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STRATEGY

November 2014

2014 2024
The Indian Coffee Can Portfolio
Analysts: Pankaj Agarwal, CFA Nitin Bhasin
Saurabh Mukherjea, CFA pankajagarwal@ambitcapital.com nitinbhasin@ambitcapital.com
saurabhmukherjea@ambitcapital.com Rakshit Ranjan, CFA Ashvin Shetty, CFA
Tel: +91 22 3043 3174 rakshitranjan@ambitcapital.com ashvinshetty@ambitcapital.com
Gaurav Mehta, CFA
gauravmehta@ambitcapital.com Sagar Rastogi Aditya Khemka
Tel: +91 22 3043 3255 sagarrastogi@ambitcapital.com adityakhemkal@ambitcapital.com

Karan Khanna Bhargav Buddhadev Anupam Gupta


karankhanna@ambitcapital.com bhargavbuddhadev@ambitcapital.com anupam.gupta@aavanresearch.com
Strategy

CONTENTS

STRATEGY
The Indian Coffee Can Portfolio3
Section 1: The case for a Coffee Can Portfolio.. 4
Section 2: Constructing the Indian Coffee Can Portfolio. 7
Section 3: How the Coffee Can is different to our other portfolio constructs14
Section 4: Todays Coffee Can for 2014-202416

COMPANIES
ITC (NOT RATED) .. 19
HDFC Bank (SELL) . 25
HCL Tech (BUY) . 31
Axis Bank (BUY) . 37
Asian Paints (SELL) 43
Godrej Consumer (SELL) . 49
Marico (BUY) .. 55
Berger Paints (SELL) .. 61
Page Industries (BUY) ...67
IPCA Laboratories (BUY) ..73
Gruh Finance (NOT RATED) 79
Balkrishna Industries (BUY) . 83
City Union Bank (BUY) . 89
eClerx (UNDER REVIEW) ..95
V-Guard (BUY) .101
Mayur Uniquoters (NOT RATED) . 107

November 17, 2014 Ambit Capital Pvt. Ltd. Page 2


Strategy

THEMATIC November 17, 2014

The Indian Coffee Can Portfolio The Indian Coffee Can Portfolio
ITC Our stance: NR
We introduce the Coffee Can Portfolio for investors who have the ability to
Mcap (US$ bn): 47.7 ADV - 6m (US$ mn): 40.6
hold stocks for very long periods of time (ideally, for ten years). Our portfolio
consists of large-cap and small-cap stocks that have delivered 10% sales HDFC Bank Our stance: SELL
growth and 15% RoCE every single year over FY05-14. Detailed back-testing Mcap (US$ bn): 36.4 ADV - 6m (US$ mn): 30.0
shows that this portfolio, including a large-cap only version, beats HCL Tech Our stance: BUY
benchmarks across all time periods. The portfolio also performs admirably
Mcap (US$ bn): 18.3 ADV - 6m (US$ mn): 26.9
well in stress tests of maximum drawdown (in periods like the Lehman crisis).
Left untouched for a decade, this portfolio, coupled with the power of Axis Bank Our stance: BUY
compounding, generates returns that are substantially higher than the Mcap (US$ bn): 18.2 ADV - 6m (US$ mn): 32.7
benchmark. Asian Paints Our stance: SELL
The case for a Coffee Can Portfolio Mcap (US$ bn): 10.4 ADV - 6m (US$ mn): 12.0
Thirty years ago, Robert Kirby of Capital Guardian Trust spoke of how a Coffee Can
Godrej Consumer Our stance: SELL
Portfolio of stocks selected using superior research and left untouched for a decade
can deliver superior returns over the long term. Over and above the quality of the Mcap (US$ bn): 5.4 ADV - 6m (US$ mn): 2.4
stock selection process, three other factors help the Coffee Can Portfolio generate Marico Our stance: BUY
superior returns: (a) no churn this reduces transaction costs; (b) the power of
Mcap (US$ bn): 3.4 ADV - 6m (US$ mn): 2.4
compounding stocks that do well over the long term become disproportionately
large in the overall portfolio; and (c) the long holding period of the portfolio helps Berger Paints Our stance: SELL
the investor effectively neutralise the noise that distracts from the core investment Mcap (US$ bn): 2.0 ADV - 6m (US$ mn): 1.5
thesis of a stock. Page Inds Our stance: BUY
Constructing the India Coffee Can Portfolio (CCP) Mcap (US$ bn): 1.7 ADV - 6m (US$ mn): 1.3
We use two filters to build the CCP: (a) sales growth of 10% per annum or more for IPCA Labs Our stance: BUY
each of the past ten years; and (b) RoCE of >15% every year for the past ten years.
Mcap (US$ bn): 1.4 ADV - 6m (US$ mn): 3.5
Back-testing of these filters over five ten-year periods (from 2000 to 2014) shows that
the CCP, including a large-cap version, beats the Sensex in each iteration and Gruh Finance Our stance: NR
delivers alpha ranging from 0.7% to 13% on a CAGR basis for the ten-year iterations. Mcap (US$ bn): 1.4 ADV - 6m (US$ mn): 1.1
Furthermore, relative to the Sensex, the CCPs also have lower maximum drawdown. Balkrishna Inds Our stance: BUY
How is the CCP different from our other portfolios?
Mcap (US$ bn): 1.1 ADV - 6m (US$ mn): 1.3
Over the past four years, we have created two different approaches to cater to
investors needs. Our quarterly Good & Clean portfolio is focused on investors who City Union Bank Our stance: BUY
are looking for short-term returns. The ten-bagger portfolio is based on our Mcap (US$ bn): 0.9 ADV - 6m (US$ mn): 1.4
greatness framework and is ideal for investors looking at a 1-3 year horizon. Our eClerx Our stance: UR
latest construct, the Coffee Can Portfolio, is for investors with a longer term
Mcap (US$ bn): 0.6 ADV - 6m (US$ mn): 0.8
investment horizon (ideally, ten year) because there is a strong body of evidence that
says that longer time periods are a powerful driver of superior investment returns. V-Guard Inds Our stance: BUY
Mcap (US$ bn): 0.4 ADV - 6m (US$ mn): 0.7
So here is the CCP for 2014to be bought now and opened ten years hence!
Our 2014 CCP consists of 16 stocks, including four banks. The list includes large-caps Mayur Uniquoters Our stance: NR
with hugely successful franchises (ITC, HDFC Bank, HCL Tech, Axis Bank and Asian Mcap (US$ bn): 0.3 ADV - 6m (US$ mn): 0.3
Paints) as well as robust, fast-growing mid-caps/small-caps (Godrej Consumer, Source: Bloomberg, Ambit Capital research
Marico, IPCA Labs, GRUH Finance, Berger Paints, Page Industries, Balkrishna
Industries, City Union Bank, eClerx, V-Guard Industries and Mayur Uniquoters).
Analyst Details
Our research clearly shows that valuation at the entry-point does not make a
Saurabh Mukherjea, CFA
difference for those who are willing to invest for the truly long run. Hence, +91 99877 85848
valuation parameters play no role whatsoever in the construction of the CCP. saurabhmukherjea@ambitcapital.com
The Coffee Can Portfolio, including the large-cap version, beats the Sensex in each Gaurav Mehta, CFA
of the five iterations that were run over 2000-2014 +91 22 3043 3255
CAGR returns for ten-year
CCP All-cap CCP Large-cap Sensex gauravmehta@ambitcapital.com
period starting
30 June 2000 30 June 2010 16.7% 17.8% 14.1% Karan Khanna
29 June 2001 30 June 2011 21.7% 23.6% 18.5%
+91 22 3043 3251
karankhanna@ambitcapital.com
28 June 2002 29 June 2012 19.0% 19.3% 18.3%
30 June 2003 28 June 2013 25.1% 27.5% 18.3% Consultant: Anupam Gupta
anupam.gupta@aavanresearch.com
30 June 2004 30 June 2014 31.6% 18.2% 18.1%
Source: Bloomberg, Ambit Capital research

Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Strategy

Section 1: The case for a Coffee Can


Portfolio
You can make more money being passively active than actively passive.
Robert G Kirby
In 1984, Robert G Kirby of Capital Guardian Trust wrote an article titled, The Robert Kirby of Capital Guardian
Coffee Can portfolio in the Journal of Portfolio Management (Source: Trust wrote about The Coffee Can
http://www.iijournals.com/doi/abs/10.3905/jpm.1984.408988). In this article, Portfolio in 1984
Kirby narrated an interesting experience with a female client.
Following the sudden death of his clients husband who handled her financial
affairs, Kirby was intrigued to see that the husband had secretly piggy-backed the
recommendations made by Kirby for the wifes portfolio. However, the husband
had managed to outperform the portfolio that Kirby managed for the wife by
applying a twist to Kirbys advice: he paid no attention to the sale
recommendations. He had simply put US$5,000 for every purchase
recommendation, tossed the share certificate in the safe deposit box and forgotten
about it.
On evaluating the portfolio, Kirby noticed several small holdings (with a value of
less than US$2,000) and large holdings (with values in excess of US$8,000).
However, one jumbo holding worth over US$800,000 stood out since it exceeded
the value of his wifes portfolio (which Kirby was managing) and was made from a
small investment in Haloid, which later resulted in a zillion shares of Xerox.
Kirby coined it the term Coffee Can Portfolio because the concept harkens back Kirby coined the term, Coffee Can
to the Wild West, when Americans, before the widespread advent of banks, saved Portfolio
their valuables in a coffee can and kept it under a mattress.
Why the Coffee Can Portfolio (CCP) works
The simplicity of the Coffee Can rests on three foundations:
No churn: By holding a portfolio of stocks for over ten years, a fund manager
resists the temptation to buy/sell in the short term. With no churn, the Coffee
Can approach reduces transaction costs which add to the overall portfolio
performance over the long term. We illustrate this with an example below.
Assume that you invest US$100mn in the CCP which kicks off on 30 June 2004
(discussed in greater detail in Section 2 of this note). Assume further that you
churn this portfolio by 25% per annum (implying that a typical position is held
for four years). Assuming a total price impact cost and brokerage cost of
100bps for every trade done over a ten-year period, this portfolio would
generate CAGR returns of 30.8%. Left untouched, however, the same portfolio Even moderate churn has an
would have generated CAGR returns of 31.5%. This implies ~4.4% of the final impact on overall portfolio
corpus (~US$67mn in value terms) is lost to churn over the ten-year period. returns
Thus, a US$100mn portfolio that would have grown to US$1.53bn over the
ten-year period (30 June 2004 - 30 June 2014) in effect grows to US$1.46bn
due to high churn.
To further demonstrate how churn and turn destroy return, we quote an
extract from Investing The Last Liberal Art (2nd edition, 2013) by Robert G.
Hagstrom. In this book, the author refers to an interesting experiment
conducted by a behavioural economist at the University of California. We
reproduce the extract below:
In 1997, Terence Odean, a behavioral economist at the University of California,
published a paper titled, Why do Investors Trade Too Much? To answer his
question, he reviewed the performance of 10,000 anonymous investors.
Over a seven-year period (1987-1993), Odean tracked 97,483 trades among
ten thousand randomly selected accounts of a major discount brokerage. The
first thing he learned was that the investors sold and repurchased almost 80
percent of their portfolios each year (78 percent turnover ratio). Then he

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compared the portfolios to the market average over three different time periods
(4 months, 1 year and 2 years). In every case, he found two amazing trends: (1)
the stocks that the investors bought consistently trailed the market, and (2) the
stocks that they sold actually beat the market1.
Odean wanted to look deeper, so he next examined the trading behavior and
performance results of 6,465 households. In a paper titled, Trading Is
Hazardous to Your Wealth (2000), Odean, along with Brad Barber, professor of
finance at University of California, Davis, compared the records of people who
traded frequently versus people who traded less often. They found that, on
average, the most active traders had the poorest results, while those who traded
the least earned the highest returns2. The implication here is that people who
might have suffered the most from myopic loss aversion and acted upon it by
selling stocks and did less well much less well than those who were able to
resist the natural impulse and instead hold their ground.
Power of compounding: Holding a stock for a period as long as 10 years
allows the power of compounding to play out. Thus, over the longer term,
winning stocks are rewarded disproportionately as compared to losing stocks
whose weight naturally reduces in the portfolio. The power of this powerful whilst compounding results in a
phenomenon is explained in detail in Section 2 of this note. natural rebalancing of winners and
Neutralising the negatives of noise: Unlike investing in indices (which losers in a portfolio
are typically constructed on simplistic measures such as market capitalization),
the CCP uses a disciplined framework (sales growth of more than 10% per
annum and ROCE of more than 15% every year for 10 consecutive years) to
filter stocks from the listed universe of stocks with a market capitalization of
more than Rs1bn. In this process, the CCP is indifferent to specific sectors,
flavor-of-the-day themes and approaches such as chasing earnings and
By its design, the CCP is indifferent
momentum. This filter results in the CCP having a healthy mix of large cap
to short-term trends, sectors,
stocks (with large franchises and steady-state growth) and mid/small cap stocks
themes, and approaches such as
(which have have greater growth potential but are at a more nascent stage of
chasing earnings or momentum
their development).

The CCPs indifference to short term trends (such as economic booms & busts,
sector-specific fads, performance blips in companies, etc) allows it to
outperform the benchmark consistently. In other words, the benchmark
responds to or reflects - every trend, fad and fashion in the market whilst the
CCP is indifferent to these trends, fads and fashions which are typically
temporary in nature - and even out over the longer term.

The CCP is also an effective way of killing noise that interferes with the
investment process. In Investing The Last Liberal Art, Hagstrom also talks
about the chaotic environment, with so much rumor, miscalculation, and bad
information swirling. Such an environment was labelled noise by Fischer
Black, the inventor of the Black-Scholes formula. Hagstrom goes on to say:

Is there a solution for noise in the market? Can we distinguish between noise
prices and fundamental prices? The obvious answer is to know the economic
fundamentals of your investment so you can rightly observe when prices have
moved above or below your companys intrinsic value. It is the same lesson
preached by Ben Graham and Warren Buffett. But all too often, deep-rooted
psychological issues outweigh this commonsensical advice. It is easy to say we
should ignore noise in the market but quite another thing to master the
psychological effects of that noise. What investors need is a process that allows

1
Terence Odean, Do investors trade too much? American economic review (December
1999)

2
Terence Odean and Brad Barber, "Trading Is Hazardous to Your Wealth: The Common
Stock Investment Performance of Individual Investors," Journal of Finance 55, no. 2 (April
2000)

November 17, 2014 Ambit Capital Pvt. Ltd. Page 5


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them to reduce the noise, which then makes it easier to make rational
decisions.
As an example, we highlight how, over the long term, Hero MotoCorps stock
price has withstood short-term news such as disappointing monthly sales,
aggressive competitive launches as well as the split with Honda.
Exhibit 1: Hero MotoCorps stock price has compounded at an impressive 18%
CAGR over 2004-2014

3,200
2,800
2,400
2,000
1,600
1,200
800
400
-
Jun-04

Jun-05

Jun-06

Jun-07

Jun-08

Jun-09

Jun-10

Jun-11

Jun-12

Jun-13

Jun-14
Hero Motocorp

Source: Bloomberg, Ambit Capital research

The chart shown above highlights that over the past ten years there are two
extended time periods when Heros share price has not gone anywhere 2006
to 2008 and then 2010 to 2013. In fact for five of the past ten years, Heros
share price has been flat. And yet, in the remaining half of the past decade,
Hero has performed so well that the 10-year CAGR of the share price is 18%.
At its simplest, this is why the Coffee Can concept works once you have
identified a great franchise and you have the ability to hold on it for a long
period time, there is no point trying to be too precise about timing your entry
or your exit. As soon as we try to time that entry/exit, we run the risk of noise
rather than fundamentals driving our investment decisions.

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Section 2: Constructing the Indian Coffee


Can Portfolio
It would be fun and interesting (and maybe very rewarding) to have someone come
along and give the idea a try.
Closing lines of Robert Kirbys 1984 article on the Coffee Can Portfolio

A: Simple filters to screen stocks for the Coffee Can


Leaving aside stocks from the Financial Services sector for now, we use three filters
to screen listed Indian companies. These filters are as simple as they are difficult to
achieve. We believe these filters should be a bare minimum for investors looking to
stay invested in a business for ten years.
Market cap of more than Rs1bn: India is the least liquid among the worlds We filter stocks with a market cap
15 largest equity markets. Thus, for institutional clients, we believe a market of more than Rs1bn on the basis of
capitalisation of Rs1bn is the bare minimum to take a position in the stock. 10% sales growth and 15% RoCE
Stocks smaller than this tend to be illiquid and create high impact costs. for every year for ten consecutive
years
Return on Capital Employed of 15% every year for consecutive years:
1 Why RoCE? Whilst management teams have a natural desire for growth
and scale, growth creates shareholder value only when the returns on
capital exceed the cost of capital. RoCE, therefore, is of utmost importance
in assessing a firms performance. Our empirical work on share price
performance of Indian companies also supports the primacy of RoCE as a
share price driver (see the exhibit below).
Exhibit 2: RoCE drives share prices (This chart is based on data from March 2002 to
March 2012)
Median outperformance - Ten-year CAGR
12.0%
12%
10% 9.0%
8%
5.9%
6%
4%
2%
0%
Superior revenue growth Superior RoCE Superior on both

Source: Bloomberg, Ambit Capital research. Note* The universe in 2002s BSE200 firms (ex-financials);
performance relative to the BSE200 Index.

2 Why 15%? We use 15% as a minimum because we believe that if a


company can deliver 15% RoCE over ten consecutive years, it is a proxy for
the annual returns investors can expect from that stock. We also believe
this is well justified theoretically by adding the risk-free rate (8.5% in India)
and an equity risk premium of 6.5%. This equity risk premium, in turn, is
calculated as 4% (the long-term US equity risk premium) plus 250bps to
account for Indias rating (BBB- as per S&P). Note further that over the past
20 years and 30 years, the Sensex has delivered returns of around 16% 15% RoCE also works as a proxy
per annum, thus validating our point of view that 15% is a sensible figure for the annual returns that
to use as a minimum RoCE criteria. investors can expect from that
stock
Revenue growth of 10% every year: Indias nominal GDP growth rate has
averaged 15% over the past ten years. A firm operating in India should,
therefore, be able to deliver sales growth of at least 15% per annum. However,
very few listed companies, only 5 out of the ~1,100 firms run under our
Very few listed companies manage
screen, have managed to achieve this! Therefore, we reduce this filter rate
to achieve a sales growth that
modestly to 10% i.e. we look for companies that have delivered revenue
matches Indias nominal GDP
growth of 10% per annum every year for ten consecutive years.
growth rate of 15%

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In summary, our filters for non-Financial Services stocks focus on a minimum


market cap of Rs1bn, RoCE of 15% for more over ten consecutive years and sales
growth of 10% for more over ten consecutive years. In effect, a healthy RoCE
protects the franchise and sales growth expands the franchise.
For Financial Services stocks, we keep the market-cap limit of Rs1bn and modify
the filters on RoE and sales growth as follows:

ROE of 15%: We prefer Return on Equity over Return on Assets because this is
a fairer measure of the banks ability to generate higher income efficiently on
a given equity capital base over time.
Loan growth of 15%: We believe loan growth of 15% is an indication of a We use RoE of 15% and loan
banks ability to lend over business cycles. Strong lenders ride the down-cycle growth of 15% as filters to screen
better, as their competitive advantages surrounding their origination, appraisal BFSI stocks
and collection process ensure that they continue their growth profitably either
through market share improvements or upping the ante in sectors which are
resilient during a downturn.

B: Back-testing proves the strength of the Coffee Can


Portfolio
Using the above filters, we ran back-tests of the CCP over five ten-year periods
(2000-2010, 2001-2011, 2002-2012, 2003-2013 and 2004-2014) on the listed
companies universe (ex-BFSI). We also ran a separate large-cap CCP consisting
solely of stocks that were in the top-100 stocks by market cap (at the start of the
period under consideration).
We also stress-tested these results for maximum drawdown (52.4% from December
2007 to December 2008) to test the strength of the portfolio during periods of
market volatility:
First, we calculate CAGR returns for each of the five portfolios and the Sensex;
Next we compute the maximum drawdown (defined as the maximum drop in
cumulative returns from the highest peak to the lowest subsequent trough);
and
Finally, we calculate the risk-adjusted returns; i.e. returns in excess of the risk-
free rate (assumed at 8%, comparable to the currently prevailing 8.2% ten-year
Government Bond Yield) divided by the absolute maximum drawdown.
The results are revealing and have been summarised as under: Five iterations of the CCP that we
Each of the five CCPs has outperformed the benchmark Sensex. rerun from 2000 to 2014 prove the
Even the sub-set of the CCP i.e. the large-cap version of the CCP has been potential of the CCP to beat the
successful in beating the Sensex. benchmark
On a risk-adjusted basis (where we define risk as maximum drawdown), all the
iterations of the all-cap portfolio as well as the large-cap portfolio have
outperformed the Sensex.
The large-cap versions of the CCP have outperformed the all-cap
versions in 2000, 2001, 2002 and 2003 (both on an absolute basis as well as
risk-adjusted basis). The 2004 version of the all-cap version of the CCP
however, has delivered superior returns compared with the 2004 large-cap
version.
Exhibit 3: Back-testing results of five iterations of the Coffee Can Portfolio
All-cap All-cap Annualised Large-cap Large-cap Annualised
Kick-off year*
CCP (start) CCP (end) ten-year return CCP (start) CCP (end) ten-year return
2000 400 1,870 16.7% 300 1,549 17.8%
2001 400 2,855 21.7% 200 1,661 23.6%
2002 600 3,427 19.0% 400 2,346 19.3%
2003 700 6,585 25.1% 500 5,680 27.5%
2004 800 12,469 31.6% 400 2,138 18.2%
Source: Bloomberg, Capitaline, Ambit Capital research. Note: Portfolio at start denotes an equal allocation of Rs100 for the stocks qualifying to be in the CCP for
that year. *The Portfolio kicks off on 30th June of every year.

We summarise the results of each of the five iterations in the next five pages.

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Period 1: 2000-2010 (2.6% alpha relative to the


Sensex; 16.7% per annum absolute returns)
All-cap portfolio stocks: NIIT, Cipla, Hero MotoCorp, Swaraj Engines
Large-cap portfolio stocks: NIIT, Cipla, Hero MotoCorp
In the first iteration, both versions of the CCP outperformed the benchmark. Whilst
the all-cap CCP delivered a 16.7% return (2.6% alpha to the Sensex), the large-cap
portfolio delivered a 17.8% return (3.8% alpha to the Sensex). The maximum
drawdown for both the portfolios in this period was also less than the maximum
drawdown for the Sensex.
Exhibit 4: First iteration summary
2000-2010* All-cap CCP Large-cap CCP Sensex
CAGR returns 16.7% 17.8% 14.1%
Maximum drawdown** -42.2% -39.2% -52.4%
Excess returns 0.21 0.25 0.12
Source: Bloomberg, Ambit Capital research. Note: * Portfolio kicks off on 30 June 2000. Excess returns have
been calculated as returns in excess of risk-free rate (assumed to be 8%) divided by absolute maximum
drawdown. Maximum drawdown is defined as the maximum drop in cumulative returns from the highest peak
to the lowest subsequent trough. ** Maximum drawdown took place from June 2000 to March 2003 for the
all-cap CCP and large-cap CCP, and from December 2007 to December 2008 for the Sensex.

The four stocks that constituted the first iteration of the Coffee Can Portfolio
consisted of one IT, one pharma company, and two companies from the
automobile/auto-ancillary sector. These were NIIT, Cipla, Hero MotoCorp and
Swaraj Engines. The star performer during this period was Hero MotoCorp which
proved to be a ten-bagger whilst NIITs stock price collapsed 78% in this period.
Exhibit 5: Portfolio performance during the first iteration Hero Motocorp was the star
Share price FY2000-10 performer, whilst NIIT was the
Company Price at Start (Rsbn) Price at End (Rsbn)
CAGR PAT CAGR
laggard in Period 1
Date from/to 30/06/2000 30/06/2010
NIIT 295 65 -14.1% -11%
Cipla 69 339 17.2% 23%
Hero Moto 198 2,049 26.4% 27%
Swaraj Engines 118 378 12.4% 7%
Portfolio* 400 1,870 16.7%
Sensex 4,749 17,701 14.1%
Source: Bloomberg, Ambit Capital research. Note: *Portfolio price at start of Rs400 denotes an equal
allocation of Rs100 in each stock at the start of the period. Portfolio price at end is the value of the portfolio
at the end of the period. Thus, for this period, the value of the portfolio rose from Rs400 at the start to
Rs1,870 at the end.

Exhibit 6: Hero MotoCorp rose exponentially whilst NIIT collapsed in 2000-2010

2,000 (Rs)
1,800
1,600
1,400
1,200 Swaraj Engines

1,000 Hero Moto


800 Cipla
600 NIIT
400
200
-
Value at start Value at end

Source: Bloomberg, Ambit Capital research. Note: Value at start denotes an equal allocation of Rs100 in each
stock at the start of the period. Value at end is the value of each stock at the end of the period. Thus, for this
period, the value of the portfolio rose from Rs400 at the start to Rs1,870 at the end.

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Period 2: 2001-2011 (3.2% alpha relative to the


Sensex; 21.7% per annum absolute returns)
All-cap portfolio stocks: Cipla, Hero MotoCorp, Apollo Hospitals and Roofit
Inds
Large-cap portfolio stocks: Cipla, Hero MotoCorp
Both versions of the CCP performed well during the second iteration as well,
beating the Sensex. The large-cap CCP gave an impressive alpha of 5.1% for this
iteration. The portfolio was remarkably steady as compared to the maximum
drawdown, delivering an excess return of 0.36x-0.39x.
Exhibit 7: Second iteration summary
2001-2011* All-cap CCP Large-cap CCP Sensex
CAGR returns 21.7% 23.6% 18.5%
Maximum drawdown** -37.7% -39.7% -52.4%
Excess returns 0.36 0.39 0.20
Source: Bloomberg, Ambit Capital research. Note: * Portfolio kicks off on 29 June 2001. Excess returns have
been calculated as returns in excess of risk-free rate (assumed to be 8%) divided by absolute maximum
drawdown. Maximum drawdown is defined as the maximum drop in cumulative returns from the highest peak
to the lowest subsequent trough. ** Maximum drawdown took place from June 2001 to March 2003 for the
all-cap CCP and large-cap CCP, and from December 2007 to December 2008 for the Sensex.

During the second iteration as well, the Coffee Can Portfolio consisted of four
stocks with two repeats (Cipla and Hero MotoCorp from the Period 1) and two new
entries (Apollo Hospitals and Roofit Industries). During this period, note that one of
the stocks in the portfolio, Roofit Industries, was delisted during 2001-2011.
Despite this, the portfolio performed admirably. The star performer yet again was
Hero MotoCorp whose stock price rose 13x whilst Cipla was a laggard at 3.6x.
Exhibit 8: Portfolio performance during the second iteration Apollo Hospitals came close to
Company
Price at Start Price at End Share FY01-11 matching Hero MotoCorps stellar
(Rsbn) (Rsbn) price CAGR PAT CAGR performance in Period 2
Date from/to 29/06/2001 29/06/2011
Cipla 91 331 13.7% 19%
Hero Motocorp 145 1,877 29.2% 22%
Apollo Hospitals 40 478 28.1% 19%
Roofit Inds. 106 NA NA NA
Portfolio* 400 2,855 21.7%
Sensex 3,457 18,846 18.5%
Source: Bloomberg, Ambit Capital research. Note: NA - Data for Roofit is not available because the company
was delisted during this period. *Portfolio price at start of Rs400 denotes an equal allocation of Rs100 in each
stock at the start of the period. Portfolio price at end is the value of the portfolio at the end of the period.
Thus, for this period, the value of the portfolio rose from Rs400 at the start to Rs2,855 at the end.

Exhibit 9: Hero MotoCorp continued its stellar performance during 2001-2011

3,000 (Rs)

2,500

2,000 Roofit Inds


1,500 Apollo Hosp

1,000 Hero Moto

500 Cipla

-
Value at start Value at end

Source: Bloomberg, Ambit Capital research. Note: Data for Roofit Ind is not available from FY03 onwards.
Value at start denotes an equal allocation of Rs100 in each stock at the start of the period. Value at end is the
value of each stock at the end of the period. Thus, for this period, the value of the portfolio rose from Rs400 at
the start to Rs2,855 at the end.

November 17, 2014 Ambit Capital Pvt. Ltd. Page 10


Strategy

Period 3: 2002-2012 (0.7% alpha to the Sensex;


19.0% per annum absolute returns)
All-cap portfolio stocks: Infosys, Hero MotoCorp, Cipla, Container
Corporation of India, Gujarat Gas, Aurobindo Pharma
Large-cap portfolio stocks: Infosys, Hero MotoCorp, Cipla, Container
Corporation of India
The third iteration has the weakest results for the five periods under our analysis.
During this period, the Coffee Can delivered an alpha of just 0.7%, even as the
large-cap Coffee Can delivered a higher alpha of 1.0%. However, both versions of
the Coffee Can performed well during maximum drawdown, delivering excess
returns of 0.26-0.32x, higher than the first iteration for the portfolio.
Exhibit 10: Third iteration summary Despite a comparatively weaker
2002-2012* All-cap CCP Large-cap CCP Sensex performance, the CCP still beat the
CAGR returns 19.0% 19.3% 18.3% Sensex in Period 3
Maximum drawdown** -42.6% -35.1% -52.4%
Excess returns 0.26 0.32 0.20
Source: Bloomberg, Ambit Capital research. Note: * Portfolio kicks off on 28 June 2002. Excess returns have
been calculated as returns in excess of risk-free rate (assumed to be 8%) divided by absolute maximum
drawdown. Maximum drawdown is defined as the maximum drop in cumulative returns from the highest peak
to the lowest subsequent trough. ** Maximum drawdown took place from June 2007 to December 2008 for
the all-cap CCP, from December 2006 to December 2008 for the large-cap CCP and from December 2007 to
December 2008 for the Sensex.

The Coffee Can Portfolio expanded in size during the third iteration. Compared
with the four stocks in the first two iterations, six stocks qualified to be part of the
Coffee Can Portfolio in the third iteration. Cipla and Hero MotoCorp were
repeated yet again whilst the other four stocks were Infosys, Container
Corporation, Gujarat Gas and Aurobindo Pharma.
Exhibit 11: Portfolio performance during the third iteration
Share price FY02-12 PAT
Company Price at Start (Rsbn) Price at End (Rsbn)
CAGR CAGR
Date from/to 28/06/2002 29/06/2012
Infosys 411 2,509 19.8% 26%
Hero Motocorp 308 2,149 21.4% 17%
Cipla 75 317 15.4% 18%
Container Corpn. 99 613 20.0% 13%
Guj Gas Company 50 310 20.0% 17%
Aurobindo Pharma 24 110 16.6% 11%
Portfolio* 600 3,427 19.0%
Sensex 3,245 17,430 18.3%
Source: Bloomberg, Ambit Capital research. Note: *Portfolio price at start of Rs600 denotes an equal
allocation of Rs100 in each stock at the start of the period. Portfolio price at end is the value of the portfolio
at the end of the period. Thus, for this period, the value of the portfolio rose from Rs600 at the start to
Rs3,427 at the end.
Exhibit 12: During this phase, the portfolio broadly tracked the Sensex
4,000 (Rs)
Auro Pharma
3,000 Guj Gas

2,000 ConCor
Cipla
1,000 Hero Moto

- Infosys
Value at start Value at end
Source: Bloomberg, Ambit Capital research. Note: Value at start denotes an equal allocation of Rs100 in each
stock at the start of the period. Value at end is the value of each stock at the end of the period. Thus, for this
period, the value of the portfolio rose from Rs600 at the start to Rs3,427 at the end.

November 17, 2014 Ambit Capital Pvt. Ltd. Page 11


Strategy

Period 4: 2003-2013 (6.8% alpha to the Sensex;


25.1% per annum absolute returns)
All-cap portfolio stocks: Infosys, Hero MotoCorp, Cipla, Sun Pharma,
Container Corporation of India, Gujarat Gas, Aurobindo Pharma
Large-cap portfolio stocks: Infosys, Hero MotoCorp, Cipla, Container
Corporation of India, Sun Pharma
Whilst the all-cap version of the Portfolio delivered a 7% alpha, the large-cap
version gave a higher 9% in the fourth iteration. In a maximum drawdown
situation, both versions remained steady and beat the Sensex, thereby delivering
excess returns of 0.60-.0.88x.
Exhibit 13: Fourth iteration summary Sun Pharma powered through to
2003-2013* All-cap CCP Large-cap CCP Sensex be the best-performing stock in
CAGR returns 25.1% 27.5% 18.3% Period 4
Maximum drawdown** -28.4% -22.2% -52.4%
Excess returns 0.60 0.88 0.20
Source: Bloomberg, Ambit Capital research. Note: * Portfolio kicks off on 30 June 2003. Excess returns have
been calculated as returns in excess of risk-free rate (assumed to be 8%) divided by absolute maximum
drawdown. Maximum drawdown is defined as the maximum drop in cumulative returns from the highest peak
to the lowest subsequent trough. ** Maximum drawdown took place from June 2007 to December 2008 for
the all-cap CCP, from September 2008 to December 2008 for the large-cap CCP and from December 2007 to
December 2008 for the Sensex.

Barring one addition (Sun Pharma), the Coffee Can Portfolio in its fourth iteration
was the same as that in the third iteration. Performance was driven by Sun
Pharmas stellar performance. However, the performance of the large-cap version
was better than the all-cap version of the Coffee Can Portfolio.
Exhibit 14: Portfolio performance during the fourth iteration
Share price FY03-13 PAT
Company Price at Start (Rsbn) Price at End (Rsbn)
CAGR CAGR
Date from/to 30/06/2003 30/06/2013
Infosys 408 2,499 19.9% 26%
Cipla 60 392 20.6% 20%
Hero Motocorp 253 1,663 20.7% 13%
Sun Pharma.Inds. 16 506 41.1% 30%
Container Corpn. 115 719 20.1% 13%
Aurobindo Pharma 37 181 17.1% 14%
Guj Gas Company 45 191 15.4% 18%
Portfolio* 700 6,585 25.1%
Sensex 3,607 19,396 18.3%
Source: Bloomberg, Ambit Capital research. Note: *Portfolio price at start of Rs700 denotes an equal
allocation of Rs100 in each stock at the start of the period. Portfolio price at end is the value of the portfolio
at the end of the period. Thus, for this period, the value of the portfolio rose from Rs700 at the start to
Rs6,585 at the end.
Exhibit 15: Sun Pharma delivered a stellar performance in Period 4

7,000 (Rs)
6,000 GujGas

5,000 Auro Pharma

4,000 ConCor
Sun Pharma
3,000
Hero Moto
2,000
Cipla
1,000
Infosys
-
Value at start Value at end
Source: Bloomberg, Ambit Capital research. Note: Value at start denotes an equal allocation of Rs100 in each
stock at the start of the period. Value at end is the value of each stock at the end of the period. Thus, for this
period, the value of the portfolio rose from Rs700 at the start to Rs6,585 at the end.

November 17, 2014 Ambit Capital Pvt. Ltd. Page 12


Strategy

Period 5: 2004-2014 (13% alpha to the Sensex; 31.6%


per annum absolute returns)
All-cap portfolio stocks: Infosys, Hero MotoCorp, Cipla, Container
Corporation of India, Gujarat Gas, Alok Industries, Munjal Showa and
Havells India
Large-cap portfolio stocks: Infosys, Hero MotoCorp, Cipla, Container
Corporation of India
The most recent iteration of our Coffee Can Portfolio has yielded the best results,
with a whopping 13% alpha over the Sensex. The Portfolio was equally divided
between large-caps and mid-caps/small-caps. The higher share of the mid-
caps/small-caps was instrumental in delivering higher alpha during this period.
Exhibit 16: Fifth iteration summary The CCP delivered its highest
2004-2014* All-cap CCP Large-cap CCP Sensex alpha, a whopping 13% to the
CAGR returns 31.6% 18.2% 18.1% Sensex, in Period 5
Maximum drawdown** -64.1% -33.9% -52.4%
Excess returns 0.37 0.30 0.19
Source: Bloomberg, Ambit Capital research. Note: * Portfolio kicks off on 30 June 2004. Excess returns have
been calculated as returns in excess of risk-free rate (assumed to be 8%) divided by absolute maximum
drawdown. Maximum drawdown is defined as the maximum drop in cumulative returns from the highest peak
to the lowest subsequent trough. ** Maximum drawdown took place from December 2007 to December 2008
for the all-cap CCP, from December 2006 to December 2008 for the large-cap CCP and from December
2007 to December 2008 for the Sensex.

The price performance among mid-cap/small-cap stocks was extreme: Havells


stock price rose 89x whilst Alok Industries stock price fell 70% by the end of the
iteration. As a result, the price performance of the large-cap portfolio (18% CAGR)
lagged that of the all-cap portfolio (32% CAGR).
Exhibit 17: Portfolio performance during the fifth iteration Extreme price performance among
Company Price at Start (Rsbn)Price at End (Rsbn)
Share price FY04-14 PAT mid-cap/small-cap stocks sets
CAGR CAGR apart Period 5 from the earlier
Date from/to 30/06/2004 30/06/2014
iterations of the CCP
Infosys 690 3,256 16.8% 24%
Hero Motocorp 508 2,635 17.9% 11%
Cipla 85 438 17.8% 16%
Container Corpn. 188 1,189 20.2% 10%
Guj Gas Company 43 415 25.4% 17%
Alok Inds. 45 14 -10.9% 19%
Munjal Showa 34 142 15.4% 12%
Havells India 3 235 56.7% 37%
Portfolio* 800 12,469 31.6%
Sensex 4,795 25,414 18.1%
Source: Bloomberg, Ambit Capital research. Note: * Portfolio price at start of Rs800 denotes an equal
allocation of Rs100 in each stock at the start of the period. Portfolio price at end is the value of the portfolio
at the end of the period. Thus, for this period, the value of the portfolio rose from Rs800 at the start to
Rs12,469 at the end.

Exhibit 18: Havells India was the star performer in Period 5


14,000 (Rs)
Havells
12,000
Munjal Showa
10,000
Alok Inds.
8,000
6,000 Guj Gas
4,000 ConCor
2,000 Cipla
- Hero Moto
Value at start Value at end
Source: Bloomberg, Ambit Capital research. Note: Value at start denotes an equal allocation of Rs100 in each
stock at the start of the period. Value at end is the value of each stock at the end of the period. Thus, for this
period, the value of the portfolio rose from Rs800 at the start to Rs12,469 at the end.

November 17, 2014 Ambit Capital Pvt. Ltd. Page 13


Strategy

Section 3: How the Coffee Can is different


to our other portfolio constructs
"Forever is a good holding period."
Warren Buffett
Over the years, we have developed various portfolio constructions for investors
based on their outlook. We have summarised these below:
Good and Clean (G&C): We began this portfolio in 2011. The G&C portfolios
Our G&C portfolio is ideal for
are constructed each quarter using: (i) a battery of financial tests based on the
investors aiming to beat
previous fiscal years data; and (ii) our forensic accounting model. Each G&C
benchmarks over the short term
portfolio typically runs for a quarter before we revise it. Thus, we believe this
portfolio is ideal for investors aiming to beat benchmarks over the short term. The
methodology is:
Within each sector, we first identify firms that do well on our greatness and
accounting frameworks;
We then overlay our macro outlook and valuation filters to identify sectors
which are placed favourably; and
The sector-level champions from step 1 (for the sectors identified in step 2)
constitute our G&C portfolio.
Please click here for the latest G&C portfolio published on 25th July 2014.
Ten-bagger: We first unveiled this portfolio - built using our greatness
framework - in January 2012. [See our 19th January 2012 note - Tomorrows ten
baggers - for the framework behind this construct note; click here for the note.]
This framework studies a firms structural strengths by focusing not on absolutes
but rather on improvements over a period of time and the consistency of those
improvements.
A basic sketch of the underlying process behind the making of a great firm has The ten-bagger framework studies
been recaptured in Exhibit 19 below. a firm's structural strength and
Exhibit 19: The greatness framework
focuses on improvements over a
period of time and the consistency
of those improvements
a. Investment (gross b. Conversion of
block) investment to sales
(asset turnover, sales)

c. Pricing discipline
(PBIT margin)

e. Cash generation d. Balance sheet


(CFO) discipline (D/E, cash
ratio)

Source: Ambit Capital Research

We rank the BSE500 universe of firms (excluding financial services firms and
excluding firms with insufficient data) on our greatness score, which consists of six
equally weighted headingsinvestments, conversion to sales, pricing discipline,
balance sheet discipline, cash generation and EPS improvement, and return ratio
improvement. Under each of these six headings, we further look at two kinds of
improvements:

November 17, 2014 Ambit Capital Pvt. Ltd. Page 14


Strategy

Percentage improvements in performance over FY11-13 vs FY08-10; and


Consistency in performance over FY08-13 i.e. improvements adjusted for
underlying volatility in financial data
A complete list of factors that are considered whilst quantifying greatness has been
mentioned in Exhibit 20 below.
Exhibit 20: Factors used for quantifying greatness
Head Criteria
1 Investments a. Above median gross block increase (FY11-13 over FY08-10)*
b. Above median gross block increase to standard deviation
2 Conversion to sales a. Improvement in asset turnover (FY11-13 over FY08-10)*
b. Positive improvement in asset turnover adjusted for standard
deviation
c. Above median sales increase (FY11-13 over FY08-10)*
d. Above median sales increase to standard deviation
3 Pricing discipline a. Above median PBIT margin increase (FY11-13 over FY08-10)*
b. Above median PBIT margin increase to standard deviation
4 Balance sheet discipline a. Below median debt-equity decline (FY11-13 over FY08-10)*
b. Below median debt-equity decline to standard deviation
c. Above median cash ratio increase (FY11-13 over FY08-10)*
d. Above median cash ratio increase to standard deviation
Cash generation and
5 a. Above median CFO increase (FY11-13 over FY08-10)*
PAT improvement
b. Above median CFO increase to standard deviation
c. Above median adj. PAT increase (FY11-13 over FY08-10)*
d. Above median adj. PAT increase to standard deviation
6 Return ratio improvement a. Improvement in RoE (FY11-13 over FY08-10)*
b. Positive improvement in RoE adjusted for standard deviation
c. Improvement in RoCE (FY11-13 over FY08-10)*
d. Positive improvement in RoCE adjusted for standard deviation
Source: Ambit Capital research; Note: * Rather than comparing one annual endpoint to another annual
endpoint (say, FY08 to FY13), we prefer to average the data out over FY08-10 and compare that to the
averaged data from FY11-13. This gives a more consistent picture of performance (as opposed to simply
comparing FY08 to FY13).
The ten-bagger portfolio focuses on structural plays that are financially strong firms
(with credible management teams) and remain consistent performers on a cross-
cyclical basis. Companies are identified based on their relentless improvement in
financial performance over long periods of time (usually, six years). This portfolio is
ideal for conventional buy-and-hold investors with a 1-3 year horizon.
Adding the Coffee Can for long-term investors with a ten-year outlook
To this suite of portfolios, we now add the Coffee Can which is ideal for long-term
investors with a ten-year outlook. In the table below, we summarise our portfolio
recommendations for investors.
Exhibit 21: Our suite of Portfolios for investors looking to invest in India The Coffee Can Portfolio is ideal
Recommended Ambit Returns over recommended time for long-term investors with a ten-
Type of Investor
Portfolio period
year outlook
The 12 instalments of our Good &
Short-term investor with quarterly Clean portfolio have delivered a
Good and Clean Portfolio
performance focus staggering 27.7% alpha over the past
four years
The three iterations of our ten-baggers
Conventional buy-and-hold
Ten-bagger portfolio portfolios have generated over 30%
investor with 1-3 year horizon
alpha over the past three years
Long-term investor with ten-year Average alpha of 5% over five ten-year
Coffee Can Portfolio
outlook iterations
Source: Ambit Capital Research

In the next section, we discuss the rationale used for constructing the India Coffee
Can Portfolio.

November 17, 2014 Ambit Capital Pvt. Ltd. Page 15


Strategy

Section 4: Todays Coffee Can for 2014-


2024
Great investing requires a lot of delayed gratification.
Charlie Munger
Introducing the candidates for Coffee Can 2014-2024
We screened Indias listed universe of non-BFSI stocks with a market capitalisation
of more than Rs1bn that have delivered 10% sales growth and 15% RoCE every
year for the past year. The list is mentioned in the exhibit below.
Exhibit 22: The short list of firms with superior RoCEs and superior sales growth The Coffee Can 2014-2024
over the last ten years (FY05-14) features some of Indias most-
Share price performance (CAGR successful franchises as well as the
Superior on both Market cap (Rsbn)* FY15 P/E
relative to Sensex)
most-compelling investment
ITC 11% 2,966 28.8
themes
HCL Tech 12% 1,134 15.5
Asian Paints 19% 622 42.3
Godrej Consumer 21% 319 37.2
Marico 17% 205 37.2
Berger Paints 19% 126 40.6
Page Ind 47% 109 53.9
IPCA 14% 80 18.4
Balkrishna Inds. 18% 80 12.2
Astral Polytechnik# 53% 41 38.9
eClerx 30% 39 15.3
V-Guard Inds. 33% 27 26.5
Mayur Uniquoters 76% 19 26.4
Insecticide India 23% 10 18.3
Source: Bloomberg, Capitaline, Ambit Capital research; Note: Share price performance has been measured
over a ten-year period (i.e. March 2004 to March 2014). In case of firms with a shorter listing history, the
performance has been measured over the shorter period (not less than 5 years). * Market cap as on 31
October 2014. Page Inds, eClerx, V-Guard and Insecticides India were not listed throughout the ten-year
period and hence the financial data used is based on Draft Red Herring Prospectus as provided by Capitaline,
for periods prior to their IPOs. # Comments withheld on this company due to internal policy.

We note that the stocks identified by this filter are the same as those in our Cusp We add four large-cap stocks (ITC,
of Greatness report (published on 14th July 2014), as we had used the same filter HCL Tech, Asian Paints, and GCPL)
and the same time period in that report as well. However, whilst that report to our Cusp of Greatness list of
focused on mid-cap/small-cap stocks, in this report we add commentary on the stocks
first four large-cap names (ITC, HCL Tech, Asian Paints and Godrej Consumer). As
before, we exclude Insecticides India from this report due to its size.
We run a similar filter for Indias listed BFSI stocks with a market cap of more than Only 1% of stocks in the BFSI
Rs1bn and: (a) an RoE of 15%; and (b) loan growth of 15% for every consecutive universe meet our screening filters
year for the past ten years. In a universe of 507 firms, a meagre 5 firms managed
to pass this test (representing a small fraction of ~1%). This handful of firms is
shown in the exhibit below.
Exhibit 23: The very short list of BFSI firms with superior RoEs and superior loan
book growth (over FY05-14)
Share price performance
Market cap (Rsbn)* FY15 P/E
(CAGR relative to Sensex)
HDFC Bank 11% 2,185 20.5
Axis Bank 11% 1,087 15.4
Gruh Finance 34% 85 39.8
City Union Bank 12% 49 12.9
Dewan Housing 11% 49 7.9
Source: Bloomberg, Capitaline, Ambit Capital research; Note: Share price performance has been measured
over the last ten-year period (i.e. March 2004 to March 2014). * Market cap as on 31 October 2014.

From the above list, we exclude Dewan Housing due to our standard G&C filters.

November 17, 2014 Ambit Capital Pvt. Ltd. Page 16


Strategy

An introduction to our stock-specific sections


In the rest of this note, we provide two-pagers for 16 of the 19 stocks (excluding
Insecticides India, Dewan Housing and Astral Polytechnik) that have made the cut
in our filters and constitute the CCP for India. Our notes focus on two critical points
that lie at the heart of any business.
Any investor taking a ten-year call must be convinced that the underlying business
has strong competitive advantages and the management has a proven ability to
take judicious capital allocation decisions:
Sustainable competitive advantages allow firms to add more value than For a ten-year view, investors must
their rivals and to continue doing so over long periods of time. In our May
convince themselves that the
2014 thematic, The Great Indian Midcaps, we applied John Kays Innovation, underlying businesses have strong
Brands and Reputation, Architecture, Strategic Asset (IBAS) framework to
competitive advantages
analyse six firms. In the company-specific sections that follow, we have given
our view on the underlying sustainable competitive advantage for the
company. We also provide our view on what the company is doing to
strengthen the franchise further.
Capital allocation: Capital allocation is perhaps the single most-important and their managements have a
decision through which a management adds value to the firms shareholders. proven track record of judicious
More importantly, effective capital allocation is not just about growing but capital allocation
growing profitably. Thus, in the stock-specific sections that follow, we provide
our views on the capital allocation skills of the companies as well as 10-year
pie charts on how the companies (excluding the Financial Services companies)
have raised and spent capital in the past decade. We believe these 10-year
pie-charts capture the essence of the cash-generating abilities of the business
and the managements discretion in utilising these cashflows.
Exhibit 24: Summary of key attributes for stocks in the CCP
Competitive Accounting Capital Treatment of Succession
Company Overall Comments
advantages quality allocation minorities planning
Strong cigarette franchise; risk around
ITC
succession planning
Strong capital allocation and sales and delivery
HCL Tech
metrics; AMBER flag in treatment of minorities
Strong brand franchise, capital misallocation
Asian Paints
risk
Godrej Risk around capital allocation, lack of focus on
Consumer RoCE
Marico Strong brand equity, RoCE back in focus
Sustainable low cost advantage and high focus
IPCA
on brand equity and cash flow generation
Maintained #2 position, RoCE improvement on
Berger Paints
the cards
Market leader, strong growth visibility,
Page Ind
aspirational brand recall
Strong player in OHT tyre exports with
Balkrishna Inds.
sustainable low cost advantage
eClerx Niche KPO with high-quality client base
Strong franchise in south India along with
strong capital allocation; high competition in
V-Guard Inds.
the sector and redundancy of core product
remains a risk
Mayur
Building scale, harnessing high-value clients
Uniquoters
Clear long-term vision and execution track
HDFC Bank
record
Strong diversified franchise, risk around
Axis Bank
succession planning
HDFC parentage and deep hinterland
Gruh Finance
penetration are competitive advantages.
City Union Conservative lender with established niche -
Bank Stable RoA and RoE
Source: Ambit Capital research; Note: = rating of 4/4; = rating of 3/ 4 and so on.

November 17, 2014 Ambit Capital Pvt. Ltd. Page 17


Strategy

Why valuations are NOT a consideration whilst constructing the CCP?


Whilst we acknowledge that from a tactical standpoint valuations play an
important role in shaping short-term returns, we have not paid any heed to
valuations whilst constructing the CCP. So why are we ignoring valuations?
Over long periods, it is how the underlying fundamentals evolve for the firm that
plays a more important role in determining returns than the beginning of the Our research shows that
period valuation itself. Put another way, over long periods how a business underlying fundamentals play a
fundamentally performs is overwhelmingly the most important driver of investment more important role in determining
returns (so much so that the valuation at the time of entering the stock becomes stock price returns than the
almost irrelevant). This point can be understood better with the following exhibits beginning of the period valuation
that plot ten-year returns over FY02-12 vs FY02 valuations as measured by P/B itself
and P/E at the beginning of the period (in 2002).
Exhibit 25: Valuation impact on long-term returns - P/B

60%

40%
R2 = 0.000
FY02-FY12 returns

20%

0%
- 5.0 10.0 15.0 20.0 25.0
-20%

-40%

-60%

-80%
FY02 Price to Book

Source: Ambit Capital research; Note: FY02-12 returns here are stock returns relative to the Sensex

The value of the R-squared makes the story self-explanatory. A zero for this value
indicates that the beginning-of-period valuations do not play any meaningful role
in explaining stock returns over the next ten years. This holds true for both P/B (as
seen in Exhibit 25 above) and P/E (as seen in Exhibit 26 below) as the measures of
valuation.
Exhibit 26: Valuation impact on long-term returns - P/E

60%

40%
R2 = 0.001
FY02-FY12 returns

20%

0%
- 10.0 20.0 30.0 40.0 50.0 60.0 70.0
-20%

-40%

-60%

-80%
FY02 Price to Earnings

Source: Ambit Capital research; Note: FY02-12 returns here are stock returns relative to the Sensex

Asian Paints, Berger Paints, and HDFC Bank are three stocks from our conventional
coverage on which we have a SELL stance and which are in the portfolio. So why
are these stocks in the CCP? Firstly, all the three stocks are what we would call
valuation-driven SELLs. As valuations have NOT been considered whilst creating
the CCP, these SELL stances are not relevant from the point of the view of the CCP.
Secondly, since our conventional coverage is based on a one-year horizon whereas
the CCP is based on a ten-year horizon, we have not paid heed to these valuation-
driven SELLs whilst constructing the CCP.

November 17, 2014 Ambit Capital Pvt. Ltd. Page 18


ITC
NOT RATED
COMPANY INSIGHT ITC IN EQUITY November 17, 2014

ITC has the largest cigarette business in India with >70% market share.
Consumer
It has leveraged its wide distribution and cash flows from the cigarettes
business to rapidly expand and fund investments in its non-cigarette
FMCG business, which has become the third-largest FMCG business in Recommendation
India. However, there are concerns around succession planning once Mcap (bn): `2,838/US$46.2
the current Chairman Mr. YC Deveshwar (YCD) retires in 2017, as the 3M ADV (mn): `1,962/US$31.9
next line of command lacks experience and will have only 5-6 years to CMP: `774
go before retirement from the point they get the top job. TP (12 mths): NA
Largest tobacco company on course to become an FMCG major Upside (%): NA
ITC has been present in India for over 100 years and is Indias largest tobacco
company with >70% market share in the branded Indian cigarette market. In Flags
the last 15 years, the company has diversified its revenue base beyond Accounting: GREEN
cigarettes (~62% of gross sales) and it now derives ~17%/11%/7% of its gross Predictability: GREEN
from the FMCG/Agri products/Paper business. ITC commands ~10% market Treatment of Minorities: AMBER
share in the biscuit market and along with its personal care business it is
among the top-three FMCG companies in India. Catalysts
ITCs moats are its distribution network and cash-rich tobacco business
Consistent profitability by ITCs non-
On the back of its strong cigarette franchise, ITC has developed the most cigarette FMCG
expansive distribution network in India. It has leveraged this distribution muscle
to rapidly scale up its FMCG business. The high cash generation of its tobacco Softening/predictability of
business is ITCs second critical competitive advantage. ITCs tobacco business Governments stance on cigarette
taxation
has ~70% operating profit margins and 100%+ RoCE with strong cash flows
which fund ITCs investments in its other nascent businesses.
Higher dividend payout ratio indicative of prudent capital allocation Performance
About 47% of ITCs operating cash flows have been deployed towards dividend
30,000 390
payouts, with an increase in the payout ratio from 28% a decade ago to over
28,000
60% consistently over FY08-13. The capex needed for the non-cigarettes FMCG 360
26,000
business has NOT been material (4% of CFO over FY04-13) despite this 24,000 330
division being 30% of HULs size and the third-largest non-cigarettes FMCG 22,000
business in India. Cash accumulation remains strong on the balance sheet at 20,000 300
`15bn annually leaving further headroom to increase dividend payout.
Nov 13

Jan 14

Mar 14

May 14

Sep 14
Jul 14

Nov 14
Succession planning post YCD is an area of concern
Mr. YC Deveshwar (YCD) is due to retire in 2017. He has been the sole driver
of value creation over the past 15 years. Neither of the next level of senior Sensex ITC (RHS)
management (Mr. Grant, Mr. Anand and Mr. Dhobale) will be under 60 years
of age in 2017 and hence they will not have more than 5-7 years of tenure as Source: Bloomberg, Ambit Capital research
Chairman. ITC has never appointed an external recruit as its Chairman in the
past. As a result, we have concerns around succession planning.
Diversifying beyond cigarettes to drive next leg of growth
Having realised the limited growth potential of its tobacco business, ITC has
been investing heavily to grow its non-cigarette FMCG business. With continued
brand investments and strong innovation focus, the FMCG business should
become the driver of growth for ITC in the near future. In its tobacco business,
ITC continues to invest in new product development and improving product
quality and packaging to retain its leadership in cigarettes.
Key financials
Year to March FY10 FY11 FY12 FY13 FY14
Analyst Details
Operating income (` mn) 181,532 211,676 247,984 296,056 328,826
Rakshit Ranjan, CFA
EBITDA (` mn) 60,740 71,534 84,996 103,318 120,988
+91 22 3043 3201
EBITDA Margin (%) 33.5% 33.8% 34.3% 34.9% 36.8% rakshitranjan@ambitcapital.com
Adjusted EPS (`) 5.1 6.3 7.8 9.4 11.1 Ritesh Vaidya
RoCE (%) 27.6% 31.6% 34.0% 34.5% 34.3% +91 22 3043 3246
P/E (x) 71.4 58.1 47.1 39.1 33.0 riteshvaidya@ambitcapital.com
Source: Company, Ambit Capital research
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
ITC

Exhibit 1: Except for FY07-09, sales growth and profitability Exhibit 2: Return ratios have also improved continuously
has been consistent for ITC over the last decade except for FY07-09
Revenues (Rs. Bn) EBITDA margin (%) RHS 38.0% RoCE RoE
350 38.0%
37.0%
300
36.0% 34.0%
250 35.0%
200 34.0% 30.0%
33.0%
150
32.0% 26.0%
100
31.0%
50 30.0%
22.0%
FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14
Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 3: Cash generated from operations for ITC (FY04- Exhibit 4: ..has been utilised to increase dividend payout
14) and enter new business segments
Interest Purchase of Increase in
received, Investments cash and
Proceeds 13% - cash
from Subsidiaries equivalents
shares, & Others 5%
6%

Dividend
paid
Net Capex 51%
CFO, 81% (incl.
acquisitions
)
30% Interest
paid
Source: Company, Ambit Capital research 1% Capital research
Source: Company, Ambit

Exhibit 5: ITC P/E band chart for the last 7 years Exhibit 6: ITC EV/EBITDA band chart for the last 7 years

400 32x 400 12x


350 29x 350 10.5
26x
300 300 9x
23x
7.5x
250 20x 250
200 200 6x

150 150
100 100
50 50
Nov-07

Nov-08

Nov-09

Nov-10

Nov-11

Nov-12

Nov-13

Nov-14

Nov-07

Nov-08

Nov-09

Nov-10

Nov-11

Nov-12

Nov-13

Nov-14

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

November 17, 2014 Ambit Capital Pvt. Ltd. Page 20


ITC

Exhibit 7: Explanation for our flags


Segment Score Comments
The company in the past has shown high levels of cash conversion and efficient working capital management
Accounting GREEN
and is professionally managed.
The company has high pricing power in its cigarettes business and has consistently seen margin expansion in the
Predictability GREEN
segment. Further, FMCG losses are declining and hence, visibility of earnings is very high.
Before YCD took charge of ITC in 1996, ITC had a chequered past with several failed diversification attempts
into power and global commodity trading. In 1991, ITC started a financial services venture which was finally sold
Treatment of to ICICI in 1995, as the business suffered large-scale write-offs. Under YCD, ITC made failed attempts at
AMBER
minorities entering the golf course development/accessories and greeting cards business. Since 2002 however, ITC has
been more prudent with its capital allocation. It increased its dividend payout to over 60% and has looked to
expand its FMCG franchise.
Source: Bloomberg, Ambit Capital research

Exhibit 8: ITC Three-quarters of the pie on our STAR* framework


Criteria Score (%) Comment
ITCs cigarette business with >70% market share lends it two competitive
advantages: a) ITC has developed the largest pan-India distribution network, b)
Competitive advantage
The high cash generation from the cigarette business allows it to fund
investments in its nascent businesses
The company in the past has shown high levels of cash conversion and efficient
Accounting quality
working capital management and is professionally managed.
ITC under the leadership of Mr. YC Deveshwar (YCD) has been very prudent with
its capital allocation. It has increased its dividend payout ratio and invested in
Capital allocation growing businesses for the future like its non-cigarette FMCG business.
However, with concerns around succession planning we remain sceptical around
the capital allocation abilities of the next leader.
ITC is not part of Ambits Connected Companies Index and does not appear to
Centrality of political connect
rely on political connections.
Before YCD took charge of ITC in 1996, ITC had a chequered past with several
failed diversification attempts into power and global commodity trading. In
1991, ITC started a financial services venture which was finally sold to ICICI in
1995, as the business suffered large-scale write-offs. Under YCD, ITC made
Treatment of minorities
failed attempts at entering the golf course development/accessories and
greeting cards business. Since 2002 however, ITC has been more prudent with
its capital allocation. It increased its dividend payout to over 60% and has looked
to expand its FMCG franchise.
YCD is due to retire in 2017. The next successor if appointed from the next level
of senior management would then get only 5-6 year tenure. ITC hasnt till date
Succession planning appointed an external recruit as its Chairman. Due to this lack of visibility
around the next Chairman we remain cautious around ITCs succession planning
ability.
Total (%)

Source: Company, Ambit Capital research. Note: = rating of 4/4; = rating of 3/ 4 and so on. *STAR: Sustainable and Tenable Advantages Rank.

November 17, 2014 Ambit Capital Pvt. Ltd. Page 21


ITC

Balance sheet (` mn)


Year to March FY10 FY11 FY12 FY13 FY14
Shareholders' equity 3,818 7,738 7,818 7,902 7,953
Reserves & surpluses 136,826 151,795 180,101 214,977 254,667
Total networth 140,644 159,533 187,919 222,879 262,620
Debt 1,077 992 791 664 511
Deferred tax liability 7,850 8,019 8,727 12,037 12,970
Total liabilities 149,571 168,543 197,437 235,580 276,101
Gross block 119,679 127,658 141,444 169,444 185,449
Net block 81,424 83,451 90,992 112,093 120,127
CWIP 10,090 13,334 22,768 14,878 22,957
Investments 57,269 55,547 63,166 70,603 88,234
Cash & equivalents 11,263 22,432 28,189 36,150 32,894
Debtors 8,581 9,076 9,824 11,633 21,654
Inventory 45,491 52,675 56,378 66,002 73,595
Loans & advances 13,061 14,181 17,154 22,401 22,635
Other current assets 2,884 3,475 1,412 6,414 10,197
Total current assets 81,279 101,840 112,957 142,600 160,975
Current liabilities 34,991 44,579 48,334 52,007 56,246
Provisions 45,499 41,048 44,111 52,588 59,947
Total current liabilities 80,491 85,628 92,445 104,595 116,193
Net current assets 788 16,212 20,512 38,006 44,782
Total assets 149,571 168,543 197,437 235,580 276,101
Source: Company, Ambit Capital research

Income statement (` mn)


Year to March FY10 FY11 FY12 FY13 FY14
Operating income 181,532 211,676 247,984 296,056 328,826
% growth 16.3% 16.6% 17.2% 19.4% 11.1%
Operating expenditure 120,792 140,141 162,988 192,738 207,838
EBITDA 60,740 71,534 84,996 103,318 120,988
% growth 25.0% 17.8% 18.8% 21.6% 17.1%
Depreciation 6,087 6,560 6,985 7,956 8,999
EBIT 54,653 64,975 78,011 95,363 111,989
Interest expenditure 648 481 779 865 30
Non-operating income 6,147 8,188 11,744 12,344 14,632
Adjusted PBT 60,153 72,682 88,975 106,842 126,591
Tax 19,543 22,806 27,352 32,658 38,739
Adjusted PAT/ Net profit 40,610 49,876 61,624 74,184 87,852
% growth 24.4% 22.8% 23.6% 20.4% 18.4%
Extraordinaries - - - - -
Reported PAT / Net profit 40,610 49,876 61,624 74,184 87,852
Minority Interest - 1 2 3 4
Share of associates 1,072 303 958 1,897 1,062
Adjusted Consolidated net
41,682 50,178 62,579 76,078 88,910
profit
Source: Company, Ambit Capital research

November 17, 2014 Ambit Capital Pvt. Ltd. Page 22


ITC

Cash flow statement (` mn)


Year to March FY10 FY11 FY12 FY13 FY14
EBIT 60,801 73,163 89,755 107,707 126,621
Depreciation 6,087 6,560 6,985 7,956 8,999
Others (1,469) (313) (71) 2,445 903
Tax (19,543) (22,806) (27,352) (32,658) (38,739)
(Incr) / decr in net working capital 34,725 (4,254) 1,457 (9,533) (10,033)
Cash flow from operations 80,601 52,351 70,775 75,916 87,751
Capex (12,741) (11,831) (23,960) (21,168) (25,113)
(Incr) / decr in investments (28,891) 1,722 (7,619) (7,437) (17,631)
Others - - - - -
Cash flow from investments (41,633) (10,109) (31,579) (28,605) (42,744)
Net borrowings (698) (85) (201) (127) (153)
Interest paid (648) (481) (779) (865) (30)
Dividend paid (44,517) (40,015) (34,524) (41,561) (55,452)
Others 7,848 9,509 2,066 3,202 7,371
Cash flow from financing (38,015) (31,072) (33,439) (39,351) (48,263)
Net change in cash 953 11,170 5,757 7,961 (3,256)
Closing cash balance 11,263 22,432 28,189 36,150 32,894
Free cash flow 67,859 40,520 46,815 54,749 62,638
Source: Company, Ambit Capital research

Ratio analysis
Year to March FY10 FY11 FY12 FY13 FY14
Gross margin (%) 61.4% 61.6% 61.2% 59.2% 60.0%
EBITDA margin (%) 33.5% 33.8% 34.3% 34.9% 36.8%
EBIT margin (%) 33.5% 34.6% 36.2% 36.4% 38.5%
Net profit margin (%) 22.4% 23.6% 24.8% 25.1% 26.7%
Dividend payout ratio (%) 94.0% 69.0% 57.7% 55.9% 54.0%
Net debt: equity (x) (0.1) (0.1) (0.1) (0.2) (0.1)
Working capital turnover (x) 1.1 19.1 21.2 32.7 34.5
Fixed assets turnover (x) 1.5 1.7 1.8 1.7 1.8
RoCE (%) 27.6% 31.6% 34.0% 34.5% 34.3%
RoE (%) 29.2% 33.2% 35.5% 36.1% 36.2%
Source: Company, Ambit Capital research

Valuation parameters
Year to March FY10 FY11 FY12 FY13 FY14
EPS (`) 5.1 6.3 7.8 9.4 11.1
Diluted EPS (`) 5.1 6.3 7.8 9.4 11.1
Book value per share (`) 18.0 20.4 24.0 28.5 33.6
Dividend per share (`) 4.8 4.4 4.5 5.3 6.0
P/E (x) 71.4 58.1 47.1 39.1 33.0
P/BV (x) 20.4 18.0 15.3 12.9 10.9
EV/EBITDA (x) 45.8 39.4 33.4 27.7 23.9
Price/Sales (x) 7.7 13.4 11.6 9.8 8.9
Source: Company, Ambit Capital research

November 17, 2014 Ambit Capital Pvt. Ltd. Page 23


ITC

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November 17, 2014 Ambit Capital Pvt. Ltd. Page 24


HDFC Bank
SELL
COMPANY INSIGHT HDFCB IN EQUITY November 17, 2014

Since its inception 20 years ago, HDFC Bank has focused on building a
BFSI
granular retail franchise on both sides of the balance sheet and
maintained a conservative approach on the balance of growth and
asset quality. With a stable management team at the helm, the bank Recommendation
will seek to further penetrate its retail offering on a pan-India basis Mcap (bn): `2,246/US$36.5
and fill the gaps in its corporate banking offering as the economic 3M ADV (mn): `1,807/US$29.4
climate improves. CMP: `930
Numero uno in Indian banking TP (12 mths): `717
Established in 1994, HDFC Bank is Indias second-largest private sector bank Downside (%): 23
by assets. It has ~4% market share in total bank credit. Retail loans form 48%
of the banks loans, with a market-leading presence in most retail product Flags
categories. Its corporate business has focussed on working capital financing. Accounting: GREEN
Predictability: GREEN
Strong retail franchise, stable management
Treatment of Minorities: GREEN
HDFC Bank has differentiated itself from its peers through its strategic focus on
a granular low-cost franchise along with a market-leading position in most
Catalysts
retail products since its early years. Over the last 20 years, the bank has taken
a longer-term approach of protecting its margins and asset quality rather than Increase in retail loan growth in
pursuing near-term aggressive growth. Superior margins and controlled asset FY16-17
quality have driven healthy average RoEs of ~18% in the last ten years. A Capital infusion bolstering tier-1
stable management team and use of technology from the beginning have
Better income traction in corporate
further facilitated the banks consistent performance. banking
Acquirer in the past, recent focus on rapid organic scale-up
A superior profitability has allowed HDFCB to sustain its capital position mainly
Performance
through internal profit generation without undue dilution of its shareholders.
150
The bank has made two acquisitions (Times Bank in 1999 and Centurion Bank 140
of Punjab in 2008) in the past, but its recent focus has been on organic growth 130
through accelerated branch network expansion on a pan-India basis. 120
110
High visibility on succession planning 100
Aditya Puri (MD & CEO) has led HDFC Bank since its inception, and following 90
Feb-14
Nov-13

Dec-13

Mar-14

May-14

Aug-14

Sep-14
Jun-14

Nov-14
the recent clarification by the RBI that about 70 years is the maximum age limit
for private bank CEOs, Mr Puri can serve for another six years. Many members
in the banks senior management team have been with bank for more than ten Sensex HDFC Bank
years and hence offer ample options for succession planning.
Source: Bloomberg, Ambit Capital research
Ripe for growth in retail; filling the gaps on corporate banking
HDFC Bank has expanded its branch network by ~70% in the last three years
with a pan-India focus, putting in place drivers to further strengthen its retail
banking business. There have been few gaps in corporate banking, investment
banking and project finance, and the bank has selectively hired and built teams
in recent years to play a bigger role, as the economic recovery sets in the next
12-18 months.

Analyst Details
Key financials standalone (` mn)
Year to March FY13 FY14 FY15E FY16E FY17E Pankaj Agarwal, CFA
+91 22 3043 3206
Net Revenues (` mn) 226,637 264,023 308,909 369,385 445,045
pankajagarwal@ambitcapital.com
Operating Profits (` mn) 114,276 143,601 172,667 210,711 260,447
Ravi Singh
Net Profits (` mn) 67,263 84,784 99,920 122,192 147,975
+91 22 3043 3181
EPS (`) 28.3 35.3 41.4 50.6 61.3 ravisingh@ambitcapital.com
RoA (%) 1.82% 1.90% 1.86% 1.87% 1.83%
Aadesh Mehta, CFA
RoE (%) 20.3% 21.3% 21.1% 21.9% 22.2% +91 22 3043 3239
P/B (x) 6.11 5.13 4.39 3.70 3.09 aadeshmehta@ambitcapital.com
Source: Company, Ambit Capital research

Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
HDFC Bank

Exhibit 1: Loan growth and net interest margins Exhibit 2: RoA and RoE

Loan growth - LHS Net interest margins - RHS RoA - LHS RoE - RHS

60% 6.0% 2.00% 25%


1.80%
50% 5.0% 1.60% 20%
40% 4.0% 1.40%
1.20% 15%
30% 3.0% 1.00%
0.80% 10%
20% 2.0% 0.60%
10% 1.0% 0.40% 5%
0.20%
0% 0.0% 0.00% 0%
FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14
Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 3: Gross NPA and provision coverage ratio Exhibit 4: Tier-1 capital ratio
Gross NPA - LHS Provision coverage ratio - RHS Tier-1 capital ratio
2.5% 100% 14%
12%
2.0% 80%
10%
1.5% 60% 8%

13.3%

12.2%

11.8%
11.6%

11.1%
10.6%
10.3%
6%
9.6%

1.0% 40%
8.6%

4% 8.6%
0.5% 20%
2%
0.0% 0% 0%
FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14
Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 5: Forward P/E evolution over the long term Exhibit 6: Forward P/B evolution over the long term

1200 24.0x 1000 4.11x

20.4x 3.56x
1000 800
16.8x 3.02x
800
600
600
400
400
200
200

0 0
Dec-06

Dec-07

Dec-08

Dec-09

Dec-10

Dec-11

Dec-12

Dec-13
Jun-06

Jun-07

Jun-08

Jun-09

Jun-10

Jun-11

Jun-12

Jun-13

Jun-14
Jun-06
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
Jun-12
Dec-12
Jun-13
Dec-13
Jun-14

Source: Company, Ambit Capital research; Trading band=Mean+1SD Source: Company, Ambit Capital research; Trading band=Mean+1SD

November 17, 2014 Ambit Capital Pvt. Ltd. Page 26


HDFC Bank

Exhibit 7: Explanation for our flags


Segment Score Comments
We did not find anything unusual in the accounts of the bank and we believe that the reported numbers are a
Accounting GREEN true reflection of the profitability of the bank. The bank has made adequate disclosures of its ESOP accounting
and revenue recognition norms.
The banks conservative approach towards growth and asset quality imparts sufficient predictability to its
Predictability GREEN
financial performance.
Treatment of We did not find any material example of unfair treatment to minorities. Lately, the banks sensible approach
GREEN
minorities towards a possible merger with HDFC Ltd has been comforting from the investors point of view.
Source: Bloomberg, Ambit Capital research

Exhibit 8: HDFC Bank - Three quarters of the pie on our STAR* framework
Criteria Score (%) Comment
Competitive advantage Strong retail franchise with long-term track record
Accounting quality Nothing unusual in the accounting
Capital allocation An acquirer in the past, but recent focus on organic build-up
HDFC Bank is not part of Ambits Connected Companies Index and does not appear to have
Centrality of political connect
any questionable political connections.
Treatment of minorities Sensible approach towards a possible merger with HDFC a positive
Succession planning Stable management team with high visibility on continuity
Total (%)

Source: Company, Ambit Capital research. Note: = rating of 4/4; = rating of 3/ 4 and so on. *STAR: Sustainable and Tenable Advantages Rank.

November 17, 2014 Ambit Capital Pvt. Ltd. Page 27


HDFC Bank

Balance sheet
Year to March (Rs mn) FY13 FY14 FY15E FY16E FY17E
Networth 362,141 434,786 511,543 606,053 726,345
Deposits 2,962,470 3,673,375 4,371,316 5,464,145 6,830,181
Borrowings 330,066 394,390 448,203 525,224 619,773
Other Liabilities 348,642 413,444 496,133 620,166 775,208
Total Liabilities 4,003,319 4,915,995 5,827,195 7,215,588 8,951,507
Cash & Balances with RBI & Banks 272,802 395,836 467,999 552,796 650,576
Investments 1,116,136 1,209,511 1,487,744 1,835,232 2,274,449
Advances 2,397,206 3,030,003 3,540,536 4,419,965 5,523,514
Other Assets 217,175 280,645 330,916 407,595 502,969
Total Assets 4,003,319 4,915,995 5,827,195 7,215,588 8,951,507
Source: Company, Ambit Capital research

Income statement
Year to March (Rs mn) FY13 FY14 FY15E FY16E FY17E
Interest Income 350,649 411,355 485,526 572,496 681,486
Interest Expense 192,538 226,529 268,599 311,728 364,832
Net Interest Income 158,111 184,826 216,927 260,768 316,654
Total Non-Interest Income 68,526 79,196 91,982 108,617 128,391
Total Income 226,637 264,023 308,909 369,385 445,045
Total Operating Expenses 112,361 120,422 136,242 158,674 184,598
Employees expenses 39,654 41,790 45,815 51,970 58,687
Other Operating Expenses 72,707 78,632 90,427 106,704 125,911
Pre Provisioning Profits 114,276 143,601 172,667 210,711 260,447
Provisions 16,764 15,873 22,412 26,963 37,928
PBT 97,512 127,728 150,255 183,748 222,519
Tax 30,249 42,944 50,335 61,556 74,544
PAT 67,263 84,784 99,920 122,192 147,975
Source: Company, Ambit Capital research

Key ratios
Year to March FY13 FY14 FY15E FY16E FY17E
Credit-Deposit (%) 80.9% 82.5% 81.0% 80.9% 80.9%
CASA ratio (%) 47.7% 45.6% 45.3% 45.0% 44.7%
Cost/Income ratio (%) 49.6% 45.6% 44.1% 43.0% 41.5%
Gross NPA (` mn) 23,346 29,893 38,475 39,069 54,518
Gross NPA (%) 0.97% 0.98% 1.08% 0.88% 0.98%
Net NPA (` mn) 4,690 8,200 13,466 13,674 19,081
Net NPA (%) 0.20% 0.27% 0.38% 0.31% 0.35%
Provision coverage (%) 79.9% 72.6% 65.0% 65.0% 65.0%
NIMs (%) 4.57% 4.39% 4.28% 4.24% 4.15%
Tier-1 capital ratio (%) 11.1% 11.8% 10.7% 10.3% 10.1%
Source: Company, Ambit Capital research

November 17, 2014 Ambit Capital Pvt. Ltd. Page 28


HDFC Bank

Du-pont analysis
Year to March FY13 FY14 FY15E FY16E FY17E
NII / Assets (%) 4.3% 4.1% 4.0% 4.0% 3.9%
Other income / Assets (%) 1.9% 1.8% 1.7% 1.7% 1.6%
Total Income / Assets (%) 6.1% 5.9% 5.8% 5.7% 5.5%
Cost to Assets (%) 3.0% 2.7% 2.5% 2.4% 2.3%
PPP / Assets (%) 3.1% 3.2% 3.2% 3.2% 3.2%
Provisions / Assets (%) 0.5% 0.4% 0.4% 0.4% 0.5%
PBT / Assets (%) 2.6% 2.9% 2.8% 2.8% 2.8%
Tax Rate (%) 31.0% 33.6% 33.5% 33.5% 33.5%
ROA (%) 1.8% 1.9% 1.9% 1.9% 1.8%
Leverage 11.2 11.2 11.4 11.7 12.1
ROE (%) 20.3% 21.3% 21.1% 21.9% 22.2%
Source: Company, Ambit Capital research

Valuation
Year to March FY13 FY14 FY15E FY16E FY17E
EPS (Rs) 28.3 35.3 41.4 50.6 61.3
EPS growth (%) 28% 25% 17% 22% 21%
BVPS (Rs) 152.2 181.2 211.9 251.0 300.9
P/E (x) 32.9 26.3 22.5 18.4 15.2
P/BV (x) 6.11 5.13 4.39 3.70 3.09
Source: Company, Ambit Capital research

November 17, 2014 Ambit Capital Pvt. Ltd. Page 29


HDFC Bank

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November 17, 2014 Ambit Capital Pvt. Ltd. Page 30


HCL Technologies
BUY
COMPANY INSIGHT HCLT IN EQUITY November 17, 2014

HCL Tech has built significant competitive advantages around its


Technology
industry-leading IMS practice, an innovative approach to application
management services and highly effective sales & execution that are
unlikely to be replicated by its peers. These competitive advantages, Recommendation
combined with its strong capital allocation track record translate into a Mcap (bn): `1,130/US$18.4
high score on our proprietary CAPOM framework (Rank 2 of 6). 3M ADV (mn): `1,684/US$27.4
CMP: `1,611
Fourth-largest India-listed IT services company
TP (12 mths): `2,110
Established in 1991, HCLT is the fourth-largest Indian-listed IT company in
Upside (%): 31
terms of revenues. It is one of the largest Indian companies in the fast-growing
infrastructure management services (IMS) segment, with 31% share of LTM
revenues amongst the top-6 Indian IT firms. It was one of the earliest movers in Flags
this segment and has built better capabilities than its peers. Accounting: GREEN
Strong competitive advantages built on multiple legs Predictability: AMBER
HCLT has sustainable advantages built through a strong capital allocation track Treatment of Minorities: AMBER
record, optimal portfolio mix with leadership in the fast-growing IMS segment,
good account mining track record and a highly effective sales organisation Catalysts
structure. We believe that these would enable the company to sustain high Acceleration of revenue growth in
return ratios and deliver faster growth than its peers. Indeed, its FY14 RoE of the IMS service line post 3QFY15
36% is second only to TCS amongst the top-5 IT vendors in India. The
Continued acceleration in the
companys return profile has improved steadily in the last three years. software service segment to widen
Among the best capital allocators in Indian IT growth base
HCLT is amongst the best capital allocators in the large-sized IT services pack Consensus expects contraction in
and it also has high RoEs. It has the best capex productivity over the last five EBIT margins over FY14-17 which
years (6.2x vs 4.0x for peers) and has a conservative yet successful acquisition may not happen
strategy. It acquired Axon in 2009 by paying a sum equal to almost half its own
market cap. This enabled the company to win significantly larger deals and a
base in Europe. Whilst HCLTs dividend payout has averaged an impressive 31% Performance
in the last three years, this has room to improve given that the top-5 Indian IT 27,000 2,000
firms have a dividend payout ratio of 35%. Given its strong competitive 24,000 1,700
advantages, we believe that its high return ratios are sustainable. 1,400
21,000
1,100
Due focus on succession planning 18,000 800
The company is led by Mr. Anant Gupta, President and CEO. He replaced Mr. 15,000 500
Vineet Nayar in 2013. HCLT provides formal training (for instance, sponsoring
Oct-13

Feb-14
Apr-14
Aug-13

Dec-13

Aug-14
Jun-14
vertical heads for Harvard Management programmes) and on-the-job training
through additional responsibilities to build a second line of command. The
company also profiles its employees and has created top-10 performer bands Sensex (LHS) HCLT (Rs) (RHS)
and 100 Best CEO Club to groom future leaders. We believe that HCLTs
succession planning is in line with its peers. Source: Bloomberg, Ambit Capital research
What is being done to strengthen the franchise further?
The company is now focused on larger-sized, more complex deals in the IMS
segment. Although HCLT was a laggard in application management services, its
growth is now accelerating due to cross-sell opportunities at IMS clients and
differentiated innovations such as ALT ASM. It is also innovating to improve its
positioning in engineering services outsourcing and digitalisation opportunities.
Key financials (` mn)
Year to March FY13 FY14 FY15E FY16E FY17E
Net Revenues (US$ mn) 4,687 5,360 5,995 6,877 7,849 Analyst Details
EBIT (` bn) 50.4 79.4 86.3 101.5 115.9 Sagar Rastogi
EBIT margins 19.6% 24.1% 23.5% 24.0% 24.0% +91 22 3043 3291
Diluted EPS (`) 56.4 90.2 105.0 123.6 140.8 sagarrastogi@ambitcapital.com
RoE 31.8% 37.2% 33.5% 31.9% 29.3% Utsav Mehta
P/E 28.6 17.8 15.3 13.0 11.4 +91 22 3043 3209
EV/EBITDA 18.2 12.0 11.4 9.7 8.5 utsavmehta@ambitcapital.com
Source: Company, Ambit Capital research

Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
HCL Technologies

Exhibit 1: The companys margins have grown steadily in Exhibit 2: resulting in a marked improvement in
the last three years profitability
6,000 30% 40%

5,000 25% 35%

4,000 20% 30%

3,000 15% 25%

2,000 10% 20%

1,000 5% 15%

- 0% 10%

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14
FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

Revenue(US$mn) (LHS) EBIT margins (RHS) FY14


RoE RoCE
Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 3: Sources of funds over the last ten years (FY04-13) Exhibit 4: Utilisation of funds over the last ten years (FY04-
13)
Equity Debt raised Interest
Other raised Increase in
3% paid
income 4% cash
3%
5% 6%

Investments Dividend
10% paid
33%

Acquisition
17%

CFO Capex
88% 31%

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 5: Forward P/E evolution over the past ten years Exhibit 6: Forward EV/EBITDA evolution over the past ten
years

24 P/E 19 EV/ EBITDA


22
20 17
18 15
16 13
14 11
12 9
10
7
8
6 5
4 3
Oct-05

Oct-06

Oct-07

Oct-08

Oct-09

Oct-10

Oct-11

Oct-12

Oct-13

Oct-14
Apr-05

Apr-06

Apr-07

Apr-08

Apr-09

Apr-10

Apr-11

Apr-12

Apr-13

Apr-14

HCLT EV/ EBITDA 6 yr avg 4 yr avg


HCLT P/E 6 yr avg 4 yr avg
Source: Company, Ambit Capital research Source: Company, Ambit Capital research

November 17, 2014 Ambit Capital Pvt. Ltd. Page 32


HCL Technologies

Exhibit 7: Explanation for our flags


Segment Score Comments
The company has amongst the leanest working capital cycles (receivable + unbilled revenue days at 87, lower
than the average of 91 for top-5 Indian IT vendors), high capex productivity and strong cash flow generation
Accounting GREEN
(five-year FCF/ NI of 66% in line with the peer average). As a result, the company ranks in the top quartile
within the Indian IT universe in our accounting framework.
Unlike certain peers, the company does not provide specific annual or quarterly guidance on revenues or
margins. It also has not indicated medium-term topline growth targets and the associated timeframe. HCLT has
Predictability AMBER significantly surprised in its quarterly EPS with an average surprise of 11% (positive or negative) in the last eight
quarters. Over these eight quarters, the company had a positive surprise on EPS five times. However, its sales
figures have been largely in line with consensus expectations (revenue surprise of 1% over the same period).
Minorities were treated unfairly by HCL Infosystems, a sister concern belonging to the same promoter group as
HCLT. HCL Infosystems, among other things, was a reseller of Nokia phones in India. The promoters reduced
Treatment of their stake in HCL Infosystems from 61% in June 2005 to 57% in December 2005. In February 2006, Nokia
AMBER
minorities decided to set up its own distribution channels in India and as a result, HCL Infosystems market share reduced
to 50% from 100%. This led to the stock price correcting by about 30%. There has been no other such incident
over the past eight years.
Source: Bloomberg, Ambit Capital research

Exhibit 8: HCL Tech Three-quarters of the pie on our STAR* framework


Criteria Score (%) Comment
The company has built strong capabilities in its industry leading IMS practise. Further, it has
Competitive advantage
created differentiated innovations such as ALT ASM.
The company ranks in the top quartile of our accounting framework. It has a lean working
Accounting quality
capital cycle, strong cash flow generation and high capex productivity.
Its capital allocation track record has been good, with a conservative, yet successful acquisition
Capital allocation track record. Further, despite its dividend pay-out ratio is lower than peers, it is an impressive
31% (3 year average).
HCLT is not a part of Ambits Connected Companies Index and does not have any questionable
Centrality of political connect
political connection.
Minority shareholders were treated unfairly by HCL Infosystems, a group company owned by the
Treatment of minorities
same promoters.
The company has not faced issues with top level management transition in the past and has
Succession planning
programmes to create multiple layers of management.
Total (%)

Source: Company, Ambit Capital research. Note: = rating of 4/4; = rating of 3/ 4 and so on. *STAR: Sustainable and Tenable Advantages Rank.

November 17, 2014 Ambit Capital Pvt. Ltd. Page 33


HCL Technologies

Income statement
Year to March (` bn) FY13 FY14 FY15E FY16E FY17E
Revenue (US$ mn) 4,687 5,360 5,995 6,877 7,849
Growth 12.9% 14.4% 11.9% 14.7% 14.1%
Revenue 257.3 329.6 367.8 422.9 482.7
Cost of goods sold 172.4 209.7 236.7 268.1 306.3
SG&A expanses 34.5 40.4 44.8 53.3 60.5
EBITDA 57.1 86.8 91.1 107.4 123.0
Depreciation 6.7 7.3 4.7 5.9 7.1
EBIT 50.4 79.4 86.3 101.5 115.9
EBIT Margin 19.6% 24.1% 23.5% 24.0% 24.0%
Other Income 1.6 (0.2) 8.6 10.2 11.5
PBT 52.0 79.3 94.9 111.8 127.4
Tax 12.2 15.5 20.8 24.6 28.0
Rate (%) 23.5% 19.5% 21.9% 22.0% 22.0%
Reported PAT 39.8 63.8 74.1 87.2 99.3
Diluted Adj EPS 56.4 90.2 105.0 123.6 140.8
DPS 12.0 22.0 32.0 32.0 36.0
Source: Company, Ambit Capital research

Balance sheet
Year to March (` bn) FY13 FY14 FY15E FY16E FY17E
Net Worth 142.9 200.0 242.8 304.1 373.8
Other Liabilities 22.1 22.0 20.6 20.7 20.7
Capital Employed 165.1 222.0 263.4 324.8 394.5
Net Block 76.9 82.6 89.7 97.6 106.0
Other Non-current Assets 23.0 23.5 26.7 26.8 26.8
Curr. Assets 130.7 197.5 239.7 307.0 383.3
Debtors 44.6 56.6 64.8 74.5 85.1
Unbilled revenues 17.1 20.2 25.2 29.0 33.1
Cash & Bank Balance 49.8 99.6 124.5 174.6 232.1
Other Current Assets 19.1 21.2 25.2 29.0 33.1
Current Liab. & Prov 65.4 81.6 92.7 106.6 121.7
Net Current Assets 65.2 115.9 147.0 200.4 261.7
Application of Funds 165.1 222.0 263.4 324.8 394.5
Source: Company, Ambit Capital research

November 17, 2014 Ambit Capital Pvt. Ltd. Page 34


HCL Technologies

Cash flow statement


Year to March (` bn) FY13 FY14 FY15E FY16E FY17E
Net Income 39.8 63.8 74.1 87.2 99.3
Depreciation 6.3 6.8 4.2 5.4 6.6
CF from Operations 46.5 71.1 78.8 93.1 106.4
Cash for Working Capital 4.8 (0.8) (5.8) (3.3) (3.7)
Net Operating CF 51.2 70.3 73.0 89.7 102.7
Net Purchase of FA (5.8) (6.5) (12.8) (13.5) (15.4)
Others (1.6) (6.8) 0.3 (0.0) (0.0)
Net Cash from Invest. (5.1) (12.9) (12.5) (13.5) (15.5)
Proceeds from Equity & other - - - - -
Dividend Payments (9.8) (18.4) (26.4) (26.4) (29.7)
Cash Flow from Fin. (25.2) (6.9) (37.9) (26.4) (29.7)
Free Cash Flow 45.4 63.8 60.3 76.2 87.3
Opening cash balance 25.1 51.6 101.9 124.8 174.6
Net Cash Flow 20.9 50.6 22.6 49.8 57.6
Closing Cash Balance 46.1 102.2 124.5 174.6 232.1
Source: Company, Ambit Capital research

Ratio analysis
FY13 FY14 FY15E FY16E FY17E
Growth
Revenue growth (US$) 12.9% 14.4% 11.9% 14.7% 14.1%
EBIT growth (`) 50.3% 57.6% 8.7% 17.6% 14.1%
EPS growth 62.9% 60.1% 16.4% 17.6% 13.9%
Return Ratios (%)
RoE 32% 37% 33% 32% 29%
RoCE 25% 33% 28% 27% 25%
ROIC 34% 54% 52% 55% 58%
Turnover Ratios
Receivable days (Days) 88 85 89 89 89
Fixed Asset Turnover (x) 3.4 4.1 4.3 4.5 4.7
Source: Company, Ambit Capital research

Valuation parameters
Year to March FY13 FY14 FY15E FY16E FY17E
P/E 28.6 17.8 15.3 13.0 11.4
EV/EBITDA 18.2 12.0 11.4 9.7 8.5
EV/Sales 4.0 3.2 2.8 2.5 2.2
Price/Book Value 8.0 5.7 4.7 3.7 3.0
Dividend Yield (%) 0.7% 1.4% 2.0% 2.0% 2.2%
Source: Company, Ambit Capital research

November 17, 2014 Ambit Capital Pvt. Ltd. Page 35


HCL Technologies

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November 17, 2014 Ambit Capital Pvt. Ltd. Page 36


Axis Bank
BUY
COMPANY INSIGHT AXSB IN EQUITY November 17, 2014

Having built a formidable corporate and commercial franchise in the


BFSI
early years of its existence, Axis Bank has decisively de-risked and
diversified its franchise towards retail in recent years. The bank is a good
example of how professional management at a bank with quasi- Recommendation
government ownership can drive high branch and employee productivity Mcap (bn): `1,126/US$18.3
and build market share. With a diversified balance sheet mix, adequate 3M ADV (mn): `1,618/US$26.3
capital, and strong profitability, the bank is well placed to exploit CMP: `477
opportunities across a wider range of banking vis-a-vis the last cycle. TP (12 mths): `450
Upside (%): -6
Changing with the times
Established in 1994, Axis Bank is Indias third-largest private sector bank by Flags
assets. It has ~3% market share in total bank credit. Whilst the bank has Accounting: GREEN
historically been a leader in corporate and commercial banking, it has also Predictability: GREEN
aggressively built its retail franchise (33% of loans) in the last three years. Treatment of Minorities: GREEN

Solid roots in corporate banking; efficient retail network Catalysts


With leading PSU mutual fund and insurance companies as promoters, Axis Bank
cornered a significant market share in cash management and transaction Sequential decline of stressed asset
businesses and built a formidable corporate and commercial banking franchise accretion over FY15-16
in its early years. Over the years, the bank built a highly diversified branch Increase in loan growth in FY16
network entirely organically, which has led to among the best branch and Turn in the investment cycle to
employee productivity and has facilitated the retail scale-up of the bank. provide fee income opportunities
Investing in organic growth
Unlike its large banking peers, Axis Bank has made investments in organically Performance
creating a wide diversified branch network on a pan-India basis. The bank has 240
also been a pioneer in investing in ATM network, technology and infrastructure. 210
The bank has a leading market share in transaction banking, cash management 180
and loan syndication and has one of the highest productivity (per branch and per 150
employee), which underscore the effectiveness of the banks investments. Axis 120
Bank is well capitalised with tier-1 capital at 12.6%. 90

May-14

Jul-14
Nov-13

Sep-14
Jan-14

Mar-14

Nov-14
Professional approach to succession planning
The current MD & CEO, Shikha Sharma, was appointed in 2009. She is 55 years
old and her second three-year term ends in May 2015. Whilst the RBI now allows Sensex Axis Bank
private bank CEOs to work until the age of 70 years, the board of Axis Bank
began looking for a successor when the last chairman turned 60. In any event,
Source: Bloomberg, Ambit Capital research
succession is likely to take place through a professional process that will consider
both internal and expernal candidates.
Well placed to explore a wider range of opportunities
As corporate asset quality began to come under stress in 2011, Axis Bank was
early to de-risk its balance sheet by lowering the share of corporate loans and
wholesale funding and by building a retail franchise. With a diversified balance
sheet mix now and improving outlook for GDP growth over FY16-17, the bank is
well placed to exploit opportunities across a wider spectrum of banking in
corporate, commercial, retail, rural and international banking. Analyst Details
Key financials standalone (` mn) Pankaj Agarwal, CFA
Year to March FY13 FY14 FY15E FY16E FY17E +91 22 3043 3206
Net Revenues (Rs mn) 162,174 193,569 216,578 253,664 299,001 pankajagarwal@ambitcapital.com
Operating Profits (Rs mn) 93,031 114,561 125,507 147,703 176,709 Ravi Singh
Net Profits (Rs mn) 51,794 62,181 70,061 84,016 102,196 +91 22 3043 3181
EPS (Rs) 22.1 26.5 29.8 35.8 43.5 ravisingh@ambitcapital.com
RoA (%) 1.65% 1.72% 1.70% 1.74% 1.77%
Aadesh Mehta, CFA
RoE (%) 18.5% 17.4% 17.1% 17.8% 18.6%
+91 22 3043 3239
P/B (x) 3.37 2.93 2.55 2.21 1.90
aadeshmehta@ambitcapital.com
Source: Company, Ambit Capital research
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Axis Bank

Exhibit 1: Loan growth and net interest margins Exhibit 2: RoA and RoE
Loan growth - LHS Net interest margins - RHS RoA - LHS RoE - RHS
70% 4.0% 2.00% 25%
60% 3.5%
20%
50% 3.0% 1.50%
2.5% 15%
40%
2.0% 1.00%
30% 10%
1.5%
20% 1.0% 0.50%
5%
10% 0.5%
0% 0.0% 0.00% 0%
FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14
Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 3: Gross NPA and provision coverage ratio Exhibit 4: Tier-1 capital ratio
Gross NPA - LHS
Provision coverage ratio - RHS Tier-1 capital ratio
2.5% 80% 14%
70% 12%
2.0%
60% 10%
1.5% 50%
8%

12.6%
12.2%
40%

11.2%
10.2%
6%

9.4%

9.5%
1.0%

9.3%
8.9%
30%
7.3%

6.4%
20% 4%
0.5%
10% 2%
0.0% 0% 0%
FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14
Source: Company, Ambit Capital research; Source: Company, Ambit Capital research

Exhibit 5: Forward P/E evolution over the long term Exhibit 6: Forward P/B evolution over the long term

18.4x 650 2.97x


600
550
500 13.5x 2.27x
450
400 350 1.56x
300 8.7x
250
200 150
100 50
0 -50
Jun-06
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
Jun-12
Dec-12
Jun-13
Dec-13
Jun-14
Dec-06

Dec-07

Dec-08

Dec-09

Dec-10

Dec-11

Dec-12

Dec-13
Jun-06

Jun-07

Jun-08

Jun-09

Jun-10

Jun-11

Jun-12

Jun-13

Jun-14

Source: Company, Ambit Capital research; Note: Trading band=Mean+1SD Source: Company, Ambit Capital research; Note: Trading band=Mean+1SD

November 17, 2014 Ambit Capital Pvt. Ltd. Page 38


Axis Bank

Exhibit 7: Explanation for our flags


Segment Score Comments
We did not find anything unusual in the accounts of the bank and we believe that the reported numbers are a
Accounting GREEN true reflection of the profitability of the bank. The bank has made adequate disclosures of its ESOP accounting
and revenue recognition norms.
The bank has one of the best track records of long-term profitability. Going forward, whilst credit cost could be
Predictability GREEN
elevated, the bank has built buffers in its operating profitability and capital position.
Treatment of
GREEN We did not find any material example of unfair treatment to minorities.
minorities
Source: Bloomberg, Ambit Capital research

Exhibit 8: Axis Bank - Three quarters of the pie on our STAR* framework
Criteria Score (%) Comment
Competitive advantage Solid roots in corporate banking; efficient retail network
Accounting quality Nothing unusual in the accounting
Capital allocation Efficient investment in building an organic retail network
Axis Bank is not part of Ambits Connected Companies Index and does not appear to have any
Centrality of political connect
questionable political connections.
Treatment of minorities No material instance of unfair treatment of minorities.
Succession planning Likely to be a smooth professional process
Total (%)

Source: Company, Ambit Capital research. Note: = rating of 4/4; = rating of 3/ 4 and so on. *STAR: Sustainable and Tenable Advantages Rank.

November 17, 2014 Ambit Capital Pvt. Ltd. Page 39


Axis Bank

Balance sheet
Year to March (` mn) FY13 FY14 FY15E FY16E FY17E
Networth 331,079 382,205 438,798 507,422 591,202
Deposits 2,526,136 2,809,446 3,230,862 3,812,418 4,613,025
Borrowings 439,511 502,909 593,687 722,352 879,435
Other Liabilities 108,881 137,889 165,467 198,560 238,272
Total Liabilities 3,405,607 3,832,449 4,428,814 5,240,752 6,321,934
Cash & Balances with RBI & Banks 204,350 282,387 333,522 394,108 475,889
Investments 1,137,375 1,135,484 1,267,735 1,495,607 1,803,972
Advances 1,969,660 2,300,668 2,740,395 3,269,846 3,981,787
Other Assets 94,222 113,910 87,162 81,191 60,285
Total Assets 3,405,607 3,832,449 4,428,814 5,240,752 6,321,934
Source: Company, Ambit Capital research

Income statement
Year to March (` mn) FY13 FY14 FY15E FY16E FY17E
Interest Income 271,826 306,412 349,164 404,112 476,371
Interest Expense 175,163 186,895 213,656 243,994 284,958
Net Interest Income 96,663 119,516 135,509 160,118 191,413
Total Non-Interest Income 65,511 74,052 81,069 93,546 107,589
Total Income 162,174 193,569 216,578 253,664 299,001
Total Operating Expenses 69,142 79,008 91,072 105,962 122,293
Employees expenses 23,770 26,013 29,598 34,038 38,142
Other Operating Expenses 45,373 52,994 61,473 71,924 84,151
Pre Provisioning Profits 93,031 114,561 125,507 147,703 176,709
Provisions 17,501 21,070 21,712 23,235 25,308
PBT 75,531 93,490 103,795 124,468 151,401
Tax 23,736 31,310 33,733 40,452 49,205
PAT 51,794 62,181 70,061 84,016 102,196
Source: Company, Ambit Capital research

Ratio analysis
Year to March FY13 FY14 FY15E FY16E FY17E
Credit-Deposit (%) 78.0% 81.9% 84.8% 85.8% 86.3%
CASA ratio (%) 47.0% 47.4% 46.8% 46.3% 45.7%
Cost/Income ratio (%) 42.6% 40.8% 42.1% 41.8% 40.9%
Gross NPA (` mn) 23,934 31,464 33,061 45,916 49,157
Gross NPA (%) 1.20% 1.36% 1.20% 1.39% 1.23%
Net NPA (` mn) 7,041 10,246 9,918 18,366 22,121
Net NPA (%) 0.36% 0.45% 0.36% 0.56% 0.56%
Provision coverage (%) 70.6% 67.4% 70.0% 60.0% 55.0%
NIMs (%) 3.18% 3.40% 3.36% 3.37% 3.35%
Tier-1 capital ratio (%) 12.2% 12.6% 12.5% 12.1% 11.6%
Source: Company, Ambit Capital research

November 17, 2014 Ambit Capital Pvt. Ltd. Page 40


Axis Bank

Du-pont analysis
Year to March FY13 FY14 FY15E FY16E FY17E
NII / Assets (%) 3.1% 3.3% 3.3% 3.3% 3.3%
Other income / Assets (%) 2.1% 2.0% 2.0% 1.9% 1.9%
Total Income / Assets (%) 5.2% 5.3% 5.2% 5.2% 5.2%
Cost to Assets (%) 2.2% 2.2% 2.2% 2.2% 2.1%
PPP / Assets (%) 3.0% 3.2% 3.0% 3.1% 3.1%
Provisions / Assets (%) 0.6% 0.6% 0.5% 0.5% 0.4%
PBT / Assets (%) 2.4% 2.6% 2.5% 2.6% 2.6%
Tax Rate (%) 31.4% 33.5% 32.5% 32.5% 32.5%
ROA (%) 1.7% 1.7% 1.7% 1.7% 1.8%
Leverage 11.2 10.1 10.1 10.2 10.5
ROE (%) 18.5% 17.4% 17.1% 17.8% 18.6%
Source: Company, Ambit Capital research

Valuation parameters
Year to March FY13 FY14 FY15E FY16E FY17E
EPS (`) 22.1 26.5 29.8 35.8 43.5
EPS growth (%) 8% 20% 13% 20% 22%
BVPS (`) 141.5 162.7 186.8 216.0 251.7
P/E (x) 21.5 18.0 16.0 13.3 11.0
P/BV (x) 3.37 2.93 2.55 2.21 1.90
Source: Company, Ambit Capital research

November 17, 2014 Ambit Capital Pvt. Ltd. Page 41


Axis Bank

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November 17, 2014 Ambit Capital Pvt. Ltd. Page 42


Asian Paints
SELL
COMPANY INSIGHT APNT IN EQUITY November 17, 2014

Asian Paints best-in-class supply chain is the biggest driver of its


competitive advantage in the paints sector. This, backed by the high- Consumer Discretionary: Paints
quality middle-management team and scale advantages around
distribution expansion and advertisement spends, will allow the firm to Recommendation
continue gaining market share from its peers in the future. We expect Mcap (bn): `622/US$10.1
18% revenue CAGR and 23% EPS CAGR over FY14-19. However, we see 6M ADV (mn): `835/US$13.6
a risk to its RoCE from capital misallocation through M&A. CMP: `649
Asian Paints controls ~50% share of organised decorative paints TP (12 mths): `559
Founded in 1942, Asian Paints now has ~50% market share in the organised Downside (%): 14
decorative paints industry. Market share gains over the last decade have
resulted in 17% revenue CAGR and 23% earnings CAGR. The firm has Flags
diversified into home dcor, with the recent acquisitions of Sleek (kitchen Accounting: GREEN
fittings) and Ess Ess (bathroom fittings). Predictability: GREEN
Treatment of minorities: AMBER
Distinct sustainable competitive advantages in the paints division
Focus on supply chain efficiencies (including the use of technology to accurately
Catalysts
forecast demand and track the performance of dealers) enables Asian Paints to
outperform its peers around product availability in shops whilst expanding its Capital misallocation on account of
product portfolio and distribution network. Further, thanks to scale-related acquisitions being RoCE-dilutive
benefits around a larger marketing budget, Asian Paints benefits most from
Disclosures on RoCEs of Sleek, Ess
premiumisation of consumer demand. Sustainability of these competitive Ess and the Ethiopian paints business
advantages is driven by retention of a high-quality middle management team.
These advantages have led to RoCEs sustaining at 35% over FY05-14. Announcement of large acquisitions
in India and abroad over the next 1-
Capital misallocation likely to be an overhang on RoCEs 3 years
The firm has stated that the home improvement division is likely to be larger
than the paints division in the longer term, even though home improvement is
a lower RoCE business than paints. Also, the de-listing of Berger International Performance
is intended to help the firm explore more options with regards to international 28,000 700
expansion despite the business generating sub-par returns historically. This 25,500
650
comes at a time when the firm is beginning to generate surplus capital amidst 600
23,000 550
an inter-generational shift amongst promoters. 500
20,500
Transition of control from second to third generation of promoters 450
18,000 400
Members from the second generation of the promoter families stepped down
Oct-13

Jan-14

Apr-14

Jul-14

Oct-14
from executive roles on the board in FY10, leaving the non-promoter
executives - Mr. P.M. Murty and then Mr. K.B.S. Anand - as the CEO & MD.
Since then, several incremental responsibilities have been awarded to the Sensex Asian Paints (RHS)
senior members of the third generation of the promoter family who have a
proven track record in executive roles at Asian Paints. However, there remains Source: Bloomberg, Ambit Capital research
a risk of capital misallocation, as the third generation drives inorganic growth.
Initiatives taken to further strengthen the franchise
Recent initiatives by Asian Paints including installing GPS tracking on vehicles in
the supply chain and bar-coding of all stocks at a depot level should further
improve supply chain efficiency, a key strength which will enable the firm to
sustain its market leadership. Moreover, the firm continues to extend its
consumer connect with upgraded branding initiatives, expansion of experience
stores and expansion of its home solutions network.
Key financials consolidated (` mn)
Year to March FY13 FY14 FY15E FY16E FY17E
Analyst Details
Net Sales 109,707 127,148 148,609 175,904 208,240
EBITDA 17,319 19,979 25,060 30,405 36,665 Rakshit Ranjan, CFA
EBITDA (%) 15.8% 15.7% 16.9% 17.3% 17.6% +91 22 3043 3201
EPS (`) 11.6 12.8 16.5 20.4 24.5 rakshitranjan@ambitcapital.com
RoE (%) 36.3% 33.1% 36.1% 38.0% 38.9% Aditya Bagul
RoCE (%) 35.3% 30.7% 34.7% 36.7% 37.7% +91 22 3043 3264
P/E (x) 55.9 43.5 39.3 31.9 26.4
adityabagul@ambitcapital.com
Source: Company, Ambit Capital research
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Asian Paints

Exhibit 1: EBITDA margins and revenue growth over the Exhibit 2: RoCE and RoE over the last ten years
last ten years

Revenue (Rs mn) EBITDA Margin (% RHS) 60% RoCE RoE (% RHS) 60%
150,000 22%
20% 50% 50%
120,000
18%
90,000 40% 40%
16%
60,000
14% 30% 30%
30,000 12%
- 10% 20% 20%
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14
Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 3: Sources of funds over the last ten years Exhibit 4: Utilisation of funds over the last ten years
Interest Dividend Increase in Debt
received, received, cash and repayment,
Debt 1% 4% cash 3%
raised, 4% equivalents,
9%

Dividend
Purchase of paid, 36%
Investments
, 10%

Net Capex,
38% Interest
paid, 4%
CFO, 92%

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 5: Forward P/E evolution over the past ten years Exhibit 6: Forward P/B evolution over the past ten years
45
40 14
35 12
30 10
25
8
20
15 6
10 4
5
2
-
-
Apr-05
Oct-05
Apr-06
Oct-06
Apr-07
Oct-07
Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
Oct-10
Apr-11
Oct-11
Apr-12
Oct-12
Apr-13
Oct-13
Apr-14
Oct-14

Apr-05
Oct-05
Apr-06
Oct-06
Apr-07
Oct-07
Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
Oct-10
Apr-11
Oct-11
Apr-12
Oct-12
Apr-13
Oct-13
Apr-14
Oct-14

APNT P/E 6 Yr Avg 4 Yr Avg APNT P/B 6 Yr Avg 4 Yr Avg

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

November 17, 2014 Ambit Capital Pvt. Ltd. Page 44


Asian Paints

Exhibit 7: Explanation for our flags


Segment Score Comments
Asian Paints has, in the past, reported high cash conversion, efficient management of working capital and low levels of
Accounting GREEN
loans and advances and contingent liabilities. Consequently, we give a high rating to the quality of its accounting.
Due to a combination of high pricing power, presence across products, categories and SKUs, and predominant exposure to
Predictability GREEN
consumer-activity-led sectors of the economy, we expect earnings to remain stable for Asian Paints.
Our accounting analysis does not raise any major red flags with respect to dubious transactions by promoters. However,
Treatment of
AMBER we raise concerns around Asian Paints capital allocation, as the firm pursues its inorganic growth aspirations with recent
minorities
acquisitions like Sleek and Ess Ess. These along with increasing contribution of overseas business will be RoE-dilutive.
Source: Company, Ambit Capital research

Exhibit 8: Asian Paints Three-quarters of the pie on our STAR* framework


Criteria Score (%) Comment
Competitive advantage Sustained advantage around product portfolio, supply chain and brand recall
Accounting quality Highly cash generative , efficient working capital management
Capital allocation Key risk as new acquisitions and overseas business are RoCE dilutive,
Asian Paints is not part of Ambits Connected Companies Index and does not
Centrality of political connect
appear to have any questionable political connections
Risk of capital misallocation could lead to lower FCF and compressed RoCE in
Treatment of minorities
future
3rd generation promoter family members occupying managerial positions.
Succession planning
However day to day operations run by professional management team.
Total (%)

Source: Company, Ambit Capital research. Note: = rating of 4/4; = rating of 3/ 4 and so on. *STAR: Sustainable and Tenable Advantages Rank.

November 17, 2014 Ambit Capital Pvt. Ltd. Page 45


Asian Paints

Balance sheet (standalone)


Year to March (` mn) FY13 FY14 FY15E FY16E FY17E
Shareholders' equity 959 959 959 959 959
Reserves and surpluses 32,884 39,433 46,281 54,594 64,667
Total net worth 33,843 40,392 47,241 55,553 65,626
Debt 2,377 2,400 2,400 2,400 2,400
Deferred tax liability 1,544 1,878 1,878 1,878 1,878
Total liabilities 39,371 47,131 54,507 63,452 74,285
Gross block 33,851 36,621 38,621 40,621 42,621
Net block 23,967 24,202 23,568 22,795 21,881
CWIP 592 716 1,000 1,000 1,000
Investments (non-current) 2,807 7,212 4,000 4,000 4,000
Cash & cash equivalents 7,520 9,317 19,231 27,978 38,573
Debtors 9,809 11,103 12,214 14,458 17,116
Inventory 18,303 20,699 24,836 29,398 34,802
Loans & advances 3,211 3,767 4,886 5,783 6,846
Total current assets 40,058 46,829 62,796 79,544 99,618
Current liabilities 23,101 26,563 31,350 37,108 43,930
Provisions 5,394 6,679 6,922 8,193 9,699
Total current liabilities 28,495 33,242 38,272 45,301 53,629
Net current assets 11,562 13,587 24,524 34,243 45,989
Total assets 39,371 47,131 54,507 63,452 74,285
Source: Company, Ambit Capital research

Income statement (standalone)


Year to March (` mn) FY13 FY14 FY15E FY16E FY17E
Net Sales 109,707 127,148 148,609 175,904 208,240
% growth 14% 16% 17% 18% 18%
Operating expenditure 92,388 107,169 123,550 145,499 171,575
EBITDA 17,319 19,979 25,060 30,405 36,665
% growth 14% 15% 25% 21% 21%
Depreciation 1,546 2,457 2,633 2,773 2,913
EBIT 16,919 18,864 24,037 29,564 36,071
Interest expenditure 366.5 422.2 336.042 336.042 336.042
Non-operating income 1145.2 1342.2 1610.64 1932.768 2319.3216
Adjusted PBT 16,552 18,442 23,701 29,228 35,735
Tax 4,957 5,715 7,347 9,061 11,435
Adjusted PAT 11,595 12,727 16,353 20,167 24,299
Extraordinary expense/(income) 0 -99.6 0 0 0
Reported PAT after minority interest 11,139 12,188 15,826 19,534 23,540
Source: Company, Ambit Capital research

November 17, 2014 Ambit Capital Pvt. Ltd. Page 46


Asian Paints

Cash flow statement (standalone)


Year to March (` mn) FY13 FY14 FY15E FY16E FY17E
Net profit before tax 16,552 18,442 23,701 29,228 35,735
Depreciation 1,546 2,457 2,633 2,773 2,913
Others (259) (415) 336 336 336
Tax (4,385) (4,802) (7,347) (9,061) (11,435)
(Incr)/decr in net working capital (1,587) (1,682) (1,022) (972) (1,152)
Cash flow from operations 11,868 14,000 18,301 22,305 26,397
Capex (net) (6,367) (2,336) (2,284) (2,000) (2,000)
(Incr)/decr in investments 973 (4,113) 3,212 - -
Other income (expenditure) 551 421 - - -
Cash flow from investments (4,843) (6,029) 928 (2,000) (2,000)
Net borrowings (1,016) (369) - - -
Interest paid (371) (423) (336) (336) (336)
Dividend paid (4,621) (5,467) (8,978) (11,222) (13,467)
Cash flow from financing (6,007) (6,259) (9,314) (11,558) (13,803)
Net change in cash 1,018 1,712 9,915 8,746 10,595
Closing cash balance 7,515 9,267 19,231 27,978 38,573
Free cash flow 5,501 11,664 16,017 20,305 24,397
Source: Company, Ambit Capital research

Ratio analysis (standalone)


Year to March (%) FY13 FY14 FY15E FY16E FY17E
EBITDA margin (%) 15.8% 15.7% 16.9% 17.3% 17.6%
EBIT margin (%) 15.4% 14.8% 16.2% 16.8% 17.3%
Net prof. margin (%) 10.2% 9.6% 10.6% 11.1% 11.3%
Dividend payout ratio (%) 46.3% 48.4% 56.7% 57.4% 57.2%
Net debt: equity (x) (0.2) (0.2) (0.4) (0.5) (0.6)
Working capital turnover (x) 9.5 9.4 6.1 5.1 4.5
Gross block turnover (x) 3.2 3.5 3.8 4.3 4.9
RoCE (pre-tax) (%) 48.5% 46.1% 50.4% 53.2% 55.5%
RoIC (%) 46.4% 39.2% 48.4% 61.9% 73.9%
RoE (%) 36.3% 33.1% 36.1% 38.0% 38.9%
Source: Company, Ambit Capital research

Valuation parameters (standalone)


Year to March FY13 FY14 FY15E FY16E FY17E
Diluted EPS (`) 11.6 12.7 16.5 20.4 24.5
Book value per share (`) 35.3 42.1 49.2 57.9 68.4
Dividend per share (`) 45.0 5.3 8.0 10.0 12.0
P/E (x) 55.9 51.1 39.3 31.9 26.4
P/BV (x) 18.4 15.4 13.2 11.2 9.5
EV/EBITDA (x) 33.8 29.3 23.4 19.3 16.0
EV/EBIT (x) 36.9 33.1 26.0 21.1 17.3
Source: Company, Ambit Capital research

November 17, 2014 Ambit Capital Pvt. Ltd. Page 47


Asian Paints

This page has been intentionally left blank

November 17, 2014 Ambit Capital Pvt. Ltd. Page 48


Godrej Consumer
SELL
COMPANY INSIGHT GCPL IN EQUITY November 17, 2014

Godrej Consumer (GCPL) has a strong domestic franchise built around Consumer
its market leadership in household insecticides (HI), hair color and the
second largest soaps business in India. However, the series of overseas Recommendation
acquisitions made since FY05 have faced serious issues resulting in
Mcap (bn): `337/US$5.5
reduction in overall RoCE from ~130% in FY05 to ~15% in FY14. In the
6M ADV (mn): `135/US$2.2
domestic business GCPL faces market share saturation in HI and high
CMP: `944
competitive intensity in soaps and hair color. With its continued focus on
acquisitions, RoCE deterioration remains a risk for the company. TP (12 mths): `722
Downside (%): 24
GCPL has made several international acquisitions over FY08-14
Godrej Consumer (GCPL), the flagship company of the Godrej Group, is a
household and personal care products company. It is a leader in the domestic Flags
insecticides space with key brands such as Good Knight and HIT (Insecticides), Accounting: AMBER
Cinthol and Godrej No.1 (Soaps) and Expert (hair care). Through ten overseas Predictability: AMBER
acquisitions since FY05, the company now has ~50% of its revenues coming Earnings Momentum: AMBER
from Africa, Latin America, Indonesia and the UK.
Expect GCPL to face significant headwinds with regards to growth Catalysts
GCPL has a strong domestic franchise in the HI and soaps category with almost
60% and 10% market share respectively. However, in HI we believe GCPLs Integration issues in its acquisitions in
share is reaching saturation and the firm faces intense competition from global Africa and LatAm
HI majors like SC Johnson and Reckitt Benckiser. In the fully penetrated soaps Increased competitive intensity in the
category where premiumisation is the only growth driver, GCPL is losing share domestic HI and soaps category
as it lacks a strong premium portfolio. In the international portfolio, Indonesia is
the best performer but faces slowing growth due to market share saturation.
Performance (%)
Africa and LatAm have generated sub-optimal return ratios so far for GCPL.
30,000 1180
26% sales CAGR target presents more risks than rewards around M&A 28,000 1080
GCPLs 26% sales CAGR target over FY11-21 is likely to include substantial 26,000 980
capital allocation for M&A. However, with the international portfolios RoCEs 24,000 880
declining from 16% in FY08 to 7% in FY14, we see the risk of a sustained drag 22,000 780
on ROCEs, due to challenges around management bandwidth, integration 20,000 680
Nov 13

Jan 14

May 14

Jul 14

Nov 14
Mar 14

Sep 14
expertise and incentive to consolidate the existing portfolio before further
acquisitions are pursued. Inorganic growth ambitions are expected to keep
dividend payout ratio at the current level of ~25%.
Sensex GCPL (RHS)
Family-owned and professionally managed
GCPL is a professionally managed company with Vivek Gambhir as the MD. The Source: Bloomberg, Ambit Capital Research
promoter, Adi Godrej, serves as the Chairman and oversees longer term
strategy including inorganic plans for the company. Mr. Godrejs younger
daughter, Nisaba, is actively involved in the business and serves as the
Executive Director looking at the innovation function at GCPL. We expect her to
assume greater responsibilities in GCPL after Mr.Godrej retires.
Headwinds for existing business, acquisition ambitions a key risk
Changes in the product portfolio include: (a) recent relaunch of Cinthol
branded soaps; and (b) cross pollination of HI portfolio from Indonesia and hair
color portfolio from LatAm. However, we forecast only 14%/16% sales/EPS
CAGR over FY14-18 due to the headwinds around market share saturation in HI
and macro/integration issues in the international business. Due to overseas
acquisitions, RoCEs should remain at ~18-20% over FY14-18.
Key financials Consolidated (` mn)
Year to March FY13 FY14 FY15E FY16E FY17E Analyst Details
Operating income (` mn) 64,074 76,024 87,994 100,668 114,398 Rakshit Ranjan, CFA
EBITDA (` mn) 9,824 11,503 12,972 14,942 17,208 +91 22 3043 3201
EBITDA Margin (%) 15.3% 15.1% 14.7% 14.8% 15.0% rakshitranjan@ambitcapital.com
Adjusted EPS (`) 19.6 22.2 25.8 30.4 35.3 Ritesh Vaidya
RoCE (%) 15.1% 16.1% 17.5% 20.3% 21.9% +91 22 3043 3246
P/E (x) 48.1 42.6 36.6 31.0 26.8 riteshvaidya@ambitcapital.com
Source: Company, Ambit Capital research

Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Godrej Consumer

Exhibit 1: Revenue has grown at a CAGR of 34% over FY05- Exhibit 2: Return ratios have deteriorated rapidly due to
14 due to series of acquisitions since FY06 low yielding overseas acquisitions
Revenues (Rs mn) EBITDA margin (%), RHS RoCE RoE (RHS)
84,000 21% 130.0% 200%
74,000 20% 180%
110.0%
64,000 160%
19%
54,000 90.0% 140%
18% 120%
44,000 70.0%
17% 100%
34,000
50.0% 80%
24,000 16%
60%
15% 30.0%
14,000 40%
4,000 14% 10.0% 20%
FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 3: CFO over the last ten years.. Exhibit 4: has been utilized to fund inorganic growth
Interest Increase in
received, cash and
Debt 5% cash
raised, equivalents
Dividend
21% 10%
paid Interest
17% paid
5%
Net Capex
CFO, 57% (incl.
acquisition
Proceeds s)
from 68%
shares,
18%
Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 5: GCPL P/E band chart for the last 7 years Exhibit 6: GCPL EV/EBITDA band chart for the last 7 years

1100 38x 1100


28x
950 950
32x
23x
800 800
26x 18x
650 650
20x 13x
500 500
14x
350 350
8x
200 200

50 50
Nov-07

Nov-08

Nov-09

Nov-10

Nov-11

Nov-12

Nov-13

Nov-14

Nov-07

Nov-08

Nov-09

Nov-10

Nov-11

Nov-12

Nov-13

Nov-14

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

November 17, 2014 Ambit Capital Pvt. Ltd. Page 50


Godrej Consumer

Exhibit 7: Explanation for our flags


Segment Score Comments
In the past, Godrej Consumer has reported excellent cash conversion, efficient management of working capital
in the domestic business, and reasonable levels of loans and advances and contingent liabilities. However, its
Accounting AMBER working capital management in its international business has been weak. Working Capital days have kept
fluctuating from a low of 7 in FY06 days to 51 days in FY12. Due to lack of disclosures, it is difficult to get a
handle on the the debt level at each of its overseas businesses.
Whilst the company has seen strong performance in its domestic business, its increased focus on overseas
businesses in Africa and Latin American has led to volatility in its reported numbers at the EBITDA margin level.
Predictability AMBER EBITDA margin for the international have moved in a range of ~5% in FY06 to ~16% in FY12 and are currently
down to ~11%. This variability in the margins makes the predictability of international business earnings
difficult.
GCPL has financed a slew of acquisitions by cutting back on dividend payouts since FY06. By and large, these
Treatment of
AMBER acquisitions have faced slowing growth, lower profitability and integration issues. This has resulted in a dip in
minorities
GCPLs RoE from ~190% in FY05 to 23% in FY14.
Source: Bloomberg, Ambit Capital research

Exhibit 8: GCPL Half pie on our STAR* framework


Criteria Score (%) Comment
Due to the scale of GCPLs household insecticide business, it is one of the first
companies globally to acquire the latest Active ingredient. It is the domestic
Competitive advantage market leader in hair colour and #2 in soaps. However, it faces headwinds
around market share saturation and higher competitive intensity for its domestic
and overseas business, which have diluted its competitive advantages.
In the past, Godrej Consumer has reported excellent cash conversion, efficient
management of working capital in the domestic business, and reasonable levels
Accounting quality
of loans and advances and contingent liabilities. However, its working capital
management in its international business has been weak.
GCPL has financed a slew of acquisitions by cutting back on dividend payouts
since FY06. Slowing growth, lower profitability and integration issues for these
Capital allocation
acquisitions has resulted in a dip in GCPLs RoCE from ~130% in FY05 to 17% in
FY14.
GCPL is not part of Ambits Connected Companies Index and does not appear to
Centrality of political connect
rely on political connections.
GCPL has cut down on its dividend pay-out in order to finance acquisitions which
Treatment of minorities
have deteriorated the RoEs from ~170 in FY05 to 23% in FY14
GCPL is a family owned but professionally managed company. There are slight
concerns over the leadership capabilities of the next generation of the promoter
Succession planning
family, but the presence of a professional management team gives some
comfort.
Total (%)

Source: Company, Ambit Capital research. Note: = rating of 4/4; = rating of 3/ 4 and so on. *STAR: Sustainable and Tenable Advantages Rank.

November 17, 2014 Ambit Capital Pvt. Ltd. Page 51


Godrej Consumer

Balance Sheet (` mn)


Year to March FY13 FY14 FY15E FY16E FY17E
Shareholders' equity 340 340 340 340 340
Reserves & surpluses 32,790 37,414 43,019 49,410 56,660
Total net worth 33,130 37,754 43,359 49,750 57,000
Minority Interest 2,095 2,251 2,966 3,824 4,853
Debt 19,486 17,017 9,517 3,017 517
Other long term liabilities 273 294 294 294 294
Deferred tax liability (140) (203) (203) (203) (203)
Total liabilities 54,844 57,113 55,933 56,682 62,461
Gross block 21,575 22,511 23,411 24,311 25,211
Net block 15,876 15,689 15,710 15,730 15,748
CWIP 1,409 1,671 1,671 1,671 1,671
Goodwill 29,085 35,525 35,525 35,525 35,525
Investments - 343 343 343 343
Cash & equivalents 8,688 8,068 4,132 5,069 11,056
Debtors 7,288 7,113 8,438 9,653 10,970
Inventory 10,471 10,821 12,536 14,342 16,298
Loans & advances 3,995 3,769 4,822 5,516 6,268
Other current assets - - - - -
Total current assets 30,441 29,771 29,927 34,581 44,592
Current liabilities 21,381 25,326 26,519 30,338 34,476
Provisions 585 559 723 827 940
Total current liabilities 21,967 25,885 27,242 31,166 35,416
Net current assets 8,475 3,886 2,685 3,415 9,175
Total assets 54,844 57,113 55,933 56,682 62,461
Source: Company, Ambit Capital research

Income statement (` mn)


Year to March FY13 FY14 FY15E FY16E FY17E
Operating income 64,074 76,024 87,994 100,668 114,398
% growth 31.7% 18.6% 15.7% 14.4% 13.6%
Operating expenditure 54,251 64,521 75,022 85,727 97,190
EBITDA 9,824 11,503 12,972 14,942 17,208
% growth 14.8% 17.1% 12.8% 15.2% 15.2%
Depreciation 770 819 879 880 882
EBIT 9,054 10,685 12,093 14,061 16,326
Interest expenditure 775 1,074 531 251 -
Non-operating income 678 627 690 759 835
Adjusted PBT 8,957 10,238 12,252 14,569 17,161
Tax 1,792 2,104 2,757 3,351 4,119
Adjusted PAT/ Net profit 7,165 8,134 9,496 11,218 13,042
% growth 15.2% 14.3% 19.7% 18.9% 17.8%
Extraordinaries 1,289 59 - - -
Reported PAT / Net profit 8,454 8,193 9,496 11,218 13,042
Minority Interest (493) (596) (715) (858) (1,029)
Share of associates - - - - -
Adjusted Consolidated net profit 7,961 7,597 8,781 10,360 12,013
Source: Company, Ambit Capital research

November 17, 2014 Ambit Capital Pvt. Ltd. Page 52


Godrej Consumer

Cash Flow statement (` mn)


Year to March FY13 FY14 FY15E FY16E FY17E
EBIT 9,732 11,312 12,783 14,820 17,161
Depreciation 770 819 879 880 882
Others 282 (960) 184 607 1,029
Tax (1,792) (2,104) (2,757) (3,351) (4,119)
(Incr) / decr in net working capital 4,613 3,969 (2,735) 208 226
Cash flow from operations 13,604 13,036 8,354 13,165 15,179
Capex (9,845) (7,334) (900) (900) (900)
(Incr) / decr in investments - (343) - - -
Others - - - - -
Cash flow from investments (9,845) (7,676) (900) (900) (900)
Net borrowings 717 (2,469) (7,500) (6,500) (2,500)
Interest paid (775) (1,074) (531) (251) -
Dividend paid (1,984) (2,083) (3,175) (3,969) (4,763)
Others 572 (354) (184) (607) (1,029)
Cash flow from financing (1,470) (5,979) (11,390) (11,327) (8,293)
Net change in cash 2,289 (620) (3,936) 938 5,986
Closing cash balance 8,688 8,068 4,132 5,069 11,056
Free cash flow 3,759 5,702 7,454 12,265 14,279
Source: Company, Ambit Capital research

Ratio Analysis
Year to March FY13 FY14 FY15E FY16E FY17E
Gross margin (%) 53.9% 53.2% 53.0% 53.1% 53.2%
EBITDA margin (%) 15.3% 15.1% 14.7% 14.8% 15.0%
EBIT margin (%) 15.2% 14.9% 14.5% 14.7% 15.0%
Net profit margin (%) 11.2% 10.7% 10.8% 11.1% 11.4%
Dividend payout ratio (%) 27.7% 25.6% 33.4% 35.4% 36.5%
Net debt: equity (x) 0.3 0.2 0.1 (0.0) (0.2)
Working capital turnover (x) (301.0) NA (60.8) (60.8) (60.8)
Gross block turnover (x) 3.0 3.4 3.8 4.1 4.5
RoCE (%) 15.1% 16.1% 17.5% 20.3% 21.9%
RoE (%) 23.4% 23.0% 23.4% 24.1% 24.4%
Source: Company, Ambit Capital research

Valuation Parameter
Year to March FY13 FY14 FY15E FY16E FY17E
EPS (`) 19.6 22.2 25.8 30.4 35.3
Diluted EPS (`) 19.6 22.2 25.8 30.4 35.3
Book value per share (`) 97.4 110.9 127.4 146.2 167.5
Dividend per share (`) 5.0 5.3 8.0 10.0 12.0
P/E (x) 48.1 42.6 36.6 31.0 26.8
P/BV (x) 9.7 8.5 7.4 6.5 5.6
EV/EBITDA (x) 33.8 28.7 25.2 21.4 18.1
Price/Sales (x) 5.0 4.2 3.7 3.2 2.8
Source: Company, Ambit Capital research

November 17, 2014 Ambit Capital Pvt. Ltd. Page 53


Godrej Consumer

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November 17, 2014 Ambit Capital Pvt. Ltd. Page 54


Marico
BUY
COMPANY INSIGHT MRCO IN EQUITY November 17, 2014

Maricos outstanding performance over the last decade was supported


Consumer
by its market-leading brands, strong distributor relationships and
superior HR policies. Since FY14, the company has made changes
around: (a) shift in control to a professional management team; (b) a Recommendation
focus on organic expansion to deliver growth; and (c) a new bonus Mcap (bn): `201/US$3.3
structure for the management team focused on long-term goals. We 3M ADV (mn): `97/US$1.6
believe Marico will deliver 17% sales CAGR and 22% EPS CAGR over CMP: `314
FY14-18E due to market share gains in Saffola and value added hair TP (12 mths): `313
oils. RoCE is likely to expand from 17% in FY13 to 43% by FY18E. Upside (%): 0
A strong player in hair oils and premium edible oils markets
Since 1990, Marico has been operating in the niche coconut hair oil (27% of Flags
sales) and premium edible oil (15% of sales) category under the Parachute and Accounting: AMBER
Saffola brand names respectively. It holds 50%+ market share in each of these Predictability: AMBER
categories. Over the last decade, it has entered the high-growth Value added Treatment of Minorities: AMBER
hair oil (VAHO) category (18% of sales) through a mix of organic & inorganic
initiatives. Marico currently has a market share of 30% in this category. Catalysts
Strong brands and robust systems and processes give it the edge
Through 40 years of investment in brands Marico has developed Parachute and Increase in dividend payout ratio
Saffola into strong brands which hold more than 50% market share in their Strong volume growth with
respective product categories despite severe competitive pressures. Marico has market share gains in VAHO and
a robust pan-India distribution outreach of 4mn outlets backed by best-in-class Saffola
technical support and processes, making it one of the most-preferred business
partners across distributors. Using professional HR systems and processes that Lower input cost inflation
are superior to its domestic peers, Marico has fostered a competitive and especially for copra
meritocratic culture amongst employees. This is a key intangible asset and
helps underpin the firms high-quality middle management team. Performance
Renewed focus on driving improvement in RoCE
After a series of overseas acquisitions and the acquisition of Paras in India, 30,000 350
Maricos RoCEs halved to 17% in FY13 from 41% in FY08. However, since 28,000 320
FY14, the management has realigned its focus on improving RoCEs through 26,000 290
24,000 260
prudent capital allocation. Following the demerger of the capital consumptive
22,000 230
Kaya business, Marico plans to use surplus cash to increase the dividend 20,000 200
payout ratio (which has already been increased to 50% in FY14 from 18% in
Nov 13

Jan 14

Mar 14

May 14

Sep 14
Jul 14

Nov 14
FY13). We expect RoCE to increase to 43% by FY18 from 17% in FY13.
Professional management to lead the company
In March 2014, Harsh Mariwala stepped down as the MD, handing over the Sensex Marico (RHS)
control to a professional management team led by Saugata Gupta. Mr.
Mariwalas focus on operating Marico in a professional manner since its Source: Bloomberg, Ambit Capital research
inception has helped create a senior management team capable of driving the
next phase of growth for Marico even in the promoters absence.
Changes implemented to drive the next leg of growth
Since FY14, changes have been made around: (a) shift in control from a
promoter-led management team to professionals; (b) management incentive
structures, giving greater weightage to long-term growth drivers; and (c)
capital deployment focus on organic growth. This should drive 22% EPS CAGR
over FY14-18E with RoCE expansion from 17% in FY13 to 43% in FY18E.
Key financials
Year to March FY13 FY14 FY15E FY16E FY17E
Analyst Details
Operating income (` mn) 45,962 46,865 53,985 62,760 73,148
Rakshit Ranjan, CFA
EBITDA (` mn) 6,258 7,480 8,809 10,555 12,668 +91 22 3043 3201
EBITDA Margin (%) 13.6% 16.0% 16.3% 16.8% 17.3% rakshitranjan@ambitcapital.com
Adjusted EPS (`) 5.6 7.5 9.2 11.1 13.4 Ritesh Vaidya
RoE (%) 17.1% 21.5% 31.5% 36.6% 41.0% +91 22 3043 3246
P/E (x) 45.0 33.6 27.5 22.8 18.9 riteshvaidya@ambitcapital.com
Source: Company, Ambit Capital research
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Marico

Exhibit 1: Revenue has recorded a CAGR of 19% over FY05- Exhibit 2: Return ratios expanded over FY05-08 but
14 with EBITDA margin expansion of 720bps contracted sharply thereafter due to a series of
acquisitions
Revenues (Rs mn) EBITDA margin (%) RHS 65.0%
53,000 17.0%
48,000 16.0% 55.0%
43,000 15.0%
38,000 14.0% 45.0%
33,000 13.0%
28,000 12.0% 35.0%
23,000 11.0%
25.0%
18,000 10.0%
13,000 9.0% 15.0%
8,000 8.0%

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14

RoCE RoE
Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 3: Cash generated from operations for Marico Exhibit 4: has gone to fund low-margin international
(FY05-13) expansion

Interest Dividend Increase in


received, received, cash and Debt
1% Purchase of cash repayment
2%
Investments equivalents 3%
- 5%
Subsidiaries Dividend
& Others paid
Debt 4% 10%
raised, 21%
Interest
Net Capex paid
CFO, 62% (incl.
Proceeds 6%
internation
from
al
shares,
acquisitions
14%
72%

Source: Company, Ambit Capital research. Note: Size of the pie represents Source: Company, Ambit Capital research. Note: Size of the pie represents
cumulative funds raised (through various sources such as CFO, equity, debt, cumulative funds raised (through various sources such as CFO, equity, debt,
etc) and spent (on capex, debt repayment, interest, dividend paid, etc) over etc) and spent (on capex, debt repayment, interest, dividend paid, etc) over
FY04-13. FY04-13.

Exhibit 5: Marico P/E band chart for the last 7 years Exhibit 6: Marico EV/EBITDA band chart for the last 7 years

350 350 24x


300 30x 300
26x 20x
250 250
22x 16x
200 18x 200
12x
150 14x 150
8x
100 100
50 50
0 0
Nov-07

Nov-08

Nov-09

Nov-10

Nov-11

Nov-12

Nov-13

Nov-14

Nov-07

Nov-08

Nov-09

Nov-10

Nov-11

Nov-12

Nov-13

Nov-14

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

November 17, 2014 Ambit Capital Pvt. Ltd. Page 56


Marico

Exhibit 7: Explanation for our flags


Segment Score Comments
In the past, Marico has reported strong cash conversion, effective management of working capital and low levels
of loans and advances. But it still ranks lower than the overall FMCG average, as it runs the risk of contingent
Accounting AMBER
liabilities related to excise duty evasion on its coconut oil sales (representing ~30% of total equity) working
against it.
Marico is strongly influenced by commodity price volatility which largely impacts the growth rate of its coconut oil
portfolio. However, with improving inventory management and strong brand equity for Parachute, Marico has
Predictability AMBER over the years improved its ability to manage copra price volatility. This has improved its volume and margin
predictability particularly for the domestic business. Predictability of the international business performance
(~25% of sales) still remains poor.
In the past, Marico has done capital misallocation by pursuing unprofitable overseas acquisitions and
diversifying into the Kaya Skin Clinic business in 2002. During this period, return ratios were impacted, as RoEs
Treatment of
AMBER came down from 63% in FY08 to only 23% in FY13. However, during our recent discussions, the management
minorities
clearly said that it would avoid acquisitions in the near term and drive growth through the organic route. This
should drive a pickup in RoEs to ~46% by FY18.
Source: Bloomberg, Ambit Capital research

Exhibit 8: Marico Limited Three-quarters of the pie on our STAR* framework


Criteria Score (%) Comment
Marico has competitive advantages around: a) strong brand equity of Parachute and Saffola,
b) 4mn widespread distribution and is seen by distributors as one of the most preferred
Competitive advantage
business partner and c) Superior HR policies which have fostered a competitive and
meritocratic work culture.
Maricos accounting quality is poorer than its FMCG peers. Specifically, we have concerns
around the companys low cash conversion ratio ratios, poor FCF, higher proportion of
Accounting quality
contingent liabilities and lower proportion of auditor fees as a percentage of sales vs its
FMCG peers.
Increasing focus on organic growth and higher dividend payout ratio is a step in the right
Capital allocation direction for capital allocation. However, previous low RoCE acquisitions continue to depress
the consolidated RoCE.
Marico is not part of Ambits Connected Companies Index and does not appear to rely on
Centrality of political connect
political connections.
Treatment of minorities Marico has a strong track record in corporate governance.
The promoter recently stepped down in favour of a professional CEO. Harsh Mariwalas son
Succession planning Rishabh is independently pursuing his venture and is not involved with Marico. Though, at a
later stage, Rishabhs involvement with Marico cannot be ruled out.
Total (%)

Source: Company, Ambit Capital research. Note: = rating of 4/4; = rating of 3/ 4 and so on *STAR: Sustainable and Tenable Advantages Rank.

November 17, 2014 Ambit Capital Pvt. Ltd. Page 57


Marico

Balance sheet (consolidated) (` mn)


Year to March FY13 FY14 FY15E FY16E FY17E
Shareholders' equity 645 645 645 645 645
Reserves & surpluses 19,170 12,961 14,953 17,533 20,727
Total networth 19,815 13,606 15,598 18,177 21,372
Minority Interest 351 358 508 658 808
Debt 7,907 5,259 3,259 1,259 -
Deferred tax liability 58 96 96 96 96
Total liabilities 28,131 19,319 19,461 20,190 22,276
Gross block 17,009 9,634 10,634 11,634 12,634
Net block 12,748 6,334 6,616 6,858 7,062
CWIP 1,477 44 44 44 44
Goodwill 3,955 2,543 2,543 2,543 2,543
Investments 1,516 3,105 3,105 3,105 3,105
Cash & equivalents 2,667 4,064 3,358 3,233 4,390
Debtors 1,966 2,232 2,733 3,174 3,695
Inventory 8,627 7,962 9,110 10,581 12,318
Loans & advances 2,555 1,474 1,822 2,116 2,464
Other current assets 1,562 1,892 2,278 2,645 3,080
Total current assets 17,376 17,624 19,300 21,749 25,947
Current liabilities 7,727 9,473 10,628 12,344 14,371
Provisions 1,214 857 1,518 1,763 2,053
Total current
8,941 10,330 12,147 14,107 16,424
liabilities
Net current assets 8,435 7,294 7,153 7,641 9,523
Total assets 28,131 19,319 19,461 20,190 22,276
Source: Company, Ambit Capital research

Income statement (consolidated) (` mn)


Year to March FY13 FY14 FY15E FY16E FY17E
Operating income 45,962 46,865 55,419 64,365 74,935
% growth 14.7% 2.0% 18.3% 16.1% 16.4%
Operating expenditure 39,704 39,385 46,598 53,540 61,958
EBITDA 6,258 7,480 8,822 10,825 12,977
% growth 29.2% 19.5% 17.9% 22.7% 19.9%
Depreciation 866 769 718 758 796
EBIT 5,392 6,711 8,104 10,067 12,182
Interest expenditure 580 345 256 136 38
Non-operating income 375 579 599 547 576
Adjusted PBT 5,187 6,946 8,447 10,478 12,720
Tax 1,462 1,905 2,365 2,986 3,752
Adjusted PAT/ Net profit 3,725 5,041 6,082 7,492 8,967
% growth 15.0% 35.3% 20.6% 23.2% 19.7%
Extraordinaries 332 - - - -
Reported PAT / Net profit 4,057 5,041 6,082 7,492 8,967
Minority Interest 98 187 150 150 150
Share of associates - - - - -
Adjusted Consolidated
3,959 4,854 5,932 7,342 8,817
net profit
Reported Consolidated
3,959 4,854 5,932 7,342 8,817
net profit
Source: Company, Ambit Capital research

November 17, 2014 Ambit Capital Pvt. Ltd. Page 58


Marico

Cash flow statement (consolidated) (` mn)


Year to March FY13 FY14 FY15E FY16E FY17E
EBIT 5,767 7,290 8,703 10,614 12,757
Depreciation 866 769 718 758 796
Others (295) (487) (256) (136) (38)
Tax (1,462) (1,905) (2,365) (2,986) (3,752)
(Incr) / decr in net
(201) 2,538 (566) (613) (724)
working capital
Cash flow from
4,675 8,205 6,234 7,637 9,039
operations
Capex (10,072) 7,078 (1,000) (1,000) (1,000)
(Incr) / decr in
1,440 (176) - - -
investments
Others - - - - -
Cash flow from
(8,632) 6,902 (1,000) (1,000) (1,000)
investments
Net borrowings 278 (2,648) (2,000) (2,000) (1,259)
Interest paid (580) (345) (256) (136) (38)
Dividend paid (749) (2,632) (3,458) (4,280) (5,140)
Others 6,088 (8,086) (226) (346) (444)
Cash flow from
5,036 (13,711) (5,940) (6,762) (6,881)
financing
Net change in cash 1,079 1,397 (706) (125) 1,158
Closing cash balance 2,667 4,064 3,358 3,233 4,390
Free cash flow (5,397) 15,284 5,234 6,637 8,039
Source: Company, Ambit Capital research

Ratio analysis (consolidated)


Year to March FY13 FY14 FY15E FY16E FY17E
Gross margin (%) 51.9% 48.8% 48.8% 49.7% 50.1%
EBITDA margin (%) 13.6% 16.0% 15.9% 16.8% 17.3%
EBIT margin (%) 12.5% 15.6% 15.7% 16.5% 17.0%
Net profit margin (%) 7.9% 10.4% 10.7% 11.4% 11.8%
Dividend payout ratio (%) 18.9% 54.2% 58.3% 58.3% 58.3%
Net debt: equity (x) 0.3 0.1 (0.0) (0.1) (0.2)
Working capital turnover (x) 8.0 14.5 14.6 14.6 14.6
Gross block turnover (x) 2.7 4.9 5.2 5.5 5.9
RoCE (%) 17.1% 21.5% 31.5% 37.5% 41.7%
RoE (%) 23.2% 29.0% 40.6% 43.5% 44.6%
Source: Company, Ambit Capital research

Valuation parameters (consolidated)


Year to March FY13 FY14 FY15E FY16E FY17E
EPS (`) 5.6 7.5 9.2 11.4 13.7
Diluted EPS (`) 5.6 7.5 9.2 11.4 13.7
Book value per share (`) 32.2 22.1 25.4 29.6 34.8
Dividend per share (`) 1.0 3.5 4.6 5.7 6.8
P/E (x) 55.8 41.7 34.1 27.6 23.0
P/BV (x) 9.7 14.2 12.4 10.6 9.0
EV/EBITDA (x) 33.2 27.2 22.9 18.5 15.3
Price/Sales (x) 4.4 4.3 3.7 3.1 2.7
Source: Company, Ambit Capital research

November 17, 2014 Ambit Capital Pvt. Ltd. Page 59


Marico

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November 17, 2014 Ambit Capital Pvt. Ltd. Page 60


Berger Paints
SELL
COMPANY INSIGHT BRGR IN EQUITY November 17, 2014

Berger has retained its #2 position in a highly competitive paints


Consumer discretionary: Paints
industry over the past five years through: (a) expansion of
dealer/depot network; (b) increased width and depth of its product
portfolio; (c) renewed focus on premiumising its product portfolio; and Recommendation
(d) IT investments to improve distribution efficiencies. We expect Berger Mcap (bn): `126/US$2.0
to deliver 17% revenue CAGR and 24% EPS CAGR over FY14-18, with 3M ADV (mn): `125/US$2.0
market share gains from Kansai and Akzo. CMP: `362
Berger establishes itself as Indias #2 paints player TP (12 mths): `269
Berger Paints is the second-largest manufacturer of decorative paints in India, Downside (%): 26
with a market share of ~17%. The firm was established in 1923 and has gone
through several ownership changes since then. However, since 1991, a Flags
majority stake in the company has been owned by UK Paints Group led by the Accounting: AMBER
Delhi based Dhingra brothers. The companys key sub-brands include Luxol, Predictability: AMBER
Bison, Rangoli, Weathercoat, Silk and Breathe Easy. Treatment of Minorities: GREEN
Initiatives taken to bridge the gap with Asian Paints
Bergers competitive advantages include: (a) a strong focus on product Catalysts
innovation (like Designer Finishes, Easy Clean, and Weathercoat All Guard) Positive impact of recent marketing
with Berger being the first company to launch tinting machines; (b) several
and distribution initiatives
decades old relationships with institutional buyers and dealers for economy
products; and (c) focused IT investments to drive supply chain efficiencies. Improvement in FCF generation in
Whilst these competitive advantages are sustainable against its peers like FY15
Kansai Nerolac and Akzo Nobel, we expect Asian Paints to outperform Berger
in supply chain efficiencies.
Prudent capital allocation Performance
Bergers capital allocation over the past decade has either been used to 28,000 500
expand core capacities, pay dividends or de-leverage the balance sheet. The 25,500
400
firm has refrained from making large non-core acquisitions which could have 23,000
jeopardised longer-term RoCEs. We believe RoCEs will revive to 27% by FY18 300
20,500
from an average of 18% over FY09-14 due to an increase in asset turns from
2.2x in FY14 to 3.0x in FY19. 18,000 200

Jul-14
Oct-13

Jan-14

Apr-14

Oct-14
Professionally-run organisation with limited promoter involvement
The promoter group follows a hands-off approach and is involved in only
Sensex Berger Paints (RHS)
strategic decision-making. Strategy execution at the ground level is completely
managed by professionals and this has helped nurture an entrepreneurial
management team over the past 20 years. Whilst members of the promoter Source: Bloomberg, Ambit Capital research.
family occupy certain junior managerial positions, we believe that operational
control will remain in the hands of professionals.
What is being done to strengthen the franchise further?
The company is implementing the following initiatives to strengthen its
franchise: (a) a better incentivised sales team to help expand the dealer
network; (b) IT-related investments to enable centralised MIS, which will help
improve supply chain efficiencies; and (c) branding investments in premium
products like Berger Silk. These initiatives will help Berger gain market share
from Akzo and Kansai in the future.
Key financials standalone (` mn)
Year to March FY13 FY14 FY15E FY16E FY17E
Net Sales 33,464 38,697 44,753 52,672 61,986
Analyst Details
EBITDA 3,712 4,314 5,206 6,180 7,458
Rakshit Ranjan, CFA
EBITDA (%) 11.1% 11.1% 11.6% 11.7% 12.0%
+91 22 3043 3201
EPS (`) 6.3 7.2 8.7 11.0 13.9
rakshitranjan@ambitcapital.com
RoE (%) 22.9% 24.1% 24.7% 26.5% 28.1%
Aditya Bagul
RoCE (%) 18.6% 17.4% 18.3% 21.1% 24.5% +91 22 3043 3264
P/E (x) 57.4 50.3 41.8 33.0 26.0 adityabagul@ambitcapital.com
Source: Company, Ambit Capital research
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Berger Paints

Exhibit 1: EBITDA margins and revenue growth over the Exhibit 2: RoCE and RoE over the last ten years
last ten years

Revenue (Rs mn) EBITDA Margin (% RHS) RoCE RoE (% RHS)


29% 40%
50,000 13% 27%
25% 35%
40,000 12%
23%
30%
30,000 11% 21%
19% 25%
20,000 10% 17%
15% 20%
10,000 9%

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14
- 8%
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 3: Sources of funds over the last ten years Exhibit 4: Utilisation of funds over the last ten years
Dividend Increase in Debt
Interest
received, cash and repayment, Dividend
received,
Debt 0% cash 3% paid, 17%
4%
raised, equivalents
29% , 8%

Purchase Interest
of paid, 10%
Investment
CFO, 60% s , 4%

Proceeds
from
Net Capex,
shares,
58%
7%
Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 5: Forward P/E evolution over the past ten years Exhibit 6: Forward P/B evolution over the past ten years

35 8
30 7
25 6
5
20
4
15 3
10 2
5 1
- -
Apr-05
Oct-05
Apr-06
Oct-06
Apr-07
Oct-07
Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
Oct-10
Apr-11
Oct-11
Apr-12
Oct-12
Apr-13
Oct-13
Apr-14
Oct-14
Apr-05
Oct-05
Apr-06
Oct-06
Apr-07
Oct-07
Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
Oct-10
Apr-11
Oct-11
Apr-12
Oct-12
Apr-13
Oct-13
Apr-14
Oct-14

BRGR P/E 6 Yr Avg 4 Yr Avg BRGR P/B 6 Yr Avg 4 Yr Avg

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

November 17, 2014 Ambit Capital Pvt. Ltd. Page 62


Berger Paints

Exhibit 7: Explanation for our flags


Segment Score Comments
Whilst Berger scores well on cash conversion, related party advances and return on surplus cash, its working
Accounting AMBER capital cycle (65-70 days) and RoEs (~25%) are inferior relative to Asian Paints (working capital cycle of 12-14
days and RoEs of 38-40%).
Although the macro demand for paints in India is not very volatile across economic cycles, the low pricing power
Predictability AMBER
of Berger Paints in the industry results in volatility of EPS growth over time.
Treatment of Our accounting analysis does not raise any major concerns around dubious transactions by promoters. Berger
GREEN
minorities has been in a capex mode for the last four years and has allocated surplus cash towards its core operations.
Source: Bloomberg, Ambit Capital research

Exhibit 8: Berger Paints Three-quarters of the pie on our STAR* framework


Criteria Score (%) Comment
Product innovation, relationships with institutional buyers and dealers is the key
Competitive advantage
strength. However the supply chain benefits lag Asian Paints.
Whilst Berger scores well on cash conversion, related party advances and return
Accounting quality on surplus cash, its working capital cycle and RoEs are inferior relative to Asian
Paints.
Prudent capital allocation for core capex, payment of dividends or deleveraging
Capital allocation
company
Berger is not part of Ambits Connected Companies Index and does not appear
Centrality of political connect
to have any questionable political connections
No major concerns around dubious transactions by promoters and capital
Treatment of minorities
allocation.
Promoters follow hands off approach. Members of promoter family occupy
Succession planning managerial positions, however operational control to remain with professional
management team.
Total (%)

Source: Company, Ambit Capital research. Note: = rating of 4/4; = rating of 3/ 4 and so on. *STAR: Sustainable and Tenable Advantages Rank.

November 17, 2014 Ambit Capital Pvt. Ltd. Page 63


Berger Paints

Balance sheet (standalone)


Year to March (` mn) FY13 FY14 FY15E FY16E FY17E
Shareholders' equity 693 693 693 693 693
Reserves and surpluses 8,839 10,514 12,377 14,881 18,081
Total net worth 9,532 11,207 13,070 15,574 18,774
Debt 5,497 6,235 5,835 4,235 2,235
Deferred tax liability 408 538 538 538 538
Total liabilities 15,436 17,980 19,444 20,347 21,547
Gross block 9,795 13,220 14,220 15,220 16,220
Net block 6,040 8,638 8,792 8,992 9,173
CWIP 1,674 1,333 500 500 500
Investments (non-current) 108 907 907 907 907
Cash & cash equivalents 2,270 1,841 3,544 3,528 3,751
Debtors 4,114 4,857 5,617 6,466 7,440
Inventory 6,364 6,957 8,045 9,325 10,804
Loans & advances 1,194 1,301 1,504 1,770 2,083
Total current assets 14,050 15,071 18,832 21,233 24,247
Current liabilities 5,514 6,887 8,337 9,813 11,548
Provisions 922 1,081 1,250 1,472 1,732
Total current liabilities 6,436 7,968 9,588 11,284 13,280
Net current assets 7,614 7,103 9,245 9,949 10,967
Total assets 15,436 17,980 19,444 20,347 21,547
Source: Company, Ambit Capital research

Income statement (standalone)


Year to March (` mn) FY13 FY14 FY15E FY16E FY17E
Net Sales 33,464 38,697 44,753 52,672 61,986
% growth 14% 16% 16% 18% 18%
Operating expenditure 29,752 34,384 39,547 46,492 54,528
EBITDA 3,712 4,314 5,206 6,180 7,458
% growth 22% 16% 21% 19% 21%
Depreciation 567 707 845 801 819
EBIT 3,145 3,607 4,360 5,379 6,640
Interest expenditure 377 466 480 400 257
Non-operating income 314 360 403 451 505
Adjusted PBT 3,082 3,500 4,283 5,430 6,888
Tax 898 1,006 1,285 1,629 2,066
Adjusted PAT 2,184 2,494 2,998 3,801 4,821
Extraordinary
0 0 0 0 0
expense/(income)
Reported PAT after minority
2,184 2,494 2,998 3,801 4,821
interest
Source: Company, Ambit Capital research

November 17, 2014 Ambit Capital Pvt. Ltd. Page 64


Berger Paints

Cash flow statement (standalone)


Year to March (` mn) FY13 FY14 FY15E FY16E FY17E
Net profit before tax 3,082 3,500 4,283 5,430 6,888
Depreciation 567 707 845 801 819
Others (1,222) (1,315) (1,364) (1,772) (2,185)
Tax (843) (1,022) (1,285) (1,629) (2,066)
(Incr)/decr in net working
(2,049) (2,049) (2,049) (2,049) (2,049)
capital
Cash flow from
1,206 3,084 3,805 4,138 4,982
operations
Capex (net) (2,179) (2,431) (167) (1,000) (1,000)
(Incr)/decr in investments (92) (803) - - -
Other income (expenditure) 230 220 - - -
Cash flow from
(2,041) (3,014) (167) (1,000) (1,000)
investments
Net borrowings 2,080 525 (400) (1,600) (2,000)
Interest paid (327) (424) (400) (257) (138)
Dividend paid (484) (619) (1,135) (1,297) (1,622)
Cash flow from financing 1,281 (499) (1,935) (3,154) (3,760)
Net change in cash 446 (429) 1,703 (16) 223
Closing cash balance 2,270 1,841 3,544 3,528 3,751
Free cash flow (974) 653 3,638 3,138 3,982
Source: Company, Ambit Capital research

Ratio analysis (standalone)


Year to March (%) FY13 FY14 FY15E FY16E FY17E
EBITDA margin (%) 12.0% 12.1% 12.5% 12.6% 12.8%
EBIT margin (%) 10.3% 10.2% 10.6% 11.1% 11.5%
Net prof. margin (%) 6.5% 6.4% 6.7% 7.2% 7.8%
Dividend payout ratio (%) 33.4% 35.8% 37.9% 34.1% 33.6%
Net debt: equity (x) 0.3 0.4 0.2 0.0 (0.1)
Working capital turnover (x) 4.4 5.4 4.8 5.3 5.7
Gross block turnover (x) 3.4 2.9 3.1 3.5 3.8
RoCE (pre-tax) (%) 26.2% 24.4% 26.2% 30.1% 35.0%
RoIC (%) 23.9% 21.5% 22.1% 25.7% 29.8%
RoE (%) 25.0% 24.1% 24.7% 26.5% 28.1%
Source: Company, Ambit Capital research

Valuation parameters (standalone)


Year to March FY13 FY14 FY15E FY16E FY17E
Diluted EPS (`) 6.3 7.2 8.7 11.0 13.9
Book value per share (`) 137.6 161.7 188.6 224.7 270.9
Dividend per share (`) 1.8 2.2 2.8 3.2 4.0
P/E (x) 57.4 50.3 41.8 33.0 26.0
P/BV (x) 2.6 2.2 1.9 1.6 1.3
EV/EBITDA (x) 32.5 28.2 23.4 19.6 16.0
EV/EBIT (x) 37.8 33.2 27.6 22.2 17.9
Source: Company, Ambit Capital research

November 17, 2014 Ambit Capital Pvt. Ltd. Page 65


Berger Paints

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November 17, 2014 Ambit Capital Pvt. Ltd. Page 66


Page Industries
BUY
COMPANY INSIGHT PAG IN EQUITY November 17, 2014

Over the last 20 years, Page Industries has successfully transformed the
Jockey brand into a market leader in the fast-growing, organised Consumer Discretionary
innerwear segment. Jockeys highly aspirational brand image has been built
by consistent delivery of comfortable, durable and affordable products. Page Recommendation
is likely to outperform its peers over FY14-20 amidst a strong macro tailwind Mcap (bn): `109/US$1.8
for mid-premium innerwear through: (a) backward integrated 3M ADV (mn): `88/US$1.4
manufacturing (delivering high-quality product at affordable prices); and (b) CMP: `9,796
aggressive distribution expansion along with an aspirational brand recall for
TP (12 mths): `9,265
Jockey. We build in 28% revenue CAGR and 29% earnings CAGR over FY14-
20E with RoEs of ~60% over this period. Downside (%): 5

Dominated Indias mid-premium innerwear over 1995-2014 Flags


Page Industries commenced operations in India in 1995 in the mid and premium Accounting: GREEN
category of the innerwear segment under the brand name, Jockey. The company
Predictability: GREEN
has market share of ~20% in men's mid/premium innerwear and ~4% in women's
Treatment of Minorities: GREEN
mid/premium innerwear segments. It is the largest player in the organised innerwear
space in India.
Competitive advantages include manufacturing, distribution and brand Catalysts
Page has generated revenue CAGR of 36% & earnings CAGR of 38% over FY06-14 Robust sales growth during FY15
with an average RoE of 58% over this period through a combination of three key despite a weak macro for demand
competitive advantages. Firstly, its backward-integrated manufacturing process gives
Successful rollout of new products
it better control on the quality and commerciality of product development. This is
difficult to replicate as it is highly labour-intensive and calls for regular hiring, New advert campaign on TV/ print
training and retention of a skilled workforce. Secondly, an aggressive distribution media
franchise, built over 20 years, enables Page to create push-based demand. And
thirdly, its aggressive advertising focuses on maintaining an aspirational brand recall
for Jockey. Performance
Prudent capital allocation approach adopted historically
28,000 9000
Given the long-term growth potential in innerwear, the management does not intend
26,000 8000
to invest in non-core businesses over the foreseeable future. The surplus capital
generated is utilised for core capex (41% of cash generated) and the rest has been 24,000 7000
returned to shareholders (49% of cash generated) through an average dividend 22,000 6000
payout ratio of 56% over FY05-14. 20,000 5000
Promoters son is actively involved in R&D and strategic decision-making 18,000 4000
Oct-13

Jan-14

Apr-14

Jul-14

Oct-14
Although Pages promoters are a part of the executive senior management team,
decision-making at a functional level is carried out in an independent and
professional manner. Mr. Sunder Genomal, Managing Director, is 60 years old and
Sensex Page Industries (RHS)
his son, Mr. Shamir Genomal, is the Chief Strategy Officer and he also heads the
R&D and product innovation function.
Initiatives underway to strengthen R&D, distribution and branding Source: Bloomberg, Ambit Capital research.
To strengthen Pages R&D capabilities, the company recently hired two senior
executives, Ms. Shelagh Margaret Commons (experienced in global innerwear
industry) and Mr. Nihal Rajan (ex-Levi Strauss & Co). Two key initiatives are underway
in distribution: (a) rapid expansion of exclusive brand outlets to help push new SKUs
into multi-brand outlets; and (b) IT investments to help track sales of products from
distributors to retailers. The firm is also stepping up its investment behind
advertisements (spends to record 30% CAGR in FY14-18 vs 16% CAGR over FY10-14)
to expand its presence into new categories like leisurewear. The firm is also working
on expanding the e-commerce sales channel.
Key financials standalone (` mn)
Year to March FY13 FY14 FY15E FY16E FY17E Analyst Details
Net Sales 8,758 11,876 15,567 20,267 26,177 Rakshit Ranjan, CFA
EBITDA 1,766 2,511 3,323 4,358 5,647
+91 22 3043 3201
EBITDA (%) 20.2 21.1 21.3 21.5 21.6
rakshitranjan@ambitcapital.com
EPS (`) 100.9 137.8 182.5 243.5 318.7
RoE (%) 59.3 61.2 60.8 61.5 61.0 Aditya Bagul
RoCE (%) 42.4 41.9 44.8 49.4 51.1 +91 22 3043 3264
P/E (x) 96.8 70.8 53.5 40.1 30.6 adityabagul@ambitcapital.com
Source: Company, Ambit Capital research
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Page Industries

Exhibit 1: EBITDA margins and revenue growth over the Exhibit 2: RoCE and RoE over the last ten years
last ten years

Revenue (Rs mn) EBITDA Margin (% RHS) 60% RoCE RoE (% RHS) 120%
15,000 22%

12,000 20% 50%


90%
18%
9,000
16% 40%
6,000 60%
14%
30%
3,000 12%

- 10% 20% 30%


FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14

FY05

FY06

FY07
FY08

FY09

FY10

FY11
FY12

FY13

FY14
Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 3: Sources of funds over the last ten years Exhibit 4: Utilisation of funds over the last ten years
Dividend Increase in
Interest Debt
received, cash and repayment,
received,
0% cash 1%
2% equivalents,
Debt 1%
raised, Purchase of
23% Investments
, -1%
Dividend
paid, 49%
Proceeds Net Capex,
43%
from
shares, CFO, 67%
9%

Interest
paid, 7%
Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 5: Forward P/E evolution over the past ten years Exhibit 6: Forward P/B evolution over the past ten years

40 25
35
20
30
25 15
20
15 10
10
5
5
- -
Apr-07

Apr-08

Apr-09

Apr-10

Apr-11

Apr-12

Apr-13

Apr-14

Apr-07

Apr-08

Apr-09

Apr-10

Apr-11

Apr-12

Apr-13

Apr-14
Oct-07

Oct-08

Oct-09

Oct-10

Oct-11

Oct-12

Oct-13

Oct-14

Oct-07

Oct-08

Oct-09

Oct-10

Oct-11

Oct-12

Oct-13

Oct-14

PAG P/E 6 Yr Avg 4 Yr Avg PAG P/B 6 Yr Avg 4 Yr Avg

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

November 17, 2014 Ambit Capital Pvt. Ltd. Page 68


Page Industries

Exhibit 7: Explanation for our flags


Segment Score Comments
Page Industries' cash conversion has remained healthy, resulting in cumulative CFO (pre-tax)/EBITDA of more than
Accounting GREEN 72% in FY05-14. Page has maintained effective control on the working capital cycle, and hence despite high sales
growth, working capital days have increased marginally from 63 days in FY09 to 69 days in FY14.
The underpenetrated nature of the industry, the growth of the middle class and continued efforts by management
Predictability GREEN have enabled Page (with its strong brand franchise) to deliver consistent performance. Page has delivered growth
of above 25% YoY consistently in both revenues and net profits over the last eight years.
Treatment of Our accounting analysis does not raise any major red flags with respect to dubious transactions by promoters.
GREEN
minorities Also, with the high levels of cash generation, the company has returned the excess cash to the shareholders.
Source: Bloomberg, Ambit Capital research

Exhibit 8: Page Industries gets a Full pie on our STAR* framework


Criteria Score (%) Comment
Near monopoly within its segment, with efficient inhouse manufacturing despite
Competitive advantage it being labour intensive and complete control over product development, strong
brand and well-incentivised dealer network.
Accounting quality Superior accounting quality as compared to peers.
Cash-generative business; management has maintained financial discipline and
Capital allocation
a high dividend payout.
Page is not part of Ambits Connected Companies Index and does not appear to
Centrality of political connect
have any questionable political connections.
Promoters have a very small and non-competing apparel business in India, but
Treatment of minorities
good overall track record of corporate governance.
Promoter family members occupying managerial position alongside professional
Succession planning management team. Although no formal succession plan is formulated the
function specific control is likely to be with the professional management
Total (%)

Source: Company, Ambit Capital research. Note: = rating of 4/4; = rating of 3/ 4 and so on. *STAR: Sustainable and Tenable Advantages Rank.

November 17, 2014 Ambit Capital Pvt. Ltd. Page 69


Page Industries

Balance sheet (standalone)


Year to March (` mn) FY13 FY14 FY15E FY16E FY17E
Shareholders' equity 112 112 112 112 112
Reserves and surpluses 2,024 2,778 3,695 4,917 6,517
Total net worth 2,135 2,890 3,806 5,028 6,628
Debt 1,007 1,632 1,162 1,322 1,262
Deferred tax liability 57 95 95 95 95
Total liabilities 3,199 4,617 5,063 6,445 7,985
Gross block 1,860 2,404 3,125 3,917 4,712
Net block 1,322 1,728 2,272 2,845 3,377
CWIP 138 36 36 36 36
Investments (non-current) 10 0 0 0 0
Cash & cash equivalents 46 35 34 39 34
Debtors 581 727 853 1,111 1,434
Inventory 2,350 3,626 3,796 4,942 6,383
Loans & advances 130 328 426 555 717
Total current assets 3,248 4,932 5,382 6,985 8,990
Current liabilities 1,302 1,838 2,371 3,087 3,987
Provisions 216 241 256 333 430
Total current liabilities 1,518 2,079 2,627 3,420 4,418
Net current assets 1,730 2,853 2,755 3,565 4,572
Total assets 3,199 4,617 5,063 6,445 7,985
Source: Company, Ambit Capital research

Income statement (standalone)


Year to March (` mn) FY13 FY14 FY15E FY16E FY17E
Net Sales 8,758 11,876 15,567 20,267 26,177
% growth 26% 36% 31% 30% 29%
Operating expenditure 6,992 9,365 12,244 15,909 20,530
EBITDA 1,766 2,511 3,323 4,358 5,647
% growth 21% 42% 32% 31% 30%
Depreciation 114 139 176 219 262
EBIT 1,652 2,372 3,147 4,138 5,384
Interest expenditure 80 104 140 124 129
Non-operating income 85 66 78 101 131
Adjusted PBT 1,657 2,334 3,085 4,115 5,386
Tax 531 797 1,049 1,399 1,831
Adjusted PAT 1,125 1,537 2,036 2,716 3,555
Extraordinary expense/(income) - - - - -
Reported PAT after minority interest 1,125 1,537 2,036 2,716 3,555
Source: Company, Ambit Capital research

November 17, 2014 Ambit Capital Pvt. Ltd. Page 70


Page Industries

Cash flow statement (standalone)


Year to March (` mn) FY13 FY14 FY15E FY16E FY17E
Net profit before tax 1,657 2,335 3,085 4,115 5,386
Depreciation 114 139 176 219 262
Others 74 67 62 23 (2)
Tax -516 -750 -1,049 -1,399 -1,831
(Incr)/decr in net working capital -457 -1,051 98 -805 -1,012
Cash flow from operations 871 740 2,372 2,154 2,803
Capex (net) -449 -473 -721 -792 -795
(Incr)/decr in investments 7 19 - - -
Other income (expenditure) 8 13 - - -
Cash flow from investments -419 -441 -643 -691 -664
Net borrowings 238 543 -470 160 -60
Interest paid (80) (97) (140) (124) (129)
Dividend paid (596) (756) (1,120) (1,494) (1,955)
Cash flow from financing -438 -310 -1,730 -1,458 -2,144
Net change in cash 14 -11 0 5 -5
Closing cash balance 46 35 34 39 34
Free cash flow 430 280 1,729 1,463 2,139
Source: Company, Ambit Capital research

Ratio analysis (standalone)


Year to March (%) FY13 FY14 FY15E FY16E FY17E
EBITDA margin (%) 20.2% 21.1% 21.3% 21.5% 21.6%
EBIT margin (%) 18.9% 20.0% 20.2% 20.4% 20.6%
Net prof. margin (%) 12.8% 12.9% 13.1% 13.4% 13.6%
Dividend payout ratio (%) 57.6% 50.9% 55.0% 55.0% 55.0%
Net debt: equity (x) 0.5 0.6 0.3 0.3 0.2
Working capital turnover (x) 6.0 5.2 5.6 6.4 6.4
Gross block turnover (x) 5.2 5.6 5.6 5.8 6.1
RoCE (pre-tax) (%) 62.5% 63.6% 68.0% 74.9% 77.5%
RoIC (%) 42.8% 41.4% 43.5% 48.1% 49.8%
RoE (%) 59.3% 61.2% 60.8% 61.5% 61.0%
Source: Company, Ambit Capital research

Valuation parameters (standalone)


Year to March FY13 FY14 FY15E FY16E FY17E
Diluted EPS (`) 100.9 137.8 182.5 243.5 318.7
Book value per share (`) 191.4 259.1 341.2 450.8 594.2
Dividend per share (`) 50.0 60.0 85.8 114.5 149.8
P/E (x) 96.8 70.8 53.5 40.1 30.6
P/BV (x) 51.0 37.7 28.6 21.7 16.4
EV/EBITDA (x) 62.2 44.0 33.1 25.3 19.5
EV/EBIT (x) 66.5 46.6 35.0 26.6 20.5
Source: Company, Ambit Capital research

November 17, 2014 Ambit Capital Pvt. Ltd. Page 71


Page Industries

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November 17, 2014 Ambit Capital Pvt. Ltd. Page 72


IPCA Laboratories
BUY
COMPANY INSIGHT IPCA IN EQUITY November 17, 2014

IPCA has built an enviably profitable and growing franchise in the India
Healthcare
and export market by playing to its strengths. The companys sustainable
competitive advantage is around innovation and cost management. It
has innovated around manufacturing processes and formulations such Recommendation
that the product is more cost-efficient and patient-friendly. This has Mcap (bn): `86/US$1.4
aided IPCA in building brand equity in front of Indian doctors. At the 3M ADV (mn): `217/US$3.5
same time, IPCA has managed costs efficiently, as reflected by its CMP: `684
consistent RoCE. Brand IPCA is showcased through various publications in TP (12 mths): `949
medical journals like Lancet and through its dominance in therapy areas Upside (%): 39
like malaria and pain in India.
Market domination in segment like malaria and rheumatology Flags
IPCA currently manufactures 350 formulations and 80 APIs across various Accounting: GREEN
therapeutic segments and sells in India (38% of sales in FY14), regulated markets Predictability: AMBER
(20%) and emerging markets (25%). IPCA is an emerging player in most Treatment of Minorities: GREEN
geographies and it dominates in segments like malaria (34% market share) and
rheumatology (46% market share) in India. Catalysts
Innovation and established brand - the key competitive advantages
Award of tenders in Africa in the
IPCAs excellence in process re-engineering, innovation in formulations, near term
established brand in front of doctors, relationship with regulators and cost Progress on 505(b)(2) projects in
leadership are its key competitive advantages. Its cost competitiveness may FY16
decline over time, but as the company scales up the value chain, the other Progress on resolution of FDA issues
factors are likely to sustain (the key factor being brand). IPCA has been able to by FY16
sustain RoCE and RoE of >15% led by high cash generation and rational capital
allocation owing to tight working capital investment and low capex.
Performance
Prudent capital allocation as evidenced by strong EBITDA margins
29,000 900
Rational capital allocation has been IPCAs forte, as evidenced by its comparable 27,500 850
gross and EBITDA margins vs its peers despite owning plain-vanilla products. The 26,000 800
company has spent 60.3% of its cash on capex aimed at increasing 24,500 750
manufacturing capacity and vertical integration. The gross block turnover has 23,000 700
remained stable at ~1.9x over the last decade, indicating that investments in 21,500 650
capex have yielded sales. IPCA pays ~15% of its profits (at par with peers) as 20,000 600
Nov-13
Dec-13
Jan-14
Mar-14
Apr-14
May-14

Sep-14
Jun-14
Jul-14

Oct-14
dividend, consistently ploughing back most of the profits.
No management transition in sight
Sensex Ipca, RHS
IPCA has not hired any external talent in the top management in the past decade
and continues to be a promoter-run business. The first-generation entrepreneur,
Mr. Premchand Godha, still plays an active role in execution whilst his sons, Mr. Source: Bloomberg, Ambit Capital research
Pranay Godha (Head of exports) and Prashant Godha (Head of domestic
business), are now well entrenched in the company. We believe a management
transition is not in sight.
Higher focus on R&D spend and innovation through 505(b)2 ventures
Whilst it continues to strengthen its regulatory ties and maintains its intense cost
focus, IPCA has become more growth-oriented since the second generation of
the Godha family has taken over. We see higher focus on R&D spend and scaling
up the value chain and an end to the legacy of vertical integration in every
product. The companys 505(b)2 ventures in the US also show that it is looking to
derive more out of its innovation capabilities.
Key financials consolidated (` mn)
Analyst Details
Year to March (` mn) FY13 FY14 FY15E FY16E FY17E
Aditya Khemka
Net Revenues (` mn) 28,131 32,818 35,387 42,185 50,098
+91 22 3043 3272
Operating Profits 4,876 6,575 7,154 8,931 10,304
adityakhemka@ambitcapital.com
Net Profits 3,686 5,333 5,226 6,573 7,615
Diluted EPS 29.2 42.3 41.4 52.1 60.3 Paresh Dave, CFA
RoE (%) 23.0 27.2 24.1 24.8 23.6 +91 22 3043 3212
P/E (x) 25.0 17.3 17.7 14.0 12.1 pareshdave@ambitcapital.com
Source: Company, Ambit Capital research
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
IPCA Laboratories

Exhibit 1: EBITDA margins and revenue growth over the Exhibit 2: RoCE and RoE over the last ten years
last ten years
40% 40%
35.0% 35.0%
35% 35%
30.0% 30.0%
25.0% 25.0% 30% 30%

20.0% 20.0% 25% 25%


15.0% 15.0%
20% 20%
10.0% 10.0%
5.0% 5.0% 15% 15%

0.0% 0.0% 10% 10%


FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14

FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Revenue growth Operating margins, RHS RoCE RoE, RHS

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 3: Sources of funds over the last ten years (FY03-14) Exhibit 4: Utilisation of funds over the last ten years (FY03-
14)
Proceeds
from Interest Increase in
Interest
shares, paid, 8.2% cash and
Debt received, Dividend
0.0% cash
raised, 1.8% paid, equivalent,
26.1% Dividend 12.0% 2.1%
received, Debt
0.2%
repayment
, 15.9%

CFO, Purchase Net


71.8% of Capex,
investment 60.3%
, 1.6%

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 5: Forward P/E evolution over the past ten years Exhibit 6: Forward P/B evolution over the past ten years
25 6.0

20 5.0

4.0
15
3.0
10
2.0
5 1.0

0 0.0
Mar-05
Sep-05
Mar-06
Sep-06
Mar-07
Sep-07
Mar-08
Sep-08
Mar-09
Sep-09
Mar-10
Sep-10

Mar-05
Sep-05
Mar-06
Sep-06
Mar-07
Sep-07
Mar-08
Sep-08
Mar-09
Sep-09
Mar-10
Sep-10
Feb-11
Aug-11
Feb-12
Aug-12
Feb-13
Aug-13
Feb-14
Aug-14

Feb-11
Aug-11
Feb-12
Aug-12
Feb-13
Aug-13
Feb-14
Aug-14

IPCA P/E 6 yr avg 4 yr avg IPCA P/B 6 yr avg 4 yr avg

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

November 17, 2014 Ambit Capital Pvt. Ltd. Page 74


IPCA Laboratories

Exhibit 7: Explanation for our flags


Segment Score Comments
In our forensic analysis of 360 companies, IPCA scores above the pharma industry average (comprising 26
companies). IPCA scores high on ratios of: (a) cash yield; (b) fixed asset turnover; (c) contingent liabilities and (d)
Accounting GREEN
change in depreciation rates. However, IPCA has weaker scores on: (a) CFO / EBITDA; and (b) provisioning for
debtors outstanding for more than six months.
Overall, the management has made appropriate disclosures in its earnings calls, meetings and interviews
regarding product filings, acquisitions and business outlook. However, the unpredictability of the institutional
Predictability AMBER
generics, US business (post Ratlam and Indore FDA Form 483s) and API business makes us assign AMBER on
predictability.
Treatment of
GREEN We have no evidence of IPCA mistreating the minorities.
minorities
Source: Bloomberg, Ambit Capital research

Exhibit 8: IPCA Labs Full pie on our STAR* framework


Criteria Score (%) Comment
Competitive advantages Excellence in innovation in formulations, established brand and cost leadership
Accounting quality IPCA is in the top quartile among peers on this criteria.
Rational capital allocation has been IPCAs forte, as evidenced by its comparable gross and
Capital allocation
EBITDA margins vs its peers despite owning plain-vanilla products
IPCA is not part of Ambits Connected Companies Index and does not appear to rely on political
Centrality of political connect
connections.
Treatment of minorities We have no evidence of IPCA mistreating the minorities.
The first-generation entrepreneur still plays an active role in execution whilst his sons are now
Succession planning
well entrenched in the company.
Sustainable low cost advantage and high focus on brand equity and cash flow
Total (%)
generation
Source: Company, Ambit Capital research. Note: = rating of 4/4; = rating of 3/ 4 and so on. *STAR: Sustainable and Tenable Advantages Rank.

November 17, 2014 Ambit Capital Pvt. Ltd. Page 75


IPCA Laboratories

Balance sheet (consolidated)


Year to March (` mn) FY13 FY14 FY15E FY16E FY17E
Total Assets 26,970 32,103 37,234 43,554 50,783
Fixed Assets 12,334 15,185 18,902 22,321 23,015
Current Assets 14,545 16,827 18,240 21,142 27,676
Investments 90 92 92 92 92
Total Liabilities 26,970 32,103 37,234 43,554 50,783
Shareholders' equity 252 252 252 252 252
Reserves and Surplus 15,285 19,344 23,592 28,935 35,124
Total net worth 15,538 19,597 23,844 29,187 35,377
Total debt 6,170 6,026 6,026 6,026 6,026
Current liabilities 3,828 4,847 5,731 6,708 7,747
Deferred tax liability 1,433 1,633 1,633 1,633 1,633
Source: Company, Ambit Capital research

Income statement (standalone)


Year to March (` mn) FY13 FY14 FY15E FY16E FY17E
Net revenues 28,131 32,818 35,387 42,185 50,098
% growth 19.3% 16.7% 7.8% 19.2% 18.8%
Operating Expenditure 21,899 24,712 27,276 32,164 38,063
Core EBITDA 6,232 8,106 8,111 10,020 12,035
% growth 21.4% 30.1% 0.1% 23.5% 20.1%
Depreciation 867 1,031 1,283 1,581 1,805
Interest expense 334 269 262 262 262
Adjusted PBT 5,031 6,806 6,565 8,176 9,967
Tax 1,345 1,472 1,339 1,603 2,352
Reported net profit 3,686 5,333 5,226 6,573 7,615
Source: Company, Ambit Capital research

Cash flow statement (consolidated)


Year to March (` mn) FY13 FY14 FY15E FY16E FY17E
PBT 4,543 6,306 6,891 8,668 10,041
Depreciation 867 1,031 1,283 1,581 1,805
Tax 916 1,305 1,665 2,095 2,427
Net Working Capital (1,444) (1,041) (158) (1,779) (2,169)
CFO 3,445 5,346 6,479 6,505 7,475
Capital Expenditure (2,993) (3,924) (5,000) (5,000) (2,500)
Investment 250 - - - -
Other investments 119 111 134 134 38
CFI (2,624) (3,813) (4,866) (4,866) (2,462)
Issuance of Equity 3 - - - -
Inc/Dec in Borrowings 442 (282) - - -
Net Dividends (468) (661) (978) (1,230) (1,425)
Other Financing activities (339) (306) (262) (262) (262)
CFF (361) (1,361) (1,241) (1,493) (1,688)
Net change in cash 460 171 372 146 3,326
Free Cash Flow 452 1,422 1,479 1,505 4,975
Source: Company, Ambit Capital research

November 17, 2014 Ambit Capital Pvt. Ltd. Page 76


IPCA Laboratories

Ratio analysis (consolidated)


Year to March FY13 FY14 FY15E FY16E FY17E
Revenue growth 19.3 16.7 7.8 19.2 18.8
Core EBITDA growth 21.4 30.1 0.1 23.5 20.1
APAT growth 16.3 44.7 (2.0) 25.8 15.8
EPS growth 16.2 44.6 (2.0) 25.8 15.8
Core EBITDA margin 22.2 24.7 22.9 23.8 24.0
EBIT margin 17.3 20.0 20.2 21.2 20.6
Net profit margin 13.1 16.3 14.8 15.6 15.2
ROCE (%) 26.6 27.2 30.6 25.6 27.3
Reported RoE (%) 23.0 27.2 24.1 24.8 23.6
Debt Equity ratio (X) 0.4 0.3 0.3 0.2 0.2
Current Ratio 3.8 3.5 3.2 3.2 3.6
CFO/EBITDA (x) 0.6 0.7 0.8 0.6 0.6
Gross Block turnover (x) 1.8 1.7 1.5 1.5 1.6
Working Capital Turnover (x) 2.6 2.7 2.8 2.9 2.5
Source: Company, Ambit Capital research

Valuation parameters (consolidated)


Year to March FY13 FY14 FY15E FY16E FY17E
EPS 29.2 42.3 41.4 52.1 60.3
Book Value ( per share) 123.1 155.3 188.9 231.3 280.3
P/E (x) 25.0 17.3 17.7 14.0 12.1
P/BV (x) 5.9 4.7 3.9 3.2 2.6
EV/EBITDA(x) 15.7 12.0 12.0 9.7 8.1
EV/Sales (x) 3.5 3.0 2.8 2.3 1.9
EV/EBIT (x) 20.0 14.8 13.6 10.9 9.5
Source: Company, Ambit Capital research

November 17, 2014 Ambit Capital Pvt. Ltd. Page 77


IPCA Laboratories

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November 17, 2014 Ambit Capital Pvt. Ltd. Page 78


GRUH Finance
NOT RATED
COMPANY INSIGHT GRHF IN EQUITY November 17, 2014

HDFCs parentage and GRUHs deep hinterland penetration underpin


BFSI
GRUHs access to lower cost of funding, superior sourcing of low ticket
customers, lower credit costs and low opex. High profitability (average
RoEs of ~28%) along with a robust loan growth (average growth of Recommendation
~28%) over the past ten years demonstrates the strength of GRUHs Mcap (bn): `85/US$1.4
competitive advantages. 3M ADV (mn): `80/US$1.3
CMP: `233
Play on the rural mortgage opportunity
TP (12 mths): NA
Set up in 1986, GRUH is a subsidiary of HDFC (which owns 59% in GRUH). It
Upside (%): NA
provides housing loans in rural and semi-urban areas, operating primarily in the
Gujarat and Maharashtra, which account for 72% of its loan book. With a
modest loan book of ~`79bn, GRUH accounts for less than 1% market share in Flags
mortgages and has averaged loan growth of ~28% over FY05-14, making it a Accounting: GREEN
promising play on the rural mortgage opportunity in India. Predictability: GREEN
Parentage and deep penetration drive competitive advantages Treatment of Minorities: GREEN
GRUHs competitive advantages are built on: (i) HDFCs parentage which
enables it to get a better rating and hence lower cost of funding, and (ii) Local Catalysts
area knowledge through deep penetration (~80-95% of talukas in Maharashtra Successful diversification into newer
and Gujrat over past 20 years) have enabled superior sourcing of low ticket geographies of Rajasthan, MP,
customers (whilst ~86% of GRUHs loan book consists of ticket sizes below `3mn, Karnataka, Tamil Nadu and
credit costs have been minimal, averaging at ~20bps over past ten years). Chhattisgarh
Sourcing of low ticket customers in hinterland consequently helps GRUH to
secure low cost financing from NHB and lower risk weights on assets. High RoEs
(average RoEs of ~28%) along with robust loan growth (average growth of Performance
~28%) over the past ten years demonstrate GRUHs competitive advantages. 30,000 250

A prudent and well-calibrated diversification into non-home states 25,000 200


GRUHs credit costs and opex/AUM have remained benign at an average of 20,000 150
20bps and 104bps respectively over the past ten years, despite venturing away 15,000 100
from its home states of Gujarat and Maharashtra in FY04-09 into newer 10,000 50
geographies (such as Rajasthan, MP, Karnataka, Tamil Nadu and Chhattisgarh).
Nov-13

Jan-14
Mar-14

May-14

Sep-14
Jul-14

Nov-14
Its RoEs have averaged ~33% in the past four years, implying that it has not
raised capital despite recording 30% CAGR over the same period. It has
Sensex Gruh Finance
sustained a generous dividend payout of ~40% over FY05-14.
Succession planning would be driven by its parent HDFC Source: Bloomberg, Ambit Capital research
The current term of GRUHs Managing Director, Mr. Sudhin Choksey, ends in
FY18. Given that GRUH enjoys strong management support from HDFC (HDFCs
vice chairman and managing director are GRUHs Chairman and non-executive
director respectively), HDFC would ensure a competent successor to Mr. Choksey.
Diversification would drive sustainable growth over the long term
A well-calibrated and judicious diversification would bear fruit in the long term in
terms of a more sustainable growth and lower asset quality geographical risks.
With low penetration and lower capacity utilisation in newer geographies
(penetration at ~10-30% and new branches under-utilised by ~35-60%), its
newer branches offer considerable room for growth and operating leverage.
Key financials (` mn) Analyst Details
Year to March FY10 FY11 FY12 FY13 FY14 Aadesh Mehta, CFA
Total income 1,270 1,570 1,960 2,400 2,980 +91 22 3043 3239
PAT 690 920 1,200 1,460 1,770 aadeshmehta@ambitcapital.com
RoA (%) 2.7% 3.1% 3.2% 3.0% 2.8% Pankaj Agarwal, CFA
RoE (%) 28.4% 31.6% 34.1% 33.3% 32.2% +91 22 3043 3206
EPS (`) 1.9 2.5 3.3 4.0 4.9 pankajagarwal@ambitcapital.com
BVPS (`) 7.3 8.8 10.6 13.5 16.7 Ravi Singh
P/E (x) 122.2 91.6 70.2 57.7 47.6 +91 22 3043 3181
P/B (x) 31.8 26.5 21.8 17.2 13.9 ravisingh@ambitcapital.com
Source: Company, Ambit Capital research
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
GRUH Finance

Exhibit 1: NIMs and loan growth over the past ten years Exhibit 2: RoA and RoE over the past ten years
45% 5.0% 36% 3.5%
40% 4.7% 34%
3.1%
32%
35% 4.4%
30% 2.7%
30% 4.1%
28% 2.3%
25% 3.8%
26%
20% 3.5% 1.9%
24%
15% 3.2% 22% 1.5%
FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14
Loan growth (%) (LHS) NIMs (%) (RHS) RoE (%) (LHS) RoA (%) (RHS)

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 3: Sources of funds FY14 Exhibit 4: Geographical mix of loan book FY14

2% 2%
9%
5% Maharashtra
7%
16% NHB Gujarat
37%
46% Bank loans Madhya Pradesh
12%
Public deposits Karnataka

Others Rajasthan

30% Chhatisgarh
36% Tamil Nadu

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 5: Forward P/E evolution over the past five years Exhibit 6: Forward P/B evolution over the past five years

37 5 yr avg One year fwd PE 10.0 5 yr avg One year fwd PB


34 33x 9.0
31 8.9x
8.0
28
7.0
25
6.0 5.5x
22
19x 5.0
19
16 4.0
13 3.0
10 2.0
Apr-10

Oct-10

Apr-11

Oct-11

Apr-12

Oct-12

Apr-13

Oct-13

Apr-14

Oct-14

Apr-10

Oct-10

Apr-11

Oct-11

Apr-12

Oct-12

Apr-13

Oct-13

Apr-14

Oct-14

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

November 17, 2014 Ambit Capital Pvt. Ltd. Page 80


GRUH Finance

Exhibit 7: Explanation for our flags


Segment Score Comments
We do not find anything unusual in the accounts of the company and we believe that the reported numbers are
Accounting GREEN
a true reflection of the profitability of the company.
Increasing diversification along with deeper penetration into newer geographies augur well for GRUHs
Predictability GREEN
profitability and growth given that it currently has a modest loan book of `79bn.
Despite its parent HDFCs domination of the Board of the company by virtue of its majority shareholding, there is
Treatment of a negligible risk to mistreatment of minorities given the clean track record of the HDFC management. We have
GREEN
minorities not come across any instances wherein the HDFC management has mistreated the minority shareholders of its
other subsidiaries or associate companies (HDFC Bank).
Source: Bloomberg, Ambit Capital research

Exhibit 8: Gruh Finance Three-quarters of the pie on our STAR* framework


Criteria Score (%) Comment
Competitive advantage HDFCs parentage and deep rural penetration are its competitive advantages.
Accounting quality Nothing unusual in the accounting
Capital allocation Well calibrated and judicious diversification into newer geographies.
GRUH is not part of Ambits Connected Companies Index and does not appear to have any
Centrality of political connect
questionable political connections.
Negligible risk to mistreatment of minorities given the clean track record of the HDFC
Treatment of minorities
management.
Succession planning Support of HDFCs management would ensure a competent successor.
Total (%)

Source: Company, Ambit Capital research. Note: = rating of 4/4; = rating of 3/ 4 and so on. *STAR: Sustainable and Tenable Advantages Rank.

November 17, 2014 Ambit Capital Pvt. Ltd. Page 81


GRUH Finance

Balance sheet
Year to March (` mn) FY10 FY11 FY12 FY13 FY14
Stockholders Equity 2,650 3,180 3,860 4,910 6,070
Borrowed Funds 23,230 29,660 38,330 49,150 64,470
Total liabilities 25,880 32,840 42,190 54,060 70,540
Loan Assets 24,490 31,720 40,670 54,380 70,090
Other assets 1,390 1,120 1,520 (320) 450
Total assets 25,880 32,840 42,190 54,060 70,540
Source: Company, Ambit Capital research

Income statement
Year to March (` mn) FY10 FY11 FY12 FY13 FY14
Net Interest Income 1,150 1,430 1,790 2,180 2,710
Fees & Other Charges 120 140 170 220 270
Total income 1,270 1,570 1,960 2,400 2,980
Operating Cost 250 320 390 460 560
Operating Profit 1,030 1,270 1,590 1,980 2,460
Provisions & Write Offs (net) 80 10 (40) 10 20
Profit Before Tax 940 1,260 1,630 1,970 2,440
Tax 250 340 430 510 670
Profit After Tax 690 920 1,200 1,460 1,770
Source: Company, Ambit Capital research

Ratio analysis
Year to March (%) FY10 FY11 FY12 FY13 FY14
Capital Adequacy Ratio (%) 16.6 13.3 14.0 14.6 16.4
Debt Equity Ratio (times) 9.0 9.0 10.0 10.0 11.0
Gross NPAs (%) 1.1 0.8 0.5 0.3 0.3
Net NPAs (%) - - - 0.1 -
Net Interest Margin (%) 4.6 4.9 4.8 4.5 4.3
Opex to Avg Assets (%) 1.0 1.1 1.0 1.0 0.9
Cost to Income Ratio (%) 20.0 20.0 20.0 19.0 19.0
RoAs (%) 2.7 3.1 3.2 3.0 2.8
RoEs (%) 28.4 31.6 34.1 33.3 32.2
Source: Company, Ambit Capital research

Valuation parameters
Year to March FY10 FY11 FY12 FY13 FY14
Diluted EPS (`) 1.9 2.5 3.3 4.0 4.9
Book value per share (`) 7.3 8.8 10.6 13.5 16.7
P/E (x) 122.2 91.6 70.2 57.7 47.6
P/BV (x) 31.8 26.5 21.8 17.2 13.9
Source: Company, Ambit Capital research

November 17, 2014 Ambit Capital Pvt. Ltd. Page 82


Balkrishna Industries
BUY
COMPANY INSIGHT BIL IN EQUITY November 17, 2014
Balkrishna Industries (BKT) has built a substantial export business over the
years in the niche area of off-highway tyres (OHT) by successfully leveraging Auto and Auto ancillaries
Indias low cost of manufacturing. Its current global OHT market share of 4%
would likely increase, due to: (1) higher capacities from the new Bhuj facility
Recommendation
(total achievable capacity of 300k MT by FY16 vs 220k MT in FY14) for
product portfolio expansion into industrial and mining tyres; (2) OEM tie-ups; Mcap (bn): `67/US$1.1
and (3) entry into newer geographies. 3M ADV (mn): `105/US$1.7
CMP: `691
Extensive OHT business built over the years
TP (12 mths): `800
BKT is the leading exporter of off-highway tyres (OHT) such as farm,
industrial/construction and mining tyres from India. BKT has succeeded in building an Upside (%): 16
extensive global OHT business due to Indias low cost manufacturing advantage and
lack of focus by other domestic manufacturers. The company primarily caters to Flags
Europe (54% of total volumes) and the Americas (19%). It has about ~4% market Accounting: AMBER
share in the global OHT market. Predictability: AMBER
Sustainable low cost advantage Treatment of Minorities: GREEN
BKTs primary competitors in the global OHT business are tyre majors like Michelin
and Bridgestone. Despite not commanding the same brand equity as the global Catalysts
majors, we believe BKT is poised to gain market share in the global OHT business
driven by: (a) its low cost advantage (BKTs employee costs are 5-7% of sales vs 25- Continued recovery in demand for
30% for its peers) which enables it to price its products nearly 15-30% cheaper than OHT across geographies
its peers; (b) increasing defocus of the global majors on the OHT space; (c) the Improving capacity utilisation and
niche nature of the OHT business (BKT has >2,000 SKUs) which has kept Chinese benign rubber prices
competition away; and (d) the high capex-intensive nature of the business (which
Improvement in FCF generation over
restrains the domestic conventional tyre makers from focussing on OHT). BKT enjoys
FY15-17
better RoICs than its domestic and global peers driven by its higher operating margin.
Capital primarily allotted to core business
BKT narrowed its focus on the niche OHT segment in 1995. Since then management Performance
has maintained its focus on OHT. Nearly 80% of cash flow from operations 30,000 900
generated and debt raised over FY05-14 have been invested as capex in the OHT 700
business. However, BKT has never pushed its balance sheet beyond net debt:EBITDA 25,000
of 2.7x. Given the high capex requirements, the payouts to shareholders have been 500
20,000
relatively low at 5.4% over FY10-14 and we expect the same to sustain in the future 300
as well. 15,000 100
May-14

Jul-14
Nov-13

Jan-14

Mar-14

Sep-14

Nov-14
Second generation in charge; third generations role increasing
BKT is a promoter-driven company. Whilst there is no explicitly stated succession
plan, it appears that Rajiv Poddar (Managing Director and Arvind Poddars son), who
Sensex Balkrishna (Rs)
joined the company in January 2009 and recently became a Joint Managing Director,
will take over as the third generation promoter to run the company. Note, however
that Arvind Poddar is just 57 years old. Source: Bloomberg, Ambit Capital research

Increasing focus on OTR tyres


Whilst BKTs competitive advantages will help it grow in the farm tyre business, it has
also been increasing its focus in industrial/construction and mining tyres (known as
off the road or OTR tyres), which account for nearly two-thirds of the total OHT
market but where BKT has less than 2% market share. The new Bhuj facility would
help BKT bridge the gaps in its OTR offerings particularly in the large/ultra large
mining and radial OTR tyres. The company is also increasing its marketing efforts by
establishing sales offices, strengthening its sales team and establishing warehouses
in the export markets.
Key financials standalone (` mn)
Year to March FY13 FY14 FY15E FY16E FY17E Analyst Details
Net Sales 31,906 35,767 38,963 45,117 51,363 Ashvin Shetty, CFA
EBITDA 6,644 8,938 9,532 10,822 12,270 +91 22 3043 3285
EBITDA (%) 20.8% 25.0% 24.5% 24.0% 23.9%
ashvinshetty@ambitcapital.com
EPS (`) 36.8 50.5 47.0 53.6 65.9
RoE (%) 28% 30% 22% 20% 20% Ritu Modi
RoCE (%) 19% 20% 17% 19% 23% +91 22 3043 3292
P/E (x) 18.8 13.7 14.7 12.9 10.5 ritumodi@ambitcapital.com
Source: Company, Ambit Capital research
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Balkrishna Industries

Exhibit 1: Strong revenue growth and EBITDA margin over Exhibit 2: Improving profitability led to an improvement
the years in return ratios

40,000 28.0% 40%

35,000 26.0%
35%
24.0%
30,000
30%
22.0%
25,000
20.0% 25%
20,000
18.0%
20%
15,000
16.0%
10,000 15%
14.0%
5,000 12.0% 10%
FY09 FY10 FY11 FY12 FY13 FY14 FY09 FY10 FY11 FY12 FY13 FY14

Revenues (Rs mn) EBITDA margin (RHS) RoCE RoE

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 3: Geographical spread Exhibit 4: BKT uses funds mainly for capex to fund its
strong underlying growth

Others,
15%

India, 12%
Europe,
54%
America,
19%

Source: Company, Ambit Capital research Source: Company, Ambit Capital research. Note: Size of the pie represents
cumulative funds raised (through various sources such as CFO, equity, debt,
etc) and spent (on capex, debt repayment, interest, dividend paid, etc) over
FY05-14.

Exhibit 5: On P/E, Balkrishna trades at a premium of 73% Exhibit 6: On EV/EBITDA, Balkrishna trades at a premium
to its historical four-year average of 134% to its historical four-year average

14 14

12 12

10 10
8 8
6 6
4 4
2 2
0 0
Jul-09

Jul-10

Jul-11

Jul-12

Jul-13

Jul-14
Nov-08
Mar-09

Nov-09
Mar-10

Nov-10
Mar-11

Nov-11
Mar-12

Nov-12
Mar-13

Nov-13
Mar-14

Oct-14

Nov-08
Mar-09
Jul-09
Nov-09
Mar-10
Jul-10
Nov-10
Mar-11
Jul-11
Nov-11
Mar-12
Jul-12
Nov-12
Mar-13
Jul-13
Nov-13
Mar-14
Jul-14
Oct-14

BKT P/E 6 year average 4 year average EV/EBITDA 6 year average 4 year average

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

November 17, 2014 Ambit Capital Pvt. Ltd. Page 84


Balkrishna Industries

Exhibit 7: Explanation for our flags


Segment Score Comments
The company has significantly higher debtor days and operating working capital cycle as compared to its peers.
However, this is primarily due to its global customer base alongside its centralised manufacturing structure (in
Accounting AMBER
India) which results in significant transit time in delivering the goods to the customers (exports account for nearly
90% of overall revenues).
Given the high nature of fixed costs (including depreciation and interest expenses), any marginal
Predictability AMBER outperformance/underperformance at the top-line level tends to have a magnified impact at the net earnings
level. However, this is an industry-wide phenomenon.
We have not come across any instances where the interests of the minority shareholders have been violated. A
Treatment of
GREEN significant portion of the companys capital has been allocated in the core business and the promoters do not
minorities
seem to have any business interests outside of BKT.
Source: Bloomberg, Ambit Capital research

Exhibit 8: Balkrishna Industries Three-quarters of the pie on our STAR* framework


Criteria Score (%) Comment
BKT operates in a niche segment where its core competitive advantage is its low-cost
structure/locational advantage. Despite not commanding the same brand equity as global
majors like Michelin and Bridgestone, we believe BKT is poised to gain market share in the
Competitive advantage global OHT business driven by: (a) its cost advantage; (b) increasing de-focus of the global
majors on the OHT space; (c) high variety low volume business, which discourages the entry
of Chinese players; and (d) high capex-intensive nature of business restraining the domestic
conventional tyre makers from focussing on the OHT segment.
BKT is in the third quartile as compared to its peers on accounting quality. A significantly
higher working capital cycle is the primary reason for BKT having a relatively modest score on
Accounting quality
accounting quality. That said, BKTs cash generation is best-in-class and the company is ranked
1 on pre-tax CFO/EBITDA among its peers.
Given the capital-intensive nature of the tyre business and BKT's ambitious expansion plan
Capital allocation (new plant at Bhuj), nearly 88% of CFO has been reinvested in capex. This and the consequent
low pay-outs to shareholders adversely impact BKT's scoring on capital allocation.
BKT is not part of Ambits Connected Companies Index and does not appear to rely on political
Centrality of political connect
connections for its profitability.
Our study of BKTs annual report suggests that BKT has refrained from transactions that could
Treatment of minorities
impact minority shareholder interests.
BKT is a promoter-driven company. It is run by the second generation of the Poddar family and
Succession planning
the third generation has also joined the ranks.
Total

Source: Company, Ambit Capital research. Note: = rating of 4/4; = rating of 3/ 4 and so on. *STAR: Sustainable and Tenable Advantages Rank.

November 17, 2014 Ambit Capital Pvt. Ltd. Page 85


Balkrishna Industries

Balance sheet (standalone)


Year to March (` mn) FY13 FY14 FY15E FY16E FY17E
Shareholders' equity 193 193 193 193 193
Reserves and surpluses 13,996 18,652 22,958 27,896 34,008
Total net worth 14,190 18,845 23,151 28,089 34,202
Debt 20,744 23,500 23,500 20,000 14,500
Deferred tax liability 999 1,722 1,722 1,722 1,722
Total liabilities 35,933 44,067 48,373 49,811 50,424
Gross block 17,842 30,014 39,686 40,133 41,150
Net block 12,777 23,294 30,597 28,329 26,583
CWIP 11,810 6,172 500 500 500
Investments (non-current) 329 615 615 615 615
Cash & cash equivalents 2,663 3,748 5,506 7,432 7,984
Debtors 5,045 6,185 6,737 7,801 8,881
Inventory 4,326 5,291 5,763 6,674 7,598
Loans & advances 2,938 3,432 3,734 4,315 4,904
Total current assets 14,971 18,656 21,740 26,222 29,368
Current liabilities 3,740 4,394 4,787 5,543 6,310
Provisions 215 276 291 311 331
Total current liabilities 3,955 4,670 5,078 5,854 6,641
Net current assets 11,017 13,985 16,663 20,368 22,727
Total assets 35,933 44,067 48,375 49,813 50,425
Source: Company, Ambit Capital research

Income statement (standalone)


Year to March (` mn) FY13 FY14 FY15E FY16E FY17E
Net Sales 31,906 35,767 38,963 45,117 51,363
% growth 13% 12% 9% 16% 14%
Operating expenditure 25,262 26,829 29,430 34,295 39,093
EBITDA 6,644 8,938 9,532 10,822 12,270
% growth 31% 35% 7% 14% 13%
Depreciation 1,077 1,650 2,370 2,714 2,764
EBIT 5,567 7,288 7,163 8,108 9,506
Interest expenditure 257 253 554 634 431
Non-operating income 37 138 121 151 159
Adjusted PBT 5,347 7,174 6,730 7,626 9,234
Tax 1,794 2,293 2,187 2,440 2,863
Adjusted PAT 3,553 4,880 4,543 5,186 6,371
Extraordinary expense/(income) (5) - - - -
Reported PAT after minority interest 3,558 4,880 4,543 5,186 6,371
Source: Company, Ambit Capital research

November 17, 2014 Ambit Capital Pvt. Ltd. Page 86


Balkrishna Industries

Cash flow statement (standalone)


Year to March (` mn) FY13 FY14 FY15E FY16E FY17E
Net profit before tax 5,352 7,177 6,730 7,626 9,234
Depreciation 1,077 1,650 2,370 2,714 2,764
Others 191 387 554 634 431
Tax (1,410) (1,758) (2,187) (2,440) (2,863)
(Incr)/decr in net working capital 291 (1,518) (930) (1,791) (1,818)
Cash flow from operations 5,501 5,937 6,536 6,742 7,749
Capex (net) (9,605) (8,581) (4,000) (446) (1,017)
(Incr)/decr in investments (7) (3,936) 3,650 - -
Other income (expenditure) 19 110 - - -
Cash flow from investments (9,593) (12,407) (350) (446) (1,017)
Net borrowings 3,610 4,325 0 (3,500) (5,500)
Interest paid (261) (251) (554) (634) (431)
Dividend paid (169) (170) (226) (237) (248)
Cash flow from financing 3,181 3,904 (780) (4,370) (6,179)
Net change in cash (911) (2,565) 5,407 1,926 552
Closing cash balance 2,662 99 5,506 7,432 7,984
Free cash flow (4,104) (2,643) 2,536 6,296 6,732
Source: Company, Ambit Capital research

Ratio analysis (standalone)


Year to March (%) FY13 FY14 FY15E FY16E FY17E
EBITDA margin (%) 20.8% 25.0% 24.5% 24.0% 23.9%
EBIT margin (%) 17.4% 20.4% 18.4% 18.0% 18.5%
Net prof. margin (%) 11.1% 13.6% 11.7% 11.5% 12.4%
Dividend payout ratio (%) 4.1% 4.0% 4.5% 4.1% 3.5%
Net debt: equity (x) 1.3 1.0 0.8 0.4 0.2
Working capital turnover (x) 3.6 3.8 3.6 3.7 3.7
Gross block turnover (x) 2.1 1.5 1.1 1.1 1.3
RoCE (pre-tax) (%) 19.4% 20.0% 17.4% 19.2% 22.6%
RoIC (%) 12.9% 13.6% 11.7% 13.1% 15.6%
RoE (%) 28.4% 29.5% 21.6% 20.2% 20.5%
Source: Company, Ambit Capital research

Valuation parameters (standalone)


Year to March FY13 FY14 FY15E FY16E FY17E
Diluted EPS (`) 36.8 50.5 47.0 53.6 65.9
Book value per share (`) 147 195 240 291 354
Dividend per share (`) 1.5 2.0 2.1 2.2 2.3
P/E (x) 18.8 13.7 14.7 12.9 10.5
P/BV (x) 4.7 3.5 2.9 2.4 2.0
EV/EBITDA (x) 12.8 9.5 8.9 7.8 6.9
EV/EBIT (x) 15.2 11.6 11.8 10.5 8.9
Source: Company, Ambit Capital research

November 17, 2014 Ambit Capital Pvt. Ltd. Page 87


Balkrishna Industries

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November 17, 2014 Ambit Capital Pvt. Ltd. Page 88


City Union Bank
BUY
COMPANY INSIGHT CUBK IN EQUITY November 17, 2014

City Union Bank has a long-term track record of superior profitability


BFSI
due to its focus on its niche in MSME/trade-based and conservative
collateralised lending. A strong capital base, steady profitability,
presence in a relatively lucrative geography (Tamil Nadu) and Recommendation
expanded branch network have placed the bank well to benefit from a Mcap (bn): `54/US$0.9
recovery in the macro-economic climate. 3M ADV (mn): `68/US$1.1
CMP: `91
A Tamil Nadubased specialist lender
TP (12 mths): `90
City Union Bank (CUBK) is a 110-year-old bank based in Tamil Nadu, from
Upside (%): -1
where ~73% of the banks business originates. The bank has ~3% branch
market share in Tamil Nadu. MSME/trade accounts for 49% of its loan book.
Gold loans (agri and personal loans) account for 16% of the banks loan book. Flags
Accounting: GREEN
Long-term track record of conservative lending with pricing power
Predictability: GREEN
The banks competitive advantage is its business model that is based on its
Treatment of Minorities: GREEN
long-term relationships in a state which offers relatively lucrative opportunities
on the credit side. A long-term track record in MSME/trade-based lending and
a conservative focus on collateralised lending have allowed the bank to deliver Catalysts
superior net interest margins along with stable asset quality. On the back of Recovery of loan growth in FY16
these factors, CUBK has delivered stable RoAs of ~1.5% and RoEs of ~20% in Decline in stressed assets accretion
the last ten years. during 2HFY15 and FY16
Strongly capitalised with tier-1 ratio of 15.5% Rising productivity of new branches
A significant share of gold loans (16% of loan book), which carries nil risk
weight, has allowed CUBK to optimise its capital consumption, as risk-weighted Performance
assets to total assets is low at ~55%. Having historically used a rights issue to 210
raise capital, the bank raised capital through a QIP in July 2014. This makes 190
the bank well-funded for a recovery in loan book growth in FY16-17E and to 170
meet the rising capital requirement under Basel-III. Currently, the bank has 150
130
among the highest tier-1 capital ratios, at 15.5%, as compared to its peers.
110
Stable management in place for long term 90

May-14

Jul-14
Nov-13

Sep-14
Jan-14

Mar-14

Nov-14
Dr. N. Kamakodi was appointed as the MD & CEO of the bank in 2011. He is
40 years old and runs the bank with the support of many families that have a
stake in the bank. Earlier, his father, Mr. V. Narayanan, was the MD & CEO of Sensex City Union Bank
the bank over 1980-2004. The bank has a highly diffused ownership held
across a large number of families.
Source: Bloomberg, Ambit Capital research
Well primed for a macro-economic recovery
CUBK is likely to continue focusing on its home market in Tamil Nadu due to
the banks small size and better opportunities within the state itself. The bank
has historically been proactive in upgrading its technology and has invested in
expanding its branch network to strengthen its liability base. A strong capital
base, steady profitability and expanded branch network (number of branches
up 73% in the last three years) place the bank well to benefit from any recovery
in the macro-economic climate.

Key financials standalone (` mn)


Analyst Details
Year to March FY13 FY14 FY15E FY16E FY17E Ravi Singh
+91 22 3043 3181
Net Revenues (` mn) 8,976 10,606 12,583 14,608 17,859
ravisingh@ambitcapital.com
Operating Profits (` mn) 5,234 5,810 6,992 7,955 9,853
Pankaj Agarwal, CFA
Net Profits (` mn) 3,220 3,471 4,033 4,834 6,037
+91 22 3043 3206
EPS (`) 6.8 6.4 6.8 8.2 10.2 pankajagarwal@ambitcapital.com
RoA (%) 1.56% 1.45% 1.51% 1.55% 1.59%
Aadesh Mehta, CFA
RoE (%) 22.3% 18.9% 17.1% 16.7% 18.0% +91 22 3043 3239
P/B (x) 2.62 2.43 1.97 1.72 1.48 aadeshmehta@ambitcapital.com
Source: Company, Ambit Capital research

Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
City Union Bank

Exhibit 1: Loan growth and net interest margins Exhibit 2: RoA and RoE
Loan growth - LHS Net interest margins - RHS RoA - LHS RoE - RHS
40% 5.0% 1.75% 30%
35% 1.70%
4.0% 25%
30% 1.65%
25% 1.60% 20%
3.0%
1.55%
20% 15%
1.50%
15% 2.0%
1.45% 10%
10% 1.40%
1.0% 5%
5% 1.35%
0% 0.0% 1.30% 0%
FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14
Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 3: Gross NPA and provision coverage ratio Exhibit 4: Tier-1 capital ratio
Gross NPA - LHS
Provision coverage ratio - RHS Tier-1 capital ratio
5.0% 70% 16%
60% 14%
4.0%
50% 12%
3.0% 10%
40%

14.4%
13.3%
8%

12.4%

11.8%

11.7%
11.5%
11.2%
10.9%
10.8%
2.0% 30%
6%
20% 4%
1.0%
10% 2%
0.0% 0% 0%
FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14
Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 5: Forward P/E evolution over the long term Exhibit 6: Forward P/B evolution over the long term

100 90
90 80 1.59x
80 70
70 8.5x 1.26x
60
60 6.7x 50 0.93x
50
4.9x 40
40
30 30
20 20
10 10
0 0
Jun-06
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
Jun-12
Dec-12
Jun-13
Dec-13
Jun-14

Jun-06
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
Jun-12
Dec-12
Jun-13
Dec-13
Jun-14

Source: Company, Ambit Capital research. Note: Trading band=Mean+1SD Source: Company, Ambit Capital research; Note: Trading band=Mean+1SD

November 17, 2014 Ambit Capital Pvt. Ltd. Page 90


City Union Bank

Exhibit 7: Explanation for our flags


Segment Score Comments
We did not find anything unusual in the accounts of the bank and we believe that the reported numbers are a
Accounting GREEN true reflection of the profitability of the bank. The bank has made adequate disclosures of its ESOP accounting
and revenue recognition norms.
The banks conservative approach towards growth and asset quality imparts sufficient predictability to its
Predictability GREEN
financial performance.
Whilst its practice of capital-raising only through rights issue has been questioned in the past, the bank has
Treatment of
GREEN recently shown flexibility by opting for a QIP. We did not find any material example of unfair treatment to
minorities
minorities.
Source: Bloomberg, Ambit Capital research

Exhibit 8: City Union Bank - Three quarters of the pie on our STAR* framework
Criteria Score (%) Comment
Competitive advantage A business model with pricing power yet conservative lending
Accounting quality Nothing unusual in the accounting
Capital allocation Strong capital position; made investments in network expansion
City Union Bank is not part of Ambits Connected Companies Index and does not appear to
Centrality of political connect
have any questionable political connections.
Treatment of minorities Except for last QIP, the bank has raised capital through rights
Succession planning CEO has support of promoter families and has a long tenure ahead
Total (%)

Source: Company, Ambit Capital research. Note: = rating of 4/4; = rating of 3/ 4 and so on. *STAR: Sustainable and Tenable Advantages Rank.

November 17, 2014 Ambit Capital Pvt. Ltd. Page 91


City Union Bank

Balance sheet (standalone)


Year to March (` mn) FY13 FY14 FY15E FY16E FY17E
Networth 16,407 20,249 27,024 30,961 36,101
Deposits 203,048 220,169 246,589 295,907 369,884
Borrowings 4,767 3,050 3,050 3,580 4,216
Other Liabilities 5,549 6,470 7,441 9,152 11,257
Total Liabilities 229,771 249,938 284,104 339,600 421,458
Cash & Balances with RBI & Banks 17,705 21,796 26,976 32,074 39,670
Investments 52,668 59,536 71,805 86,185 107,662
Advances 152,461 160,968 177,208 213,057 266,401
Other Assets 6,937 7,638 8,115 8,284 7,725
Total Assets 229,771 249,938 284,104 339,600 421,458
Source: Company, Ambit Capital research

Income statement (standalone)


Year to March (` mn) FY13 FY14 FY15E FY16E FY17E
Interest Income 21,888 25,459 27,702 31,632 37,942
Interest Expense 15,647 17,865 19,214 21,521 25,490
Net Interest Income 6,240 7,594 8,488 10,111 12,452
Total Non-Interest Income 2,736 3,012 4,095 4,498 5,407
Total Income 8,976 10,606 12,583 14,608 17,859
Total Operating Expenses 3,742 4,796 5,592 6,653 8,005
Employees expenses 1,509 1,856 2,211 2,698 3,259
Other Operating Expenses 2,233 2,940 3,381 3,956 4,747
Pre Provisioning Profits 5,234 5,810 6,992 7,955 9,853
Provisions 1,204 1,674 1,950 1,913 2,308
PBT 4,030 4,136 5,041 6,042 7,546
Tax 810 665 1,008 1,208 1,509
PAT 3,220 3,471 4,033 4,834 6,037
Source: Company, Ambit Capital research

Ratio analysis (standalone)


Year to March FY13 FY14 FY15E FY16E FY17E
Credit-Deposit (%) 75.1% 73.1% 71.9% 72.0% 72.0%
CASA ratio (%) 16.8% 17.8% 18.6% 19.1% 19.6%
Cost/Income ratio (%) 41.7% 45.2% 44.4% 45.5% 44.8%
Gross NPA (` mn) 1,731 2,931 3,852 4,652 5,603
Gross NPA (%) 1.16% 1.84% 2.16% 2.16% 2.08%
Net NPA (` mn) 964 1,973 2,388 2,698 3,082
Net NPA (%) 0.63% 1.23% 1.35% 1.27% 1.16%
Provision coverage (%) 46.0% 33.9% 38.0% 42.0% 45.0%
NIMs (%) 3.11% 3.27% 3.28% 3.33% 3.34%
Tier-1 capital ratio (%) 13.3% 14.4% 16.8% 15.8% 14.7%
Source: Company, Ambit Capital research

November 17, 2014 Ambit Capital Pvt. Ltd. Page 92


City Union Bank

Du-pont analysis (standalone)


Year to March FY13 FY14 FY15E FY16E FY17E
NII / Assets (%) 3.0% 3.2% 3.2% 3.2% 3.3%
Other income / Assets (%) 1.3% 1.3% 1.5% 1.4% 1.4%
Total Income / Assets (%) 4.3% 4.4% 4.7% 4.7% 4.7%
Cost to Assets (%) 1.8% 2.0% 2.1% 2.1% 2.1%
PPP / Assets (%) 2.5% 2.4% 2.6% 2.6% 2.6%
Provisions / Assets (%) 0.6% 0.7% 0.7% 0.6% 0.6%
PBT / Assets (%) 2.0% 1.7% 1.9% 1.9% 2.0%
Tax Rate (%) 20.1% 16.1% 20.0% 20.0% 20.0%
ROA (%) 1.6% 1.4% 1.5% 1.5% 1.6%
Leverage 14.3 13.1 11.3 10.8 11.3
ROE (%) 22.3% 18.9% 17.1% 16.7% 18.0%
Source: Company, Ambit Capital research

Valuation parameters (standalone)


Year to March FY13 FY14 FY15E FY16E FY17E
EPS (`) 6.8 6.4 6.8 8.2 10.2
EPS growth (%) -1% -6% 7% 20% 25%
BVPS (`) 34.6 37.3 45.9 52.5 61.3
P/E (x) 12.2 14.2 13.2 11.0 8.8
P/BV (x) 2.62 2.43 1.97 1.72 1.48
Source: Company, Ambit Capital research

November 17, 2014 Ambit Capital Pvt. Ltd. Page 93


City Union Bank

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November 17, 2014 Ambit Capital Pvt. Ltd. Page 94


eClerx
UNDER REVIEW
COMPANY INSIGHT ECLX IN EQUITY November 17, 2014

eClerxs competitive advantages include its niche focus, strong


Technology
knowledge management system, sticky customer franchise and proven
ability to mine clients. These are not easily replicable as evidenced by
the companys industry-leading RoCEs. It has a strong capital allocation Recommendation
track record with a high dividend payout ratio and a conservative Mcap (bn): `39/US$0.6
acquisition strategy. Our BUY stance and estimates are under review. 3M ADV (mn): `58/US$0.9
CMP: `1,290
A unique knowledge process outsourcing company
TP (12 mths): UR
eClerx specialises in providing middle and back office support to companies
Upside (%): UR
across the world, including many Fortune 500 companies. Almost all delivery
employees are based offshore. The company has recorded 34% revenue CAGR
over FY09-14 whilst sustaining RoCEs in excess of 40%. It has three segments Flags
financial services (~40% of revenues), digital marketing services (~40%) and Accounting: GREEN
cable and telecom (~20%). Predictability: AMBER
Competitive advantages to sustain in the long term Treatment of Minorities: GREEN
eClerx has built superior knowledge management processes, domain
knowledge and automation capabilities which enable it to offer faster Catalysts
deployment and better quality of service to customers vs most peers as well as Revenue acceleration driven by
most captives. These competitive advantages are difficult to replicate especially client-specific issues getting resolved
since peers prefer to focus on low-volume, simpler processes. This is evidenced
over the next three quarters
in its sticky customer franchise, ability to mine clients and superior returns vis-
-vis peers (FY14 RoE of 50% vs 20% for peers). Potential EPS-accretive acquisition in

Proven track record of good capital allocation the next 12 months


eClerxs dividend payout ratio has remained consistently high in the last three
years (average of 47% vs 32% for Indian IT mid-caps). Thus a significant
Performance
portion of the companys profits not allotted towards capex has been returned
27,000 1,500
to shareholders. The cash on books is high (42% of net worth), possibly to
provide for an acquisition. The company is not very acquisitive, with only one 24,000
1,200
acquisition made (Agilyst) since it listed. The acquisition was successful and 21,000
added to the companys growth and reduced customer concentration. 18,000
900

Expect continuity in management team 15,000 600


Sep-13
Nov-13
Dec-13
Feb-14
Mar-14
May-14
Jun-14
Aug-13

Aug-14
eClerxs promoters, Anjan Malik and PD Mundhra, are young (in their 40s) and
hence, the company has no stated succession policy. Senior management like
Mr. Mistry (Principal, Digital) and Mr. Gupta (CFO) have been with the
organisation for more than 10 years. Our discussions with the management Sensex (LHS) eClerx (Rs) (RHS)
suggest that the company is making an effort to promote talent internally.
Further improving the franchise Source: Bloomberg, Ambit Capital research.

eClerx has focused on reducing client concentration risk by pursuing non-top-5


clients business more aggressively (29% of LTM revenues). It has a new HR
policy to reduce attrition, boost collaboration as it prepares to move up the
value chain, and tackle more complex processes. Further, the management has
indicated that it is likely to make an acquisition in the near future. An
acquisition may provide an additional growth engine and also reduce customer
concentration risk.
Key financials (` mn)
Year to March FY10 FY11 FY12 FY13 FY14
Analyst Details
Net Revenues (` mn) 2,570 3,420 4,729 6,605 8,410
Sagar Rastogi
EBIT (` bn) 933 1,254 1,770 2,291 3,204
EBIT margins 36% 37% 37% 35% 38% +91 22 3043 3291
Diluted EPS (`) 25.1 41.1 53.0 56.9 83.7 sagarrastogi@ambitcapital.com
RoE 40% 61% 55% 44% 50% Utsav Mehta
P/E 51.4 31.4 24.3 22.7 15.4 +91 22 3043 3209
EV/EBITDA 36.1 26.9 19.1 14.2 10.2
utsavmehta@ambitcapital.com
Source: Company, Ambit Capital research
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
eClerx

Exhibit 1: eClerxs margins have been steady in the last Exhibit 2: Its return ratios have not dipped below 40%
five years since listing
160 60% 210%
140 50%
120 160%
40%
100
80 30% 110%
60
20%
40 60%
10%
20
- 0% 10%

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14
FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14
Revenue(US$mn) (LHS) EBIT margins (RHS) RoE RoCE
Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 3: Sources of funds over the last ten years Exhibit 4: Utilisation of funds over the last ten years
Cumulative funds raised (FY05-14) Cumulative funds spent (FY05-14)
Non op-
Proceeds income
from IPO in 6% Capex
2008 14%
10%
Dividend
paid
38%
Increase in
cash
24%
Acquisitions
CFO 24%
84%

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 5: Forward P/E evolution over the past five years Exhibit 6: Forward EV/EBITDA evolution over the past five
years
18 P/E 16 EV/ EBITDA
16 14
14
12
12
10
10
8
8
6 6
4 4
May-10
Sep-10

May-11
Sep-11

May-12
Sep-12

May-13
Sep-13

May-14
Sep-14

May-10
Sep-10

May-11
Sep-11

May-12
Sep-12

May-13
Sep-13

May-14
Sep-14
Jan-10

Jan-11

Jan-12

Jan-13

Jan-14

Jan-10

Jan-11

Jan-12

Jan-13

Jan-14

ECLX P/E 4 yr avg ECLX EV/ EBITDA 4 yr avg


Source: Company, Ambit Capital research Source: Company, Ambit Capital research

November 17, 2014 Ambit Capital Pvt. Ltd. Page 96


eClerx

Exhibit 7: Explanation for our flags


Segment Score Comments
The company has a lean working capital cycle (receivable + unbilled revenue days at 79), lower than the
average of 93 for mid-sized IT vendors), and strong cash flow generation (five year FCF/ NI of 74% vs 47% peer
Accounting GREEN
average). Further, the company has carried marginal related party transactions in the last five years. As a result,
the company ranks in the top quartile within the Indian IT universe in our accounting framework.
The company does not provide specific annual or quarterly guidance on revenues or margins. It provides a
qualitative outlook on its business. eClerx surprises regularly on its quarterly EPS with an average surprise of 9%
Predictability AMBER (positive or negative) in the last eight quarters on consensus expectations Over these eight quarters, the
company had a positive surprise on EPS five times. However, its sales figures have been largely in-line with
consensus expectations (revenue surprise of 1% over the same period).
There have been no significant related party transactions made by the company in the last five years. Further,
both promoters hold their stake in the company in their individual names and the holding structure is
Treatment of
GREEN transparent. Lastly, the companys dividend payouts are high (47% average in the last three years) and it had
minorities
proposed a buyback in 2013 (which failed). The share price moved significantly above the proposed buyback
price and hence did not garner interest. The company has not indicated another buyback in the future.
Source: Bloomberg, Ambit Capital research

Exhibit 8: eClerx Full pie on our STAR* framework


Criteria Score (%) Comment
eClerx scores on technology processes and strong relationships with clients but is vulnerable to
Competitive advantage
competition from large IT companies.
The company is in the top quartile among peers on this criteria. It has a lean working capital
Accounting quality cycle, strong cash flow generation and has marginal related party transactions in the last five
years.
Its business model generates high RoCEs and dividend payout has been high. Further, the
Capital allocation
company is conservative on acquisitions.
eClerx is not part of Ambits Connected Companies Index and does not have any questionable
Centrality of political connect
political connection.
The promoters hold shares in their individual names and there have been no anti-minority
Treatment of minorities
transactions so far.
Promoters are relatively young (under 45 years of age) and have a professional background.
Succession planning Further, the senior management have been with the company for over 10 years providing an
able second in-line command.
Total (%)

Source: Company, Ambit Capital research. Note: = rating of 4/4; = rating of 3/ 4 and so on. *STAR: Sustainable and Tenable Advantages Rank.

November 17, 2014 Ambit Capital Pvt. Ltd. Page 97


eClerx

Balance sheet
Balance sheet (` mn) FY11 FY12 FY13 FY14
Net Worth 2,384 3,432.0 4,383.3 5,890
Other Liabilities - 1.7 9.9 19
Capital Employed 2,384 3,433.7 4,393.2 5,908
Net Block 370 488.7 1,355.2 1,559
Other Non current Assets 70 88.4 144.8 216
Curr. Assets 3,088 4,038.8 4,521.3 6,138
Debtors 659 421.8 654.8 996
Cash & Bank Balance 1,794 2,685.4 2,700.1 3,560
Other Current Assets 635 931.5 1,166.5 1,581
Current Liab. & Prov 1,144 1,182.2 1,628.2 2,005
Net Current Assets 1,943 2,856.6 2,893.2 4,133
Application of Funds 2,384 3,433.7 4,393.2 5,908
Source: Company, Ambit Capital research

Income statement
Income statement (` mn) FY11 FY12 FY13 FY14
Revenue (US$ mn) 76 98 122 138
Revenue 3,420 4,729 6,605 8,410
EBITDA 1,345 1,899 2,546 3,535
Depreciation 91 129 256 331
EBIT 1,254 1,770 2,291 3,204
EBIT Margin 36.7% 37.4% 34.7% 38.1%
Other Income 240 223 (181) 110
PBT 1,494 1,993 2,109 3,314
Tax 166 394 393 759
Reported PAT 1,328 1,599 1,716 2,555
PAT Margin 38.8% 33.8% 26.0% 30.4%
Diluted EPS 41.1 53.0 56.9 83.7
DPS 29.0 23.0 25.0 35.0
Source: Company, Ambit Capital research

Cash flow statement


In ` mn FY11 FY12 FY13 FY14
PBT 1,392 1,992 2,109 3,316
Cash for Working Capital (324) 113 (348) (791)
Taxes (166) (384) (403) (767)
Net Operating CF 1,020 1,721 1,533 1,950
Net Purchase of FA (240) (251) (267) (212)
Net Cash from Invest. 332 (832) (349) (1,117)
Proceeds from Equity & other 25 33 70 85
Dividend Payments (335) (758) (597) (911)
Cash Flow from Fin. (310) (725) (527) (825)
Free Cash Flow 780 1,469 1,266 1,734
Opening cash balance 472 1,515 1,687 2,349
Net Cash Flow 1,042 163 658 8
Closing Cash Balance 1,515 1,686 2,349 2,406
Source: Company, Ambit Capital research

November 17, 2014 Ambit Capital Pvt. Ltd. Page 98


eClerx

Financial ratios
FY11 FY12 FY13 FY14
Growth
Revenue (US$) 37% 29% 25% 14%
EPS 64% 29% 7% 47%
Return Ratios (%)
RoE 61% 55% 44% 50%
RoCE 51% 49% 48% 48%
Turnover Ratios
Receivable days (Days) 71 31 36 44
Fixed Asset Turnover (x) 9.9 11.0 7.2 5.8
Source: Company, Ambit Capital research

Valuations
FY11 FY12 FY13 FY14
P/E 31.4 24.3 22.7 15.4
EV/EBITDA 26.9 19.1 14.2 10.2
EV/Sales 10.6 7.7 5.5 4.3
Price/Book Value 16.7 11.6 9.1 6.7
Dividend Yield (%) 2.2% 1.8% 1.9% 2.7%
Source: Company, Ambit Capital research

November 17, 2014 Ambit Capital Pvt. Ltd. Page 99


eClerx

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November 17, 2014 Ambit Capital Pvt. Ltd. Page 100


V-Guard Industries
BUY
COMPANY UPDATE VGRD IN EQUITY November 17, 2014

V-Guard has grown from a regional player in south India to a successful


Capital Goods
pan-India player through product portfolio expansion, competitive
pricing and expansion of distribution network. We expect the companys
sustainable competitive advantage around the scalability of its asset- Recommendation
light manufacturing model to continue as the capacity expansion of Mcap (bn): `27/US$0.4
vendors is not a challenge. To further strengthen its franchise the 3M ADV (mn): `39/US$0.6
company is making huge investments in advertising. CMP: `910
TP (12 mths): `1,009
Transformation from a regional player to a national player
Upside (%): 11
Founded in 1977 with the stabiliser as its flagship product, V-Guard is the market
leader in light electricals in Kerala and is amongst the top-3 brands in the other
four south states. In the past six years, it has graduated from a regional to a pan- Flags
India player (non-south revenue share at 30% in FY14 vs 5% in FY08). Accounting: AMBER
Predictability: GREEN
Asset-light business model a sustainable competitive advantage Treatment of Minorities: GREEN
V-Guard has an asset-light business model with an average gross block turnover
of 4.9x and consistently strong pre-tax RoCE of 27% over FY05-14. This is driven Catalysts
by V-Guard's meticulously built supplier network (small-scale manufacturing units
Improvement in revenue share of
of stabilisers) which we believe is scalable. The capacity of these units can be
expanded by 50% through the introduction of semi-automated machines with non-south to 50% by FY17
minimal additional capex. Strong festive demand in FY15 to
Judicious capital allocation reflected in robust RoCEs result in strong growth for V-Guard
V-Guard scores well on capital allocation: (a) V-Guards RoCE has been strong
at 27% over the past 10 years; (b) the company has not diversified into low-
margin businesses for the sake of growth; (c) capex on electrical cables (largest Performance
capex item over the past ten years) has led to cables and wires becoming the 1,150 28,000
largest product in its portfolio; (d) expansion outside the south has already 950 25,000
achieved breakeven; and (e) V-Guards dividend payout has remained healthy at
750 22,000
33% of profit since listing.
Second generation in charge 550 19,000
V-Guard does not have an explicitly stated succession plan. Mr. Mithun 350 16,000
Oct-13
Dec-13
Feb-14
Apr-14

Aug-14
Jun-14

Oct-14
Chittilappilly (son of Kochouseph Chittilappilly, V-Guards founder) who joined in
FY06 is only 33 years old. In FY12, Mithun took over from his father as the
Managing Director. Since he joined in FY06, V-Guard's revenues have grown at V-Guard Sensex on RHS
a robust 37% CAGR. V-Guard has also attracted talent from leading companies
in the consumer durables and light electrical space.
Source: Bloomberg, Ambit Capital research
What is being done to strengthen the franchise further?
To strengthen the franchise further the company has done the following: (a) It
has consistently added new products to its portfolio and grown them successfully.
The latest successful addition is fans, which has reached a turnover of `1bn in
FY14 (launched in FY10). (b) It has a consistently high spend on advertisement.
V-Guards FY14 advertisement spends to sales at 3.9% in FY14 was higher than
Havells 2.4% and Bajajs 2.2%. Consequent to an ad spend CAGR of 29% over
FY11-14, V-Guard has gained market share in all the products under its portfolio
over FY12-14. (c) It recruited senior marketing employees from leading
competitors to attain a smooth expansion of the franchise into non-South market.
Key financials standalone (` mn)
Year to March FY13 FY14 FY15E FY16E FY17E
Net Sales 13,602 15,176 18,342 22,194 25,967
EBITDA 1,099 1,226 1,651 2,108 2,532
Analyst Details
EBITDA (%) 8.1 8.1 9.0 9.5 9.8 Bhargav Buddhadev
+91 3043 3252
EPS (`) 21.1 23.6 33.0 42.5 53.8
bhargavbuddhadev@ambitcapital.com
RoE (%) 26.7 24.3 27.8 29.6 30.1
Deepesh Agarwal
RoCE (%) 20.6 19.9 24.4 27.0 28.4
+91 3043 3275
P/E (x) 42.7 38.3 27.3 21.2 16.7 deepeshagarwal@ambitcapital.com
Source: Company, Ambit Capital research
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
V-Guard Industries

Exhibit 1: Strong revenue CAGR of 31% over FY05-14 Exhibit 2: led to V-Guard achieving pre-tax RoCE and RoE
alongside robust average EBITDA margin of 10.3% over of 27.1% and 31.3% respectively over FY05-14
FY05-14
16,000 13.0 60
14,000 12.0
50
12,000 11.0
10,000 40
10.0
8,000
9.0 30
6,000
4,000 8.0 20
2,000 7.0
10
- 6.0
FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14
-

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14
Sales (Rsmn) EBITDA margin (%) on RHS
Pre-tax ROCE (%) ROE (%)

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 3: CFO forms the largest component of funds raised Exhibit 4: High spend on capex to fund rising growth
over the past decade (FY05-14) momentum (FY05-14)

Investmen
ts (net),
3% Others, 5%
Dividend,
Debt, 25% CFO, 56%
25%

Interest,
dividend
capex,
recd, 2%
45%
Capital Interest,
raised, 25%
17%

Source: Company, Ambit Capital research. Note: Size of the pie represents Source: Company, Ambit Capital research. Note: Size of the pie represents
cumulative funds raised (through various sources such as CFO, equity, debt, cumulative funds raised (through various sources such as CFO, equity, debt,
etc) and spent (on capex, debt repayment, interest, dividend paid, etc) in etc) and spent (on capex, debt repayment, interest, dividend paid, etc) in
the past 10 years the past 10 years

Exhibit 5: Forward P/E evolution over the past ten years Exhibit 6: Forward P/B evolution over the past ten years
1,200 1,200
29x 7.0x
1,000 1,000
24x 5.5x
800 800
19x
4.0x
600 600
14x
400 9x 400 2.5x

200 200 1.0x


- -
Sep-08

Sep-09

Sep-10

Sep-11

Sep-12

Sep-13

Sep-14

Mar-08
Sep-08
Mar-09
Sep-09
Mar-10
Sep-10
Mar-11
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
Sep-14
Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Mar-13

Mar-14

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

November 17, 2014 Ambit Capital Pvt. Ltd. Page 102


V-Guard Industries

Exhibit 7: Explanation for our flags


Segment Score Comments
In our accounting analysis of light electrical companies, V-Guard scores low due to its poor working capital cycle
Accounting AMBER and low CFO/EBITDA. Expansion in the non-south market has been the reason for V-Guards poor cash
conversion. However, its working capital cycle has improved from 96 days in FY11 to 61 days in FY14.
Given its detailed disclosure (this is the only company in the sector which gives product-wise disclosures) and
Predictability GREEN
transparency of the management guidance, the predictability over topline and bottomline performance is strong.
Whilst V-Guard remains the largest company for the Chittilapilly family, it is also involved in other businesses such
Treatment of as theme parks (Wonderla Holidays, which was listed in May 2014) and garments (V-Star Creations). So far, there
GREEN
minorities have been no incidences of mistreatment of minorities by the promoters. The Chittilapilly family holds a 66% stake
in the company and this stake is held in their individual names.
Source: Bloomberg, Ambit Capital research

Exhibit 8: V-Guard Industries gets three-quarters of the pie on our STAR (Sustainable and Tenable Advantages Rank)
framework
Criteria Score (%) Comment
Whilst V-Guard is ranked 1 in light electricals in Kerala, it is still not ranked among the top-five players
Competitive advantage
in the non-south market. Competition in the sector remains tough.
Accounting quality V-Guard is in the second quartile; expansion beyond south India has kept its CFO/EBITDA low.
V-Guard is a cash-generative company with low capex and high RoCEs; the management has
Capital allocation
maintained healthy payout ratios (average ~33% since listing in 2008).
V-Guard is not part of Ambits Connected Companies Index and does not appear to have any
Centrality of political connect
questionable political connections.
Treatment of minorities The promoter family has other unrelated businesses; no major anti-minority transactions so far.
Succession planning Business remains promoter driven, with the second generation currently in charge.
Total (%)
Use of stabilisers could become redundant in the future, and beyond stabilisers, V-Guards newer
Weaknesses
products are more competitive. V-Guard remains a regional player.
Source: Company, Ambit Capital research. Note: = rating of 4/4; = rating of 3/ 4 and so on

November 17, 2014 Ambit Capital Pvt. Ltd. Page 103


V-Guard Industries

Balance sheet (standalone)


Year to March (` mn) FY13 FY14 FY15E FY16E FY17
Cash 150 28 - 150 19 424
Debtors 1,988 2,121 2,513 2,919 3,344
Inventory 2,486 2,525 3,216 3,770 4,269
Loans & advances 454 381 612 741 867
Other Current Assets 2 1 1 1 1
Investments - - - - -
Fixed assets 1,470 1,662 1,794 2,051 2,209
Miscellaneous - - - - -
Total assets 6,549 6,718 7,986 9,500 11,113
Current liabilities & provisions 2,282 2,473 3,278 4,088 4,926
Debt 1,574 992 700 400 -
Other liabilities - Deferred Tax Liability 79 95 95 95 95
Total liabilities 3,935 3,560 4,074 4,584 5,021
Shareholders' equity 298 298 298 298 298
Reserves & surpluses 2,315 2,859 3,614 4,618 5,794
Total networth 2,613 3,158 3,912 4,917 6,092
Net working capital 2,646 2,554 3,063 3,341 3,553
Net debt (cash) 1,425 964 850 381 - 424
Source: Company, Ambit Capital research

Income statement (standalone)


Year to March (` mn) FY13 FY14 FY15E FY16E FY17
Operating income 13,602 15,176 18,342 22,194 25,967
% growth 36.9 11.6 20.9 21.0 17.0
Operating expenditure 12,503 13,950 16,691 20,086 23,435
EBITDA 1,099 1,226 1,651 2,108 2,532
% growth (10.3) 11.5 34.7 27.7 20.1
Depreciation 114 120 168 193 216
EBIT 985 1,106 1,482 1,915 2,315
Interest expenditure 200 211 154 88 -
Non-operational income / Exceptional items 36 48 37 42 52
PBT 822 943 1,366 1,869 2,368
Tax 193 241 382 561 710
Reported PAT 629 702 983 1,308 1,657
Adjustments - - - - -
Adjusted PAT 629 702 983 1,308 1,657
% growth (21.2) 11.6 40.1 33.1 26.7
Source: Company, Ambit Capital research

November 17, 2014 Ambit Capital Pvt. Ltd. Page 104


V-Guard Industries

Cash flow statement (standalone)


Year to March (` mn) FY13 FY14 FY15E FY16E FY17
PBT 822 943 1,366 1,869 2,368
Depreciation 114 120 168 193 216
Interest 180 191 154 88 -
Tax (255) (189) (382) (561) (710)
(Incr) / decr in net working capital (772) (23) (509) (278) (212)
Others 16 66 - - -
Cash flow from operating activities 105 1,108 797 1,311 1,661
(Incr) / decr in capital expenditure (253) (324) (300) (450) (375)
(Incr) / decr in investments - 25 - - -
Others - 19 - - -
Cash flow from investing activities (253) (280) (300) (450) (375)
Issuance of equity (2) - - - -
Incr / (decr) in borrowings 560 (567) (292) (300) (400)
Others (310) (359) (383) (392) (481)
Cash flow from financing activities 248 (926) (674) (692) (881)
Net change in cash 100 (98) (177) 169 405
Source: Company, Ambit Capital research

Ratio analysis (standalone)


Year to March (%) FY13 FY14 FY15E FY16E FY17E
EBITDA margin 8.1 8.1 9.0 9.5 9.8
EBIT margin 7.2 7.3 8.1 8.6 8.9
Net profit margin 4.6 4.6 5.4 5.9 6.4
Return on capital employed 20.6 19.9 24.4 27.0 28.4
Return on equity 26.7 24.3 27.8 29.6 30.1
Current ratio (x) 2.2 2.0 1.9 1.8 1.8
Source: Company, Ambit Capital research

Valuation parameters (standalone)


Year to March FY13 FY14 FY15E FY16E FY17E
EPS (`) 21.1 23.6 33.0 42.5 53.8
Book value per share (`) 87.7 106.0 131.3 159.6 197.8
P/E (x) 42.7 38.3 27.3 21.2 16.7
P/BV (x) 10.3 8.5 6.9 5.6 4.6
EV/EBITDA (x) 25.3 22.7 16.9 13.2 11.0
EV/Sales (x) 2.0 1.8 1.5 1.3 1.1
EV/EBIT (x) 28.3 25.2 18.8 14.5 12.0
Source: Company, Ambit Capital research

November 17, 2014 Ambit Capital Pvt. Ltd. Page 105


V-Guard Industries

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November 17, 2014 Ambit Capital Pvt. Ltd. Page 106


Mayur Uniquoters
NOT RATED
COMPANY INSIGHT MUNI IN EQUITY November 17, 2014

Mayur Uniquoters scale, focus on quality, innovation and well-


Industrials
established relationship with domestic footwear manufacturers and
domestic/global auto OEMs set it apart in a fragmented synthetic leather
industry. The companys stellar capital allocation track record and Recommendation
consistent RoCE expansion is a testament of its well-entrenched Mcap (bn/mn): `19/US$312
competitive advantages which are sustainable over the long term. 3M ADV (mn): `27/US$0.4
CMP: `442
The largest Indian synthetic leather manufacturer
Mayur Uniquoters, Indias largest synthetic leather manufacturer has built: (a)
strong manufacturing capabilities (five Italian coating lines, sixth line to be Flags
commissioned in FY15); and (b) strong relationships with large auto OEMs and Accounting: GREEN
footwear manufacturers in the last two decades. Mayur reported revenue/EBITDA Predictability: GREEN
CAGR of 32%/51% and its RoCE averaged 43% over FY09-14. Exports recorded Treatment of Minorities: GREEN
55% CAGR over FY08-14 (23% of sales in FY14 vs 9% in FY10).
Catalysts
Scale, product and relationshipsthe key competitive advantages
Strong volume growth post
Mayur has built its competitive advantage by: (a) continuously adding scale, (b) commissioning of the new coating
maintaining its focus on product quality/innovation, and (c) forging strong line in 3QFY15
relationships with footwear and auto OEMs in India and now global auto OEMs.
Margin improvement in 2HFY15 with
Product quality and innovation has helped Mayur expand its clientele and gain falling crude prices and rising
market share from unorganised competitors. Its track record of consistent RoCE premium sales
improvement (40% in FY14 vs 10%/21% in FY05/FY09) and strong growth (10-
Addition of auto OEM clients in the
year sales CAGR: 30%) are a testament of its strong competitive advantages.
US and rising supplies to the
furnishing industry in Europe
Textbook capital allocation in the past decade
Mayurs scale increased 5x (to ~30mn metres in FY14 from 6mn metres in
FY04). This was supplemented by an increase in asset turnover (to 3.5x over Performance
FY08-14 vs 2.4x over FY04-08) and expansion in EBITDA margin (to 16.6% over 500 29,000
FY09-14 vs 11% over FY04-08), thus leading to sharp RoCE improvement (to 400
40% in FY14 vs 10% in FY05). Mayur has concertedly maintained moderate 26,000
300
dividend payouts (10% of CFO over FY05-14), as it re-invested 64% of the cash 23,000
200
accruals for enhancing scale, which in turn drove the sharp sales growth.
100 20,000
First-generation promoter but developing a second line of management
Nov-13

Jan-14

May-14

Jul-14

Nov-14
Mar-14

Mayur is a first-generation promoter-driven company, wherein the business is Sep-14


largely built by Mr Suresh Poddar. The promoters son Mr Manav Poddar, and
MUNI (LHS) SENSEX
son-in-law, Mr Arun Kumar Bagaria, have been inducted into the Board and they
manage the marketing and production functions. The company has started hiring
senior leather industry professionals at key functions such as production, sales, Source: Bloomberg, Ambit Capital research
and distribution, to develop a second line of management.
Expanding clientele; entering new product segments
Alongside consistent scale elevation in PVC (sixth coating line to be
commissioned in November 2014; seventh line planned already), the company is
setting up the largest Indian polyurethane leather plant (to be commissioned by
end-FY16). Furthermore, it is expanding its presence in North America (has set
up a marketing subsidiary) and reaching out to new markets in Europe to supply
synthetic leather to the furnishing industry. Moreover, the company has increased
supplies to premium auto OEM clients to ensure higher realisations.
Key financials - standalone
Y/E Mar (` mn) FY10 FY11 FY12 FY13 FY14 Analyst Details
Revenues 1,647 2,486 3,109 3,692 4,556 Achint Bhagat
Adjusted EBITDA 282 410 533 690 932 +91 22 3043 3178
EBITDA margin (%) 17.1% 16.5% 17.1% 18.7% 20.5%
Adjusted EPS (`) 3.0 4.7 6.2 4.0 13.1 achintbhagat@ambitcapital.com
ROCE (%) 64.0% 68.4% 64.9% 62.9% 58.7% Nitin Bhasin
ROIC (%) 59.9% 77.1% 66.1% 57.6% 51.9% +91 22 3043 3241
P/E (x) 151.6 97.2 73.6 112.7 34.5
nitinbhasin@ambitcapital.com
Source: Company, Ambit Capital research
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Mayur Uniquoters

Exhibit 1: Sharp revenue growth and margin expansion Exhibit 2: translated into sharp RoCE and RoE expansion
over the last ten years
(` mn) 80% 60%
5,000 25%

4,000 20% 60%


40%
3,000 15% 40%

2,000 10% 20%


20%
1,000 5%
0% 0%
0 0%

FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
Revenue (LHS) EBITDA margin (RHS) FY14 RoCE (LHS) RoE (RHS)

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 3: CFO accounted for 79% of the cash source over Exhibit 4: Almost two-thirds of cash generated/raised was
the last ten years deployed for capacity expansions
Purchase Increase in
of cash/ cash
Interest, Debt Investment equivalents
dividend Proceeds, s 5% , 4% Dividend
recd, 4% 16% paid, 19%

Proceeds Interest
from paid, 4%
shares, 1%

Net Capex
CFO, 79% , 68%

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 5: P/E multiples have re-rated several times over Exhibit 6: Mayur is trading at peak P/
the last three years
(X)
(X)
5
30
25 4

20 3
15 2
10 1
5
0
0
May-11
Aug-11
Nov-11
Feb-12
May-12
Aug-12
Nov-12
Feb-13
May-13
Aug-13
Nov-13
Feb-14
May-14
Aug-14
Nov-14
May-11

Nov-11

May-12

Nov-12

May-13

Nov-13

May-14

Nov-14
Aug-11

Feb-12

Aug-12

Feb-13

Aug-13

Feb-14

Aug-14

One-yr fwd P/B 3-yr average P/B


One-yr fwd P/E 5-yr average P/E
Source: Company, Ambit Capital research
Source: Company, Ambit Capital research

November 17, 2014 Ambit Capital Pvt. Ltd. Page 108


Mayur Uniquoters

Exhibit 7: Explanation for our flags


Segment Score Comments
On our forensic accounting screener of 127 mid-cap stocks, Mayur ranks 11th due to its high CFO/EBITDA (80%
Accounting GREEN
conversion ratio), low audit fees and no material unclassified loans or contingent liabilities.
The management has made timely announcements regarding expansion and has usually met its guided targets
both in terms of capacity commissioning and utilisation-level ramp-up. Moreover, margins have been stable and
Predictability GREEN
have not been susceptible to unpredictable operating cost (raw material, power and fuel, fixed expenses)
volatilities.
The company does not have any major unlisted subsidiaries (held partly by the promoter) nor does it carry out
Treatment of
GREEN any related party transactions to the detriment of the minority shareholders. The promoter does not hold any
minorities
shares in the company through unlisted subsidiaries.
Source: Bloomberg, Ambit Capital research

Exhibit 8: Mayur Uniquoters Full pie on our STAR* framework


Criteria Score (%) Comment
Capacity leadership and relationships with domestic/Global auto OEMs and Indian footwear
Competitive advantages
manufacturers
Ranks 11th amongst 127 mid-cap companies with a market capitalization of `5bn-20bn.
Accounting quality
CFO/EBITDA conversion ratio of 80% in the last 10 years.
Re-invested 80% CFO for capacity expansion. Strong sales growth and material RoCE expansion
Capital allocation
in the last decade.
Mayur is not part of Ambits Connected Companies Index and does not have any questionable
Centrality of political connect
political connection.
No instance of anti-minority transactions in the past decade; uncomplicated holding structure
Treatment of minorities
and no material insider transactions.
Succession planning Promoter-led business with no explicit succession plan.
Total (%)

Source: Company, Ambit Capital research. Note: = rating of 4/4; = rating of 3/ 4 and so on. *STAR: Sustainable and Tenable Advantages Rank.

November 17, 2014 Ambit Capital Pvt. Ltd. Page 109


Mayur Uniquoters

Balance sheet (standalone)


Year to March (` mn) FY10 FY11 FY12 FY13 FY14
Share capital 54 54 54 108 108
Reserves and surplus 366 556 805 1,076 1,503
Total Networth 421 610 859 1,185 1,611
Loans 44 78 29 46 157
Sources of funds 482 708 918 1,266 1,827
Net block 231 313 451 547 977
Capital work-in-progress 3 34 40 189 266
Investments 1 1 1 1 1
Cash and bank balances 196 228 190 107 134
Sundry debtors 256 316 406 565 671
Inventories 98 146 307 442 638
Loans and advances 27 40 34 68 125
Total Current Assets 586 742 1,072 1,351 1,741
Current liabilities and provisions 338 382 667 869 1,177
Net current assets 248 360 405 482 564
Application of funds 482 708 918 1,266 1,827
Source: Company, Ambit Capital research

Income statement (standalone)


Year to March (` mn) FY10 FY11 FY12 FY13 FY14
Revenue 1,647 2,486 3,109 3,692 4,556
yoy growth 43% 51% 25% 19% 23%
Total expenses 1,366 2,076 2,642 3,115 3,764
EBITDA 282 410 533 690 932
yoy growth 136% 46% 30% 30% 35%
Net depreciation / amortisation 22 27 39 52 70
EBIT 266 394 511 666 879
Net interest and financial charges 13 19 20 24 43
Other income 6 11 17 27 18
PBT 252 375 492 642 836
Provision for taxation 90 122 158 206 269
Adjusted PAT 162 253 334 436 568
yoy growth 163% 56% 32% 31% 30%
Reported PAT 162 253 334 436 568
EPS (`) 3 5 6 4 13
Source: Company, Ambit Capital research

November 17, 2014 Ambit Capital Pvt. Ltd. Page 110


Mayur Uniquoters

Cash flow statement (standalone)


Year to March (` mn) FY10 FY11 FY12 FY13 FY14
Net profit before tax 252 375 492 642 836
Depreciation 22 27 39 52 70
Others 1 (3) (2) (4) 43
Tax (83) (141) (153) (194) (269)
(Incr)/decr in net working capital 17 (89) (91) (213) (109)
Cash flow from operations 216 172 281 272 555
Capex (net) 25 130 127 365 506
(Incr)/decr in investments 10 - (117) (19) 38
Other income (expenditure) 6 8 9 14 5
Cash flow from investments
Net borrowings (34) 34 (23) 181 111
Issuance/buyback of equity - - - - -
Interest paid (28) (45) (69) (96) (46)
Dividend paid (6) (7) (8) (9) (43)
Cash flow from financing (69) (18) (99) 77 22
Net change in cash 138 32 (50) (10) 126
Free cash flow (before investments) 191 42 154 (93) 48
Source: Company, Ambit Capital research

Ratio analysis (standalone)


Year to March FY10 FY11 FY12 FY13 FY14
EBITDA margin (%) 17.1 16.5 17.1 18.7 20.5
EBIT margin (%) 16.1 15.9 16.5 18.0 19.3
Net prof. (bef min int) margin (%) 9.8 10.2 10.7 11.8 12.5
RoCE (pre-tax) (%) 64 68 65 63 59
RoIC (%) 60 77 66 58 52
RoE (%) 49 51 48 46 42
Source: Company, Ambit Capital research, Note: * excluding revaluation reserve

Valuation parameters (standalone)


Year to March FY10 FY11 FY12 FY13 FY14
P/E (x) 152 97 74 113 35
P/B(x) 46.6 32.1 22.8 16.6 12.2
Debt/Equity(x) 0.1 0.1 0.0 0.0 0.1
Net debt/Equity(x) -0.4 -0.2 -0.1 0.0 0.1
EV/EBITDA(x) 68.8 47.3 36.4 28.1 20.8
Source: Company, Ambit Capital research, Note: * excluding revaluation reserve

November 17, 2014 Ambit Capital Pvt. Ltd. Page 111


Mayur Uniquoters

Institutional Equities Team


Saurabh Mukherjea, CFA CEO, Institutional Equities (022) 30433174 saurabhmukherjea@ambitcapital.com
Research
Analysts Industry Sectors Desk-Phone E-mail
Nitin Bhasin - Head of Research E&C / Infra / Cement / Industrials (022) 30433241 nitinbhasin@ambitcapital.com
Aadesh Mehta, CFA Banking / Financial Services (022) 30433239 aadeshmehta@ambitcapital.com
Achint Bhagat Cement / Infrastructure (022) 30433178 achintbhagat@ambitcapital.com
Aditya Bagul Consumer (022) 30433264 adityabagul@ambitcapital.com
Aditya Khemka Healthcare (022) 30433272 adityakhemka@ambitcapital.com
Ashvin Shetty, CFA Automobile (022) 30433285 ashvinshetty@ambitcapital.com
Bhargav Buddhadev Power Utilities / Capital Goods (022) 30433252 bhargavbuddhadev@ambitcapital.com
Dayanand Mittal, CFA Oil & Gas / Metals & Mining (022) 30433202 dayanandmittal@ambitcapital.com
Deepesh Agarwal Power Utilities / Capital Goods (022) 30433275 deepeshagarwal@ambitcapital.com
Gaurav Mehta, CFA Strategy / Derivatives Research (022) 30433255 gauravmehta@ambitcapital.com
Karan Khanna Strategy (022) 30433251 karankhanna@ambitcapital.com
Krishnan ASV Real Estate (022) 30433205 vkrishnan@ambitcapital.com
Pankaj Agarwal, CFA Banking / Financial Services (022) 30433206 pankajagarwal@ambitcapital.com
Paresh Dave, CFA Healthcare (022) 30433212 pareshdave@ambitcapital.com
Parita Ashar Metals & Mining / Oil & Gas (022) 30433223 paritaashar@ambitcapital.com
Rakshit Ranjan, CFA Consumer / Retail (022) 30433201 rakshitranjan@ambitcapital.com
Ravi Singh Banking / Financial Services (022) 30433181 ravisingh@ambitcapital.com
Ritesh Gupta, CFA Midcaps Chemical / Retail (022) 30433242 riteshgupta@ambitcapital.com
Ritesh Vaidya Consumer (022) 30433246 riteshvaidya@ambitcapital.com
Ritika Mankar Mukherjee, CFA Economy / Strategy (022) 30433175 ritikamankar@ambitcapital.com
Ritu Modi Automobile (022) 30433292 ritumodi@ambitcapital.com
Sagar Rastogi Technology (022) 30433291 sagarrastogi@ambitcapital.com
Sumit Shekhar Economy / Strategy (022) 30433229 sumitshekhar@ambitcapital.com
Sandeep Gupta Media / Midcaps (022) 30433211 sandeepgupta@ambitcapital.com
Tanuj Mukhija, CFA E&C / Infra / Industrials (022) 30433203 tanujmukhija@ambitcapital.com
Utsav Mehta Technology (022) 30433209 utsavmehta@ambitcapital.com
Sales
Name Regions Desk-Phone E-mail
Sarojini Ramachandran - Head of Sales UK +44 (0) 20 7614 8374 sarojini@panmure.com
Deepak Sawhney India / Asia (022) 30433295 deepaksawhney@ambitcapital.com
Dharmen Shah India / Asia (022) 30433289 dharmenshah@ambitcapital.com
Dipti Mehta India / USA (022) 30433053 diptimehta@ambitcapital.com
Hitakshi Mehra India (022) 30433204 hitakshimehra@ambitcapital.com
Nityam Shah, CFA USA / Europe (022) 30433259 nityamshah@ambitcapital.com
Parees Purohit, CFA UK / USA (022) 30433169 pareespurohit@ambitcapital.com
Praveena Pattabiraman India / Asia (022) 30433268 praveenapattabiraman@ambitcapital.com
Production
Sajid Merchant Production (022) 30433247 sajidmerchant@ambitcapital.com
Sharoz G Hussain Production (022) 30433183 sharozghussain@ambitcapital.com
Joel Pereira Editor (022) 30433284 joelpereira@ambitcapital.com
Nikhil Pillai Database (022) 30433265 nikhilpillai@ambitcapital.com
E&C = Engineering & Construction

November 17, 2014 Ambit Capital Pvt. Ltd. Page 112


Mayur Uniquoters

Explanation of Investment Rating

Investment Rating Expected return


(over 12-month period from date of initial rating)
Buy >5%

Sell <5%

Disclaimer
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Additional information on recommended securities is available on request.


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