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Deutsche Bank

Markets Research
Asia Strategy Date
9 January 2017
India
India Equity Strategy
Strategy Update

Abhay Laijawala
Research Analyst (+91) 22
7180-4031
abhay.laijawala@db.com

2017 Outlook: A year of uncertainties


Abhishek Saraf, CFA
Research Analyst (+91) 22
Market to be volatile and uncertain in 1H, recover in 2H 7180-4221
We expect the market to move in a narrow range during 2017, with recovery likely in the abhishek.saraf@db.com
latter part of the year. Unless the union budget surprises positively with a tax induced fiscal
stimulus, the market is likely to mirror the movement seen in 4Q16, with FIIs continuing to
stay on the sidelines while locals provide buying support. The articulation of President
Trump’s economic policies will be
9 January 2017

India Equity Strategy

the most determining global factor particularly for FII liquidity followed by the outcome of
the French and German elections, how the UK manages ‘Brexit’ and the path of CNY.
Domestically, verdict of 5 state elections in Mar’17, Union Budget in early Feb’17,
developments over roll out of GST and other executive actions hold key to earnings and
sentiments. We are setting Dec’17 Sensex target of 29,000 (~8% upside) implying PE of 16.4x
on FY18 EPS.
Key themes: US$/global growth plays, rate-sensitives and pro poor/rural plays Key
investment themes in 2017: (1) beneficiaries of a stronger global banking sector and
appreciating US$ - IT Services (2) global growth beneficiaries – Metals, Automobiles (3)
beneficiaries of the 6 year low consumer finance interest rates and (4) aggressive
government focus on pro poor and pro rural initiatives - Automobiles, Consumer durables,
consumer staples. O-Wt: IT, Autos, Staples, Energy, Materials, Utilities; U-wt: Financials,
Healthcare, Industrials, Telecom. Our top large cap picks are: Auro Pharma, BPCL, Maruti,
NTPC, SBI, Shree Cement, Tata Motors, TCS, Tech M, Vedanta India, Yes Bk.
From monetary to fiscal policy: Will union budget be a game changer in 2017? The trinity of
elevated oil/commodity prices, strengthening US$ and rising global bond yields may
constrain the RBI in pursuing significant monetary accommodation in 2017 and hence
transfer the onus of boosting growth to the government. It may embark on a fiscal stimulus
with higher expenditure on rural infrastructure and pro-poor initiatives. It is also likely that
the government cuts direct taxes sharply to complement near 7-year low interest rates to
jumpstart aggregate demand and raise India Inc’s capacity utilization. These initiatives may
be funded by innovative taxation and a mild fiscal stretch.
Goods and Services Tax: the bitter medicine that needs to be swallowed
While we strongly believe that India must move to a GST regime, the transition is likely to be
disruptive for large sections of the economy and Small and Medium Enterprises particularly
(SME’s). The SME’s constitute 40% of GDP and are the second largest employer in the country
after agriculture. Many SME’s have been impacted very significantly following
demonetization and may be impacted further as GST is introduced. Based on the progress on
GST so far, we estimate that the GST could be implemented in 2QFY18. Consequently, we see
a high risk to consensus earnings growth expectations for FY18 which may need to be revised
downwards in 2HFY18.
DIIs will be market stabilizers; Mid caps to stay buoyant
Our global economics team sees upside risks to both US interest rate trajectory and US$,
implying that foreign institutional investors flows will be muted at least in 1QFY18. Domestic
institutional investors [DIIs] will - for the third year in succession- remain the mainstay of
institutional inflows as the conventional lure of physical assets i.e. Gold and Real estate fades.
Mid caps to stay buoyant
As DII flows are likely to predominate, mid cap stocks appear poised to outperform Sensex.
In addition, the PE premium of mid cap index has now declined sharply to 2% vs 17% at the
start of 2016. We do not rule out expansion in mid cap’s premium in 2017. Our top mid cap
picks are: CESC, Petronet LNG, Ramco Cements, REC, Shriram Trans Fin, UPL.
_______________________________________________________________________________________________________________
_
Deutsche Bank AG/Hong Kong Distributed on: 09/01/2017 18:30:45 GMT
Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the
firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P)
057/04/2016.

Contents
The landscape in 2016 ..............................................................................................3
Gazing into the crystal ball – Volatile 1H, modest recovery in 2H 2017 ....................4
Domestic Institutional Investors will remain market stabilizers ................................4
Transition from monetary to fiscal policy: Will Union Budget be a game changer in
2017? ........................................................................................................................5

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9 January 2017
India Equity Strategy

Investor positioning, Market themes, portfolio and top picks...................................5


Dec’17 Sensex target at 29000, implying an upside of 8% from current levels .......6

Model Portfolio...................................................................... 7
Top Large Cap Picks ............................................................ 10
Auro Pharma (Buy, Target Price: INR921, Upside: 33%) ........................................ 10
BPCL (Buy, Target Price: INR710, Upside: 7%) ...................................................... 10
Maruti Suzuki (Buy, Target Price: INR6,200, Upside: 10%) .................................... 11
NTPC (Buy, Target Price: INR200, Upside: 22%) .................................................... 11
Shree cement (Buy, Target Price: INR18,450, Upside: 29%) .................................. 12
State Bank of India (Buy, Target Price: INR315, Upside: 28%) ............................... 12
Tata Motors (Buy, Target Price: INR575, Upside: 15%) .......................................... 13
TCS (Buy, Target Price: INR2,900, Upside: 27%) .................................................... 13
Tech Mahindra (Buy, Target Price: INR680, Upside: 45%) ..................................... 14
Vedanta (Buy, Target Price: INR277, Upside: 20%) ................................................ 15
Yes Bank (Buy, Target Price: INR1,450, Upside: 16%) ........................................... 16

Top Mid Cap Picks .............................................................. 17


CESC (Buy, Target Price: INR810, Upside: 27%) .................................................... 17
Petronet LNG (Buy, Target Price: INR415, Upside: 11%) ....................................... 17
Ramco Cement (Buy, Target Price: INR660, Upside: 14%) .................................... 18
Rural Electrification Corp (Buy, Target Price: INR145, Upside: 12%) ...................... 18
Shriram Transport Finance (Buy, Target Price: INR1,100, Upside: 18%) ................ 18
UPL (Buy, Target Price: INR800, Upside: 21%) ...................................................... 19

From monetary to fiscal policy .......................................... 20


Over from RBI to New Delhi ................................................................................... 20

Government policies will be key driver for markets ........ 22


GST a critical influencer for markets in 2HFY18 ...................................................... 22
Significant progress on GST already made, few knotty issues remain unresolved . 22

A tale of two investors ....................................................... 23


Rising global rates will impact FIIs flows, DIIs will yet again remain the mainstay of
institutional flows .................................................................................................... 23

Mid caps likely to stay buoyant on DII interest ................ 26


DII flows have exceeded FII flows in past 2 years .................................................. 26
Premium valuation of mid cap has shrunk .............................................................. 26

Sensex valuation at slight premium to 5-10 yrs avg ........ 28


Sensex trading 2%/4% above 5 yr/10yr average valuations ................................... 28
MSCI India sector P/E relative to MSCI India P/E.................................................... 33

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The landscape in 2016


As we look into 2017 the domestic macro environment presents a mixed picture. Inflation
has declined, interest rates are now down to the lowest levels in near 7 years, the Balance
of Payments appears to be in good shape with steady FDI flows and a low current account
deficit. However, economic growth – which had dropped to 7.2% in 1HFY17 from 7.6% in
FY16 – is expected to stay below 7%, disrupted by the demonetization exercise affected in
November. Our economists expect GDP growth to slow to 6.5% in FY17 and recover to 7.5%
in FY18. Capital formation growth remains frustratingly anemic – for the fifth consecutive
year now - in fact declining by 4.4% in 1HFY17 despite governments higher spends on
infrastructure since last year.

The BSE Sensex stayed rangebound (up just 2% yoy in 2016) though the mid cap index was
up 7% - a strong reflection of domestic investor flows dominating market liquidity. Domestic
Institutional Investor (DII) buying has managed to offset the sharp selling by Foreign
Institutional Investors (FII’s), particularly in Oct-Dec 2016. In Oct-Dec 2016 FII’s net sold
US$4.6bn of equities while DII’s net bought US$5.2bn, strongly insulating the market from
foreign selling. The robustness of domestic institutional inflows is attributed to the strong
resilience seen in retail flows into equity mutual funds (monthly average inflows of
US$680mn in 2016).

For the third consecutive year, corporate earnings growth has belied expectations.
Consensus earnings growth for FY17 now stands at 8.6% (was 17.5% at the beginning of the
fiscal year in April). More importantly, FY18 consensus earnings growth expectations look
unrealistically high at

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India Equity Strategy

19.5%. The rollout of the Goods and Services Tax remains by far the biggest determinant
for corporate earnings in FY18. While we strongly believe that India must move to a GST
regime, the transition is likely to be disruptive for large sections of the economy and
particularly Small & Medium Enterprises (SME’s). The SME’s constitute 40% of GDP and are
the second largest employer in the country after agriculture. Many SME’s have been
impacted significantly following demonetization and may be impacted further as GST is
introduced. Based on the progress of GST so far, we estimate that the GST could be
implemented in 2QFY18. Consequently, we see a risk to consensus earnings growth
expectations for FY18 which may need to be revised downwards in 2HFY18.

Markets to be volatile in 1H, modest recovery in 2H 2017


We expect the market to move in a narrow range during 2017, with a perceptible recovery
seen towards the latter part of the year. Unless the union budget surprises very positively
through a tax induced fiscal stimulus, the market is likely to mirror the movement seen over
past three months with FII’s continuing to stay on the sidelines while locals provide buying
support. In the first half of the calendar year the market will be influenced by a combination
of both domestic as well as global factors. The articulation of President Trump’s economic
policies will be the most determining factor – particularly for FII liquidity – followed by the
outcome of the French and German elections, how the UK manages ‘Brexit’ and the path of
the Chinese renminbi. Among domestic factors we see two events that will shape market
direction – the union budget and the verdict from five state elections in Feb-March. The
Budget is scheduled to be presented on February 1 and the election verdict will be out on
March 11, 2107. In 2H domestic factors will take over as the key market determinants,
particularly the rollout of the GST. This may likely emerge as the single biggest determinant
for economic growth and corporate earnings in 2HFY18. As is true of the adage that the
most effective medicine is bitter when swallowed, we believe that this highly anticipated
economic reform may prove to be disruptive in the initial roll out period, which could impact
aggregate demand and corporate earnings.

Domestic Institutional Investors will remain market stabilizers


Our global economics team believes that Trump’s economic plan should rebalance the
policy mix and will be a game changer for the US. This makes us very bullish on US growth.
Fiscal stimulus and broad-based deregulation are expected to jolt the US economy toward
a long-term equilibrium of higher growth, inflation, and interest rates. The policy shift could
see upside risks to both – US interest rate trajectory and the appreciation of the US dollar.
In our view, following the inauguration of President Trump on January 20 and the
articulation of the new administration’s economic policy, we may see the US dollar index
resume the appreciation trajectory, which could see foreign institutional investors either
selling or stay on the sidelines at least in 1QFY18. The government of India can possibly
circumvent this by announcing a game changing budget focused a massive rehaul of the
direct tax regime in India.

With subdued FII participation, all eyes will be on local investors, who have kept markets
steady over 4Q despite a bout of aggressive FII selling. We believe that the ongoing
transition from physical to financial savings and emerging constraints on the declining
trajectory in bond yields bode very well for equities. In 2016 retail investors have invested
close to US$680mn/month in domestic equity mutual funds. We see this trend getting
entrenched even further in 2017 as the bond markets near the end of a near two year bull
market.

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India Equity Strategy

Transition from monetary to fiscal policy: Will Union Budget be a


game changer in 2017?
Elevated oil and commodity prices, strengthening US dollar, the prospect of rising bond
yields in developed markets and a likely compulsion by the government to stretch the fiscal
deficit are set to emerge as likely constraints for the RBI in pursuing monetary policy
accommodation in 2017 after a two year period which has seen policy interest rates decline
by 175bps. With the emergence of the abovementioned global factors, we see the onus for
boosting growth transitioning from the RBI to the government of India.

If the government wants to restore economic growth – sustainably - towards a 7.5% -8%
range it needs to revive capital formation, which unfortunately cannot be revived
meaningfully without a pickup in private sector capital expenditure. In our view the
combination of a more than six year low in interest rates (Govt ten year treasury yield at
6.4%, AAA one year corporate bond at 6.9% and SBI’s mortgage rate of 8.65%) coupled with
a radical rehaul in direct taxation (Income and corporate taxes) could be a game changer in
aiding capital formation. The combination of lower interest rates and sharp reduction in
direct taxes may be the most appropriate solution to reviving India Inc’s capacity utilization
rates which have now stayed sub optimal for five years, holding back the need for new
capacity creation. However, we concede that the government may need to look at
additional sources of tax revenue – including the introduction of newer taxes - coupled with
a stretch in the fiscal deficit to implement a radical rehaul of direct taxes – reducing tax
rates, eliminating exemptions and simplifying the tax structure. In our view a very modest
banking transaction tax could provide the government with substantial fiscal
maneuverability to attempt a rehaul of direct taxation – income and corporate taxes.

Investors will however need to be realistic of India’s political economy, with 2017 being the
third year of the political term of the government. Expenditure on social spending, anti
poverty programs and rural infrastructure is set to rise, which may again create the need
for additional resources. India’s tax-GDP ratio needs to rise substantially if the government
wants to achieve the twin objective of jumpstarting aggregate demand through direct tax
cuts, while creating the resources to fund rural infrastructure and poverty alleviation
schemes, which the Modi administration has been highlighting following the
demonetization exercise.

Investor positioning, Market themes, portfolio and top picks


The key investment ideas in 2017 will be (1) beneficiaries of a stronger global banking sector
and appreciating US$ - IT Services (2) Global growth beneficiaries – Metals, Automobiles (3)
beneficiaries of a six year low in consumer finance interest rates and (4) aggressive
government focus on pro poor and pro rural initiatives - Automobiles, Consumer durables,
consumer staples.
We have a barbell portfolio with 5 o-wt sectors, 4 u-wt sectors and 1 neutral positioning. Oil
and Gas, IT Services, Automobiles and Consumer Staples constitute our biggest overweights
while banking and financials constitute our biggest underweights.

Our OW on IT services is premised on our belief that global IT spending will recover in 2017.
According to our US strategist, the US financial sector is expected to be a big beneficiary of
Trumponomics owing to (1) lighter touch regulation and a less hostile environment, (2)

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India Equity Strategy

higher interest rates and (3) lower US corporate tax rates. Interest rates are also hardening
in other developed markets including the Eurozone and the UK. The end of negative interest
rates and steepening yield curves in developed markets should be very positive for global
banking, financial and insurance sector – which have seen considerable stress over past one
to two years - which constitutes close to 40% of Indian IT sector revenues. A depreciating
rupee should also help offset the headwind of increased H1B visa costs. In addition
valuations are also highly supportive. The sector trades at a PE relative of less than one
(relative to MSCI India) last seen in 2009. TCS and Tech Mahindra are our preferred picks in
the sector.

We are underweight on financials as we see several near term challenges for banks – growth
remains extremely slow at just 5-6% in terms of loans, liquidity appears to abundant (banks
are sitting on 11-12% additional SLR). These factors should induce banks to cut rates (SBI
has already taken the first move) thereby impacting NIMs. Thus revenue drivers for the
sector will be weak for next 3-6 months. This is happening at a time when credit costs will
remain heavy for corporate banks, as they improve their coverage ratios and this in turn will
have earning implications. We however believe that growth will gradually get better on the
back of a likely quick remonetisation, lower rates and a likely growth oriented budget and
expect a stronger second half for the sector. We prefer wholesale funded financials within
the sector.

Over weight: Autos, Consumer Staples, Energy (mainly through Oil & Gas), IT
Services, Materials (Chemicals, Construction Materials, Metals), and Utilities
(through Electric utilities and IPP)
Under weight: Financials (through Banks, Diversified Financials and Mortgage Fin), Healthcare,
Industrials and Telecom.

Our top picks in large caps are: Auro Pharma, BPCL, Maruti, NTPC, SBI, Shree Cement, Tata Motors,
TCS, Tech Mahindra, Vedanta India, Yes Bank

Our top picks in mid caps are: CESC, Petronet LNG, Ramco Cements, REC, Shriram Trans Fin, UPL.

Dec’17 Sensex target at 29000, implying an upside of 8% from current


levels
We are setting year end Dec’17 Sensex target at 29,000, implying an upside of 8% from
current levels. At our target, Sensex will trade at 16.4 times FY18 EPS (DB est) and 14.2 x on
FY19 EPS (Cons est), versus the 5 year average 1yr fwd PE multiple of 17.2x and 10-year
average multiple of 16.8x. While the target multiple may appear cheaper compared to
historical averages, we believe there remains risk of cuts to consensus FY18 earnings
forecast particularly as and when GST is rolled out and its near term disruptive impact is
digested by the market.

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India Equity Strategy

Portfolio positioning

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India Equity Strategy

Model Portfolio

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India Equity Strategy

 Aurobindo has
Top Large Cap Picks been moving
up the value
chain in terms
of product
Auro Pharma (Buy, Target Price: INR921, Upside: 33%) complexity in
 Aurobindo’s consistent and timely product approvals in US (highest amongst peers the US
for 2014- YTD 2017) demonstrates its strong regulatory compliance of its US FDA (injectables,
facilities. Faster approvals and market share gains in recently launched products opthal,
will drive US business growth of c17% CAGR over FY16-18E. respiratory,
controlled

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9 January 2017
India Equity Strategy

substances) which should aid in improving profitability and sustainability of Harshad Katkar (+91) 22
revenues. 7180 4029
harshad.katkar@db.com
 The EU business turnaround (loss making at the time of acquisition) is on track to
achieve 7-8% EBITDA margin by FY18. We expect the profitability to improve as it
backward integrates more products to India, ramps up its own filings, launches Amit Murarka
own products in EU. (+91) 22 7180 4069
amit.murarka@db.com
 We expect valuation discount to converge on back of healthy earnings growth of
c21% CAGR over FY16-18E driven by improving product mix in US and EU margin
expansion. Stock trades at 17.3x on FY17 and 13.9x on FY18 EPS respectively which
is c25% discount to its average PER of 18x for past two years and 25-40% discount
to Sun and Lupin.
 Key downside risks: any delays in USFDA approvals of key ANDAs filed or any
delays in EU site transfer of products could cap margin expansion.

BPCL (Buy, Target Price: INR710, Upside: 7%)


 BPCL is the 2nd largest public sector oil refining and marketing company in India
with 24.5 MMTPA total refining capacity. BPCL also has a significant presence in
upstream E&P through equity stakes in large hydrocarbon discoveries in
Mozambique and Brazil.
 We estimate BPCL’s refining segment EBITDA to increase by 40% over FY16-18E
driven by higher refining margins and throughput post Kochi capacity expansion.
 We expect net auto fuel marketing margin to improve over the next 12m by over
10% – every INR0.5/lit increase in margin improves BPCL’s FY17e EPS by 13%.
 Strong oil products consumption growth of ~7% p.a. should support increase in
marketing segment profitability. Consumption growth has been 9.7% YTDFY17
and 10.9% growth FY16 (highest in last 10 yrs).
 We forecast EBITDA/ net profit growth of 13%/ 14% CAGR over FY1618E.
 BPCL is currently trading at FY18 P/BV of 2.0x and P/E of 9.3x which adjusted for
the value of its upstream business is trading at a 10-15% discount to regional
peers.
Kartik Mehta (+91) 22 7180 4210 kartik-a.mehta@db.com

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India Equity Strategy

 Key risks are sharp increase in oil prices, imposition of subsidy sharing on OMCs and Abhishek Puri (+91)
delay in development of its upstream oil & gas assets particularly in Mozambique. 22 7180 4214
abhishek.puri@db.co
m
Maruti Suzuki (Buy, Target Price: INR6,200, Upside: 10%)
 Our preference for Maruti is based on the company’s model pipeline (the strongest in
recent history), which should result in resilient market share and improved pricing
power.
 The company has now been able to demonstrate that it is able to use pricing power to
stave off the negative FX impact. This is a structural change and should positively affect
its earnings trajectory and reduce volatility in margins. In the near term a depreciating
JPY will have a positive impact on margins. Our global team expects the JPY to
depreciate to 125 by Dec 2017.
 The company will likely be the key beneficiary when the demand recovery in P/V
resumes after the initial shock.
 The stock trades at 20x FY18E P/E and 5% FCF yield. While the stock is expensive
relative to history, its competitive position has also become structurally stronger. We
forecast a FY17-19E EPS CAGR of 17%.

NTPC (Buy, Target Price: INR200, Upside: 22%)


 75% addition to regulated equity over FY16-19 to drive strong EPS growth and RoE
expansion. PBT Growth – 22% CAGR over FY16-19E.
 The company is reducing its costs and gaining market share in a weak market and is
better prepared when the market picks up. The upside to flow: 1) higher power
demand due to lower coal costs (and coal import substitution); and 2) Uday
distribution reforms to improve SEB health – addressing demand issues as well as
counterparty risks.
 NTPC’s new CEO has proactively reached out to its key stakeholders and resolved long-
pending issues:
 A) With the regulators – regulations are now balanced vs. unfavourable for power
generators earlier in 2014-19 tariff norms. (a) Sale of excess power allowed – provides
upside opportunities. (b) Compensation for operational parameters, if utilisation is
lower due to the fault of State utilities – protects downside risks.
 B) With Coal India – the agreement to supply higher domestic coal, eliminate costlier
imports and improved coal quality is a positive – leading to a cut in fuel cost over the
last year, despite price rise.
 NTPC has improved upon its core operations – leading to lower coal consumption, i.e.,
higher incentives with core ROE of >19%.
 Valuations look reasonable at 1.3x FY18E P/B when interest rates are declining, for
16/23% PAT/EBITDA CAGR for FY16-19E and expanding ROE (c.300bps) to >14% by
FY19e.

Amyn Pirani (+91) 22 7180 4355 amyn.pirani@db.com

Srinivas Rao, CFA (+65) 6423 4114 srini.rao@db.com

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India Equity Strategy

Shree cement (Buy, Target Price: INR18,450, Upside: 29%) Manish Karwa
(+91) 22 7180 4212
 Its strong capacity addition pipeline in East and North India should position it as the manish.karwa@db.c
third largest player by end-FY17E and help drive a 11% volume CAGR over FY16-19E. om
 It remains the cost leader in the Indian cement industry by a large margin (15% lower
than the nearest competitor). Manish Shukla (+91)
22 7180 4211
 These factors should help drive a 24% OCF CAGR over FY16-19E. This is driven purely
manish.shukla@db.c
by the company, without assuming any meaningful improvement in sector
demand/supply balance before FY19E. om

 In our view, the valuation on current production does not appear to build in any upside
Tata Motors (Buy,
from the company's strong operating leverage (given capacity utilization of around Target Price:
62% in FY18E) or any major upside from an upcycle. INR575, Upside:
 Valuation: Our 12M TP is derived from an average of EV/t of cement capacity of US$ 15%)
280, EV/t of reserves of US$ 5.0, life-of-mine DCF and 16.8x EV/EBITDA. We believe
 TAMO’s global
this is reasonable considering the company's continued cost leadership and strong
luxury
capacity addition pipeline.
volumes are
 Risk: The key risks are (1) a quest for market share irrespective of profitability levels, expected to
and (2) lower-than-expected demand growth. If volumes were 1% lower than our improve over
estimates, this would have a 3% impact on our FY17E EPS. Likewise, a 1% lower-than- the next three
expected price would have a 6% impact on our FY17E EPS. to six months,
driven by new
launches in
State Bank of India (Buy, Target Price: INR315, Upside: 28%) the SUV
 Over the long run, SBI is likely to be key beneficiary of demonetization. It is a leader in portfolio.
credit cards, debit cards, digital products and has a disproportionate share in rural While 2016
lending and government business/ was driven by
new sedan
 It is the only PSU bank which has been gaining share in loans and SA deposits, despite launches, we
the NPL challenges. note that
 While in the immediate term, NIMs could moderate a bit, over the medium term, its TAMO’s
43%+ CASA ratio and a strong retail liability franchise would result in a ~3%+ margins profitability is
in medium term. driven by its
SUVs.
 While concerns on asset quality prevail, we believe that the worst of NPL recognition
and credit costs are behind – slippages were at 3.4% and credit costs at 2.1% in 2QFY17,  We also
and should gradually decline FY18 onwards. expect the
GBP
 Valuations at 1.0x FY18E P/B and 10x FY18E P/E for a likely 10% medium term RoE
depreciation
remain attractive.
to start
positively
affecting
margins from
4QFY17
onwards. A
10%
depreciation
Chockalingam Narayanan (+91) 22 7180 4056 chockalingam.narayanan@db in the
.com GBP/USD
leads to a 15-
20% increase
in TAMO’s EPS

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9 January 2017

India Equity Strategy

after a lag of three to four quarters. Aniruddha Bhosale (+91)


22 7180 4037
 TAMO trades at FY18E EV/EBITDA of 4.8x (adjusted for difference in R&D accounting)
aniruddha.bhosale@db.c
for a FY17-19E EBITDA and EPS CAGR of 25% and 41%, respectively. This is at a premium
to global peers such as BMW/Daimler, which trade at 3.8-4x. om

 We believe the premium is justified given the higher volume growth as well as
expected margin expansion as a result of GBP depreciation.

TCS (Buy, Target Price: INR2,900, Upside: 27%)


 Faster US and weak rupee tailwinds to 2017 revenue growth:
 Turnaround in revenue growth in the Financial Services vertical (44% of revenues) on
account of:
 Faster growth in the largest market - USA (52% of revenues)
 Lifting of regulatory overhang on key European Banking clients
(viz, Credit Suisse, Deutsche Bank and Barclays)
 Rupee depreciation should further air revenue growth and margins
 We expect TCS to deliver sector-leading USD revenue CAGR of 12.6% in FY17E-19E
 Strategic vendor status and diversified portfolio helping the company make market
share gains:
 TCS ranks among the top-tier vendors for most of its large customers. Thus, it has
benefitted from the vendor consolidation exercise at these customers
 Key success factors:
 Geographically distributed global delivery centres and improved client mining over the
past five years.
 Strong and longstanding relationship between business relationship managers (BRM’s)
and clients Vendor Management Officers (VMOs). The reorganization at Infosys and
Wipro has hurt them on this parameter
 Very high CEO-level engagement. Personal interest taken by Chandra in each
engagement from large or potentially large customers. Consistent and stable second
level leadership (unlike Infosys/TCS) has also helped
 High exposure to insurance vertical (12-13% vs. 7% for Infosys) is shielding TCS from
the drop in business from the banking and financial services (BFS) customers
Amyn Pirani (+91) 22 7180 4355 amyn.pirani@db.com

Srinivas Rao, CFA (+65) 6423 4114 srini.rao@db.com

Page 14 Deutsche Bank AG/Hong Kong


9 January 2017
India Equity Strategy

 Stable margins:
 Despite pricing pressure and growth moderation, TCS has managed to maintain
operating margins (EBIT) above 26%
 This has been managed by investing the savings from a weak rupee and utilisation
benefits into improved investment in SG&A; this has been further boosted by the
recent rupee depreciation
 Inexpensive valuation; well-supported by superior earnings growth:
 Given TCS’s premium vendor status, it will gain the most as spending recovers
 We value the stock at 20x FY17E and a PEG of 1.6x, supported by an earnings CAGR of
13% for FY17E-19E

Tech Mahindra (Buy, Target Price: INR680, Upside: 45%)


 Long term fundamentals improving
 The confluence of
 (a) recovery in telecom revenues (48% of revenues),
 (b) continuation of revenue momentum in the enterprise business and
 (c) revenue recovery and operational efficiency-driven margin improvement,
 Backed by improvement in deal wins – particularly in the hitherto underperforming
telecom vertical, we believe the company is poised to deliver a strong performance in
2HFY17E
 Given a robust revenue and margin recovery in sight, we believe that at 10xFY17E, the
stock is attractively priced. We maintain Top Buy along with TCS.
 Telecom revenue growth supports our positive view
 A 25% rise in revenues in the telecom vertical in FY16, we believe:
 stability in revenues from top customers;
 M&A-related integration revenues from 2QFY17;
 closure of large managed services and transformation contracts in 2QFY17, will
support our modest 1.1%yoy USD revenue growth forecast from this vertical.
 We expect enterprise revenues to grow 14%yoy in FY17, supported by:
 CY15 deal wins (TCV of USD530m+);
 strong business momentum in recent quarters.
 Overall, we expect USD revenues to grow 7.6% yoy in FY17 (vs. ~8% organic in FY16).
 Tighter cost controls and better utilization to drive margin upside potential
 Operational improvements implemented by management since September 2015
should begin to take effect in 2HFY17, delivering a healthy operating margin
expansion;
Aniruddha Bhosale (+91) 22 7180 4037 aniruddha.bhosale@db.com

Deutsche Bank AG/Hong Kong Page 15


9 January 2017

India Equity Strategy

 This should be a function of tighter cost controls on recent acquisitions (LCC) and
better utilization
 In our view, this, along with revenue growth revival in the telecom business will drive
a 240bps yoy EBIT margin expansion in FY18 to 15.4%.
 Still our top Buy with a target price of INR680
 We base our target price on a P/E of 17x FY17E earnings (PEG of 0.8)
 Downside risks include: 1) high vertical and client concentration, with >48% of
revenues from the telecom vertical; and currency fluctuation risk.

Vedanta (Buy, Target Price: INR277, Upside: 20%)


 Positive price outlook for Zinc – with zinc business (Hindustan Zinc and Zinc
International) contributing ~50-52% of consolidated EBITDA in FY17-18, a zinc price
uptick would have a significant positive impact on the earnings and fair valuation of
Vedanta;
 improving visibility on the Cairn-Vedanta merger, which should help resolve the long-
pending cash fungibility issues for Vedanta Ltd, support deleveraging and also simplify
the corporate structure; and
 improving operating cash flows from the company’s aluminium business supported by
a combination of volume growth from asset sweating as well as operational
efficiencies.
 Competitive position of Indian upstream aluminum operations has improved to second
quartile following operating cost savings from ramp up and stabilization of newly
commissioned facilities.
 Merger with Cairn India should help improve capital allocation efficiency across the
various group entities, with better alignment of the promoter interest with that of the
minorities.
 Any improvement in visibility on the potential sale of the government’s stake in
Hindustan Zinc would help further resolve the cash fungibility issues and likely provide
a strong stock price trigger.
 Vedanta India trades at consolidated FY18 EV/EBITDA of 4.86x
(attributable) which is at a ~25% discount to its global peers.
 Risks: Decline in LME prices; execution delays in zinc and aluminum business; delay in
completion of the merger with Cairn India.

Anuj Singla (+91) 22 7180 4172 anuj.singla@db.com

Page 16 Deutsche Bank AG/Hong Kong


9 January 2017
India Equity Strategy

Yes Bank (Buy, Target Price: INR1,450, Upside: 16%)


 Yes is the biggest beneficiary of an easy liquidity environment; we expect Yes to be
amongst the very few banks wherein NIMs would improve
 CASA ratio for Yes Bank is improving at a strong pace. CASA ratio is now >30% and we
believe it will improve further. This will result in ~3.5% NIMs for the bank.
 Loan growth at 38% remains much higher than the industry average. This will moderate
but will still remain strong at ~25%
 Asset quality is stable, with gross NPLs <1%. It is significantly building its distribution
network and rolling out new retail products. Tailwinds for growth remain strong.
 Valuations at 2.4x FY18E P/B and 11.5x FY18E P/E for a likely 22%+ RoE remain
attractive.

Manish Karwa (+91) 22 7180 4212 manish.karwa@db.com

Manish Shukla (+91) 22 7180 4211 manish.shukla@db.com

Deutsche Bank AG/Hong Kong Page 17


9 January 2017

India Equity Strategy

Harshad Katkar

Top Mid Cap Picks (+91) 22 7180 4029


harshad.katkar@db.
com

CESC (Buy, Target Price: INR810, Upside: 27%)


Amit Murarka
 The core power business could deliver 30% CAGR over the next three years on capacity (+91) 22 7180 4069
expansion (Haldia and re-start of Chandrapur power project – Coal linkage and PPA amit.murarka@db.c
with Noida Power approved). om
 CESC can triple its earnings over two years if the Chandrapur project turns around – it Ramco Cement
has received coal linkage, 100MW PPA started with TN and additional 187MW PPA
(Buy, Target Price:
approved with Noida Power at 15.5% ROE which will help company to recover interest
and depreciation, and make a positive contribution.
INR660, Upside:
14%)
 Non-core businesses are turning around with cost rationalization, which seems
sustainable - the margins for BPO (Firstsource) and Retail (Spencers) business have  It has
room for improvement as it is lower than peers. achieved
 It has won franchise for electricity distribution in Kota and Bharatpur in Rajasthan for significant
20 years. With an initial capex of INR 1.5bn, revenue is expected to be 7.5bn which will cost
give boost to its existing distribution business. reductions on
the back of
 Valuations are reasonable at 1.1x P/B for FY18E with ROE improvement to 12-14% by improved
FY18-19e, as well as a 44% EPS CAGR over FY16-19E. blending,
higher
proportion of
Petronet LNG (Buy, Target Price: INR415, Upside: 11%) sales from
 Petronet LNG (PLNG) is the largest LNG importer and regasification player in India (75% satellite
market share) with a capacity of 20mmtpa. grinding units,
higher
 We expect LNG consumption in India to grow sharply driven by low prices and volumes from
industrial recovery; PLNG being the market leader is well placed to benefit. coastal
 We expect LNG volume growth at 18% CAGR over FY16-18 to drive 42% CAGR in EBITDA shipping for
and 41% CAGR in EPS CAGR for PLNG over this period. Eastern India
volumes and
 PLNG has long term contracts for off-take of 14.75 MMTPA p.a. at Dahej on take or pay
the
basis which should ensure utilization of 98%.
commissionin
 Kochi LNG terminal utilisation remains extremely low at less than 10%; progress on the g of limestone
proposed Kochi-Mangalore pipeline may provide a positive surprise on volumes. beneficiation
units.
 PLNG is currently trading at 3.2x FY18e PBV with RoE of 22.3%.
 Its growth
capex has
been
completed,
bringing D/E
to below 1x,
Abhishek Puri (+91) 22 7180 4214 abhishek.puri@db.com
 Our earnings
model
suggests
Ramco can
deliver 15%
EPS CAGR
(FY16-19E)

Page 18 Deutsche Bank AG/Hong Kong


9 January 2017
India Equity Strategy

even under moderate demand conditions. Manish Shukla (+91)


22 7180 4211
 Valuation: To arrive at our 12-month target price, we use an average of (a) ) EV/EBITDA
manish.shukla@db.c
of 13.5x (b) EV/t of cement capacity of US$150, (c) EV/t of limestone reserves of US$
3.0 and (d) Life of Mine DCF. om

 Risk: Lower than expected volumes and prices remains the key risks. Our model
Manish Karwa
suggests, in the event, volumes fall by 1%, FY17E EPS falls by 2%. Likewise, if price falls
(+91) 22 7180 4212
by 1%, then EPS falls by 5%. Also, an increase in support to group companies needs to
manish.karwa@db.c
be watched out.
om

Rural Electrification Corp (Buy, Target Price: INR145, Upside: 12%)


 The success of the UDAY Scheme implemented by the central government should lead
to improved health of state electricity boards (SEBs) which in turn should reduce asset
quality concerns for REC.
 Incremental growth is being driven by generation (traditional as well as renewable)
and transmission projects. We expect REC to deliver loan growth of 13-15% over next
two years.
 2QFY17 NIM was at 4.8%, which is higher than what was seen at most banks and
NBFC’s. We expect NIMs to remain healthy as funding costs decline on sharp fall in
wholesale funding costs.
 Valuations are very attractive with the stock trading at FY18E P/B of 0.7x (which is Manish Shukla (+91)
almost a 25% discount to past five year average) and P/E of 4x for FY18E RoE of 17% 22 7180 4211
and dividend yield of ~4%. manish.shukla@db.c
om

Shriram Transport Finance (Buy, Target Price: INR1,100, Upside: 18%)


Manish Karwa
 SHTF AUMs continue to grow at a healthy pace. AUM growth in 2QFY17 was 19% YoY. (+91) 22 7180 4212
Although we believe this might get impacted due to demonetization, but should manish.karwa@db.c
recover from 2HFY18 onwards. om

 Weak economic conditions over the past few years have led to elevated credit costs, UPL (Buy, Target
which should fall over time as economy improves. Price: INR800,
 Sharply lower funding costs due to strong system liquidity should help in lowering the Upside: 21%)
funding costs which should lead to NIM expansion.
 UPL produces
 The stock trades at FY18E P/B of 1.6x and P/E of 10.8x for FY18E RoE of 16% and
and markets
earnings CAGR of 29% over FY16-18E.
generic crop
protection
chemicals
(pesticides) in
Chockalingam Narayanan (+91) 22 7180 4056 chockalingam.narayanan@db
120 countries
.com
and has c.4%
global market
share. UPL is
world’s 4th
largest generic
agchem
company by
revenue and
80% of its

Deutsche Bank AG/Hong Kong Page 19


9 January 2017

India Equity Strategy

revenue comes from outside India. It also produces post-harvest chemicals (brand
Deco) and seeds (through its subsidiary Advanta).
 Low cost manufacturing base in India (50% of global supplies) coupled with a strong
global distribution network are the key sources of its competitive advantage.
 We rate UPL a Buy premised on robust volume growth driven by i) new product
launches and ii) distribution expansion (particularly in Africa, China and the US mid-
west) driving revenue/ EBITDA/ PAT growth of 13%/ 16%/ 24% CAGR over FY16-19E.
 We expect revenue from Brazil (20% of total) to grow >50% in FY17 after 84% YoY
growth in FY16, driven by continuing market share gains by its Unizeb product
portfolio.
 Favorable currency moves in FY17 (YTD INR has depreciated by 2.5% vs. USD and 14%
vs. Brazilian Real) should also support higher revenue growth in FY17. UPL lost 8% of
revenue (in INR terms) in FY16 due to adverse currency movements.
 UPL is also poised to benefit from USD4-5bn of products (10% of market) going off-
patent over the next five years and as production costs in China continue to rise.
 UPL is trading at FY18 P/E of 15x which is a 15-25% discount to global peers.
 Key risks are i) failure of new products, ii) heightened competition, iii) expensive
acquisition and iv) adverse currency movements.
Amit Murarka
(+91) 22 7180 4069 amit.murarka@db.com

Harshad Katkar (+91) 22 7180 4029 harshad.katkar@db.com

Page 20 Deutsche Bank AG/Hong Kong


9 January 2017
India Equity Strategy

passing on from the RBI


From monetary to fiscal policy to the government. The
urgency of a fiscal
stimulus is now
increasing to
Over from RBI to New Delhi
complement the
A significant portion of monetary accommodation which began in January’ 15 seems to be now impressive monetary
coming to a close. The RBI in past 2 years has cut policy repo rate by 175 bps, while the liquidity accommodation which
stance also witnessed a regime shift in early 2016 when RBI in its annual policy transitioned from has resulted in interest
a deficit liquidity stance to a neutral liquidity stance, hinting that the Central Bank was rates now declining to a
comfortable with neutral to surplus liquidity situation, as monetary transmission was expected seven year low.
to be achieved without a deficit scenario. In addition, the recent demonetization drive has added
to easing liquidity scenario as big chunk of cash in circulation has come back into formal fold, Elevated oil and
and it is likely that a nontrivial portion of cash deposits will not be withdrawn and hence remain commodity prices,
with banks. strengthening US dollar,
the prospect of rising
bond yields in
developed markets
could constrain the RBI
in pursuing aggressive
monetary policy
accommodation in 2017
after a two year period
which has seen policy
interest rates decline by
175bps. With the
emergence of the
abovementioned global
factors, we see the onus
for boosting growth
transitioning from the
RBI to the government
of India.

With better part of monetary accommodation (both through lower rates and surfeit liquidity)
now behind us and several segments of the economy (particularly rural India, SMEs and capital
formation) yet to show material signs of recovery, we see the baton for stimulating the economy

GFCF growth (% YoY)


6.0%

5.0%

4.0%

3.0%

2.0%

1.0%

0.0%

-1.0%

Deutsche Bank AG/Hong Kong Page 21


9 January 2017

India Equity Strategy

Source: Deutsche Bank, MOSPI, *Data for FY17 is based on 1st advance estimates

If the government wants to restore economic growth – sustainably - towards a 7.5% -8%
range it needs to revive capital formation, which unfortunately cannot be revived
meaningfully without a pickup in private sector capital expenditure. In our view the
combination of a more than six year low in interest rates (Govt ten year treasury yield at
6.4%, AAA one year corporate bond 6.9% and SBI’s mortgage rate at 8.65%) coupled with a
radical rehaul in direct taxation (income and corporate taxes) could be a game changer in
aiding capital formation. The combination of lower interest rates and sharp reduction in
direct taxes may be the most appropriate solution to reviving India Inc’s capacity utilization
rates which have now stayed sub optimal for almost five years, holding back the need for
new capacity creation.

We concede that the government may need to look at additional sources of tax revenue to
fund any major reduction in personal and corporate taxes. In our view a very modest
banking transaction tax could provide the government with substantial fiscal
maneuverability to attempt a rehaul of direct taxation – Income and corporate taxes.

Investors will however need to be realistic of India’s political economy, with 2017 being the
third year of the political term of the government and a national election in 2019.
Expenditure on social spending, poverty alleviation programs and rural infrastructure is set
to rise, which may again create the need for additional resources. India’s tax GDP ratio
needs to rise substantially if the government wants to achieve the double objective of
jumpstarting aggregate demand through direct tax cuts while also raising public spends on
infrastructure, agriculture and poverty alleviation schemes.

We see a strong likelihood of the government implementing its pro-poor, prorural policy via
several announcements in the upcoming Union Budget where we expect significant hike in
budgetary allocation for rural construction, agriculture and poverty alleviation programs. It
remains to be seen how the finance minister walks the tightrope of achieving the twin
objectives of jumpstarting aggregate demand to stimulate capital expenditure and raising
spending on rural infrastructure and poverty alleviation schemes.

Government policies will be


key driver for markets
GST a critical influencer for markets in 2HFY18
Since it formed the government in 2014 the Modi administration has undertaken several
reform measures which should be highly beneficial for India’s economy in longer term.
These include reforms in power transmission, bank’s NPL recognition, bankruptcy bill,
constituting monetary policy committee, inflation targeting, foodgrain management, direct
benefit transfers, deregulating oil prices, some labor reforms in textile sector, progress on
improving ease of doing business and ramping up public investments. It now appears that
multiple reforms measures are at different stage of progress and government seems to have

Page 22 Deutsche Bank AG/Hong Kong


9 January 2017
India Equity Strategy

largely addressed most of the critical policy decisions practically possible in a short time
period of 3 years.

Among the unfinished agenda, the fruition of the GST now remains the single biggest focus
area for the government. We believe that the government will endeavor to roll out GST in
FY18 itself, despite the pressure to delay it as the economy (particularly the SME segment
which constitutes 40% of GDP) may not be able to cope with multiple transformational
changes (the earlier being the demonetization drive) in the same year. However, given the
recent commentary by the finance minister and regular deliberations of the Central and
State Ministers in GST council makes us believe that the government seems intent on rolling
out GST at the earliest possible, even though some segments of business community may
not be prepared for the new indirect tax regime.

Significant progress on GST already made, few knotty issues remain


unresolved
The committee appears to have made significant headway in terms of identifying the
different slabs and assigning most of the goods and services under a particular slab, the key
unsolved vexatious issue remains that of duality of control over inter-state transactions.
Once this is resolved and solution is arrived at for other issues such as territory definition,
sharing of revenue loss for few states etc. the tax regime appears to be in a reasonable stage
of readiness. While the initial deadline of 1st April 2017 seems difficult to attain, we will not
be surprised if GST is initiated by 2HFY18.

While the long term benefit of a uniform income tax regime is incontrovertible and well
appreciated, we believe that several businesses will take time to adjust to the new tax
dispensation which may be disruptive for operations. Hence we anticipate some earnings
impact once GST is rolled out and expect consensus earnings to be adjusted accordingly.

A tale of two investors


Rising global rates will impact FIIs flows, DIIs will yet again remain the
mainstay of institutional flows
We continue to believe that the environment for FII inflows will remain stressed in 1H2017
– before normalizing in 2H - as key Central bankers worldwide gradually move towards
monetary policy normalization and tighten liberal liquidity injection and policy rates. Global
bond yields have already begun to drift away from zero/negative bounds indicating that the
traditional template for pricing asset worldwide - which was broken for a brief period during
mid 2016 -is being restored. However, this will imply that a significant chunk of funds of
global asset allocator will gravitate towards US assets, primarily exerting pressure on capital
flows for other countries, most markedly for emerging markets.

With rising US bond yields, appreciating USD and an expected fiscal stimulus by Trump
administration it is highly likely that both the capital flows and currencies of most emerging
market will be under pressure- the impact on commodity exporting EMs may however be
less intense than commodity importing EMs. In such a situation India in unlikely to stay

Deutsche Bank AG/Hong Kong Page 23


9 January 2017

India Equity Strategy

insulated and accordingly we expect FII flows to remain volatile and subdued for Indian
equities, particularly in 1H of CY2017.

With FII inflows likely to remain muted, we believe that domestic institutional investors will
- for the third year in succession- remain the mainstay of institutional inflows for Indian
equities. In the past 2 years i.e. CY15 and CY16, DIIs have pumped in ~US$16bn into Indian
equities, which is >2.5x of the US$6.2bn of inflows from foreign institutional investors (FIIs),
during the same period. This trend will be further entrenched in 2017 as we see limited
impediments to continuing equitization of household savings.

The conventional lure of physical assets i.e. Gold and Real estate has already abated
significantly over the past 2 years and is likely to stay muted in foreseeable future as India
transitions towards a less-cash economy, coupled with a stringent regulatory scrutiny over
generation and circulation of unaccounted money, which is likely to dent investment
demand for these two asset classes.

Page 24 Deutsche Bank AG/Hong Kong


9 January 2017
India Equity Strategy

This implies that household savings will continue to incrementally move towards financial
assets and with falling interest rates, households are likely to rely more on equity
instruments to generate above average returns.

Deutsche Bank AG/Hong Kong Page 25


9 January 2017

India Equity Strategy

Mid caps likely to stay buoyant on


DII interest
DII flows have exceeded FII flows in past 2 years
With DIIs likely to be key drivers of the market in 2017, mid cap stocks should again
outperform large cap benchmark indices. Over the past 2 years when DII flows have far
outstripped FII flows the broad mid cap index has outperformed the Sensex in both the
years (by 12.5% in 2015 and 6% in 2016). In our view, the strong DII buying of mid caps has
been one of the key factors behind the strong outperformance of mid cap index over the
past 2 years.

Premium valuation of mid cap has shrunk


The mid cap index also benefits from relatively better valuation - despite an outperformance
in 2016, implying higher confidence of consensus on earnings of mid cap index. PE valuation
premium of mid cap index to BSE Sensex which stood at 17% at the start of 2016 has now
declined sharply to 2%, despite its outperformance in 2016. We do not rule out another
bout of expansion in mid cap’s premium in 2017 as DIIs will likely be the key driver of
institutional flows.

Page 26 Deutsche Bank AG/Hong Kong


9 January 2017
India Equity Strategy

Sensex valuation at slight premium to 5-


10 yrs avg
Sensex trading 2%/4% above 5 yr/10yr average valuations
BSE Sensex is currently trading at 17.5x 1 yr forward earnings – which is at a slight premium
to past 5/10 yrs average [2% vs. past 5 year average and 4% vs. past 10 yrs average]. Even
as Sensex has been largely flat during the year (~2%), valuations have slightly stretched due
to cut in earnings growth estimate, which picked up momentum particularly after the

Deutsche Bank AG/Hong Kong Page 27


9 January 2017

India Equity Strategy

demonetization exercise. While the worst impact of demonetization on corporate earnings


appear behind us and consensus now estimates Sensex earnings to grow at 19.5% in FY18,
we see some risk to consensus earnings estimate in 2HFY18, particularly on the back of near
term disruption to business operations emanating from a likely rollout of Goods and
Services Tax Act in 2HFY18, despite its long term beneficial impacts. Hence we expect a
moderate 8% upside to Sensex from current levels and set our Dec’17 Sensex target of
29,000. At our target, Sensex will trade at 16.4 times FY18 EPS (DB est) and 14.2 x on FY19
EPS (Cons est), versus the 5 year average 1yr fwd PE multiple of 17.2x and 10-year average
multiple of 16.8x.

Figure 17: Sector-wise trend in PE ratios of DB India universe


FY15 FY16 FY17E
FY18E
DB India 19.8 21.3 17.8 14.5
Automotives 23.3 21.3 20.0 16.1

Infrastructure 31.3 40.1 27.0 23.3


Cement/Construction 35.6 33.4 26.3 26.1

Consumer 43.2 38.4 35.9 30.9


Agri & Fertilizers 13.5 12.3 9.4 8.1

Financials 16.0 24.0 17.5 12.8

IT Services 18.0 17.2 15.9 14.4

Page 28 Deutsche Bank AG/Hong Kong


9 January 2017
India Equity Strategy

Media 63.2 37.3 30.0 25.4

Metals 12.1 34.6 16.0 11.5

Oil & Gas 15.6 14.1 11.7 9.7


Healthcare 30.4 25.4 22.4 18.3

Telecom 16.2 17.0 16.7 15.2

Utilities 16.8 14.2 14.6 11.9

Source: Deutsche Bank

Figure 18: Sector-wise trend in EPS growth of DB India universe


FY15 FY16 FY17E
FY18E

Figure 19: Sector-wise trend in PBV of DB India universe


FY15 FY16 FY17E
FY18E
DB India 2.6 2.5 2.3 2.0
Automotives 5.1 4.1 3.5 3.0

Infrastructure 3.2 3.1 2.9 2.7


Cement/Construction 3.2 2.9 2.6 2.4

Consumer 13.7 12.2 11.2 10.1

Agri & Fertilizers 1.9 1.8 1.6 1.4


Financials 2.1 1.9 1.8 1.6

IT Services 4.9 4.2 3.6 3.1

Media 10.2 8.3 6.7 5.5


Metals 1.1 1.2 1.3 1.1

Oil & Gas 1.6 1.5 1.4 1.3

Healthcare 6.4 5.2 4.3 3.5


Telecom 1.6 1.5 1.4 1.3

Utilities 1.9 1.9 1.7 1.6

Figure 20: Sector-wise trend in ROE of DB India universe FY18E

Deutsche Bank AG/Hong Kong Page 29


9 January 2017

India Equity Strategy

FY15 FY16 FY17E

DB India 12.3% 12.0% 14.1% 15.3%


Automotives 21.3% 19.2% 19.0% 20.0%
Infrastructure 11.8% 9.9% 11.3% 11.8%

Cement/Construction 9.8% 9.2% 10.5% 9.4%

Consumer 32.6% 34.3% 32.2% 34.1%


Agri & Fertilizers 13.5% 14.6% 18.3% 18.4%
Financials 13.7% 7.9% 10.4% 12.9%

IT Services 29.2% 26.3% 24.3% 22.9%


Media 17.5% 24.6% 24.9% 23.8%

Metals -0.1% -2.1% 6.9% 10.2%

Oil & Gas 10.6% 9.5% 12.4% 13.7%


Healthcare 22.4% 20.8% 21.0% 21.3%

Telecom 8.0% 8.6% 8.7% 9.0%

Utilities 11.0% 13.3% 11.9% 13.6%

Source: Deutsche Bank

Figure 21: Sector-wise trend in Net Debt/Equity of DB India universe


FY15 FY16 FY17E
FY18E

Figure 22: Sector-wise trend in EV/EBITDA of DB India universe


FY15 FY16 FY17E
FY18E
DB India 11.9 11.6 10.4 8.7
Automotives 10.9 10.0 10.3 8.5

Infrastructure 20.3 24.4 19.3 15.5


Cement/Construction 18.0 15.7 12.7 12.2

Consumer 29.5 26.5 24.4 20.9


Agri & Fertilizers 8.2 8.0 7.1 6.2

Page 30 Deutsche Bank AG/Hong Kong


9 January 2017
India Equity Strategy

Valuation and return ratios

Deutsche Bank AG/Hong Kong Page 31


9 January 2017

India Equity Strategy

Page 32 Deutsche Bank AG/Hong Kong


9 January 2017
India Equity Strategy

Deutsche Bank AG/Hong Kong Page 33


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India Equity Strategy

Page 34 Deutsche Bank AG/Hong Kong


9 January 2017
India Equity Strategy

Figure 45: Companies mentioned list


Recommendation
Bloomberg Ticker Company Name
Last price (INR)
HMCL IN Equity Hero Motocorp Ltd 3,068 Hold
MM IN Equity Mahindra & Mahindra Ltd (M&M) 1,220 Buy
TTMT IN Equity Tata Motors Ltd (TaMo) 498 Buy
MSIL IN Equity Maruti Suzuki Limited 5,616 Buy
ITC IN Equity ITC Ltd 243 Buy
NEST IN Equity Nestle India Ltd 5,930 Buy
GCPL IN Equity Godrej Consumer Products Ltd 1,522 Buy
HUVR IN Equity Hindustan Unilever Limited (HUVR) 834 Hold
BPCL IN Equity Bharat Petroleum corporation Limited (BPCL) 665 Buy
HPCL IN Equity Hindustan Petroleum Corporation Limited (HPCL) 467 Buy

PLNG IN Equity Petronet LNG Limited 374 Buy


RIL IN Equity Reliance Industries Ltd 1,075 Buy
SBIN IN Equity State Bank of India (SBI) 246 Buy
YES IN Equity YES Bank Ltd 1,247 Buy
RECL IN Equity Rural Electrification Corporation Limited (REC) 129 Buy

Deutsche Bank AG/Hong Kong Page 35


9 January 2017

India Equity Strategy

SHTF IN Equity Shriram Transport Finance Co Ltd (SHTF) 928 Buy


HDFC IN Equity Housing Development Finance Corp Ltd (HDFC) 1,222 Buy
DLFU IN Equity DLF Limited 127 Hold
ARBP IN Equity Aurobindo Pharma Limited 692 Buy
SUNP IN Equity Sun Pharmaceuticals Industries (Sun Pharma) 641 Buy
LT IN Equity Larsen & Toubro Ltd (L&T) 1,391 Hold
BHEL IN Equity Bharat Heavy Electricals Ltd (BHEL) 126 Buy
SKF IN Equity SKF India Ltd 1,275 Buy
INFO IN Equity Infosys Limited 972 Hold
TCS IN Equity Tata Consultancy Services Ltd (TCS) 2,281 Buy
TECHM IN Equity Tech Mahindra Ltd 470 Buy
WPRO IN Equity Wipro Ltd 470 Hold
UPLL IN Equity UPL LTD 660 Buy
TRCL IN Equity The Ramco Cements Ltd 578 Buy
SRCM IN Equity Shree Cement Limited 14,299 Buy
JSTL IN Equity JSW Steel Ltd 175 Buy
VEDL IN Equity Vedanta Limited 231 Buy
CESC IN Equity CESC Limited 640 Buy
NTPC IN Equity National Thermal Power Corporation (NTPC) 164 Buy
CAIR IN Equity Cairn India 256.1 Hold
LPC IN Equity Lupin 1512.05 Hold
COAL IN Equity Coal India 305.7 Hold
HZ IN Equity HINDUSTAN ZINC 264.25 Buy
BARC LN Equity BARCLAYS PLC 235.25 Buy
CSGN SE Equity CREDIT SUISSE GROUP-REG 15.89 Hold
Advanta Seeds Uncovered
Unizeb Uncovered
Source: Deutsche Bank, Bloomberg Finance L.P., Last price as on 6th January 2017, Last price for Barclays and Credit Suisse are in GBP and CHF respectively.

Appendix 1
Important Disclosures

*Other information available upon request

Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via
Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies, and other sources. For
disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see
the most recently published company report or visit our global disclosure look-up page on our website at
http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr. Aside from within this report, important conflict disclosures can also be
found at https://gm.db.com/equities under the
"Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.

Page 36 Deutsche Bank AG/Hong Kong


9 January 2017
India Equity Strategy

Analyst Certification
The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s). In addition, the undersigned
lead analyst(s) has not and will not receive any compensation for providing a specific recommendation
or view in this report. Abhay Laijawala/Abhishek Saraf

Equity rating key


Buy: Based on a current 12- month view of total share-holder
return (TSR = percentage change in share price from current price
to projected target price plus pro-jected dividend yield ) , we
recommend that investors buy the stock.
Sell: Based on a current 12-month view of total shareholder
return, we recommend that investors sell the stock
Hold: We take a neutral view on the stock 12-months out and,
based on this time horizon, do not recommend either a Buy or
Sell.
Newly issued research recommendations and target prices
supersede previously published research.

Equity rating dispersion and banking relationships

500 53 %
45
0
40
0
350 37 %
30
0
2
5
0
2
0
0

150 17 % 19 % 10 %20 %
10
0
50
0
Buy Hold Sell

Companies Covered Cos. w/ Banking Relationship


Asia-Pacific Universe

Deutsche Bank AG/Hong Kong Page 37


9 January 2017
India Equity Strategy

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India Equity Strategy
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Page 41
David Folkerts-Landau
Group Chief Economist and Global Head of Research

Raj Hindocha Michael Spencer Steve Pollard


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Research Global Head of Economics Global Head of Equity Research

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Debt Research Equity Research Equity Research Equity Derivatives Research

Andreas Neubauer Stuart Kirk


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