morning insight - 21 jan 2016transaction, the company's stake in icex, which is part of anil...

JANUARY 21, 2016

Economy News The Union Cabinet approved amendments to the power tariff policy that

aims to tighten regulations for setting rates and promote clean energy. Ithas nearly 30 major amendments and a few minor ones, aimed at ensuringuninterrupted supply to all consumers by 2021-22. (BS)

The government approved a viability gap funding of Rs 50.5 bn for settingup over 5,000 MW of grid linked solar power projects under theJawaharlal Nehru National Solar Mission. The total investments expectedunder this scheme is about Rs 300 bn. (BS)

The Centre has announced the much-awaited roadmap for implementingthe Indian Accounting Standards (Ind AS) by banks, insurers and NBFCs.These institutions will be required to prepare Ind AS-based financialstatements for accounting periods beginning April 1, 2018. (HBL)

Corporate News Tata Steel has suspended operations at its Canadian iron ore-mining and

processing project this month. This action is in response to presentlychallenging conditions in the steel and iron ore markets and is expected tobe reviewed on an ongoing basis. (HBL)

Five central trade unions representing almost 90 per cent of the workmenof Coal India have served a notice to the coal major's management for aday's strike on March 29 to protest disinvestment in the company. Thestrike will also be observed at Singareni Collieries Company. (ET)

Sudan has offered three oil and gas blocks for exploration anddevelopment to India's ONGC Videsh as part of efforts to increase thecountry's oil revenue. Three areas have been offered to the Indiancompany, comprising blocks 8, 15 and 24, the last of which is in thedevelopment stage. (ET)

State-owned trading firm MMTC has sold 10 per cent stake in commoditybourse Indian Commodity Exchange (ICEX) for Rs 200 mn. Post thistransaction, the company's stake in ICEX, which is part of Anil Ambani-ledReliance Group, has come down to 16 per cent. (ET)

Maruti Suzuki's export to Sri Lanka, its biggest foreign destination lastyear, is losing speed after an increase in import duty two months earlier.The import duty on 1,000cc vehicles was increased from 50 to 70 per cent,impacting Maruti's WagonR. (BS)

Cipla and three other drug makers - Emcure, Hetero and Natco - will sellgeneric version of Bristol-Myer Squibb's anti-hepatitis drug, Daclatasvir.The drug makers will manufacture and sell the anti-hepatitis drug in 112low and middle-income countries under a sub-licence from The MedicinesPatent Pool. (BS)

Indian Oil Corporation, has a Rs. 210 bn capital expenditure plan inplace to upgrade its total refining capacity of 80 million tonnes perannum. The three public sector oil refiners will have to invest Rs. 300-350bn over the next four years to produce auto fuels that will comply with BSVI emission norms. (HBL)

TVS Motor is confident of gaining significant market share inmotorcycles with the launch of new bikes targeting commuters and speedfreaks. It has launched a new TVS Victor in the commuter segment and aTVS Apache RTR 200 with racing genes. (HBL)

Reliance Communications has paid Rs 53.84 bn as spectrumliberalisation fee to DoT for radiowaves in the 800/850 MHz band held byit in 16 telecom circles. (FE)

Equity% Chg

20 Jan 16 1 Day 1 Mth 3 Mths

Indian IndicesSENSEX Index 24,062 (1.7) (6.5) (11.8)NIFTY Index 7,309 (1.7) (6.7) (11.4)BANKEX Index 16,917 (2.3) (11.9) (16.3)SPBSITIP Index 10,736 (1.0) (2.8) (4.9)BSETCG INDEX 12,341 (1.2) (12.4) (22.3)BSEOIL INDEX 8,950 (2.3) (3.7) (3.4)CNXMcap Index 12,027 (1.8) (9.4) (10.7)SPBSSIP Index 10,311 (2.0) (11.3) (10.8)

World IndicesDow Jones 15,767 (1.6) (8.6) (8.2)Nasdaq 4,472 (0.1) (10.0) (7.6)FTSE 5,674 (3.5) (6.0) (10.6)NIKKEI 16,416 (3.7) (11.8) (10.1)HANGSENG 18,886 (3.8) (12.2) (16.8)

Value traded (Rs cr)20 Jan 16 % Chg - Day

Cash BSE 2,969 1.4Cash NSE 18,064 10.9Derivatives 354,837 29.4

Net inflows (Rs cr)19 Jan 16 % Chg MTD YTD

FII (761) (59) (8,251) (8,251)Mutual Fund 810 159 2,763 2,763

FII open interest (Rs cr)19 Jan 16 % Chg

FII Index Futures 16,210 (2.0)FII Index Options 84,798 3.1FII Stock Futures 48,374 (2.6)FII Stock Options 4,458 2.5

Advances / Declines (BSE)20 Jan 16 A B T Total % total

Advances 40 196 48 284 15Declines 256 1,190 93 1,539 83Unchanged 4 29 9 42 2

Commodity % Chg

20 Jan 16 1 Day 1 Mth 3 Mths

Crude (US$/BBL) 28.6 1.0 (17.6) (36.7)Gold (US$/OZ) 1,106.0 1.5 1.7 (5.8)Silver (US$/OZ) 14.1 0.2 (1.1) (10.1)

Debt / forex market20 Jan 16 1 Day 1 Mth 3 Mths

10 yr G-Sec yield % 7.8 7.8 7.8 7.6Re/US$ 68.0 67.6 66.4 65.1

Sensex

Source: ET = Economic Times, BS = Business Standard, FE = Financial Express,BL = Business Line, ToI: Times of India, BSE = Bombay Stock Exchange

24,000

25,500

27,000

28,500

30,000

Jan-15 Apr-15 Jul-15 Oct-15 Jan-16

Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 2

MORNING INSIGHT January 21, 2016

Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report hasbeen prepared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrarywith the views, estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited.

RESULT UPDATE

Saday [email protected]+91 22 6621 6312

AXIS BANK

PRICE: RS.389 RECOMMENDATION: BUYTARGET PRICE: RS.510 FY17E P/E: 9.4X, P/ABV: 1.7X

Q3FY16 results: Asset quality overhang partly ebbsReported earnings meet our expectations - NII grew 15.9% YoY largely dueto strong NIM (only 6bps QoQ decline despite cut in base rate) while loanbook continued to grow at healthy pace. PAT grew 14.5% (YoY) aided byopex containment (C/I ratio fell by 240bps YoY) despite higher credit costsarising out of asset quality review as suggested by the RBI. Retailfranchise continued to demonstrate robust growth - retail loan grew 27%YoY while retail fee income contributed ~40% of total fee income.

NPLs rose sharply QoQ but were lower than expectations. Bank has fullyrecognized the necessary impairments as per the RBI assessment inQ3FY16 itself. We believe this partly clears the asset quality overhang onthe stock. Nonetheless, high exposure to non-operational power portfolioremains a potential risk, in our view. Management has guided 125bps ofcredit cost (including utilization of contingent provisions) on likelyimpairments of Rs.74 bn during FY16. We have tweaked the earnings butassign lower multiple (2.25x FY17 ABV) to Axis bank on higher NPL risk(8% funded exposure to highly leveraged companies) in prevailing toughmacro environment. We retain BUY rating (1.7x FY17 ABV) on the stockwhich reports healthy return ratios (RoE: 18-19%, RoA: 1.7%) but cut theTP to Rs.510 (Rs.685 earlier).

Quarterly Performance

(Rs mn) Q3FY16 Q3FY15 YoY (%)

Interest on advances 75,294 65,019 15.8

Interest on Investment 22,928 21,064 8.9

Interest on RBI/ banks' balances 688 539 27.6

Other interest 3,024 2,275 32.9

Total interest earned 101,933 88,897 14.7

Interest expense 60,313 53,002 13.8

Net interest income 41,621 35,896 15.9

Other income 23,378 20,391 14.6

Operating Revenue (NII + Other income) 64,998 56,286 15.5

Operating Expenses 25,148 23,140 8.7

Payments to / Provisions for employees 8,295 7,785 6.6

Other operating expenses 16,852 15,356 9.7

Operating Profit before Prov. & Cont. 39,851 33,146 20.2

Provisions & contingencies 7,126 5,072 40.5

Provision for taxes 10,972 9,077 20.9

Net profit 21,753 18,998 14.5

EPS (Rs) 9.1 8.0 13.8

Source: Company

Core earnings meet our expectations; margin continued to remainhigher than management's guidance.Although Axis bank has witnessed moderation in core performance vis-à-vis therun-rate seen during recent quarters, NII growth (15.9% YoY) was a shadeabove our expectations largely due to better than expected NIM (3.79% inQ3FY16; down by only 6bps QoQ despite 35bps cut in base rate during Sep 2015)while loan book continued to grow at healthy pace (21.0% YoY).



Although axis bank has been witnessing strong contribution of fee income to to-tal income (35-37%), we are modeling lower contribution from fees, going for-ward, as off-balance sheet growth has seen moderation in recent times. Fee-in-come is progressively witnessing higher contribution from non-lending activities.Retail business contribution in fee-income continues to be at ~40% (Q3FY16)while corporate segment saw muted growth as demand from corporate segmenthas remained subdued.

We are modeling moderate growth in non-interest income at 13.7% CAGR dur-ing FY15-17E as against ~30% CAGR witnessed during FY08-15 as slow businessgrowth along with moderate traction in off-balance sheet items are likely to im-pact this stream of revenue.

Contribution to Net Revenue

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E

NII 56% 56% 59% 60% 60% 62% 63% 64% 64%

Fee Income 38% 34% 35% 37% 35% 36% 31% 32% 33%

Trading Profit 4% 8% 3% 1% 4% 2% 4% 4% 2%

Other non-interest Income 1% 2% 3% 2% 2% 1% 1% 1% 1%

Total net Revenue 100% 100% 100% 100% 100% 100% 100% 100% 100%

Source: Company, Kotak Securities - Private Client Research

Break-up of Fee Income

(Rs bn) 3Q 2014 4Q 2014 1Q 2015 2Q 2015 3Q 2015 4Q 2015 1Q 2016 2Q 2016 3Q 2016

Total Fee Income 14.56 17.80 13.78 15.91 16.86 21.24 15.51 18.13 18.85

Large & Mid corporate 4.44 5.38 3.36 4.70 4.23 5.91 3.70 4.70 4.64

Treasury & DCM 3.35 3.56 3.31 3.02 3.54 4.25 2.17 1.81 1.88

Agri & SME Banking 1.16 1.60 0.49 0.86 1.01 1.27 0.62 0.94 0.94

Business Banking 1.16 1.21 1.38 1.27 1.52 1.37 2.95 3.44 3.77

Capital Markets 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Retail Banking 4.38 6.37 5.18 6.04 6.63 8.19 6.08 7.18 7.58

Source: Company

PAT (Rs.21.8 bn) grew 14.5% (YoY) mainly aided by opex containment (C/I ratiofell by 240bps YoY) despite higher credit costs (102bps annualized) arising out ofasset quality review as suggested by RBI. Management has guided 125bps ofcredit cost (including utilization of contingent provisions) on likely impairments ofRs.74 bn during FY16 as compared to 128bps reported during 9MFY16.

Although bank has added 216 branches during 9MFY16, opex continued to growat modest pace (7-8% during previous 3 quarters). Management has guided thatC/I ratio is likely to come at ~40% during FY16 (300 branch addition during fullyear) which might be reduced to ~38% during next three years. We do takecognizance of its continued focus on business re-engineering to reduce transac-tion costs and hence we are expecting C/I ratio to remain at ~40% during FY16/17E.



Cost / Income ratio (%)


Reported NIM remained close to the upper-band of management'sguidance, largely aided by sharp decline in CoF and surge in LDR.Reported NIM saw marginal decline (6bps QoQ; 3.79% in Q3FY16) and cameabove our expectations, also much ahead of management's medium term guid-ance of ~3.50%, largely aided by sharp decline in cost of funds (CoF) and surgein LDR (93.2% in Q3FY16). Strong liability franchise as well as sharp decline inwholesale funding rates in recent quarters have helped the bank in offsettingthe recent base rate cut (35bps announced during September 2015).

Trends in NIM (%)

Source: Company

Going forward, we expect NIM to trend downward, as there is limited scope tofurther increase LDR from current levels. We believe mobilizing deposits wouldbe the key to fund its future loan growth. Nonetheless, we also take cognizanceof its favorable ALM profile, where 38% of deposits have less than one yearmaturity, while 21% of advances would be re-priced within one year (as per ARFY15 disclosures). We believe this would support margins in the falling interestrate environment as larger amount of deposits as compared to advances wouldcome for re-pricing at lower interest rates.

We are modeling NIM to come at 3.75%/3.65% during FY16E/17E as comparedto 3.92% witnessed during FY15 (3.8% in 9MFY16), after factoring in amplifiedcompetitive intensity capping the asset yield.



Healthy traction in balance sheet; retail banking segment continuesto impress

Axis bank's balance sheet continued to grow at healthy pace (17.9% YoY)mainly aided by strong loan growth (21.0% YoY). Retail segment continued towitness robust growth (26.8% YoY) while SME segment has been reporting sub-dued growth. Management has also indicated that corporate segment is wit-nessing healthy growth (22.1% YoY) on refinancing opportunities.

In retail segment, focus continues on both housing as well as auto loans. How-ever, we believe share of higher yielding unsecured portfolio is likely to rise inthe future (12-14% from the current levels of 11%), as per management's ear-lier guidance. Our interaction with the bankers suggests that competition hasintensified in the retail segment and hence, we opine that its NIM which hasbeen holding-up well in the recent quarters could see some downward pressure,going forward.

Break-up of advances

Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16

Large & Mid Corporate 44.2% 45.5% 46.6% 45.3% 45.8% 46.5% 46.5%

SME Advances 16.3% 15.6% 15.3% 14.6% 13.5% 13.4% 13.4%

Agriculture Retail 39.6% 38.9%^ 38.1%^ 40.2%^ 40.7%^ 40.1%^ 40.1%^

Source: Company, ^ indicates retail book including FCNR linked advances

Its deposit growth has continued to grow at relatively moderate pace (16.2%YoY) vis-à-vis loan book while saving deposits grew at healthy pace (16.0%YoY). CASA mix stands healthy at 43.2% (Q3FY16) while CASA share on dailyaverage basis remained stable (QoQ) at 40% during Q3FY16.

NPLs rose sharply QoQ but lower than expectations; high exposureto non-operational power portfolio remains a potential risk, in ourview.

GNPA/NNPA rose 28.6%/62.9% sequentially, while in percentage terms theyrose to 1.68% (1.38% in Q2FY16) and 0.75% (0.48% in Q2FY16), respectively.NPLs rose sharply QoQ but were lower than our expectations. Bank has fully rec-ognized the necessary impairments as per the RBI assessment in Q3FY16 itself.We believe this partly clears the asset quality overhang on the stock. The slip-page was higher (Rs.22.8 bn; 2.96% annualized) largely coming from pharma-ceuticals, power and plastics segments. Out of this ~Rs.10 bn came due to assetquality review as suggested by RBI and around 35% of slippages (RS.7.4 bn)originated from standard restructured book due to shifting of DCCO.

Trend in Asset Quality

(Rs bn) Q1 FY14 Q2 FY14 Q3 FY14 Q4 FY14 Q1 FY15 Q2 FY15 Q3 FY15 Q4 FY15 Q1 FY16 Q2 FY16 Q3 FY16

Gross NPA 24.90 27.35 30.08 31.46 34.63 36.13 39.02 41.10 42.51 44.51 57.24

% of Gross Advances 1.10 1.19 1.26 1.22 1.34 1.34 1.34 1.34 1.38 1.38 1.68

Net NPA 7.90 8.38 10.03 10.24 11.13 11.80 12.51 13.17 14.61 15.44 25.14

% of Net Advances 0.35 0.37 0.42 0.40 0.44 0.44 0.44 0.44 0.48 0.48 0.758

Provision Coverage Ratio (%) 80.0% 80.0% 78.0% 78.0% 77.0% 78.0% 78.0% 78.0% 78.0% 78.0% 72.0%

Source: Company

Trend in addition to impaired assets

(Rs bn) Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016

Restructuring 6.86 10.31 6.70 11.15 4.80 5.70 1.32 15.40 7.40 4.63 1.26

as a % of loan book 1.39% 2.09% 1.36% 2.26% 0.83% 0.99% 0.23% 2.68% 1.05% 0.66% 0.18%

Slippage 6.81 6.18 5.89 3.01 6.26 9.11 7.08 6.10 11.85 24.03 20.82

Slippage Ratio (%) 1.38% 1.26% 1.20% 0.61% 1.09% 1.58% 1.23% 1.06% 1.69% 3.42% 2.96%

Addition to impaired assets (%) 2.78% 3.35% 2.56% 2.88% 1.92% 2.57% 1.46% 3.74% 2.74% 4.08% 3.14%

Source: Company



Fresh impairment during Q3FY16 (Rs.22.1 bn; 3.1% annualized) was lower thanthe previous quarter (4.1% in Q2FY16). Similarly, stressed assets (restructuredportfolio + Net NPA) also declined QoQ from 3.3% in Q2FY16 to 3.2% inQ3FY16, positive in our view. However, we opine that risk of asset impairmentremains elevated for Axis bank due to its high exposure to infrastructure andother stressed sectors. In its power portfolio, only ~50% of assets are opera-tional in nature while rest will see DCCO (Date of Commencement of Commer-cial Operations) during next two years. Management has guided that Q4FY16could see Rs.13.0 bn of slippage along with Rs.9.0 bn of fresh restructuring dueto DCCO extension.

Exposure to Stressed Segments (Funded)

(%) FY13 FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16

Infrastructure Construction 7.6 7.4 7.6 7.8 7.8 7.2 6.8 7.2 6.9

Power Generation & Distribution 4.9 5.2 5.2 5.2 5.3 6.0 6.7 6.0 6.3

Metals & Metal Products 4.2 4.6 4.6 5.2 5.3 5.9 5.9 6.2 6.2

Engineering & Electronics 3.5 3.3 3.3 3.3 3.3 3.2 3.3 6.7 3.1

Financial Companies 7.0 4.6 4.3 4.5 5.5 4.7 4.4 6.2 4.6

Trade 2.9 3.6 3.6 3.6 3.5 3.4 3.1 3.7 3.1

Food Processing 4.1 3.6 3.7 3.5 3.5 3.1 3.1 2.7 2.9

Real Estate 2.6 3.3 3.3 3.3 3.3 3.2 3.3 2.9 3.3

Shipping, Transportation & Logistics 2.3 2.3 2.3 2.1 2.1

Telecom 1.4

Petroleum & Petroleum Products 0.5 0.5 0.4 0.5 0.6 2.3 1.1

Chemicals 1.6

Total Exposure to 10 sectors 40.7 39.4 38.4 39.0 40.1 37.0 37.2 43.8 37.4

Source: Company

During Q3FY16, Axis bank has refinanced ~Rs 16 bn worth of assets under 5:25scheme and one account (Rs.5 bn) under SDR scheme. Although its provisioncoverage ratio stands healthy at 72% (including prudential write-offs), it sawsequential decline (600bps), negative in our view.

Valuations & recommendationNonetheless, high exposure to non-operational power portfolio remains a poten-tial risk, in our view. Management has guided 125bps of credit cost (includingutilization of contingent provisions) on likely impairments of Rs.74 bn duringFY16. We have tweaked the earnings estimate for FY16/17E (expect earnings togrow 17.1% CAGR during FY15-17E) but assign lower multiple (2.25x FY17 ABV)to Axis bank on higher NPL risk (8% funded exposure to highly leveraged com-panies) in prevailing tough macro environment. We retain BUY rating (1.7x FY17ABV) on the stock which reports healthy return ratios (RoE: 18-19%, RoA: 1.7%)but cut the TP to Rs.510 (Rs.685 earlier).



Key data

Rs. bn 2014 2015 2016E 2017E

Interest income 306.4 354.8 409.2 476.1

Interest expense 186.9 212.5 244.1 287.5

Net interest income 119.5 142.2 165.1 188.6

Growth (%) 23.6% 19.0% 16.1% 14.2%

Other income 74.1 83.7 94.8 108.2

Gross profit 114.6 133.9 159.8 180.2

Net profit 62.2 73.6 83.4 97.9

Growth (%) 20.0% 18.3% 13.4% 17.4%

Gross NPA (%) 1.2 1.3 2.0 1.7

Net NPA (%) 0.4 0.4 0.9 0.5

NIM (%) 3.8 3.9 3.8 3.7

CAR (%) 16.1 15.1 15.2 14.0

RoE (%) 17.7 18.0 17.8 18.7

RoA (%) 1.7 1.7 1.7 1.7

DPS (Rs) 4.0 4.6 4.8 5.0

EPS (Rs) 26.5 31.0 35.2 41.3

Adjusted BVPS (Rs) 158.3 182.9 198.1 225.3

P/E (x) 14.7 12.5 11.0 9.4

P/ABV (x) 2.5 2.1 2.0 1.7





RESULT UPDATE

Dipen [email protected]+91 22 6621 6301

NIIT LTD (NIIT)PRICE: RS.79 RECOMMENDATION: BUYTARGET PRICE: RS.92 FY17E P/E: 11.1X

NIIT's 3QFY16 performance was better than our expectations, largely ledby CLS, which saw revenues grow by 15% YoY in CC terms. They grew by8% QoQ in USD terms, we estimate. S&C also reported growth of 2.5% ona YoY basis, bettering the 0.6% growth witnessed in 2Q. Marginsimproved by 392bps on a YoY basis, above expectations. NIIT has shownimprovement in revenue growth and margins over the past three quarterswith the margin improvement taking us by surprise. We remain optimisticon the future prospects of NIIT. NIIT has also launched new programs inS&C business and added new clients in CLS, which should support futuregrowth. We await more clarity on growth prospects and thecorresponding profitability in the Skills business, though. Our FY17 EPSestimates stand marginally increased to Rs.7.1 (Rs.6.8), respectively. OurDCF-based PT stands revised to Rs.92 (Rs.90 earlier). The recent sharp fallin price has made valuations attractive. We upgrade the stock to BUY(SELL, earlier).

3QFY16 results - Better than estimates

(Rs mn) 2QFY16 3QFY16 QoQ (%) 3QFY15 YoY (%)

Income 2725 2623 -3.7 2482 5.7

Expenditure 2474 2460 2425

EBIDTA 251 163 -35.1 57 186.0

Depreciation 129 117 152

EBIT 122 46 -62.3 -95 -148.4

Interest 0 0 0

Other Income -51 -67 4

PBT 71 -21 -129.6 -91 -76.9

Tax 11 5 4

PAT 60 -26 -95

Share of profit 147 163 113

Adjusted PAT 207 137 -33.8 18 661.1

E O items 0 0 0

Shares (mns) 165.2 165.2 165.2

EPS (Rs) 1.3 0.8 0.1

EBIDTA (%) 9.2 6.2 2.3

EBIT (%) 4.5 1.8 -3.8

Net Profit (%) 2.2 -1.0 -3.8

Source: Company

S&C revenues reported YoY growth for second successive quarter S&C revenues grew by 2.5% YoY, after reporting and 0.5% rise in the previ-

ous quarter. This is the second successive quarter of YoY growth in this busi-ness and reflects the benefits of the turnaround strategy adopted for thedomestic and Chinese markets.

The growth rates of S&C are being driven by the Beyond-IT courses and Skillcourses. Beyond IT business grew by 8% YoY and formed 38% of revenues(40% in 2Q and 39% in 1Q).

The muted growth in IT course revenues reflects the continuing negative sen-timents in the minds of the prospective students.

Summary table

(Rs mn) FY15 FY16E FY17E

Sales 9,573 10,260 11,508Growth (%) 0.7 7.2 12.2EBITDA 442 818 1,084EBITDA margin (%) 4.6 8.0 9.4Net profit (1,385) 739 1,180EPS (Rs) (8.4) 4.5 7.1Growth (%) (873.7) (153.4) 59.6CEPS (Rs) (4.6) 7.5 10.2BV (Rs/share) 30.8 33.4 38.7Dividend / share (Rs) 1.6 1.8 1.8ROE (%) (23.4) 13.9 19.8ROCE (%) (7.3) 5.5 19.3Net cash (debt) (542) (104) 454NW Capital (Days) 24.4 15.7 16.8P/E (x) (9.4) 17.7 11.1P/BV (x) 2.6 2.4 2.0EV/Sales (x) 1.4 1.3 1.1EV/EBITDA (x) 30.7 16.1 11.6

Source: Company, Kotak Securities - Pri-vate Client Research



We opine that, despite some momentum in the revenue growth of IT servicesexports industry the recruitments have not picked up as companies try to im-prove utilization rates, look at just-in-time hiring and also increase non-linearrevenues.

While the higher capacity utilization levels at major IT companies in recentquarters do provide an opportunity, the bend towards non-linear revenuescan pose a challenge to ILS, going ahead.

However, we do believe that, if the IT services exports continue to do well,the positive sentiments will rub-off on NIIT over the next few quarters.

Overall enrolments were at 65,989 as against 61,370 in the previous quarter.

The capacity utilization of own centres was at 34%, as against 36% in 2Q v/s 31% as at FY15-end.

New programs to support growth in Beyond-IT NIIT has been introducing new programs to improve the growth rates in the

Beyond-IT business.

During the quarter, it introduced new programs with HP and Metascale.While the partnership with HP has led to a new certificate course in SoftwareTesting, NIIT has attacked the Big Data market through its tie-up withMetascale.

We believe these are high-growth opportunities, with Big Data professionalsseeing significant demand in the new Digital world.

We expect these programs to attract significant enrolments, in line with thedemand seen for 'StackRoute.'

StackRoute and NIIT TV scaling up NIIT has already introduced StackRoute - a specialised program offering

training across various technologies. This is directed at IT companies, whichcan use this program to re-skill their employees, especially in emerging areasof digital technologies. Individual students can learn the full stack of digitaltechnologies, with a view to enter the start-up world and also develop IPs.

The first batch of 72 students was initiated in 2Q (average fees Rs.200,000 /student). Two new batches were started and have been over-subscribed bystudents already.

NIIT TV is an initiative which is offering courses free of charge (as of now) onthe net. It is an extension of the cloud-based training being currently offeredto NIIT students.

This initiative has increased visibility for NIIT and will help the company inmoving ahead towards its target of skilling 10mn students over the next fiveyears.

During 3Q, NIIT has introduced CBSE Board Exam preparatory classes for Std10th and 12th students.

NIIT IFBI has also launched new programs during the quarter.

CLS revenues (USD terms) grew strongly at 8% QoQ Revenues in the CLS business grew by 8 % on a QoQ basis in USD terms. On

a YoY basis, the CC revenue growth was at 15%, which is impressive. Rev-enues were higher than estimates.

Revenues rose as the contracts won in the past few quarters started scalingup at a rapid pace.

The business has been scaling well, especially in the back-drop of good orderwins by the company in Managed Training Solutions (MTS) business.



Managed Training Services has continued to be the growth driver for NIIT.Revenues from MTS formed 91% of CLS revenues in 3QFY16 as against 90%in 2Q and 89% in 1Q.

After transferring the Element K business, the company has been left withabout 1/3rd of the overall revenues in CLS. Of this, about 90% is contributedby Managed Training Services (MTS), which has been growing at a very fastpace.

The business signed 1 new customer in 3Q, similar to 1Q and 2Q.

NIIT is developing into a major player in the MTS business with 27 clients.Most of these are large corporations.

We believe that, with the developed economies likely stabilizing, the oppor-tunity is huge and demand may pick up over the next few quarters.

The contribution of CLS to NIIT's EBIDTA was at about 76% in FY14 and128% in FY15 (S&C reported negative EBIDTA) and is expected to remain sig-nificant at about 83% in FY17.

Thus, CLS profitability will greatly influence NIIT's margins in the near term.We expect CLS profits to grow strongly in FY16 and FY17.

NIIT is now turning its focus to the domestic markets and will be offeringlearning solutions to corporates in India, on a selective basis.

Revenue break up

(Rs mn) 3QFY16 2QFY16 3QFY15

Skills & Career 828.00 1045.00 808.00

Institutional 209.00 232.00 314.00

Corporate 1586.00 1448.00 1360.00

Source: Company

SLS (Institutional)

SLS revenues were down on a YoY basis because of the discontinuance of 2state Government projects of 698 schools in 1Q.

The company had completed 2 school projects each in 1QFY16 and 4QFY15.These projects had covered 698 and 531 schools, respectively.

The non-Government schools business now contributes about 70% of SLSrevenues (68% in 2Q). Within private schools, the company has stopped sup-plying hardware as a part of the overall project.

Thus, pure IP-led private Schools business now form about 20% of the overallSLS revenues (26% in 2Q, though).

The business added 38 non-Government schools to take the total number to2841.

The company witnessed continuing momentum in IP based orders. N Guru,the company's offering in the private schools business is gaining increasingacceptance, as is reflected in the additional schools bookings.

K-12 business hived off

NIIT has hived off its K-12 learning business (Revenues of Rs.209mn) into aseparate subsidiary named MindChampion Learning Systems Ltd.

This separate subsidiary will invite strategic partners and chart its own inde-pendent growth path.

We await further details on the same. However, we feel this is an emergingbusiness with significant potential.



NIIT to participate in 'Skill India' initiative; finer details awaited NIIT has announced that, it will impart skill-based training to 10mn students

in 16 different sectors over the next 5 years.

These sectors are largely in the services arena though the company will alsoprovide skills in manufacturing sectors at a later date.

NIIT is clear that, it will be selective in choosing courses and will select onlythose courses wherein the working capital requirements are minimal. We areencouraged by this decision of the company.

NIIT is already working with the Government on the Skills initiative. However,a significant scale up will be seen only over a period of time, we understand.

We would like to get further details on the scale up plans of NIIT, fundingcommitments, profitability levels in this business, etc.

The funding of courses will be important because the Government may notbe able to fully or substantially fund these numbers. Thus, it remains to beseen as to how many students are able to fund their skill requirements.

There may be initial headwinds which may restrict the pace of growth in thisbusiness and there may be a corresponding impact of the profitability levelsof the business.

We have assumed steady growth in the S&C business as well as improve-ment in margins in FY16 and FY17.

Cloud expected to be a growth driver for S&C NIIT is now focusing on the Cloud Campus as the next growth area for this

business. The company has invested significantly in building the Cloud infra-structure which had impacted margins during FY13.

About 71% of the physical outlets (59% in 2Q) are now cloud-enables and soare 78% of the courses. (76% in 2Q).

We expect this to be a driver of future revenue growth. We believe that,successful acceptance of this model can lead to faster roll-out of programs,wider reach of programs as well as better employee productivity, leading tohigher revenues and margins.

Margins rose YoY Headline margins for the quarter were higher by 392bps YoY to 6.2%.

The main contributor was the S&C business where company reported mar-ginal profits (0.6% margin) as compared to (-)13% margins in 3QFY15. S&Cmargins have shown YoY improvement for the second successive quarter andthat is a positive.

CLS maintained margins at about 11.7% QoQ. CLS had the tailwind of thedepreciating rupee and that helped margins sustain on a YoY basis. NIIT hasbeen reinvesting the benefits of the rupee, to improve growth rates.

In fact, CLS margins have been stable for the past 8 quarters now.

The rise in margins comes on the back of an improvement in profitability in1Q and 2Q also. The company had initiated a restructuring exercise in4QFY15 and had reorganized its business. This had a beneficial impact onprofitability in 1QFY16.

Consolidation, including capacity recalibration, had led to lower cost duringthe quarter. NIIT has reduced several of the low-margin owned centres aswell as reduced number of business associates. It has also reduced geo-graphical presence by shutting down smaller locations. Moreover, the com-pany has also cut down on the number of courses offered from 200 to about100.



Increased implementation of Cloud Campus also helped in restricting the im-pact on margins.

The company has exited several geographies and is also rationalizing capac-ity to cut costs and improve profitability.

The fixed cost base in 3QFY15 in this business was about Rs.550mn, which in-cluded people, facilities and marketing spends. NIIT has brought the samedown by about Rs.60mn on a quarterly basis.

With the cost rationalization exercise, NIIT was looking at annualized savingsof about Rs.252mn over the next few quarters. The same was alreadyachieved in 1Q.

EBIDTA margins

(%) 3QFY16 2QFY16 3QFY15

Skills & Career 0.60 6.51 -13.37

Institutional -11.96 4.92 2.55

Corporate 11.60 11.67 11.54

Source: Company

Future prospects We have our tweaked our FY16 and FY17 earnings.

We have built in an improved scenario for the S&C and CLS businesses (onassumption of improvement in developed economies) and have also assumedprofitability improvement due to the cloud initiative.

We expect the S&C business to report 1% growth in revenues in FY16 and a6.5% growth in FY17.

CLS revenues are expected to rise by 22% in FY16 and 18% in FY17.

Revenue break up


Skills & Career 3284.00 3313.72 3528.40

Institutional 1412.00 978.27 907.29

Corporate 4878.00 5968.44 7072.14

Source: Company, Kotak Securities - Private Client research

We have assumed margins to improve to 8% in FY16 and 9.4% in FY17. Thecloud initiative is expected to help improve the S&C margins.

Also, the recent restructuring initiatives like exit from various locations andrationalization of capacity should support margins. NIIT has achieved annual-ized savings of Rs.250mn from these initiatives.

On the other hand, SLS margins are expected to rise on higher contributionof private schools and lower bought-outs. CLS should see margins improvedue to higher proportion of MTS revenues.

After accounting for its 24% share in NIIT Technologies' profits, we expectthe net profit to be at Rs.1.18bn in FY17.

EBIDTA margins

(%) FY15 FY16E FY17E

Skills & Career -5.4 2.5 3.3

Institutional 4.0 1.8 7.0

Corporate 11.6 12.0 12.8

Source: Company, Kotak Securities - Private Client research



Valuations and recommendation

The performance in 9mFY16 inspires optimism.

The initiatives taken by the new management have led to earlier-than-ex-pected benefits on margins.

We are optimistic about the growth in CLS as well as on the S&C business.

While we have upgraded our estimates for the CLS and S&C businesses, weawait more clarity on growth prospects and the corresponding profitability inthe Skills business.

At our TP of Rs.92, FY17E earnings will be discounted by 13x which, we feel,is reasonable.

Post the sharp fall in price, we upgrade the stock to BUY (SELL, earlier).

Concerns

A slower-than-expected recovery in the global economy could impact rev-enue growth of NIIT.

Steep rupee appreciation v/s major global currencies may impact thefinancials of NIIT.

We recommend BUY onNIIT Ltd with a price target

of Rs.92




RESULT UPDATE


ZENSAR TECHNOLOGIES LTD

PRICE: RS.837 RECOMMENDATION: REDUCETARGET PRICE: RS.872 FY17E P/E: 10.2X

Zensar's operating results for 3Q were lower than estimates. Revenuesmatched expectations largely due to the sharp rise in products / licensesrevenues. Margins were lower than expectations. Excluding rupeedepreciation impact and product sales, services revenues fell by about 4%QoQ, we estimate. Application services USD revenues saw a sharp fall of5% QoQ, partly due to seasonality but also due to closure of 2 largeprojects. IMS reported flattish revenues. This business has stagnated overthe past several quarters (except 2Q) with USD revenues in 3QFY16 lowerthan that in 2QFY15. The products business is also expected to remainranged, as per management guidance. In FY14, USD revenues, excludingbought-outs, were likely lower YoY. In FY15 also, the organic growth inservices was just about 1% YoY in USD terms, we believe. Themanagement has been positive on the future prospects, though, on theback of the order bookings and the pipeline. Our FY16 and FY17 EPS standat Rs.73.5 (Rs.74.8, earlier) and Rs.81.9 (Rs.79.8, earlier), respectively. Inour DCF model, we have incorporated a more benign operatingenvironment in our near term assumptions, which has resulted in a PT ofRs.872 (Rs.893). The stock has corrected sharply in past few sessions. Werecommend REDUCE (SELL, earlier). We will become positive on the stockonly when, there is more stability / growth in revenues and profitabilityinitiatives start playing out sustainably.

3QFY16 results - below estimates

(Rs mn) 2QFY16 3QFY16 % QoQ 3QFY15 % YoY

Income 7564.3 7568.1 0.1 7176.7 5.5

Expenditure 6393.4 6479.1 6140.3

EBIDTA 1170.9 1089.0 -7.0 1036.4 5.1

Depreciation 108.9 113.8 97.4

EBIT 1062.0 975.2 -8.2 939.0 3.9

Interest 26.7 28.4 32.0

Other inc 229.4 94.8 109.6

PBT 1264.7 1041.6 -17.6 1016.6 2.5

Tax 340.2 316.5 321.3

Minority Interest 11.1 9.7 0.1

PAT 913.4 715.4 -21.7 695.2 2.9

E.O items 0.0 0.0 0.0

Shares (mns) 44.3 44.3 44.3

EPS (Rs) 20.6 16.1 15.7

Margins (%)

Operating Profit 15.5 14.4 14.4

Gross Profit 14.0 12.9 13.1

Net Profit 12.1 9.5 9.7

Source: Company

USD revenues down 1.4% QoQ despite sharp rise in product rev-enues

Zensar reported a 1.4% de-growth in USD revenues on a QoQ basis.

The product / license revenues rose to $13.2mn in 3QFY16 from $9.2mn in2QFY16. They were at $7.2mn in 1QFY16.

Summary table


Sales 25,890 30,044 32,818Growth (%) 11.8 16.0 9.2EBITDA 3,556 4,520 5,064EBITDA margin (%) 13.7 15.0 15.4PBT 3,585 4,569 5,060Net profit 2,594 3,260 3,632EPS (Rs) 58.5 73.5 81.9Growth (%) 9.2 25.7 11.4CEPS (Rs) 67.7 83.6 92.3BV (Rs/share) 261.0 320.9 389.1Dividend / share (Rs) 11.0 12.0 12.0ROE (%) 24.7 25.3 23.1ROCE (%) 32.7 35.1 32.0Net cash (debt) 2,876 5,162 7,825NW Capital (Days) 45.6 46.5 45.4P/E (x) 14.3 11.4 10.2P/BV (x) 3.2 2.6 2.2EV/Sales (x) 1.3 1.1 0.9EV/EBITDA (x) 9.6 7.1 5.8




We note that, product revenues are inherently volatile across quarters. Theyhad fallen from $14.4mn in 3QFY15 to about $6.5mn in 4QFY15. Thus, theserevenues may de-grow in 4QFY16.

The services revenues de-grew by about 4% QoQ in USD terms and came inmuch below estimates.

In 2Q, revenues from PA had grown sharply by about 22% in USD terms($14.6mn v/s $12mn QoQ). We had expected these to reduce in 3Q. Theserevenues came in at $14.7mn in 3Q.

Thus, organic services revenues (excluding products and PA) were down by5% QoQ, in USD terms.

AMS business de-grew by 5% QoQ, after rising 2% QoQ in 2Q

AMS business reported a 5% de-growth in USD terms. On an organic busi-ness (excl PA), revenues were 6% down QoQ.

The fall in revenues was largely due to furloughs and also closure of twolarge accounts at the end of 2Q. The new projects starts were not able tocompensate for this fall in revenues.

Revenues in AMS have been volatile over the past several quarters, whichshows the lack of stability in the major revenue stream of the company.

Within this business, Zensar is focusing on 4 areas - higher share of annuityrevenues, bagging larger accounts (to increase annuity revenues), EnterpriseTransformation Business and digital enterprise.

The Enterprise Transformation business has seen good traction in terms oforder-bookings. Moreover, it is looking at selling IMS services to the AMScustomers.

In the Digital space, Zensar has brought together product startups in India,evaluating their innovations, to further help take the shortlisted products glo-bal. These startups are in the new age technology areas of SMAC (Social,Mobility, Analytics and Cloud).

Zensar is also looking at Insourcing services, wherein it will help companies(which want their captive units in addition to outsourcing) set up their captiveunits in India or elsewhere.

PA, the digital commerce company in Zensar's fold, saw stable revenuesQoQ.

Digital and e-commerce services formed about 26% of 3Q revenues as com-pared to 12.6% in FY15.

IMS services revenues flat QoQ after a growth of 7.5% QoQ in 2Q;stagnation over past several quarters

IMS business (about 18% of revenues) reported flattish revenues QoQ toabout $20mn, after reporting a 7.5% growth in 2Q. The strong growth in 2Qcame as push-overs from 1Q got accounted during the quarter.

These revenues have also been very volatile. These had de-grown by 11%QoQ in 1Q. Revenues had grown by 7% QoQ in 4QFY15, fallen in 3QFY15and remained flat in 2Q / 1Q.

We have been indicating over the past few quarters that, Zensar's revenuegrowth has been very erratic due to the projects based nature of the same.

Zensar's IMS revenues have also stagnated for the past several quarters ataround $20mn.

In fact, IMS revenues in USD terms are actually lower in 3QFY16 when com-pared to their 1QFY14 levels.



According to the management, within the IMS business, the services businesshas grown from $6mn to $11mn over the past few quarters. On the otherhand, the maintenance business (erstwhile Akibia) has seen revenues de-grow from $13mn to $9mn, due to the conscious efforts of the management.

While maintenance revenues are expected to remain stable, services rev-enues should continue to grow, according to the management.

We will watch out for the same before becoming more positive on this busi-ness.

According to the management, the consolidated service offerings along withAkibia are getting acceptance from the company's clients. Zensar is re-bal-ancing the IM portfolio, with a focus on increasing dual shore services withexisting and new customers.

FY15 had seen 35.4% of IM revenues come from dual shore services in com-parison with 29.9% for FY14.

Within the IM space, Zensar remains focused on Hybrid Cloud Integration,End User Experience Management, Multi-Vendor Support and Managed Se-curity Solutions.

Products / bought-out revenues up 43% QoQ

Product / licenses / bought-out revenues grew by 43% QoQ in USD terms af-ter growing by 51% in 2Q and 17% QoQ in 1Q.

We believe this is due to the seasonal nature of this business. This is ad-equately reflected in the cost of products bought for resale, which has goneup from Rs.518mn in 2Q to Rs.744mn in 3Q.

According to the management, in 9mFY16, products business brought in$19mn of revenues and the balance was contributed by the license revenues.

For FY15, these revenues were at around $38mn. We expect these revenuesto amount to around $38mn in FY16.

Thus, with the products business expected to de-grow and the IMS businessalso stagnating, about 25%-30% of Zensar's revenues is not reporting anygrowth for Zensar.

Order bookings and stabilization of IMS to help growth

The management has indicated consistent traction in order bookings and alsoa healthy pipeline ($592mn, which is all-time high).

The recently won deals are expected to scale up, going forward. The com-pany needs to execute on the same efficiently and bring about more stabilityand predictability in its revenues over the next few quarters.

We believe that, these factors should lead to growth in FY16. However, thequarterly performance is expected to be volatile in the near term.

Employee strength up marginally

The number of employees rose marginally for the second successive quarter,after two successive quarters of reductions.

In the past, Zensar had consciously reduced the number of employees as theywere not able to meet the targeted performance levels. The company hasalso reduced the number of projects especially those, which were not yield-ing the desired margins.

Utilisation levels (including trainees) were higher at about 82%.

Zensar has been focusing on improving utilization levels. However, we do notexpect any major benefit from the same going ahead.



EBIDTA margins lower than expected

Margins fell by about 109bps and came in lower than expectations. The prof-itability in the AMS business came in much lower than estimates at 17.4% v/s 20.4% in 2Q. Profits in the products business also fell QoQ, despite a 43%rise in revenues.

Margins fell despite the rupee depreciation and capacity utilization benefits,because of the seasonality, closure of large projects in 2Q and due to higherproportion of product revenues (which enjoys low single-digit margins).

The management expects margins to trend higher once the re-structuring ofthe business is completed. The levers for margins improvement are : leanexecution, improved utilization, moving more PA projects to maintenance(annuity), increased off-shore content, etc.

We view this positively but would wait and see further impact of these initia-tives on the profitability of the company.

The receivables days have also gone up from 63 days' sales to 73 days' rev-enues, largely due to the higher product revenues.

Financial prospects

We have made changes to our FY16 and FY17 earnings estimates. We as-sume the rupee to average 65.6 / USD in FY16 and 65.2 / USD in FY17.

USD revenues are expected to rise by 8% in FY16 and 10% in FY17. PA hasbeen merged into Zensar WEF 2QFY15.

Margins are expected to be higher v/s FY15 as benefits of PA consolidation,slightly higher utilization levels and cost containment are likely to be morethan offset by pressure from salaries.

We have assumed tax at 28% in FY16 and FY17.

Consequently, PAT is expected to work out to Rs.3.63bn in FY17. The EPSworks out to about Rs.82.

Valuations

In our DCF model, we have incorporated a more benign operating environ-ment in our near term assumptions, which has resulted in a PT of Rs.872(Rs.893) for the stock.

The stock had moved up post the 2Q numbers, before correcting sharply oflate. Despite the recent fall, we see little upside from current levels and rec-ommend REDUCE (sell at inclines). We had recommended SELL post 2Q num-bers.

IMS revenues have been stagnant and product revenues are expected to re-main ranged over the foreseeable future.

Organic services revenues were lower in USD terms in FY14 and were up byonly about 1% in FY15. For FY16, it is expected to be around 5% YoY.

Measures like lean execution, improved efficiencies, best practices, etc aretargeted at improving the profitability profile of the company, but includingcurrency benefits, margins have improved only slightly.

While we view the business restructuring exercise with optimism, only a sus-tained rise in margins and stable revenue growth profile may lead us to ac-cord higher valuations to the stock.

Concerns

A sharp appreciation in the rupee from the current levels may impact ourearnings estimates for the company.

A slower-than-expected recovery in major user economies may impact ourprojections.

We recommend REDUCE onZensar Technologies with a price

target of Rs.872




RESULT UPDATE

Teena [email protected]+91 22 6621 6302

ULTRATECH CEMENTS LTD

PRICE: RS.2617 RECOMMENDATION: BUYTARGET PRICE: RS.3009 FY17E P/E: 19.9X

Revenues for Q3FY16 were marginally lower than our estimates due tolower cement realizations. Costs per tonne have come down resulting inhealthy improvement in EBITDA/tonne during the quarter. Net profitswitnessed a sharp improvement on higher margins and lower borrowings.Cement prices witnessed sharp declines during the quarter specifically innorthern and central region due to lower than expected demand scenario.Cement demand has continued to remain weak during Q3FY16 also due todelays in pick up in infrastructure projects along with continuedslowdown in rural spending and real estate sector.

At current price of Rs 2617, stock is trading at 19.9x P/E and 10.6x EV/EBITDA on FY17 estimates. We revise our volume estimates downwardsfor the company going forward to factor in delays in approvals for buyingJP group's MP based plants aggregating 5 MT. We arrive at a revised pricetarget of Rs 3009 on FY17 estimates (Rs 3366 earlier). Owing to adequateupside, we continue to maintain BUY rating on the stock.

Financial highlights

(Rs mn) Q3FY16 Q3FY15 YoY (%)

Net Sales 57,473 54,898 4.7

Expenditure 47,034 46,441

Inc/Dec in trade -662 -602

RM 8,662 8,385

As a % of net sales 15.1 15.3

Purchase of finished goods 1,092 979


Staff cost 3,492 3,056


Power and fuel 10,682 12,058


Transportation & Handling 13,980 13,175


Other expenditure 9,788 9,390


Operating Profit 10,439 8,457 23.4

Operating Profit Margin (%) 18.2 15.4

Depreciation 3,238 2,783

EBIT 7,201 5,673 26.9

Interest 1,257 1,540

EBT(exc other income) 5,944 4,134 43.8

Other Income 1,318 1,445

EBT 7,262 5,578 30.2

Tax 2,177 1,935

Tax Rate (%) 30.0 34.7

PAT 5,085 3,644 39.6

NPM (%) 8.8 6.6

Equity Capital 2,744.2 2,744.0

EPS (Rs) 18.5 13.3

Source: Company

Summary table


Sales 226,565 248,330 301,125Growth (%) 13 10 21EBITDA 39,154 46,299 68,627EBITDA margin (%) 17.3 18.6 22.8PBT 28,863 33,130 53,905Net profit 20,148 23,191 36,116EPS (Rs) 73.4 84.5 131.6Growth (%) -6% 15% 56%CEPS(Rs) 114.7 131.1 183.2BV (Rs/share) 687.2 760.9 881.7Dividend / share (Rs) 9.0 9.0 9.0ROE (%) 11.2 11.7 16.0ROCE (%) 14.1 14.1 19.9Net cash (debt) (19,915) (21,038)(11,632)NW Capital (Days) 62.4 62.4 62.4EV/Sales (x) 3.3 3.0 2.4EV/EBITDA (x) 18.8 16.0 10.6P/E (x) 35.6 31.0 19.9P/BV (x) 3.8 3.4 3.0




Revenue growth impacted by lower prices

Company's revenues for Q3FY16 were marginally lower than our estimates andgrew by 4.7% YoY led by volume improvement of 5% YoY and flat blended re-alizations YoY. Company's blended realizations (including RMC and white ce-ment) during Q3FY16 stood at Rs 5007 per tonne as against Rs 5004 per tonne inQ3FY15. Sequentially blended cement realizations are down by 4.7% for thequarter. Cement volumes including cement and clinker exports stood at 11.48MT for Q3FY16 as against 10.97 MT during Q3FY15. White cement and wallcare putty volumes stood at 3.38 lac tonnes as against 3.17 lac tonnes in previ-ous quarter.

Rural demand has remained depressed but demand from roads and infrastruc-ture has started witnessing improvement from northern region and also earlysigns of revival are being seen from UP. Eastern region has witnessed demandimprovement from low cost and individual housing segment along with infra-structure segment. Western region demand stood flat during the quarter due tofestive season and lack of infrastructure projects. Southern region was impactedbadly during the quarter due to rains and poor availability of sand. AndhraPradesh development is yet to take off.

Ultratech Cements is still awaiting clarification from the government over thetransfer of limestone reserves as part of its deal to buy Jaypee Group's twoMadhya Pradesh cement assets. A clause in the new Mines and Minerals (Devel-opment and Regulation) Act 2015 barring the transfer of mines that were notallotted through auctions seems to be hampering this acquisition. Post clarifica-tion and court approvals, company would be able to enhance its capacity bynearly 5 MT.

We revise our volume estimates downwards for the company going forward tofactor in delays in approvals for buying JP group's MP based plants aggregating5 MT. We thus expect revenues to grow at a CAGR of 15% between FY15-17.(Rs 274 bn and Rs 329 bn estimated earlier for FY16/17 respectively)

Operating margin improvement led by cost reduction

Operating margins for the quarter stood at 18.2% as against 15.4% inQ3FY15. Margins have improved on cost reduction led by savings in powerand fuel and raw material costs along with lower other expenditure.

Raw material cost is down during the quarter due to softening prices of addi-tives and raw material mix optimization.

Staff cost has moved up due to the impact of higher bonuses as per Amend-ment in bonus Act.

Reduction in road freight was negated by increase in railway freight due tobusy season surcharge and change in market mix and sales pattern. Logisticscosts moved up marginally on YoY basis. Company's transportation throughroad has moved up to 71% from 69% in Q2FY16.

Power and fuel cost have declined on yearly basis with increase in share ofcaptive power plants and decline in pet coke prices. Company's pet coke/im-ported coal/indigenous coal mix stands at 74%/18%/8%.

EBITDA per tonne (including white cement, wall care putty and rmc) for thecompany during Q3FY16 stood at Rs 909 per tonne vs Rs 771 per tonne forQ3FY15.

We revise our estimates and expect operating margins of 18.6% (19.3% es-timated earlier) during FY16 and expect it to improve to 22.8% (23.4% esti-mated earlier) during FY17.



Sales and cost break up

Per tonne analysis Q3FY16 Q3FY15

Dispatches (mn tonne) 11.48 10.97

Blended Realisation/tonne 5,007 5,004

YoY (%) 0

Cost per tonne

Raw material 697 709

Finished goods 95 89

Staff cost 304 279

Power and fuel 931 1,099

Transportation &Handling 1,218 1,201

Other expenditure 853 856

EBITDA per tonne 909 771


Net profit performance was led by improvement in margins andlower tax rate

Net profits of the company registered a growth of 39.6% YoY for the quarterand was led by healthy improvement in margins, lower interest expense andlower tax rate in comparison with last year. We revise our estimates to factor indelays in acquisition of Jaiprakash MP based cement plants owing to lack ofclarity on limestone mine transfer. We expect PAT to grow at a CAGR of 34%between FY15-17. (Rs 24.9 bn and Rs 40.1 bn estimated earlier for FY16/17 re-spectively)

Company is cautiously optimistic on the sector with headwinds from suppressedrural income, slow pace of government projects and delays in AP demand revivalcontinue to remain in near to medium term. With upcoming election schedule invarious states and thrust of government on infrastructure development, demandis likely to improve in medium to long term.

Valuation and recommendation

At current price of Rs 2617, stock is trading at 19.9x P/E and 10.6x EV/EBITDA on FY17 estimates.

We value the company based on 12x EV/EBITDA on FY17 estimates and con-tinue to maintain BUY recommendation on the stock with a revised price tar-get of Rs 3009 (Rs 3366 earlier) on FY17 estimates.

Key risks to our target price and recommendation would come from sharpfall in the cement prices.

We continue to maintain BUYrecommendation on Ultratech

Cements Ltd with a price targetof Rs.3009



Forthcoming events Company/MarketDate Event

21-Jan Alembic Pharma, Hindustan Zinc, M&M Financial Services earnings expected

22-Jan Cairn India, ITC earnings expected

25-Jan Container Corporation, HDFC Bank earnings expected

27-Jan Colgate Palmolive, Godrej Consumer Products, Havells India, HDFC earnings expected

28-Jan Dabur India, Gujarat Pipavav, ICICI Bank earnings expected

29-Jan JSW Steel, L&T, Pidilite Industries, Thermax, TVS Motor Company earnings expected

Source: BSE India

Gainers & Losers Nifty Gainers & LosersPrice (Rs) chg (%) Index points Volume (mn)

Gainers

Idea Cellular 118 0.7 NA 4.6

Bajaj Auto 2,278 0.5 NA 0.2

HCL Tech 842 0.4 NA 2.0

Losers

Vedanta Ltd 64 (7.7) NA 25.6

Hindalco Ind 68 (5.9) NA 8.3

Adani Ports 219 (5.8) NA 4.1

Source: Bloomberg

Bulk deals Trade details of bulk deals

Date Scrip name Name of client Buy/ Quantity Avg.Sell of shares price

20-Jan ANISHAIMPEX Sunil Kumar Malik B 130,000 12.0

20-Jan INDOVATION Jayalakshmi Kutcherlapati S 16,169 48.8

20-Jan INTELLCAP Sunil Optics Pvt Ltd S 150,250 56.7

20-Jan MANGTIMBER J R Laddha Financial Services Pvt Ltd S 305,000 15.5

20-Jan MANGTIMBER Century Textiles & Ind.Ltd. B 305,000 15.5

20-Jan SAUMYACAP Sunder Sugnomal Bhatia S 40,000 1.5

20-Jan VASINFRA Rajiv Mehta B 67,421 16.9

20-Jan VINRKLB Khushali Nemish Badani B 44,175 5.7

20-Jan VINRKLB Lunkad Textiles Pvt Ltd S 45,125 5.7

20-Jan WOMENSNEXT Nikhil Vora B 64,000 62.7

20-Jan WOMENSNEXT Choice Equity Broking Pvt Ltd S 52,000 62.5

Source: BSE



Fundamental Research Team


Sanjeev ZarbadeCapital Goods, [email protected]+91 22 6621 6305

Teena VirmaniConstruction, [email protected]+91 22 6621 6302

Saday SinhaBanking, NBFC, [email protected]+91 22 6621 6312

Arun AgarwalAuto & Auto [email protected]+91 22 6621 6143

Ruchir KhareCapital Goods, [email protected]+91 22 6621 6448

Ritwik RaiFMCG, [email protected]+91 22 6621 6310

Sumit PokharnaOil and [email protected]+91 22 6621 6313

Amit AgarwalLogistics, [email protected]+91 22 6621 6222

Meeta Shetty, [email protected]+91 22 6621 6309

Jatin DamaniaMetals & [email protected]+91 22 6621 6137

Pankaj [email protected]+91 22 6621 6321

Jayesh [email protected]+91 22 6652 9172

K. [email protected]+91 22 6621 6311

Technical Research Team

Shrikant [email protected]+91 22 6621 6360

Amol [email protected]+91 20 6620 3350

Derivatives Research TeamSahaj [email protected]+91 79 6607 2231

Rahul [email protected]+91 22 6621 6198

Malay [email protected]+91 22 6621 6350

Prashanth [email protected]+91 22 6621 6110

RATING SCALE

Definitions of ratingsBUY – We expect the stock to deliver more than 12% returns over the next 9 months

ACCUMULATE – We expect the stock to deliver 5% - 12% returns over the next 9 months

REDUCE – We expect the stock to deliver 0% - 5% returns over the next 9 months

SELL – We expect the stock to deliver negative returns over the next 9 months

NR – Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for information purposesonly.

RS – Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there is not a suffi-cient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target.The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon.

NA – Not Available or Not Applicable. The information is not available for display or is not applicable

NM – Not Meaningful. The information is not meaningful and is therefore excluded.

NOTE – Our target prices are with a 9-month perspective. Returns stated in the rating scale are our internal benchmark.



DisclaimerKotak Securities Limited established in 1994, is a subsidiary of Kotak Mahindra Bank Limited. Kotak Securities is one of India's largest brokerage anddistribution house.Kotak Securities Limited is a corporate trading and clearing member of Bombay Stock Exchange Limited (BSE), National Stock Exchange of India Limited (NSE),Metropolitan Stock Exchange of India Limited (MSEI), United Stock Exchange of India Limited (USEIL). Our businesses include stock broking, services renderedin connection with distribution of primary market issues and financial products like mutual funds and fixed deposits, depository services and PortfolioManagement.Kotak Securities Limited is also a depository participant with National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited(CDSL).Kotak Securities Limited is also registered with Insurance Regulatory and Development Authority as Corporate Agent for Kotak Mahindra Old MutualLife Insurance Limited and is also a Mutual Fund Advisor registered with Association of Mutual Funds in India (AMFI). We are registered as a Research Analystunder SEBI (Research Analyst) Regulations, 2014"We hereby declare that our activities were neither suspended nor we have defaulted with any stock exchange authority with whom we are registered in lastfive years. However SEBI, Exchanges and Depositories have conducted the routine inspection and based on their observations have issued advise letters orlevied minor penalty on KSL for certain operational deviations. We have not been debarred from doing business by any Stock Exchange / SEBI or any otherauthorities; nor has our certificate of registration been cancelled by SEBI at any point of time.We offer our research services to clients as well as our prospects.This document is not for public distribution and has been furnished to you solely for your information and must not be reproduced or redistributed to any otherperson. Persons into whose possession this document may come are required to observe these restrictions.This material is for the personal information of the authorized recipient, and we are not soliciting any action based upon it. This report is not to be construedas an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It is for the generalinformation of clients of Kotak Securities Ltd. It does not constitute a personal recommendation or take into account the particular investment objectives,financial situations, or needs of individual clients.We have reviewed the report, and in so far as it includes current or historical information, it is believed to be reliable though its accuracy or completenesscannot be guaranteed. Neither Kotak Securities Limited, nor any person connected with it, accepts any liability arising from the use of this document. Therecipients of this material should rely on their own investigations and take their own professional advice. Price and value of the investments referred to in thismaterial may go up or down. Past performance is not a guide for future performance. Certain transactions -including those involving futures, options andother derivatives as well as non-investment grade securities - involve substantial risk and are not suitable for all investors. Reports based on technical analysiscenters on studying charts of a stock's price movement and trading volume, as opposed to focusing on a company's fundamentals and as such, may not matchwith a report on a company's fundamentals.Opinions expressed are our current opinions as of the date appearing on this material only. While we endeavor to update on a reasonable basis theinformation discussed in this material, there may be regulatory, compliance or other reasons that prevent us from doing so. Prospective investors and othersare cautioned that any forward-looking statements are not predictions and may be subject to change without notice. Our proprietary trading and investmentbusinesses may make investment decisions that are inconsistent with the recommendations expressed herein.Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by thePrivate Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, targetprice of the Institutional Equities Research Group of Kotak Securities Limited.We and our affiliates/associates, officers, directors, and employees, Research Analyst(including relatives) worldwide may: (a) from time to time, have long orshort positions in, and buy or sell the securities thereof, of company (ies) mentioned herein or (b) be engaged in any other transaction involving such securitiesand earn brokerage or other compensation or act as a market maker in the financial instruments of the subject company/company (ies) discussed herein oract as advisor or lender / borrower to such company (ies) or have other potential/material conflict of interest with respect to any recommendation and relatedinformation and opinions at the time of publication of Research Report or at the time of public appearance. Kotak Securities Limited (KSL) may haveproprietary long/short position in the above mentioned scrip(s) and therefore should be considered as interested. The views provided herein are general innature and does not consider risk appetite or investment objective of particular investor; readers are requested to take independent professional advicebefore investing. This should not be construed as invitation or solicitation to do business with KSL. Kotak Securities Limited is also a Portfolio Manager.Portfolio Management Team (PMS) takes its investment decisions independent of the PCG research and accordingly PMS may have positions contrary to thePCG research recommendation.The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company orcompanies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations orviews expressed in this report.No part of this material may be duplicated in any form and/or redistributed without Kotak Securities' prior written consent.Details of Associates are available on our website ie www.kotak.comResearch Analyst has served as an officer, director or employee of subject company(ies): NoWe or our associates may have received compensation from the subject company(ies) in the past 12 months. We or our associates may have managed or co-managed public offering of securities for the subject company(ies) in the past 12 months. We or our associates may have received compensation forinvestment banking or merchant banking or brokerage services from the subject company(ies) in the past 12 months. We or our associates may have receivedany compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company(ies) in thepast 12 months. We or our associates have not received any compensation or other benefits from the subject company(ies) or third party in connection withthe research report. Our associates may have financial interest in the subject company(ies).Research Analyst or his/her relative's financial interest in the subject company(ies): NoKotak Securities Limited has financial interest in the subject company(ies): Axis Bank, Ultratech Cements - YesOur associates may have actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately precedingthe date of publication of Research Report.Research Analyst or his/her relatives has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the monthimmediately preceding the date of publication of Research Report: NoKotak Securities Limited has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately precedingthe date of publication of Research Report: NoSubject company(ies) may have been client during twelve months preceding the date of distribution of the research report."A graph of daily closing prices of securities is available at www.nseindia.com and http://economictimes.indiatimes.com/markets/stocks/stock-quotes. (Choosea company from the list on the browser and select the "three years" icon in the price chart)."Kotak Securities Limited. Registered Office: 27 BKC, C 27, G Block, Bandra Kurla Complex, Bandra (E), Mumbai 400051. CIN: U99999MH1994PLC134051,Telephone No.: +22 43360000, Fax No.: +22 67132430. Website: www.kotak.com. Correspondence Address: Infinity IT Park, Bldg. No 21, Opp. Film City Road,A K Vaidya Marg, Malad (East), Mumbai 400097. Telephone No: 42856825. SEBI Registration No: NSE INB/INF/INE 230808130, BSE INB 010808153/INF011133230, MSEI INE 260808130/INB 260808135/INF 260808135, AMFI ARN 0164 and PMS INP000000258. NSDL: IN-DP-NSDL-23-97. CDSL: IN-DP-CDSL-158-2001, Research Analyst INH000000586. Our research should not be considered as an advertisement or advice, professional or otherwise. The investor isrequested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and the like and take professionaladvice before investing. Investments in securities are subject to market risk; please read the SEBI prescribed Combined Risk Disclosure Document prior toinvesting. Derivatives are a sophisticated investment device. The investor is requested to take into consideration all the risk factors before actually tradingin derivative contracts. Compliance Officer Details: Mr. Manoj Agarwal . Call: 022 - 4285 6825, or Email: [email protected] case you require any clarification or have any concern, kindly write to us at below email ids: Level 1: For Trading related queries, contact our customer service at '[email protected]' and for demat account related queries contact us [email protected] or call us on:Online Customers - 30305757 (by using your city STD code as a prefix) or Toll free numbers18002099191 / 1800222299, Offline Customers - 18002099292 Level 2: If you do not receive a satisfactory response at Level 1 within 3 working days, you may write to us at [email protected] or call us on 022-42858445 and if you feel you are still unheard, write to our customer service HOD at [email protected] or call us on 022-42858208. Level 3: If you still have not received a satisfactory response at Level 2 within 3 working days, you may contact our Compliance Officer (Name: ManojAgarwal ) at [email protected] or call on 91- (022) 4285 6825. Level 4: If you have not received a satisfactory response at Level 3 within 7 working days, you may also approach CEO (Mr. Kamlesh Rao) [email protected] or call on 91- (022) 6652 9160.

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