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Sector: Midcap Initiating Coverage

Sensex 18,832 Nifty 5,704

October 3, 2012
3 October 2012

Price: INR 392

Target Price: INR 426


Background: V-Guard Industries (VGIL) was started in 1977 by Shri.Kochouseph Chittilappily to manufacture and market Voltage Stabilizers under the brand name
V-Guard. VGIL emerged as a leading player in the stabilizer segment and became a household brand. V-Guard began to aggressively diversify from 1992 and became a multi product company with presence in Stabilizers, Pumps, Cables, UPS, Water Heaters, Fans, Switch Gear and Induction Cooker. VGIL manufactures as well as outsources in all these products with share of manufacturing and outsourced at 59% and 41% respectively in FY12. VGIL has a strong distribution network with 230 exclusive distributors, 1,200 channel partners and 11,000 dealers across India. 52 Week High/Low Bloomberg code Reuters code Issued Equity (shares in mn) Mkt. Cap in mn Mkt. Cap in bn USD Avg. Daily Vol. (000) Avg. Daily Vol. (mn) Shareholding Promoters(%) FII (%) DII (%) Others (%) Pledge (% of promoter holding)

INR 457/141 VGRD IN VGUA BO 29.85 INR 11,700 $ 0.2 249.99 INR 96.9/$ 1.7
Mar12 Jun12

Play on the consumer theme

Growing consumer spend to aid VGIL VGIL has a wide product profile catering to the mass consumption market in the household electrical appliances segment. With growing per capita income, higher disposable income, nuclearisation of families & increasing aspirational levels, demand for these products is expected to remain strong. According to NCAER, the number of high income households rose from 13.8 million households in 2001-02 to 46.7 million households in 2009-10. Going ahead, the numbers of middle income households are expected to increase by 70% to 238 million by 2015. Moreover, VGIL is likely to gain on increasing urbanization and change in consumer preference. The robust rise of middle income increasing outlets and new product lines will drive revenues for VGIL in the next two years.

67.34 5.92 2.81 23.93 -

67.38 7.42 2.22 22.98 -

66.04 households, growing disposable income, strong demand, expansion into new geographies by 9.68 2.50 21.78 Outlook & Valuation -

VGIL, at CMP of INR 392, trades at 19.37X and 15.63X to its FY13 & FY14 earnings respectively. The EPS of the company has been growing at a CAGR of about 21.39%.Given the growing consumer demand, entry into new products, successful diversification into newer segments, increasing market

V-Guard Sensex

1M -19.9 1.3

3M 38.0 4.7

12M share, increasing outlets, and strong distribution network provide earnings visibility for the stock. We 104.4 expect V-Guard to report an EPS of INR 20.24 in FY13E and INR 25.08 in FY14E. At the CMP of INR 11.2

392, the stock trades at 19.37X EPS of FY13E and 15.63X EPS of FY14E. We Initiate coverage of VGuard with an OUTPERFORMER rating and price target of INR 426 based on a target PE multiple of 17x its FY14E EPS (PEG-0.79).Key Risks to our recommendation include steep increase in raw material cost and slow down in the Indian economy which will lower consumption demand.

Valuation Summary
Y/E March ( INRmn) Revenue EBIDTA PAT EPS EPS growth (%) FCF / Share PE P/ BV EV / EBIDTA
Vinayakamp +91-44-30007360

FY11 7,266 730 426.36 14.28 67.46 NA 27.44 6.80 17.84 2.9 0.89 25% 25% 0.79

FY12 9,936 935 508 17.02 19.15 25.88 23.03 5.55 13.93 1.3 0.89 27% 24% 0.32

FY13E 11,461 1,081 604.02 20.24 18.90 23.92 19.37 4.55 12.05 1.1 1.02 29% 23% 0.30

FY14E 13,517 1,311 748.44 25.08 23.91 37.83 15.63 3.68 9.94 1.0 1.02 29% 24% 0.02

EV / Sales Dividend Yield (%) ROCE (%) ROE (%) Net Debt / Equity

Growth driven by new product launches: V-Guard started its business as a single product company namely stabilizers and has expanded its product portfolio to Cables, Stabilizers, Water Pumps, Solar Water Heaters, Geysers, Digital UPS for computers, Inverters for households and Fans. The company has introduced two new products domestic switch gear and induction cooker in the market. Both these are in the pilot phase. Launch of induction cooker marks VGILs entry in the kitchen appliances segment. A pilot project has been carried out in central Kerala prior to launching the switchgear which includes Earth Leakage Circuit Breakers (ELCBs) before making an entry in domestic switchgear market. Looking at the positive response in central Kerala, VGIL plans to launch the product in North and South Kerala in the coming six months before entering the North Indian market. The company also plans to tap the market through the same kind of channel and using same marketing team. The share of revenues from outsourced goods in FY12 was at INR 5902.42mn vs INR 4371.54mn an increase of about 35.01%. The overall share of manufactured goods and traded goods in FY12 stood at 59% and 41% respectively.

The company has launched induction cookers recently and it turned out to be a very successful pilot launch. It plans to launch this product in South India. VGIL is in talks with vendors to manufacture induction cookers in India. The company is targeting a turnover of INR 1000mn from the kitchen appliances segment in the next four years by adding a few other products such as Mixers, Grinders in this segment. Capacity expansion: VGIL has planned a capex of INR 250mn for fiscal 2013. VGIL is investing about INR 150mn towards doubling of expansion of its house wiring and cable factory at Kashipur plant in Uttaranchal. This plant is running at near full capacity producing 0.27mn coils a month. The company has plans to double this capacity to 0.55mn coils per month to take advantage of excise duty and the incentives which will accrue till 2018. Further, a second solar water heater manufacturing plant is also coming up at Perundurai near Erode; for which INR 30mn will be spent out of capex. And the remaining capex is likely to be spent on incremental expansion, manufacturing facilities, extension of existing factories etc.

Strong distribution network: VGIL has about 230 distributors of whom 100 are in South India, 1200 Channel Partners (large retailers with many outlets) and plans to add more distributors in the markets, apart from South India. VGIL expects each distributor to generate minimum of INR 50mn per year on an average, which will generate revenues of INR 15bn per annum. VGIL has recently opened an office in Guwahati apart from plans to add distributors in the Northeast, West Bengal, and Chhattisgarh. VGIL intends to focus to improve the penetration levels of its products in the Eastern market in fiscal 2013.

Increasing market share: V-Guard Industries, over the past few years, has successfully gained market share in all of its product categories. In Stabilizers, it had a market share of about 12% which has now improved to 16% over three years. And in the wires industry, with size of roughly about INR 65bn the company used to be a very small player about three years back having about 1% market share which has now improved significantly to 4%. In the geyser segment, VGIL has increased its market share to 10% from 3.5%. The company holds number three position in India in solar water heater segment, enjoying roughly 10% market share. In the single phase domestic water pump segment with a market size estimated at about INR 20bn, VGILs market share has improved to 7% from 5% three years back.

Diversified Product Growth: The success of VGIL lies in its diverse product portfolio which is directly related to
the rise in disposable income of the middle class consumer in India. VGILs major chunk of revenues in FY12 was generated through cables and stabilizer contributing 30% and 20% respectively. Both the products grew by 36% and 20% YoY. Further, LT Cables, Digital UPS and Fans individually registered growth of 39%, 236% and 20% respectively in FY12. During FY12 other products such as Pumps, Water Heaters and Solar Water Heater reported expansion in its sales by 25%, 44% and 21% respectively.

Solar Water Heater, 3% LT Cable, 4%

% of Revenues
Others, 2%

UPS, 6% Cable, 28%

Fan, 6%

Digital UPS, 7% Water Heater, 9%

Stabilizers, 20%

Pumps, 15%

Expanding Pan India to de-risk business: VGILs sales are currently predominantly from the southern region led by its strong brand name as well as its distribution network. It had been primarily focusing on these markets and has built a wide product portfolio. Moreover, over the past few years it has widened its distribution network to pan-India. The company ventured into Maharashtra, Haryana, Madhya Pradesh, Orissa, Himachal Pradesh, Chhattisgarh, Uttar Pradesh and Gujarat in FY10, with an objective to focus on pan-India presence. Going ahead the company wants to expand its presence in Bihar and the north-eastern states. This strategy, although margin dilutive in the initial years would enable VGIL to become a formidable player in all its product categories in a few years from now. Growing distribution network aid growth: Currently, VGILs products are sold through 230 exclusive distributors, 1200 Channel Partners and 11,000 dealers with 52% of sales concentrated in four southern Indian states of Andhra Pradesh, Karnataka, Kerala and Tamil Nadu. Its network is also spread across all states in India except North East and Jammu & Kashmir. The company has a diversified client base which differs from product to product and includes

direct marketing agents, distributors and retailers. VGIL is offering a cash discount to dealers who provide cash immediately and is also talking to banks for channel financing for distributors .This should ease its working capital position going forward. Higher Advertisement spending boost brand perception and visibility across India: During FY12, the company incurred INR 924.59 mn as selling and distribution expenses, out of which the advertisement expenses stood at INR 380 million for FY12. Higher spending on marketing, promotion and branding will enable the company to compete against its established peers in the organized segment and help improve brand perception on a national scale. Outsourcing model provides flexibility and aids growth: VGIL operates a unique business model which is a mix of manufacturing and outsourcing for its product portfolio. It manufactures products such as cables and solar water heater, whereas it outsources the manufacturing of stabilizers, pumps, electric water heater, Fans, UPS and Digital UPS from around 69 organizations, with whom the company has a tie-up. Given the short lifecycle of a consumer electronic product, its design capabilities along with outsourcing operations has helped to rationalize its capex requirement and simultaneously branch out into new product lines. The share of revenues from manufactured goods in FY12 was at INR 4094.71mn vs INR 2972.92mn in FY11 an increase of about 37.73%. The share of revenues from traded goods in FY12 was at INR 5902.42mn vs INR 4371.54mn an increase of about 35.01%. The overall share of manufactured goods and traded goods in FY12 stood at 59% and 41% respectively. VGIL is looking at launching 2 new product categories in the form of mixers & grinders in consumer appliances space which will drive growth in the next 4 years All new products are developed at its R&D centre and then given to vendors for manufacturing. This arrangement also helps in keeping the costs under control as it saves on overheads and can have the vendors near the market, which saves on transportation cost. Moreover, since the product portfolio of the company demands intense market penetration through proper branding, promoting and strong network channel, VGIL can focus on new product development, branding and distribution rather than manufacturing all products in house.

PVC Wiring Cables LT Cables Pumps & Motors Fans Water Heaters Solar Water Heaters

No. of Units Remarks Own Manufacturing Units

2 1 1 1 1 1 Coimbatore , Kasipur Coimbatore Coimbatore Kala Amb, Himachal Pradesh Kala Amb, Himachal Pradesh Coimbatore

Stabilizers Pump Fan UPS EWH

Outsourced Production Facilities No. of Units Remarks

63 20 6 12 6 Across India

Industry Overview:

A voltage regulator is an electrical regulator designed to automatically maintain a constant voltage level. It may use an electromechanical mechanism, or passive or active electronic components. Depending on the design, it may be used to regulate one or more AC or DC voltages. At many industrial automation processes, measurement and control installations and also at network PCs it is necessary to supply different types of electrical devices with stabilized AC voltage. It is very important that the stabilized AC voltage is not dependent on external variations such as: supply voltage, frequency and load. The poor voltage conditions has made it imperative for every house hold to use a stabilizer for Refrigerators and Air Conditioners The stabilizer market in India is around INR.20bn with the organized segment size being pegged at around INR 10bn. The company has about 35 models with different capacities varying from 100 VA to 5 KVA. The company enjoys a 16% market share in the stabilizer segment. Sales from the segment in FY12 was INR.2009mn contributing 20% to the companys revenues. The key competitors are Keeline, Bluebird, Premier and Logicstat.

Cables are one of the basic inputs therefore they are very critical for the entire industrial sector. Cables can be broadly classified into domestic PVC Cables and LT Cables . The construction and infrastructure sector is one of the major end markets for the domestic cable segment. LT Cables are used for low voltage transmission of electricity and are used for last mile connectivity from the step down transformer onwards.The telecom and industrial sector are the user industry for power cables in India. Whether made of Copper, Aluminium or other non-ferrous materials - cables and wires play decisive role in our daily lives and in almost every industry. Cables are used by Power, Steel, Cement, Refineries, Petro-Chemicals, Fertilizers and Communication Sector as well as Railways including Metro Rail. The Indian cable industry is highly fragmented with large number of cable producers. Many of these companies are Small-scale cable producers, the smallest of which are family-run operations which use the most basic production equipments. There has been very limited consolidation amongst the major players in the industry. The tendency of Cable companies to grow organically, rather than by acquisition of competitors, means that no dominant groups have emerged in the industry.

Domestic, Industrial wiring Cable:

The Indian PVC cable market is estimated to be around INR 73.5bn. The market for this segment is growing at around 10% - 15%. The industry is highly fragmented with large number of cable producers. The organized players have a market share of about 75%-80% with top ten players having a share of around 45%. The sales from this segment in FY12 was around INR 2825mn contributing around 28% of total turnover. The key competitors in this segment are Finolex Cables, Havells, KEI and Polycab.

LT Power Cable:
The market for the LT power cable segment is around INR 65bn. V-Guard is having a range of armored and unarmored variants in both copper and aluminium up to the size of 400 The sales from this segment in FY12 was around INR 580mn. Key players in this segment are Finolex, Havells, RPG, Unicab and Polycab.

Pump Industry
A pump is service equipment but has a role in almost every sector of national economy. Water Pumps are the vital elements in an enormous range of fluid handling applications & range from small household pumps to immense units utilized in the water, chemical and energy industries. The market size of pumps in India is around INR 45bn. There are more than 400 different models with capacities ranging from 0.25HP to 25HP, ideal to suit all domestic and agricultural requirements. The water pump range includes Mono block, Centrifugal, Submersible, Jet pumps compressor and regenerative self prime pumps. The sales from the motor pump segment in FY12 was around INR 1520mn amounting to 15% of total turnover. The key competitors in the pump industry are CRI Pumps, Kirloskar, Crompton Greaves, Havells and Texmaco.

Uninterrupted Power Supply (UPS)

Electronic equipment, medical equipment and computers often require highly reliable power supply. Also the supply should be without fluctuations. In India, the electric power projections depict a shortfall in power generation. The quality of power is also not as desired. Therefore, a suitable power conditioning system is needed to buffer the equipment from electric utility supply variations and fluctuations . In major metro cities the power cuts are for about an hour and in Tier II, III cities, smaller towns & villages the power cuts extend up to 8 hours a day which necessitates the need to own a UPS. Further, the power that is made available is of very poor quality with low voltage which drives demand for UPS.

There are two types of UPS - on line UPS and offline UPS. Online UPS systems are the UPS which is in operation constantly. It also compensates power discrepancies, if any and provides a pure sine wave AC supply. Offline UPS on the other hand are normally on standby status and are manually or automatically switched on. The mains are fed directly to the load through a transfer switch. UPS can be classified into two segments; those systems with power output greater than 1 KVA and those with less than 1 KVA. The former finds applications in small offices, hospitals, defense, process industry, telephone exchanges, remote microwave relays and so on, while the latter largely caters to single PC use.

The UPS market in India is having a market size of around INR 40bn .VGIL entered this market in FY1998 and have got around 13 different models. The sales from this segment in FY12 was about INR 420mn. The key competitors in this segment are Numeric,Su-kam, APC and Emerson.

The digital UPS commonly known as Inverter market in India is having a market size of around INR 57bn including batteries. VGIL entered the market in FY2010 with three capacity variants 1400 VA, 800 VA and 600 VA with Sine wave models and Pseudo Sine wave models. Tubular batteries are also available with 12 V 100 AH capacity. The sales from Inverter segment in FY2012 was around INR 730mn contributing about 7% of total sales. The major competitors in this segment are Crompton Greaves, Usha, Numeric, Microtec, Sukam, Mahindra Powerol, Xenon and Luminous.

Electric Fans
According to NCAER, Electric fan, which is an item of necessity and mass consumption, is the second 'most wanted' consumer durable in rural India after bicycle. It features in the high-market penetration product category and is very high in terms of purchase priority amongst entry level / basic necessity category durable. Being a tropical country the electric fan is an essential item for the lower to middle class people of the country. But due to involvement of lesser technological input and low entry barrier the market is equally divided among the organized and unorganized players The increase of input prices like copper and alloy steel along with stiff competition from the SSI manufacturers (who are exempt from excise duty), the manufacturers are currently facing severe margin pressure. With Boom in housing construction, increasing industrial activity, rising disposable incomes, the demands for fans remain healthy. The market size of the fan segment is around INR.50bn out of which ceiling fan has the largest share with 65% market, Table, Pedestal and Wall fans with 30% market and Exhaust and Ventilating fans occupy the remaining 5%. VGIL entered the segment in 2006 and currently has more than 30 models, with variants of Ceiling, Pedestal, Table, Wall, Ventilating and Exhaust Fans. The sales in the segment during FY12 was around INR 640mn which amounted to 6% of total turnover. The key competitors in this segment are Crompton Greaves, Bajaj, Usha, Orient and Havells.

The organized market size of Electric water heaters is around INR 7bn. VGIL entered the segment in FY1996 and is available in more than 35 models with capacities ranging from 1,6,10,15,25,35 and 50 litre in different shapes and sizes. VGIL has also got a Instant gas water heater with capacity of 5 ltr. The sales during FY2012 was INR 860mn contributing 9% of total turnover.

Solar Water Heater:

The solar water heater market in India consists of segments like domestic and commercial / industrial with a market size of around INR.6bn. VGIL entered the market in FY2001, and has more than 23 different models capacities ranging from 100 lpd to 5000 lpd. The sales from this segment was about INR 260mn. Tata BP Solar and Racold are the major players in the market. The Government of India provides for subsidy to promote solar water heater under the JNNSM solar policy. Capital subsidy equivalent to upfront interest subsidy INR 1850 per sq. m. to registered institutions and Rs 1400 per sq. m. of collector area to registered commercial establishments. In the case of housing complexes INR 1900/ sq. m. of collector area is provided as capital subsidy. Further,85% of the cost of the project will be provided loans for 5 years from IREDA/Banks at interest rates of 2% for domestic users, 3% for institutional and 5% for commercial users.

Revenues to grow 15% and 18% in FY13 & FY14
VGIL is likely to benefit from growing consumer demand for durables which is likely to drive its revenues in FY13 and FY14. The company is likely to report revenues of INR 11,461mn and INR 13,517mn in FY13 and FY14 respectively which provides revenue growth of about 15% and 18%. The growing consumer market with strong population demography provides the company with revenue visibility for the next couple of years. Apart from this the company has forayed into Switch Gear and Induction Cooker, the pilot launch of these two products is very encouraging. The companys focus to become a Pan India player is likely to de-risk its business across geographies.

Revenues ( 16000 14000 12000 10000 8000 6000 4000

2000 0 7266 11461 13517






EBITDA margins stable

VGIL is likely to maintain stable EBITDA margins of about 9.43% and 9.70% in FY13 and FY14 with EBITDA of about INR 1,080.7mn in FY13 and INR 1,311.1mn in FY14. EBITDA margins are likely to improve on account of lower copper prices which have seen a decline in LME prices due to slower growth of leading economies of the world.

EBITDA(CAGR -18.39%)
1400 1200

1000 800 600

400 200 0




Working Capital management to strengthen Balance sheet

VGIL has got a strong balance sheet with low leverage. Net debt to equity in FY12 stood at 0.52X as compared to 0.81X in FY11. VTWL follows an asset light model which enables it to utilize its assets optimally. The asset turnover ratio of the company in FY12 was at 3.10X and this is likely to be 3.04X and 3.02X in FY13 and FY14 respectively. VGIL is also looking at improving the working capital due to better management of inventories and debtors apart from negotiating better terms with suppliers. As a result of these initiatives the Inventory days which stood at 55 days in FY12 is likely to improve to 50 days and 45 days in FY13 and FY14 respectively. The debtor days in FY12 which stood at 50 days is likely to improve to 45 days and 40 days in FY13 and FY14 respectively. The creditor days of the company which stood at 20 days in FY12 will improve to about 40 and 50 days in FY13 and FY14 respectively.

VGIL, at CMP of INR 392, trades at 19.37X and 15.63X to its FY13 & FY14 earnings respectively. The EPS of the company has been growing at a CAGR of about 21.39%.Given the growing consumer demand, entry into new products, successful diversification into newer segments, increasing market share, increasing outlets, and strong distribution network provide earnings visibility for the stock. We expect V-Guard to report an EPS of INR 20.24 in FY13E and INR 25.08 in FY14E. At the CMP of INR 392, the stock trades at 19.37X EPS of FY13E and 15.63X EPS of FY14E. We Initiate coverage of V-Guard with an OUTPERFORMER rating and price target of INR 426 based on a target PE multiple of 17x its FY14E EPS (PEG-0.79).

Steep increase in raw material cost: Copper is the key raw material for VGIL. Any steep increase in copper prices and inability to pass on the same to customers will impact the companys revenues and profitability. Unorganized sector penetration: In most of the segments where VGIL has presence there is penetration by unorganized players which affects the organized players in the industry. In the case of any downtrend in the economy the share of unorganized players will increase which will impact organized players like VGIL.

Slowdown in the economy: Though India has a strong consumption trend which attracts capital to these sectors, any slowdown in the economy will result in lower consumer spending which will impact companies in that segment.

Income Statement (Abstract) INR(million) Particulars Net Revenue Growth (%) Operating Exp. EBIDTA Growth (%) Depreciation Other Income Interest Tax Paid Tax Rate (%) Reported PAT Adjusted PAT Growth (%) FY11 7,266 60 6,536 730 43 79 17 113 165 30 426 426 67% FY12 9,936 37 9,001 935 28 97 24 170 184 27 508 508 19% FY13E 11,461 15 10,380 1,081 16 110 24 144 247 29 604 604 19% 24 156 306 29 748 748 24% FY14E 13,517 18 12,206 1,311 21 125 Key Ratios Particulars Dividend payout (%) EBIDTA margin (%) PBT Margin (%) RoCE (%) RoE (%) Current Ratio Debt/Equity Balance Sheet (Abstract) INR(million) Particulars Share Capital Reserves & Surplus Net worth Current Liabilities Non-Current Liabilities Total Liabilities Net Fixed Assets Other Non-Current Assets Cash & marketable securities Other Current Assets Total Assets FY11 299 1,421 1,720 871 1,459 4050 1,158 0 71 2,821 4050 FY12 299 1,808 2,106 1,462 1,138 4707 1,348 0 34 3,325 4707 FY13E 299 2,272 2,571 1,497 1,200 5268 1,450 0 428 3,390 5268 FY14E 299 2,881 3,179 1,984 1,300 6464 1,591 0 1245 3,628 6464 Valuation Ratios Particulars P/E P/BV Cash Flow statement (Abstract) INR(million) Particulars Cash flow from operations Cash flow from investing Cash flow from financing Free cash flow Net change in cash -3 FY11 -386 FY12 794 FY13E 762 FY14E 1,255 -241 -196 38 818 EV/Sales EV/EBIDTA Div Yield (%) FY11 27.4 6.8 2.9 17.8 0.9 FY12 23.0 5.5 1.3 13.9 0.9 FY13E 19.4 4.5 1.1 12.0 1.0 FY14E 15.6 3.7 1.0 9.9 1.0 Inventory Days Debtor Days Creditor Days CCC* Interest Cover Ratio FY11 24.5 10.1 7.6 25% 25% 3.3 0.8 60 50 20 90 6.2 FY12 20.6 9.4 7.0 27% 24% 2.3 0.5 55 50 20 85 5.1 FY13E 17.3 9.4 7.4 29% 23% 2.6 0.5 50 45 40 55 6.9 FY14E 14.0 9.7 7.8 29% 24% 2.5 0.4 45 40 50 35 7.8 Per Share Ratios Particulars Adjusted EPS (INR) Cash EPS BV/Share (INR) FCF/Share(INR) DPS (INR) FY11 14.3 16.9 57.6 -12.8 3.0 FY12 17.0 20.3 70.6 25.9 3.5 FY13E 20.2 23.9 86.1 23.9 4.0 FY14E 25.0 29.2 106.5 37.8 4.0

DuPont Analysis Particulars Net Profit Margin (%) Asset Turnover Leverage factor RoE (%) FY11 5.9 2.3 1.8 25% FY12 5.1 3.1 1.5 24% FY13E 5.3 3.0 1.5 23% FY14E 5.5 3.0 1.4 24%

-11 -237 -188 *CCC Cash Conversion Cycle 394 -594 37 -37 -179 24 394

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