintain TechM as our top BUY.

Seasonally stronger revenue growth We expect a strong quarter for TCS, Infosys and HCLT and weak quarters for Wipro and TechM. Infosys is likely to lead the pack (4.0% QoQ growth in organic, constant currency terms) followed by TCS (3.5% QoQ) and HCLT (3.1% QoQ). It is a seasonally weak quarter for Wipro (0% QoQ – mid-point of its quarterly guidance in constant currency) while TechM is expected to report muted growth (-0.5% QoQ) given seasonal weakness in Comviva. All major currencies appreciated against the US$ in the June-16 quarter (average quarter) resulting in 40-100bps tailwind. However, we note that many currencies depreciated meaningfully in the aftermath of Brexit and we expect this to contribute 50-100bps of cross currency tailwind during the Sep-16 quarter.

Amongst mid-sized companies, it is a seasonally strong quarter for Mindtree (3.5% QoQ growth in organic cc terms). We expect Persistent to report strong revenue growth (4.7% QoQ in reported US$ terms) aided by ~200bps inorganic contribution from the IBM deal.

Wage hikes and visa costs to impact margins EBIT margins are likely to be under pressure for most companies driven primarily by wage hikes, INR appreciation (0.8%) and visa costs. For TCS and Infosys, we build in 130bps and 200bps EBIT margin declines. HCLT and TechM do not administer wage hikes during this quarter. For TechM, we build 130bps decline driven by Comviva-related weakness. For HCLT, we assume a 100bps decline due to margin dilution from the Volvo deal.

Amongst mid-sized companies, impact of the IBM deal on Persistent’s margins is a key thing to watch out for. For Mindtree, we are building in 40bps QoQ decline.

Brexit: Near-term negative, but potentially positive in the long term In our note dated 27 Jun 2016, we highlighted that Brexit would lower Indian IT players’ revenues and margins over the next 12 months driven by potential IT budget cuts from BFSI and UK-based manufacturing clients. However, we believe Brexit could also create additional demand when things settle as customers would need to update technology to support business changes that Brexit entails, including shifting new HQs or regional offices to mainland Europe. Like the Global Financial Crisis (GFC), this event can make clients more open to outsourcing as they would no longer be burdened by legacy systems and arrangements.

Preparing for the upcoming results We have increased our long-term USD/INR estimates to Rs67.5 (vs Rs66.5 earlier), which is the primary driver of the upgrades to our EPS estimates. We have made notable changes to our estimates for HCLT (FY18/19 EPS estimates lowered by 4%, target multiple lowered to 14x from 15x) to reflect Brexit-related impact (highest exposure to European BFSI), attrition in senior management, and unattractive acquisitions like Geomtric. We have cut our TP by 15% to Rs850 but have maintained our by stance on cheap valuation of 13x 1-year forward P/E.

Expected result dates Result dates TCS 14 Jul

Infosys 15 Jul

Mindtree 18 Jul

Wipro 19 Jul

HCLT early August

Persistent 23 Jul

eClerx *11 Aug

TechM *1 Aug

Source: BSE, Company; * denotes expected reporting date.

Ambit vs consensus (Jun-16) EPS (Rs) Ambit Consensus

TCS 30.8 31.3

Infosys 14.9 15.0

Wipro 8.9 9.4

HCLT 13.6 13.7

TechM 7.1 8.3

Mindtree 9.5 9.1

Persistent 9.5 8.9

eClerx 22.9 21.2


Ambit vs consensus (FY17) EPS (Rs) Ambit Consensus

TCS 134.3 134.7

Infosys 64.3 66.1

Wipro 38.2 38.4

HCLT 55.1 56.5

TechM 35.2 37.3

Mindtree 41.0 41.2

eClerx 40.9 42.2


http://reports.ambitcapital.com/reports/Ambit_Technology_BrexittohurtintheneartermTechMmostinsulated_27Jun2016.pdf



Recommendations

We retain TechM as our top pick in the sector. We retain our BUY stance on Infosys, HCLT and TCS and SELL stance on Wipro, Mindtree, Persistent and eClerx.

TCS (BUY, 18% upside): We expect revenue growth to accelerate from FY17 (FY16A: 7%, FY17E: 10%, FY18E: 13%) without significantly compromising margins or cash flows. TCS’ low cost structure and leadership in key segments will enable it to continue winning business. Despite its large scale, TCS has less than 3% market share in each of its key markets, which leaves significant headroom for growth. It also has a good track record of identifying and investing in new markets and segments (e.g., Nordic region, Japan, automation, etc.), which gives us comfort that it will not be blindsided by changing trends. The stock is trading at 18x 1-year forward earnings despite FY16 RoE of 35%+ and FY17-19E EPS CAGR of 12% (we see ~15% in the long-term).

Infosys (BUY, 27% upside): Focused initiatives from the new management have enabled Infosys to improve sales execution (successfully positions itself as offering innovation at India costs) and delivery (employee engagement, automation). We expect revenue growth to accelerate (FY16A: 9%, FY17E: 12%, FY18E: 15%). Valuation of 18x 1-year forward earnings appears attractive with well over 20% RoE (depressed only because of high cash) and FY17-19E EPS CAGR of 15%.

Wipro (SELL, 2% downside): We have a SELL stance on the stock despite reasonable valuations (14x 1-year forward P/E) because of its poor and deteriorating portfolio mix (high exposure to capital markets, telecom equipment), weak organization structure (vertical heads responsible for revenue growth and service-line heads for profitability) and high senior management churn. Our channel checks also indicate that Wipro’s delivery quality is “inconsistent” though the company is taking a number of steps to improve this. We think things are likely to get worse for Wipro before they get better. Also, recent primary checks with industry stakeholders indicate that there are permanent problems in Wipro’s culture that could prevent a turnaround.

HCL Tech (BUY, 17% upside): The current de-rating (13x 1-year-forward EPS vs 15x just 4 months ago) is due to miscommunication by management – revenue growth in the last quarter was below guidance and management abruptly discontinued margin guidance. This will normalise once investors are assured about limited margin deterioration in the core business (ex-Volvo deal, we assume only 50bps deterioration YoY in margins). Our DCF-based target price implies 14x Jun 2018 ending EPS. Our channel checks assure us of HCLT’s strong competitive advantage in fast-growing service lines like infrastructure management and engineering services. High exposure to these, at ~55% of revenue (vs 20%/11% for TCS/Infosys), would ensure HCLT continues to outperform peers over the next 2-3 years on revenue growth. EBIT margin would also normalise as it has in the past (FY16A: 20%, FY17E: 19%, FY18E: 19.5%).

Tech Mahindra (BUY, 35% upside): TechM is our top pick in the technology sector because our thesis of margin expansion and telecom revenue growth acceleration is playing out whereas consensus remains unconvinced. TechM has ample headroom to improve EBIT margin (FY14A: 19.4%, FY16A: 13.5%, FY18E: 16.5%) from automation, code reuse and restructuring of past acquisitions. Our channel checks with industry participants as well as conversations with the Chief Technology Officer of TechM give us confidence. Telecom segment should also return to growth driven by M&A-related integration spend by clients and pipeline of large deals in digital and network management services. We expect FY16-18 EPS CAGR of 14%. There is room for re-rating of current valuations of 13x 1-year forward P/E – our DCF-based target price implies 15x Jun 2018 ending EPS.



Detailed June 2016 quarterly estimates Exhibit 44:

Jun-16E Mar-16 QoQ Jun-15 YoY Comment

TCS

Sales (US$ mn) 4,396 4,207 4.5% 4,036 8.9% 3.5% QoQ revenue growth in constant currency terms; 100bps tailwind from cross currency movements due appreciation pf Japanese Yen and Singpore Dollar

Sales (Rs bn) 294 284 3.4% 257 14.6%

EBIT (Rs bn) 72.8 74.1 -1.7% 67.5 7.9%

EBIT margin (%) 24.8% 26.1% -130 bps 26.3% -150 bps Margins could be impacted by wage hike, but will be offset by INR appreciation and operating leverage.

PBT (Rs bn) 79.3 83.2 -4.6% 75.2 5.5%

PAT (Rs bn) 60.6 63.4 -4.4% 57.1 6.2% We have not factored in any forex gains/ losses.

Infosys

Sales (US$ mn) 2,558 2,446 4.6% 2,256 13.4% 4% QoQ revenue growth in constant currency.

Sales (Rs bn) 171 166 3.4% 144 19.2% We estimate 60bps cross currency tailwind.

EBIT (Rs bn) 40 42 -5% 34 17%

EBIT margin (%) 23.5% 25.5% -200 bps 24.0% -50 bps We build-in 200bps decline in EBIT margin on account of wage hikes and visa fees

PBT (Rs bn) 48 50 -3% 42 15%

PAT (Rs bn) 34 36 -5% 30 13% We have not factored in any forex gains/losses.

Wipro

IT Services

Sales (US$ mn) 1,933 1,882 2.7% 1,794 7.7%

0% QoQ revenue growth in organic constant currency terms. Health plan acquisition to contribute 200bps to revenue. Our estimates are in line with guidance (1-3% in cc terms). We are not building in any contribution from Viteos acquisition yet.

EBIT (Rs bn) 25 26 -2.5% 24 3.1% We estimate 70bps cross currency tailwind.

EBIT margin (%) 19.4% 20.1% -70 bps 21.0% -160 bps We build 70bps decline in EBIT margins due to wage hikes and dilution impact from acquisitions.

Consolidated

Sales (Rs bn) 137 137 -0.1% 124 10.9%

EBIT (Rs bn) 24 25 -2.1% 24 1.4%

EBIT margin (%) 17.8% 18.1% -40 bps 19.4% -170 bps

PBT (Rs bn) 29 29 -1.8% 28 2.6%

PAT (Rs bn) 22 22 -1.9% 22 0.5%

HCLT

Sales (US$ mn) 1,693 1,587 6.7% 1,538 10.1%

3.1% QoQ revenue growth in constant currency. The Volvo deal adds US$80mn to total revenue (5%), of which US$50mn (3.2%) is the inorganic component coming from external IT business.

Sales (Rs bn) 113 107 6.3% 98 15.8% We estimate 40bps of cross currency tailwind

EBIT (Rs bn) 22 22 1.4% 20 14.2%

EBIT margin (%) 19.8% 20.7% -100 bps 20.1% -30 bps We expect margins to drop by 100bps due to dilution from Volvo deal, partly offset by INR appreciation

PBT (Rs bn) 25 24 2.0% 22 12.9%

PAT (Rs bn) 19 19 0.8% 18 8.8% Source: Company, Ambit Capital research.



Detailed June 2016 quarterly estimates Exhibit 45:

Jun-16E Mar-16 QoQ Jun-15 YoY Comment

TechM

Sales (US$ mn) 1,032 1,023 0.9% 989 4.3%

We expect organic constant currency revenue growth to be muted (-0.5% QoQ) due to seasonal weakness in Comviva (-3% QoQ growth assumption for Telecom) offsetting growth in enterprise (2% QoQ). One month of revenue from Pininfarina will contribute 60bps of overall revenue.

Sales (Rs bn) 69 69 0.3% 63 9.7% We are building in 100bps cross currency tailwind.

EBIT (Rs bn) 8.6 9.4 -9.4% 7.6 12.2%

EBIT margin (%) 12.4% 13.7% -130 bps 12.1% 30 bps Margin decline driven by Comviva weakness, visa fees, INR appreciation; partially offset by operating leverage

PBT (Rs bn) 9.2 10.8 -14.7% 8.9 3.6% PAT (Rs bn) 7.0 8.9 -22.1% 6.8 3.1% We have not factored in any forex gains or losses.

Mindtree

Sales (US$ mn) 204 196 4.4% 155 31.8% We expect 3.5% organic cc growth during the quarter and 90bps tailwind from cross currency movements.

Sales (Rs mn) 13,659 13,242 3.1% 9,816 39.1% EBIT (Rs mn) 1,912 1,911 0.1% 1,407 35.9%

EBIT margin (%) 14.0% 14.4% -40 bps 14.3% -30 bps Margin expected to decline by 40bps due to visa costs and costs related to recent acquisitions.

PBT (Rs mn) 2,059 2,004 2.8% 1,781 15.6%

PAT (Rs mn) 1,596 1,560 2.3% 1,382 15.5% We have not factored in any forex gains or losses.

Persistent

Sales (US$ mn) 105 100 4.7% 79 33.8% We expect 4.7% QoQ revenue growth in US$ terms, of which ~200bps will come from IBM deal (all three months of IBM revenues were not included in Mar-16 results).

Sales (Rs mn) 7,038 6,771 3.9% 5,004 40.6% We expect 10bps tailwind from cross currency movements.

EBIT (Rs mn) 780 818 -4.6% 742 5.1%

EBIT margin (%) 11.1% 12.1% -100 bps 14.8% -370 bps Margin expected to be impacted by IBM deal (lower margin), visa costs.

PBT (Rs mn) 1,046 1,028 1.8% 940 11.3%

PAT (Rs mn) 764 808 -5.5% 672 13.6% We have not factored in any forex gains or losses.

eClerx

Sales (US$ mn) 51 51 0.8% 46 10.4% Organic constant currency revenue growth of 0.5%.

Sales (Rs mn) 3,426 3,432 -0.2% 2,983 14.9% We estimate 30bps cross currency tailwind.

EBIT (Rs mn) 1,145 1,269 -9.8% 891 28.6% EBIT margin (%) 33.4% 37.0% -360 bps 29.9% 360 bps Margin expected to be impacted by wage hikes and INR

appreciation. PBT (Rs mn) 1,253 1,359 -7.8% 1,050 19.4% PAT (Rs mn) 952 1,083 -12.1% 732 30.1%






Rs bn FY17E FY18E FY19E FY17E FY18E FY19E FY17E FY18E FY19E

TCS

Target Price (Rs) 2,950 2,950 0%

Our estimates are largely unchanged.

Out TP remains unchanged at Rs2,950 and implies 19x Jun-18 ending EPS estimate.

USD/ INR 67.4 67.4 67.4 66.5 66.5 66.5 1% 1% 1%

Revenue (US$mn) 18,232 20,538 23,111 18,282 20,696 23,290 0% -1% -1%

EBIT 320 360 404 317 358 402 1% 1% 1%

EBIT margin 26.1% 26.0% 26.0% 26.1% 26.0% 26.0% 00bps 00bps 00bps

PAT 265 297 334 262 296 333 1% 0% 0%

EPS (Rs) 134 151 170 133 150 169 1% 0% 0%

Infosys

Target Price (Rs) 1,500 1,450 3%

Our estimates are largely unchanged. We increase our TP to Rs1,500 to reflect quarterly roll-over (19x Jun-18 ending P/E).

USD/ INR 67.4 67.5 67.5 66.5 66.5 66.5 1% 2% 2%

Revenue (US$mn) 10,692 12,250 14,051 10,812 12,420 14,248 -1% -1% -1%

EBIT 178 207 237 175 206 237 1% 0% 0%


PAT 147 171 196 145 171 196 1% 0% 0%

EPS (Rs) 64 75 86 64 75 86 1% 0% 0%

Wipro

Target Price (Rs) 550 550 0%

Our marginally higher estimates for FY17-FY19 reflect weaker assumption for INR. We keep our TP unchanged at Rs550 implying 13x June-18 ending EPS estimate.

USD/ INR 67.4 67.5 67.5 66.5 66.5 66.5 1% 2% 2%

IT Services Revenue (US$mn) 7,996 8,758 9,699 8,001 8,784 9,727 0% 0% 0%

EBIT 106 115 119 105 114 117 1% 1% 1%


Consolidated Revenue 567 620 683 561 613 676 1% 1% 1%

EBIT 103 113 129 102 111 127 1% 1% 1%


PAT 94 103 117 93 102 116 1% 1% 1%

EPS (Rs) 38 42 47 38 41 47 1% 1% 1%

HCL Tech

Target Price (Rs) 875 1,000 -13% We lower our estimates for FY18-19 on account of lower growth assumption for engineering services, software segments. We cut our TP to Rs875 on account of cut in EPS estimates and using a lower target multiple 14x (vs 15x earlier).

USD/ INR 67.4 67.5 67.5 66.5 66.5 66.5 1% 2% 2%

Revenue (US$mn) 6,994 7,877 9,017 7,143 8,146 9,322 -2% -3% -3%

EBIT (Rs bn) 90 101 119 90 106 124 -1% -4% -4%

EBIT margin 19.0% 19.0% 19.5% 19.0% 19.5% 20.0% 00bps -50bps -50bps

PAT (Rs bn) 78 87 102 78 90 106 0% -4% -4%

EPS (Rs) 55 62 72 55 64 75 0% -4% -4%






In Rs bn FY17E FY18E FY19E FY17E FY18E FY19E FY17E FY18E FY19E

Tech Mahindra

Target Price (Rs)

700

680

3% Our higher estimates for FY18/FY19 reflect our changed INR/USD assumption. We roll forward our target price and increase it to Rs700, implying 15x Jun-18 ending EPS estimate.

USD/ INR 67.4 67.5 67.5 66.5 66.5 66.5 1% 2% 2% Revenue (US$mn) 4,257 4,703 5,234 4,177 4,621 5,226 2% 2% 0% EBIT (Rs bn) 42 52 58 44 51 57 -4% 3% 2% EBIT margin 14.6% 16.5% 16.5% 15.7% 16.5% 16.5% -110bps 00bps 00bps PAT (Rs bn) 35 41 46 36 40 46 -3% 3% 1% EPS (Rs) 39 47 52 40 45 51 -3% 3% 1% Mindtree

Target Price (Rs) 700 700 0%

Our estimates are largely unchanged. Out TP remains unchanged at Rs720 and implies 14x Jun-18 ending EPS estimate.

USD/ INR 65.5 66.0 66.0 65.1 66.0 66.0 1% 0% 0%

Revenue (US$mn) 709 843 986 706 831 971 0% 2% 2%

EBIT (Rs mn) 6,888 8,354 9,765 6,821 8,227 9,609 1% 2% 2%


PAT (Rs mn) 6,014 6,917 8,077 5,961 6,819 7,956 1% 1% 2%

EPS (Rs) 36 41 48 35 41 47 1% 1% 2%

Persistent (Rs mn)

Target Price (Rs) 700 680 3% Our estimates are largely unchanged. We roll forward our target price to Rs700 (Rs680 earlier) implying 14x Jun-18 ending EPS.

USD/ INR 67.4 67.5 67.5 66.5 66.5 66.5 1% 2% 2%

Revenue (US$mn) 448 505 551 451 506 552 -1% 0% 0%

EBIT (Rs mn) 3,620 4,679 5,470 3,590 4,605 5,405 1% 2% 1%


PAT (Rs mn) 40 40 38 40 40 38 0% 0% 0%

EPS (Rs) 4,484 5,376 6,272 4,534 5,302 6,207 -1% 1% 1%

eClerx (Rs mn)

Target Price (Rs)

1,450

1,450

0% Our estimates are largely unchanged. Out TP remains unchanged at Rs1,450 and implies 13x Jun-18 ending EPS.

USD/ INR 67.4 67.5 67.5 66.5 66.5 66.5 1% 2% 2% Revenue (US$mn) 212 242 278 212 242 278 0% 0% 0% EBIT (Rs mn) 5,053 5,674 6,357 5,068 5,623 6,263 0% 1% 2% EBIT margin 34.9% 34.4% 33.9% 35.2% 34.5% 33.9% -40bps -20bps 00bps PAT (Rs mn) 5,237 5,886 6,600 5,252 5,835 6,506 0% 1% 1% EPS (Rs) 96 108 121 96 107 119 0% 1% 1% Source: Company, Ambit Capital research



Utilities Power demand at a pan-India level has grown at ~9% vs 4% in FY16 led by pick-up in demand from industrial states. However, we expect utilities under our coverage to report mixed revenue and EBITDA growth. We expect revenue growth of 12%, 19%, and 0% for NTPC (led by 10% volume growth), JSW Energy (JSWE; acquisition of Baspa-II and Karacham Wangtoo w.e.f Sept ’15), and Tata Power (TPL; 14% decline in Mundra’s volume). We expect 810bps, 1300bps and 90bps improvement in EBITDA margin for NTPC (lower base impact), JSWE acquisition and lower imported coal prices), and TPL (reduction in losses at Mundra). JSWE (14% downside) is our top SELL and TPL (53% upside) is our top BUY. Retain SELL on NTPC. Torrent Power is UNDER REVIEW. Mixed PLFs: India’s average PLF has improved by 180bps to 63.5% in 1QFY17 led by pick-up in demand from industrial demand states. Whilst average PLF for NTPC/JSWE has improved by 350bps/280bps to 81%/68%, average PLF for TPL (thermal plants) has declined by 660bps to 67% led by 920bps decline in Mundra’s PLF. Margin improvement: We expect 810bps, 1010bps and 90bps YoY improvement in EBITDA margin for NTPC (lower base impact as 1QFY16 saw tax reversal of Rs8.4bn from revenue), JSWE (lower imported coal prices alongside consolidation of hydro assets) and TPL (reduction in Mundra’s losses due to lower coal prices).

Where do we go from here? The near-term outlook for utilities seems to be improving with 18 states giving an in-principle approval for the UDAY scheme (SEB restructuring scheme). We believe UDAY should result in 10-12GW of new PPAs coming in for bidding in the near term, which is positive for PPA starved companies like JSWE, KSK, Rattan India, CESC and JSPL. However, for NTPC and TPL, the impact of UDAY will be minuscule as they already have PPAs and significant pick-up in power demand to improve their PLFs beyond 85%. For Torrent, the fall of spot RLNG prices to ~US$5.5/mmbtu is a big positive as it is a precursor for the company’s cost plus PPA for Dahej (800MW) and Unosugen (282MW) being approved by regulator once its RLNG terminal becomes operational from Apr 2017. Ambit vs consensus: Currently there no credible consensus estimates available for NTPC, TPL and JSWE.

Recommendations Tata Power (BUY, TP Rs104/share, 37% upside):

The Mumbai circle is Tata’s most lucrative business, with FY12-FY15 RoE of 16% vs -1% overall for the company. With ~50% of incremental capex in this business vs its share in capital employed of ~13% in FY15, Tata Power’s RoE should improve materially from 1%/9% in FY15/FY16 to 10%/14% in FY17/FY18. There is merit in it getting compensatory tariff as 15.5% RoE would increase tariff to only Rs3.2/unit vs NTPC’s tariff of Rs3.1 in FY15. Our sensitivity analysis suggests a likely tariff hike of ~39 paise for Mundra for FY17, which will translate into PBT of Rs5.7bn vs reported loss of Rs2.1bn in FY16. Tata is doing value-accretive acquisitions – Welspun Renewables should drive FY17/FY18 EPS upgrade by 7%/7% and TP by 4% to Rs107/share post conclusion of transaction. Our TP of Rs104 implies 1.7x FY17E BV, a 9% discount to own five-year average.

JSW Energy (SELL, TP Rs73/share, 14% downside):

JSPL’s acquisition increases the risk profile - FY18 net debt:equity is likely to increase to 1.7x vs 0.7x pre-acquisition; exposure to merchant increases to 46% from 28% earlier; and increase in share of un-tied fuel from 53% to 65. Vijayanagar’s profitability (contributes 66% of consolidated PAT) may get impacted as its realization will fall by 18% under short-term PPA. Moreover, after 3 years tariff can reduce even more as South grid is likely to be fully synchronised by FY17-end and coal-based capacity in South India is likely to double to 68GW by FY19. JSWE is trading at expensive valuations of 1.5x FY17E P/B despite FY17-18 RoE of 14.5% being lower than cost of equity of 15% and growth challenges due to power surplus situation. We expect 3% decline in FY17 EPS due to fall in profitability at Vijayanagar.

Stock Performance

(%) 3-month


NTPC 19 12

Tata Power 10 2

JSW Energy 24 17

June’16E Qtrly EPS


NTPC 2.9 NA

Tata Power 1.5 NA

JSW Energy 2.5 NA

FY17E EPS


NTPC 10.6 11.8

Tata Power 5.2 3.9

JSW Energy 7.6 7.7





NTPC

Sales (Rs mn) 191,128 170,846 181,126 12% 6% Led by 10% volume growth (PLF up 350bps YoY to 81% in 1QFY17); and 2% realisation growth.

EBITDA (Rs mn) 53,879 34,377 54,541 57% -1% Led by: (a) higher revenue; and (b) lower base impact (tax reversal of Rs8.4bn from revenue in 1QFY16). EBITDA margin (%) 28.2% 20.1% 30.1% 810bps -190bps

PBT (Rs mn) 31,879 17,076 35,712 87% -11% Trickle-down impact of higher EBITDA

PAT (Rs mn) 23,909 21,354 27,164 12% -12% PAT growth is lower than PBT due to tax reversal in 1QFY16.

Tata Power

Sales (Rs mn) 92,751 92,346 93,752 0% -1% Flat revenues given 14% YoY decline in Mundra's volumes offset by volume growth in Mumbai and Delhi circles.

EBITDA (Rs mn) 20,528 19,551 21,644 5% -5% Improvement in margin led by lower losses at Mundra due to fall in coal prices EBITDA margin (%) 22.1% 21.2% 23.1% 90bps -100bps

APBT (Rs mn) 7,395 6,328 6,871 17% 8% Trickle-down impact of higher EBITDA.

APAT (Rs mn) 4,007 2,413 5,127 66% -22% Expect tax rate to decline from 49% in 1QFY16 to 35% in 1QFY17 due to reduction in Mundra's losses.

JSW Energy

Sales (Rs mn) 24,670 20,805 27,046 19% -9% Led by acquisition of Baspa-II and Karcham Wangtoo w.e.f. 1st Sept 2015 - 30% of volumes are likely to be from hydro assets in 1QFY17 given hydro-generation season.

EBITDA (Rs mn) 11,859 7,908 11,609 50% 2% Led by consolidation of Baspa-II and Karcham Wangtoo and decline in fuel cost from Rs2.2/unit in 1QFY16 to Rs2.0/unit EBITDA margin (%) 48.1% 38.0% 42.9% 1010bps 520bps

APBT (Rs mn) 5,776 3,807 4,841 52% 19% Trickle-down impact of higher EBITDA

APAT (Rs mn) 4,128 2,342 3,286 76% 26% Led by decline in share of losses of JSW Toshiba (associate) as entire investment has already has already been written-off


Change in TP due to rollover by 3 months Exhibit 49:

Company Target Price (Rs/share)

Upgrade (%) Previous Revised

NTPC 126 126 0.5%

Tata Power 103 104 0.6%

JSW Energy 73 74 1.0%


July 08, 2016 Ambit Capital Pvt. Ltd.


Ambit Coverage Valuation Summary Name Reco Mcap ADVT - 6m CMP TP Upside EPS (Rs) P/E (x) P/B (x) EV/EBITDA (x) ROE (%)

($ mn) ($ mn) (Rs) (Rs) (%) FY16E FY17E FY18E FY17E FY18E FY17E FY18E FY17E FY18E FY17E FY18E

Automobiles

Tata Motors BUY 21,688 64.7 455 535 18 46 57 57 8 8 1.6 1.3 3 3 20 17 Maruti Suzuki BUY 18,557 54.0 4,141 4,500 9 151 187 239 22 17 4.1 3.5 11 10 18 20 Mahindra & Mahindra SELL 13,422 20.2 1,457 1,295 (11) 57 63 72 23 20 3.3 2.9 15 13 14 15 Bajaj Auto SELL 11,206 10.4 2,611 2,520 (3) 126 136 157 19 17 5.5 5.1 12 11 30 32 Hero Motocorp SELL 9,191 18.0 3,103 2,820 (9) 157 173 189 18 16 6.6 5.7 11 10 37 35 Eicher Motors* SELL 7,894 18.5 19,593 17,575 (10) 470 626 769 31 25 11.0 8.1 17 14 46 41 Ashok Leyland BUY 3,928 17.7 93 119 28 4 5 7 17 13 3.9 3.2 10 8 23 24 Exide Industries SELL 2,219 3.4 176 140 (21) 7 8 9 22 19 3.1 2.8 13 11 15 15 TVS BUY 2,109 8.3 299 340 14 9 14 20 22 15 6.0 4.7 14 10 30 36 Balkrishna Inds SELL 966 0.3 674 660 (2) 59 59 65 11 10 2.0 1.7 7 7 19 17 Mahindra CIE BUY 868 0.7 181 238 32 5 8 14 22 13 2.6 2.1 11 9 13 16 BFSI

HDFC Bank SELL 44,528 24.9 1,186 1,181 (0) 49 59 71 20 17 3.6 3.1 N/A N/A 19 20 SBI SELL 25,340 78.7 220 180 (18) 13 15 20 15 11 1.1 1.0 N/A N/A 8 10 ICICI Bank SELL 21,128 71.1 245 240 (2) 17 19 23 13 11 1.5 1.3 N/A N/A 12 13 Kotak Mahindra Bank SELL 20,305 18.5 746 511 (32) 19 25 30 30 25 3.7 3.3 N/A N/A 12 13 Axis Bank BUY 19,199 74.2 542 600 11 35 36 45 15 12 2.1 1.9 N/A N/A 15 17 IndusInd Bank BUY 9,770 21.9 1,105 1,240 12 38 49 63 23 18 3.3 2.9 N/A N/A 16 17 Bajaj Finance SELL 6,470 11.0 8,096 4,327 (47) 239 275 335 29 24 4.9 4.2 N/A N/A 18 19 Bank of Baroda BUY 5,406 23.4 158 175 11 (23) 15 23 10 7 0.9 0.8 N/A N/A 9 13 SHTF SELL 4,082 9.6 1,213 843 (30) 52 71 89 17 14 2.4 2.1 N/A N/A 15 16 LIC HFC SELL 3,728 15.3 498 396 (20) 33 36 39 14 13 2.4 2.1 N/A N/A 18 17 Punjab National Bank SELL 3,404 14.8 117 82 (30) (20) 16 18 7 6 0.6 0.5 N/A N/A 9 9 MMFS SELL 2,953 7.0 350 276 (21) 12 14 19 24 19 3.0 2.7 N/A N/A 13 15 CIFC BUY 2,235 1.7 965 996 3 37 47 64 21 15 3.5 2.9 N/A N/A 19 21 SCUF BUY 1,711 0.9 1,750 2,190 25 80 98 115 18 15 2.3 2.0 N/A N/A 13 14 Federal Bank SELL 1,529 5.4 60 49 (18) 3 5 6 13 10 1.2 1.1 N/A N/A 10 12 Bank of India SELL 1,516 6.6 109 80 (27) (75) 11 23 10 5 0.4 0.3 N/A N/A 4 7 Union Bank of India SELL 1,355 9.8 133 110 (17) 20 25 26 5 5 0.4 0.4 N/A N/A 8 8 City Union Bank BUY 1,079 0.8 122 136 12 7 9 11 14 11 2.1 1.8 N/A N/A 16 17 Karur Vysya Bank SELL 957 1.0 534 475 (11) 47 45 61 12 9 1.3 1.2 N/A N/A 11 14 Motilal Oswal BUY 809 0.1 382 381 (0) 12 16 19 24 20 3.4 3.0 N/A N/A 15 16 South Indian Bank SELL 445 1.3 22 19 (14) 2 3 4 8 6 0.7 0.7 N/A N/A 10 12 Magma BUY 381 0.4 108 138 27 9 11 15 10 7 1.1 0.9 N/A N/A 12 14 Source: Bloomberg, Ambit Capital research, Note: * Indicates December ending companies, # Indicates June ending companies, NA indicates Field Not Applicable; UR indicates Under Review



Ambit Coverage Valuation Summary

Name Reco Mcap ADVT - 6m CMP TP Upside

EPS (Rs)

P/E (x)

P/B (x)

EV/EBITDA (x)

ROE (%)

($ mn) ($ mn) (Rs) (Rs) (%) FY16E FY17E FY18E

FY17E FY18E

FY17E FY18E

FY17E FY18E

FY17E FY18E

Agri Inputs

PI Inds BUY 1,440 1.6 708 800 13 23 28 33 25 21 6.5 5.2 18 15 29 27 SRF BUY 1,129 3.6 1,325 1,650 25 74 92 114 14 12 2.5 2.2 8 7 19 20 Rallis India SELL 616 0.9 214 160 (25) 7 8 11 25 20 4.2 3.7 15 13 18 20 Aviation

Interglobe Aviation SELL 5,415 18.6 1,013 890 (12) 55 59 71 17 14 11.4 7.5 11 9 85 64 Capital Goods

BHEL SELL 5,081 14.7 140 128 (8) (4) 4 10 33 14 1.0 1.0 34 10 3 7 Cummins SELL 3,391 3.9 825 575 (30) 27 29 32 29 26 6.3 5.5 28 24 24 23 Thermax SELL 1,580 0.8 894 607 (32) 26 21 28 42 32 4.1 3.7 25 21 10 12 Crompton Consumer SELL 1,297 N/A 140 115 (17) 4 4 5 34 27 17.9 15.0 20 17 73 60 Inox Wind SELL 770 1.8 234 231 (1) 19 19 16 12 14 3.4 3.6 8 9 28 24 Greaves Cotton BUY 500 0.3 138 193 40 7 8 9 17 15 3.6 3.2 12 10 22 22 Cement

UltraTech BUY 13,770 14.2 3,382 3,668 8 80 137 181 25 19 3.9 3.3 14 12 17 19 Shree Cement SELL 8,003 2.5 15,486 10,914 (30) 138 379 545 41 28 8.0 6.6 37 39 20 26 Ambuja Cement* BUY 5,915 8.3 257 242 (6) 5 11 13 23 19 3.4 3.0 14 12 16 16 ACC* BUY 4,470 5.9 1,605 1,594 (1) 39 51 76 32 21 3.4 3.1 15 11 11 15 Ramco Cement SELL 2,035 2.0 576 328 (43) 23 25 28 23 20 2.3 2.3 12 11 18 17 Orient Cement BUY 544 0.2 179 190 6 3 4 12 41 15 3.3 2.7 12 8 8 20 Consumer Goods/FMCG

ITC BUY 44,228 43.2 247 295 19 8 10 11 26 23 8.3 7.5 18 16 34 35 Hind. Unilever BUY 29,482 19.2 918 990 8 19 23 28 40 33 46.7 41.0 29 24 125 132 Nestle India * SELL 9,313 4.0 6,511 6,000 (8) 110 125 164 52 40 19.7 17.0 31 24 40 46 Godrej Consumer SELL 8,242 5.8 1,632 1,116 (32) 33 40 44 41 37 9.0 7.6 30 26 24 22 Dabur India SELL 8,210 5.9 315 292 (7) 7 8 9 39 33 11.2 9.4 32 27 31 31 Marico Inds BUY 5,143 5.5 269 310 15 6 7 9 38 30 13.6 11.1 26 21 40 41 Britannia Inds SELL 5,000 9.6 2,809 2,750 (2) 68 80 95 35 30 30.0 23.9 23 20 48 45 GSK Consumer SELL 3,871 1.7 6,205 5,650 (9) 163 170 194 36 32 9.3 8.1 33 28 27 27 Colgate Palmolive SELL 3,821 4.7 947 895 (5) 22 25 29 38 32 21.7 18.5 24 20 61 62 Page Inds BUY 2,237 2.4 13,519 15,500 15 209 272 367 50 37 23.5 18.7 32 24 53 57 TTK Prestige BUY 816 0.4 4,725 5,420 15 102 147 193 32 25 6.9 6.0 20 15 22 26 Source: Bloomberg, Ambit Capital research, Note: * Indicates December ending companies, # Indicates June ending companies, NA indicates Field Not Applicable; UR indicates Under Review




Name Reco Mcap ADVT - 6m CMP TP Upside EPS (Rs) P/E (x) P/B (x) EV/EBITDA (x) ROE (%)

($ mn) ($ mn) (Rs) (Rs) (%) FY16E FY17E FY18E FY17E FY18E FY17E FY18E FY17E FY18E FY17E FY18E

E&C and Infrastructure

L&T SELL 21,492 45.6 1,555 1,250 (20) 47 53 62 29 25 3.3 3.1 23 20 12 13 Bharat Electronics BUY 4,521 5.9 1,270 1,450 14 58 60 68 21 19 3.0 2.7 15 13 15 15 AIA Engineering BUY 1,432 0.7 1,023 1,050 3 45 41 50 25 20 1.9 1.7 18 15 16 17 Engineers India BUY 1,046 2.5 209 200 (4) 9 10 12 20 17 2.4 2.3 18 13 12 14 Sadbhav Engineering BUY 740 0.6 291 335 15 (3) (2) 3 N/A 90 2.9 2.8 11 9 (2) 3 Sadbhav Infra BUY 535 N/A 102 129 26 (8) (6) (5) N/A N/A 3.0 3.0 13 10 (18) (13) Techno Electric BUY 508 0.1 601 745 24 25 37 44 16 14 2.9 2.5 11 10 19 20 VA Tech BUY 483 1.2 597 640 7 16 24 34 25 18 3.0 2.6 13 10 12 16 Ashoka Buildcon BUY 467 1.1 168 250 49 5 2 1 73 158 1.8 1.8 9 8 (9) (6) Healthcare Lupin BUY 11,073 42.8 1,656 1,890 14 51 65 94 26 18 5.9 4.6 16 12 25 29 Dr. Reddy's Labs SELL 8,917 20.2 3,525 2,876 (18) 118 119 162 30 22 4.1 3.5 18 14 15 18 Cadila Healthcare BUY 5,211 6.1 343 401 17 16 19 23 18 15 5.2 4.1 13 11 31 31 Home Building

Asian Paints BUY 14,054 15.8 988 1,117 13 19 22 28 44 35 14.2 11.8 29 23 35 36 Havells BUY 3,304 8.8 356 394 10 12 11 13 32 27 7.4 6.6 23 19 24 26 Berger Paints BUY 2,960 1.4 288 324 13 5 7 9 39 33 10.9 9.0 24 21 31 30 Supreme Inds# BUY 1,681 1.2 892 912 2 18 32 41 28 22 7.0 5.7 15 12 28 29 Finolex Cables BUY 846 0.6 373 414 11 18 19 22 19 17 3.5 3.1 15 13 19 19 Century Ply BUY 681 0.8 207 205 (1) 8 8 11 26 19 6.7 5.2 15 11 29 31 V-Guard BUY 627 1.1 1,404 1,450 3 37 47 58 30 24 7.2 6.0 19 16 27 27 Bajaj Electricals BUY 371 0.9 248 270 9 9 14 18 18 14 2.9 2.5 9 7 17 20 Media

Zee SELL 6,381 12.8 448 380 (15) 11 14 18 31 24 6.1 5.6 21 16 21 24 Dish TV BUY 1,526 6.9 97 115 19 6 2 4 40 26 16.2 11.3 11 9 50 52 Hathway SELL 412 0.2 33 34 0 (2) (1) (1) N/A N/A 2.9 3.0 8 6 (8) (5) Metals & Mining

Coal India BUY 29,566 21.1 316 400 27 23 26 33 12 10 4.4 3.4 9 7 42 40 Tata Steel SELL 4,577 37.7 318 175 (45) (30) 5 19 64 17 0.9 0.9 8 7 1 6 Hindalco Inds SELL 3,912 18.7 128 64 (50) 1 3 6 39 21 0.7 0.7 8 8 2 3 SAIL SELL 2,886 3.4 47 37 (22) (10) 0 2 200 28 0.5 0.5 14 11 0 2 NALCO SELL 1,692 0.7 44 37 (16) 3 3 4 13 12 0.8 0.8 5 5 7 7 Source: Bloomberg, Ambit Capital research, Note: * Indicates December ending companies, # Indicates June ending companies, NA indicates Field Not Applicable; UR indicates Under Review




Name Reco Mcap ADVT - 6m CMP TP Upside

EPS (Rs)

P/E (x)

P/B (x) EV/EBITDA (x)

ROE (%)

($ mn) ($ mn) (Rs) (Rs) (%)

FY16E FY17E FY18E

FY17E FY18E

FY17E FY18E

FY17E FY18E

FY17E FY18E

Oil & Gas IOCL BUY 17,048 9.0 473 550 16 43 53 62 9 8 1.4 1.2 6 5 16 17 BPCL BUY 11,950 19.9 1,114 1,162 4 103 110 120 10 9 2.5 2.1 6 6 0 0 GAIL SELL 7,241 8.9 385 365 (5) 18 26 35 15 11 1.5 1.3 9 7 10 13 HPCL BUY 5,189 15.2 1,033 1,035 0 114 105 112 10 9 1.7 1.5 6 6 18 17 Petronet LNG SELL 3,273 6.2 294 285 (3) 12 17 19 17 16 3.0 2.6 12 10 19 17 Indraprastha Gas BUY 1,252 6.6 603 705 17 30 37 43 16 14 3.2 2.8 9 8 21 21 Gujarat State Petronet BUY 1,112 0.9 133 160 20 8 9 11 15 13 1.8 1.7 8 7 12 14

Power Utilities

NTPC SELL 18,702 10.3 153 126 (17) 12 11 13 14 11 1.4 1.3 10 8 10 12 Power Grid Corporation BUY 12,677 10.1 163 175 7 11 15 18 11 9 1.8 1.6 8 7 17 18 Tata Power BUY 2,951 5.1 74 104 41 4 5 9 14 9 1.3 1.1 7 6 9 14 JSW Energy SELL 2,051 3.4 84 74 (12) 9 8 10 11 9 1.5 1.3 6 6 14 15 Torrent Power UR 1,229 3.6 172 UR N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A Retail Titan BUY 5,305 9.0 403 404 0 8 9 11 45 35 8.8 7.8 30 25 24 27 Bata India SELL 1,053 3.4 552 398 (28) 12 16 19 35 29 5.7 5.0 20 17 18 20 Jubilant Foodworks SELL 1,183 10.6 1,212 931 (23) 17 22 28 56 43 8.8 7.3 22 18 17 19 Trent BUY 873 0.6 1,770 2,009 14 31 56 78 31 23 3.6 3.1 22 15 12 15

Software/Technology TCS BUY 71,022 39.7 2,430 2,950 21 123 134 151 18 16 5.4 4.5 13 12 33 31 Infosys BUY 39,431 60.4 1,157 1,500 30 59 64 75 18 15 3.8 3.3 14 12 22 23 Wipro SELL 20,510 12.3 560 550 (2) 36 38 42 15 13 2.6 2.4 11 10 19 19 HCL# BUY 15,007 28.1 717 875 22 53 56 64 13 11 3.0 2.6 9 8 26 25 Tech Mahindra BUY 7,266 14.8 505 720 43 35 39 47 13 11 2.9 2.5 9 7 22 23 Mindtree SELL 1,642 5.6 659 720 9 36 41 49 16 13 8.1 7.1 11 9 27 28 Eclerx SELL 878 0.8 1,451 1,450 (0) 88 96 108 15 13 4.7 4.1 10 9 34 33 Persistent Systems SELL 796 1.2 671 720 7 37 41 49 16 14 2.9 2.5 10 8 19 19 Source: Bloomberg, Ambit Capital research, Note: * Indicates December ending companies, # Indicates June ending companies, NA indicates Field Not Applicable; UR indicates Under Review



Institutional Equities Team Saurabh Mukherjea, CFA CEO, Institutional Equities (022) 30433174 [email protected]

Research Analysts

Name Industry Sectors Desk-Phone E-mail

Nitin Bhasin - Head of Research E&C / Infra / Cement / Industrials (022) 30433241 [email protected]

Aadesh Mehta, CFA Banking / Financial Services (022) 30433239 [email protected]

Aakash Adukia Oil & Gas / Chemicals / Agri Inputs (022) 30433273 [email protected]

Abhishek Ranganathan, CFA Retail (022) 30433085 [email protected]

Achint Bhagat, CFA Cement / Home Building (022) 30433178 [email protected]

Anuj Bansal Mid-caps (022) 30433122 [email protected] Ashvin Shetty, CFA Automobile (022) 30433285 [email protected]

Bhargav Buddhadev Power Utilities / Capital Goods (022) 30433252 [email protected]

Deepesh Agarwal, CFA Power Utilities / Capital Goods (022) 30433275 [email protected] Dhiraj Mistry, CFA Consumer (022) 30433264 [email protected]

Gaurav Khandelwal, CFA Automobile (022) 30433132 [email protected] Girisha Saraf Mid-caps / Small-caps (022) 30433211 [email protected]

Karan Khanna, CFA Strategy (022) 30433251 [email protected]

Kushank Poddar Technology (022) 30433203 [email protected] Pankaj Agarwal, CFA Banking / Financial Services (022) 30433206 [email protected]

Paresh Dave, CFA Healthcare (022) 30433212 [email protected]

Parita Ashar, CFA Metals & Mining / Aviation (022) 30433223 [email protected]

Prashant Mittal, CFA Strategy / Derivatives (022) 30433218 [email protected]

Rahil Shah Banking / Financial Services (022) 30433217 [email protected]

Rakshit Ranjan, CFA Consumer (022) 30433201 [email protected]

Ravi Singh Banking / Financial Services (022) 30433181 [email protected]

Ritesh Gupta, CFA Oil & Gas / Chemicals / Agri Inputs (022) 30433242 [email protected]

Ritesh Vaidya, CFA Consumer (022) 30433246 [email protected] Ritika Mankar Mukherjee, CFA Economy / Strategy (022) 30433175 [email protected]

Ritu Modi Automobile (022) 30433292 [email protected]

Sagar Rastogi Technology (022) 30433291 [email protected]

Sumit Shekhar Economy / Strategy (022) 30433229 [email protected]

Utsav Mehta, CFA E&C / Industrials (022) 30433209 [email protected]

Vivekanand Subbaraman, CFA Media (022) 30433261 [email protected]

Sales

Name Regions Desk-Phone E-mail

Sarojini Ramachandran - Head of Sales UK +44 (0) 20 7614 8374 [email protected]

Dharmen Shah India / Asia (022) 30433289 [email protected]

Dipti Mehta India / USA (022) 30433053 [email protected]

Hitakshi Mehra India (022) 30433204 [email protected]

Krishnan V India / Asia (022) 30433295 [email protected]

Nityam Shah, CFA USA / Europe (022) 30433259 [email protected]

Parees Purohit, CFA UK / USA (022) 30433169 [email protected]

Praveena Pattabiraman India / Asia (022) 30433268 [email protected]

Shaleen Silori India (022) 30433256 [email protected]

Singapore

Pramod Gubbi, CFA – Director Singapore +65 8606 6476 [email protected]

Shashank Abhisheik Singapore +65 6536 1935 [email protected]

USA / Canada

Ravilochan Pola - CEO Americas +1(646) 361 3107 [email protected]

Production

Sajid Merchant Production (022) 30433247 [email protected]

Sharoz G Hussain Production (022) 30433183 [email protected]

Jestin George Editor (022) 30433272 [email protected]

Nikhil Pillai Database (022) 30433265 [email protected]

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Investment Rating Expected return (over 12-month)

BUY >10%

SELL <10%

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