Ambit - Strategy Err GRP - On The Cusp of Greatness

STRATEGY
July 2014
Thematic: On the cusp of greatness

Analyst:
Saurabh Mukherjea, CFA
saurabhmukherjea@ambitcapital.com
Tel: +91 99877 85848
Strategy
CONTENTS
On the cusp of greatness………………….................................................................. 3
Enduring greatness is rare……………………………………………………………………..4
Small firms on the cusp of greatness…………………………………………………………6
The ‘STAR’ framework…………………………………………………………………………. 9
- Marico Limited……………………………………………………………………………….13
- Balkrishna Industries………………………………………………………………………. 48
- Astral PolyTechnik………………………………………………………………………….. 65
- eClerx Services Limited……………………………………………………………………. 77
- V-Guard Industries…..…………………………………………………………………….. 90
- Mayur Uniquoters Limited………………………………………………………………..105
Appendix 1: John Kay’s IBAS framework………………………………………………… 117
Appendix 2: Questionnaire used to assign scores based on ‘STAR’ framework…… 122
Appendix 3: Summary of our previous work on ‘greatness’………………………… ..125
Appendix 4: Potential ‘greats’ – Financial summary…………………………............. 128
July 14, 2014 Ambit Capital Pvt. Ltd. Page 2

Strategy
THEMATIC July 14, 2014
On the cusp of greatness Stocks discussed in this report

Marico
Continuing with our quarterly thematics on the subject of ‘greatness’, we MRCO IN Mcap (US$ mn): 2,592
now look at relatively small companies which haven’t yet attained Our stance: BUY 3M ADV(US$ mn): 1.32
greatness but appear to be on course for the same. As always, capital
allocation is at the heart of our quest for identifying ‘greats’. In this note Page Industries
we highlight Balkrishna Inds, V-Guard, Astral Poly, Marico, Page Inds, PAG IN Mcap (US$ mn): 1,472
eClerx and Mayur Uniquoters as stocks that show great promise. Our stance: NR 3M ADV(US$ mn): 1.05
“Greatness” is elusive Balkrishna Ind

Less than 15% of Indian firms stay ‘great’ over a five-year time horizon. Superior BIL IN Mcap (US$ mn): 1,130
capital allocation, which is at the core of greatness, is rarer still - less than 1.5% Our stance: BUY 3M ADV(US$ mn): 1.00
of firms have delivered on the dual goals of high revenue growth (10% or higher)
and high RoCEs (15% or higher) in at least 17 of the last 20 years. Astral Poly
Our ‘ten-bagger’ construct for identifying ‘greats’ ASTRA IN Mcap (US$ mn): 631
Through our ten-bagger series and its underlying ‘greatness’ loop we seek to Our stance: NR 3M ADV(US$ mn): 0.36
identify superior capital allocators on an annual basis (click here for the latest
iteration). In this note, with the same focus on efficient capital allocation, we eClerx
customise our process for smaller firms that are on the path to greatness. ECLX IN Mcap (US$ mn): 623
Our stance: NR 3M ADV(US$ mn): 0.79
Screening for firms on the cusp of greatness
We screen for firms that have generated pre-tax RoCEs in excess of 15% and V-Guard
revenue growth north of 10% in each of the last ten years. From a universe of VGRD IN Mcap (US$ mn): 312
over 1,000 firms (with market cap of `1bn or more), only 14 pass this dual test. Our stance: BUY 3M ADV(US$ mn): 0.73
Of these, four have a market-cap above `300bn and are well researched whilst
one is below `5bn and hence too small to analyse. Of the remaining nine, Berger Mayur Uniquoters
and IPCA were covered extensively in our last note, ‘The Great Indian Mid-caps’. MUNI IN Mcap (US$ mn): 279
We dive deep into the remaining seven in this note. Our stance: NR 3M ADV(US$ mn): 0.21
Deep dives into seven firms on the cusp of greatness Source: Bloomberg, Ambit Capital research
Note: NR - Not Rated
 Marico: A market leader in coconut hair oils and premium edible oils, it is
positioned to deliver EPS CAGR of 18% YoY over FY14-19 through a mix of
brand extensions and acquisitions in high-growth categories/ geographies. Analyst Details
Renewed focus on capital allocation makes it a re-rating candidate. Saurabh Mukherjea, CFA
 Page: Page has demonstrated healthy growth over the past decade whilst saurabhmukherjea@ambitcapital.com
+91 3043 3175
maintaining its operating margin & gradually increasing its RoCE. We expect
the company to sustain its competitive advantages around product quality, Gaurav Mehta, CFA
product development, distribution, brand and professional management. gauravmehta@ambitcapital.com
+91 22 3043 3255
 Balkrishna: BKT has built a substantive export business in the Off Highway
Tyre space by successfully leveraging its low-cost advantage. With increasing Rakshit Ranjan, CFA
rakshitranjan@ambitcapital.com
focus on the On-the-Road segment, OEM customers and newer geographies,
+91 22 3043 3201
BKT should continue gaining market share from global peers.
Ashvin Shetty, CFA
 eClerx: eClerx has sustained high return ratios over the last ten years despite ashvinshetty@ambitcapital.com
operating in a ‘commoditised’ space. The secret to its success is robust domain +91 22 3043 3285
expertise and strong knowledge management, which aids training and
Bhargav Buddhadev
automation through which it has become indispensable to its clients. bhargavbuddhadev@ambitcapital.com
 Astral Poly: The company is a market leader in CPVC. It reported FY04-14 +91 22 3043 3252
revenue CAGR of 47.5% and average RoCE of more than 20% led by first- Sagar Rastogi
mover advantage in CPVC through a tie-up with Lubrizol and efficient capital sagarrastogi@ambitcapital.com
allocation. +91 22 3043 3291
 V-Guard: It has recorded 28% revenue CAGR and 35% PAT CAGR in FY04-14 Tanuj Mukhija, CFA
tanujmukhija@ambitcapital.com
due to its leadership in south India and a strong positioning in stabilisers.
+91 22 3043 3203
Prudent capital allocation and the strength and discipline of promoters place it
Achint Bhagat
ahead of competitors.
achintbhagat@ambitcapital.com
 Mayur Uniquoters: The company balanced growth and RoCEs through +91 22 3043 3178
efficient capital allocation over the last decade. Its capacity leadership and
Consultant: Anupam Gupta
strong relationships with the domestic/global auto OEMs and footwear anupam.gupta@aavanresearch.com
manufacturers, positions it several notches above its competition.
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
Enduring greatness is rare

“On a long enough timeline, the survival rate for everyone drops to zero.”
– Chuck Palahniuk in The Fight Club
“Every institution is vulnerable, no matter how great. There is no law of nature
that the most powerful will inevitably remain at the top. Anyone can fall, and
most eventually do.”
– Jim Collins in How the Mighty Fall
As we have often highlighted in the past, it is extremely difficult, if not impossible, for
successful firms to sustain greatness over meaningful timeframes. For example:
 Only 9 of the 30 Sensex companies that were a part of the Sensex 20 years ago
are still a part of that index today. This means 70% of the largest 30 firms in India
have faded to mediocrity. Several of them, like Hindustan Motors, Ballarpur
Industries, and Mukand Ltd, are hardly discussed these days.
 80% of listed companies have failed to beat inflation (assumed at 7.9% p.a.) over
the last 20 years.
 Only 17% of sector leaders at any point stay leaders five years later as measured
on our ‘greatness’ framework, which is discussed in the Appendix 3 on pages
125-127. (For more details, click here for our 7th June 2013 thematic, “Why do
great Indian companies self-destruct?”).
The one conclusion easily drawn from these observations is that the odds are very
small for a firm to attain and sustain greatness over any meaningful period of time.
Whilst enduring greatness is difficult, a small fraction of Indian firms indeed manage
to stay ‘great’ over long periods of time - less than 1.5% of listed firms have
consistently delivered on the dual goals of high revenue growth (10% or higher) and
high RoCEs (15% or higher) in at least 17 of the last 20 years. What is it that allows
such a small minority of firms to continue being great over decades when most others
around them are sliding?
To understand this, we had analysed six mid-cap companies that have achieved this Efficient capital allocation is at the
rather rare feat of enduring greatness over the past 20 years (click here for our note core of greatness…
published on 22 May 2014).
The objective of this note is to take this exercise a step forward and look at the
‘enduring greats’ of the years to come by identifying firms that have produced
outstanding results over the last ten years.
…hence we look at firms that have

consistently delivered superior
Historical greats RoCEs and superior revenue
Efficient capital allocation is at the core of greatness. More importantly, effective growth, both at the same time!
capital allocation is not just about growing but growing profitably - a point we had
made in detail in our 31 July 2013 note, ‘The cash flow conundrum for India Inc’ -
because as William Thorndike says in his brilliant book, ‘The Outsiders’:
“Capital allocation is a CEO’s most important job.”
“What counts in the long run is the increase in per-share value, not overall growth or
size.”
In our 22 May 2014 note, the screen that we had used to identify firms that have
exhibited enduring greatness over long periods of time historically was based on the
consistency of superior RoCE generation and superior revenue growth. Starting with
the entire universe of firms with a market cap in excess of `1bn, we had screened for
firms that have generated RoCEs in excess of 15% and revenue growth in excess of
10% each year, in at least 17 of the last 20 years.

Strategy
Only a small fraction of firms, representing about 1.4% of the universe, managed to
clear both of these filters over the FY94-13 period. This list is reproduced in Exhibit 1
below.
Exhibit 1: The short list of firms with superior RoCEs and superior sales growth over
the last 20 years (FY94-13)
Share price
Market cap
Superior on both performance CAGR FY15 P/E
(in ` bn) *
(rel. to Sensex)
Infosys 28.9% 1,901.1 15.2
Sun Pharma.Inds. 24.7% 1,187.5 20.6
Asian Paints 12.7% 514.8 35.4
Hero Motocorp 15.6% 449.0 17.0
Dabur India 8.6% 327.2 29.8
Cipla 8.8% 306.8 19.3
Motherson Sumi 23.5% 226.4 21.5
Pidilite Inds. 15.3% 156.8 27.6
Havells India** 26.6% 114.1 20.6
IPCA Labs. 13.9% 104.5 15.9
CRISIL 14.8% 85.9 34.1
Berger Paints 16.6% 79.7 28.5
Guj Gas Company 5.4% 33.7 13.3
Munjal Showa 0.0% 3.4 5.8
Jyoti Structures -4.6% 2.7 7.3
Source: Bloomberg, Capitaline, Ambit Capital research; Note: This exhibit has been reproduced without any
changes from our 22 May 2014 note. Share price performance has been measured over a 20-year period (i.e.
Mar-94 to Mar-14). In case of firms with a shorter listing history, the performance has been measured over the
shorter period (not less than 15 years). * Market cap as on 01 April 2014. **Comments withheld on this
company due to internal policy
We then ran a similar screen on banks and financial services (BFSI) firms. The BFSI
screen sought to identify firms that have delivered RoEs in excess of 15% and loan
book growth in excess of 15% each year over the last ten years. In a universe of 507
firms, a meagre 5 firms managed to pass this test (representing a small fraction of
~1%). This tiny list of firms is reproduced in the exhibit below.
Exhibit 2: The very short list of BFSI firms with superior RoEs and superior loan book
growth (over FY04-13)
Share price performance CAGR Market cap
Superior on both FY15 P/E
(rel. to Sensex) (in ` bn) *
HDFC Bank 10.9% 1,770.7 19.0
Axis Bank 11.0% 690.1 10.8
Indian Bank -4.5% 52.7 5.5
City Union Bank 12.0% 28.9 9.0
Dewan Hsg Fin. 11.0% 28.0 6.2
Source: Bloomberg, Capitaline, Ambit Capital research; Note: This exhibit has been reproduced without any
changes from our 22 May 2014 note. Share price performance has been measured over the last ten-year period
(i.e. Mar-04 to Mar-14). In case of Indian Bank, the performance has been measured over the last 7 years. *
Market cap as on 01 April 2014.
With intention of understanding their recipe for sustained success, we then delved
deeper into six mid-cap companies from Exhibits 2 and 3 above, which due to their Motherson Sumi, Pidilite, IPCA
superior capital allocation have generated eye-popping stock returns: Motherson Labs, CRISIL, Berger Paints and
Sumi, Pidilite Inds, IPCA Labs, CRISIL, Berger Paints, and City Union Bank. CUBK are amongst firms which
have been successful in enduring
This deep dive into the six companies listed above was conducted using John Kay’s greatness over meaningful
IBAS framework as a tool to assess the sustainable competitive advantages of these timeframes
six companies. The IBAS framework focusses on ‘Innovation’, ‘Brands’, ‘Architecture’
and ‘Strategic Assets’ as sources of sustainable competitive advantage and is
discussed in greater detail in Appendix 1 on page 117 of this note.
Continuing with the line-of-thought that we had initiated in the 22 May 2014 note, in
this note we seek to identify relatively small firms that have the ingredients to be the
enduring greats of tomorrow. The next few pages focus on our method of identifying
and analysing these potential greats.

Strategy
Small firms on the cusp of greatness

Screening for firms on the cusp of greatness
Whilst our previous note focused on identifying firms that have been successful in
sustaining greatness over the last 20 years, in this note, our objective is to identify
firms which are currently on the ‘cusp of greatness’. Hence, since the time period
under study is shorter, the criteria for selection have been made much more
stringent.
Starting with the same universe of firms (i.e. firms greater than `1bn in mcap, ex-
banks and financial services firms), we screen for firms that have generated RoCEs in
excess of 15% and revenue growth in excess of 10% in each of the last 10 years.
Only a handful of firms are
This, yet again, leaves us with a very short list of 14 firms (that is just 1.3% of the
currently on the cusp of
universe). This list is shown in Exhibit 3 below.
greatness…
Exhibit 3: The short list of firms with superior RoCEs and superior sales growth over
the last ten years (FY05-14)
Share price performance CAGR Market cap
Superior on both FY15 P/E
(rel. to Sensex) (in ` bn)*
ITC 11% 2,802.7 26.8
HCL Technologies# 12% 991.9 15.1
Asian Paints 19% 514.8 36.9
Godrej Consumer 21% 305.5 29.5
Marico 17% 135.4 28.2
Ipca Labs. 14% 104.5 17.6
Berger Paints 19% 79.7 32.1
Page Industries 47% 71.0 44.6
Balkrishna Inds 18% 47.9 12.2
eClerx Services 30% 33.0 13.3
Astral Poly 53% 26.1 32.3
V-Guard Inds. 33% 13.8 21.5
Mayur Uniquoters 76% 13.5 20.1
Insecticide India 23% 2.8 DNA
Source: Bloomberg, Capitaline, Ambit Capital research; Note: Share price performance has been measured over
a 10-year period (i.e. Mar-04 to Mar-14). 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 01 April 2014. HCL Technologies is
a June ending company. Hence it has been included in this list based on FY04-FY13 financials. 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.
As one would expect, this small set of firms has outperformed the Sensex by 28%
(on a CAGR basis) over the last 10 years.
Whilst the large-cap names from Exhibit 3 (ITC, HCL Technologies, Asian Paints and
Godrej Consumer) are well-researched companies, we choose to go beyond these
names in this note and look at the next layer of firms that, due to their superior
capital allocation, are on the cusp of enduring greatness. Both Ipca Labs and Berger
Paints have been successful in demonstrating enduring greatness over the last 20
years and hence were analysed in our 22 May 2014 note. We also exclude
Insecticides India from the current study owing to its extremely small size.
Consequently, we focus on the following stocks in greater detail in this note:
 Marico
 Page Industries
 Balkrishna Industries
 eClerx Services
 Astral Poly
 V-Guard Industries
 Mayur Uniquoters

Strategy
Before turning to a framework for analysing these potential ‘greats’, we briefly touch
upon a back-test of this framework used to identify firms ‘on the cusp of greatness’.
A back-test of “cusp of greatness” framework
Exhibit 4 below shows the forward-looking share price performance of firms that
qualified on the twin filters of superior RoCE and strong growth and hence were ‘on
the cusp of greatness’ in 2004 (based on the reported financials over the 1995-2004
period). On a one-year basis, these stocks handsomely outperformed the benchmark
Sensex by ~35%. Outperformance was also seen on a three-year basis, with these
stocks outperforming the Sensex by over 2% (in CAGR terms). The outperformance,
however, diminishes on a five-year and ten-year basis, which is to be expected given
our previous finding that over 80% of successful Indian companies go on to self-
destruct within five years (click here for our 07 June 2013 note on this issue). …and such firms have historically
Exhibit 4: Performance of firms on the cusp of greatness in 2004 delivered superior returns
Share price performance
Superior on both
1yr 3yr* 5yr* 10yr*
Infosys 71% 41% 21% 17%
Hero Motocorp 15% 11% 22% 18%
Cipla 48% 35% 24% 18%
Container Corporation 67% 60% 28% 20%
Gujarat Gas Company 100% 51% 28% 25%
Alok Industries 24% 5% -14% -11%
Munjal Showa 86% 13% 4% 15%
Havells India 270% 164% 58% 57%
Average 85% 47% 21% 20%
Sensex 50% 45% 25% 18%
Outperformance 35.1% 2.3% -3.3% 1.8%
Source: Bloomberg, Ambit Capital research; Note: Share price performance has been measured on a forward-
looking basis, starting from June 30, 2004. * Performance is in CAGR terms.
In Exhibit 5 that follows, we plot the rolling one-year forward share price
performance of firms that have historically cleared these twin filters. Thus, firms that
qualify in 2004 are those that had generated RoCEs greater than 15% and revenue
growth greater than 10% in each of the ten years over 1995-2004. The stock
performance for these firms is measured from June 2004 to June 2005 and the list is
then updated in June 2005 based on 1996-2005 financials.
Exhibit 5: Outperformance was also seen on a rolling basis (vs Sensex)
900
Growth of `100 invested in
800
Jun' 04-Jun'
700 14 CAGR
600
June 20 04
500 Cusp of 23%

400 greatness
Sensex 18%
300
200
100
-
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Source: Bloomberg, Capitaline, Ambit Capital research; Note: The above chart plots the average rolling one-year
forward share price performance of firms on the cusp of greatness since 30 June 2004.

Strategy
This rolling one-year forward back-test suggests significant share price

outperformance for firms qualifying as being on the ‘cusp of greatness’. Such firms A rolling one-year forward back-
have delivered 23% CAGR returns vs 18% recorded by the Sensex over the last ten test also suggests superior share
years. price performance for firms that
clear the twin filters of superior
Exhibit 5 points to an interesting trend in the performance of the ‘cusp of greatness’ RoCE and strong growth
stocks. The majority of outperformance for firms that were on the ‘cusp of greatness’
is concentrated in the initial phases of the upcycle (FY04-06 and FY14) which is
understandable given that these were essentially small & mid-cap companies. Thus,
for example, firms that cleared the twin filters of superior RoCE and strong growth
delivered 62% CAGR returns in the first two years (i.e. over the period June 2004 –
June 2006) vs 49% delivered by the Sensex. On the other hand, these small, mid-cap
companies have underperformed the Sensex during periods of an economic
downturn.
Further, not only have these firms delivered superior share price performance, such
firms have also shown a significant level of persistence over the last ten years. On an
average basis, 71% of firms that clear both the RoCE and sales growth filters (in year
‘t’) continue to clear both these filters in year ‘t+1’.
In the next section, we discuss the ‘STAR’ (Sustainable and Tenable Advantages Rank)
framework used for analysing the greatness of these seven potential ‘greats’. This is
then followed by stock-specific sections analysing these companies in greater detail in
the context of this framework. (For a brief financial snapshot of these potential
‘greats’, please refer to Appendix 4 on page 128 of this note.)

Strategy
The ‘STAR’ framework

We use a ‘STAR’ (Sustainable and Tenable Advantages Rank) framework to analyse
the potential ‘greats’ identified in the previous section. The framework assesses these
firms’ strengths on the following parameters:
 Competitive advantages
 Accounting quality
 Capital allocation
 Centrality of political connect
 Treatment of minorities
 Succession planning
The final score for a company is based on an average of its individual scores on each
of these six parameters such that each parameter is given equal weightage, with 100
being the maximum possible score. Further, a company receives ‘ ’ if its total score
is between 0 and 25. Similarly, it receives ‘ ’ or ‘ ’ if its total score is between 25-
50 and 50-75 respectively; ‘ ’ is awarded if the score is greater than 75.
Exhibit 6: ‘STAR’ Framework Summary
Centrality of
Competitive Accounting Capital Treatment of Succession
Company political Overall Comments
advantages quality allocation minorities planning
connect
Strong brand equity; RoCE
Marico
back in focus
Growth with focus on stable
Page Industries
margins
Sustainable low cost
Balkrishna Industries
advantage
Niche KPO with high quality
eClerx Services
client base
Innovative CPVC market
Astral Poly
leader
Leader in the south India
V-Guard Industries
electrical market
Mayur Uniquoters Harnessing high-value clients
Source: Ambit Capital research; Note: = rating of 4/4; = rating of 3/ 4 and so on.
Competitive advantages
If you define “added value” as the difference between the cost of a firm’s inputs and
that of its output, sustainable competitive advantages allow firms to add more value
than their rivals and to continue doing so over long periods of time.
We discuss the underlying greatness of these companies in the context of John Kay’s
IBAS framework (‘Innovation’, ‘Brands’, ‘Architecture’ and ‘Strategic Assets’): John Kay’s framework focusses on
‘Innovation’, ‘Brands’,
 Innovation: Whilst innovation is often talked about as a source of competitive
‘Architecture’ and ‘Strategic Assets’
advantage, especially in the Technology and Pharmaceutical sectors, it is actually
as sources of sustainable
the most tenuous source of sustainable competitive advantage as:
competitive advantage
o Innovation is expensive.
o Innovation is uncertain - the innovation process tends to be a ‘hit or miss’.
o Innovation is hard to manage due to the random nature of the process.
 Brands and reputation: In many markets, product quality, in spite of being an
important driver of the purchase decision, can only be ascertained by a long-
term experience of using that product. In many other markets, the ticket price of
the product is high; hence, consumers are able to assess the quality of the
product only after they have parted with their cash.
In both these markets, customers use the strength of the company’s reputation
as a proxy for the quality of the product or the service. Since the reputation takes
many years to build, reputation tends to be difficult and costly to create. This in
turn makes it a very powerful source for a competitive advantage.

Strategy
 Architecture: ‘Architecture’ refers to the network of contracts, formal and

informal, that a firm has with its employees, suppliers and customers. Such
architecture is most often found in firms with a distinctive organisational style or
ethos, because such firms tend to have a well-organised and long-established
set of processes or routines for doing business.
 Strategic assets: In contrast to the three distinctive capabilities discussed
above, strategic assets are easier to identify as sources of competitive
advantages. Such assets can come in different guises such as intellectual
property, licences and regulatory permissions, sunk costs, and natural
monopolies. Whilst strategic assets can come in different forms, all of them
result in a lower per unit cost of production for the firm owning the asset relative
to its competitors.
(For more details on the IBAS framework, please refer to Appendix 1 on page 117 of
this note. For the questionnaire that we used to assess how each company fares on
the IBAS framework, please refer to Appendix 2 (Exhibit 178) on page 122).
Accounting quality
The objective here is to assess the authenticity of reported financials. Accounting
quality is a significant driver of stock returns in India. Our analysis (reproduced below
from our 22 November 2013 note) suggests that deciles constructed based on
accounting scores, as per our forensic accounting model (briefly outlined in Exhibit 8),
show a tight link with share price performance, with D1 (i.e. the top 10% of BSE500
stocks on accounting quality) outperforming D10 by a whopping 26% CAGR.
Exhibit 7: Decile-level analysis points to a strong link between accounting scores and
stock price performance
20%
R² = 84%
15%
Average share price
D2 D1
10%
performance
D3
D7 D6
5% D5 D4
D8
0%
100 120 140 160 180 200 220 240 260
-5%
D9
-10%
D10
-15%
Average decile accounting score
Source: Ace Equity, Capitaline, Bloomberg, Ambit Capital research; Note: Accouting score is based on annual
financials over FY08-13; stock price performance is from April 2007 to November 2013. This exhibit has been
reproduced without any changes from our 22 November 2013 note.
Whilst each sector would have its own set of metrics to assess accounting quality, a
generic framework that we had discussed to assess accounting quality for the BSE500
universe of firms (excluding, banks and financial services firms) in our 22 November
2013 note is shown in Exhibit 8 below. These ratios have been broadly categorised
into four buckets.
Exhibit 8: Key categories of accounting checks
Category Ratios
We focus on four categories of
(1) CFO/EBITDA, (2) change in depreciation rate, and (3) non-
P&L mis-statement checks accounting checks: P&L mis-
operating expenses as a proportion of total revenues.
(1) Cash yield, (2) change in reserves (excluding share premium) statement, balance sheet mis-
to net income excluding dividends, (3) provisions for doubtful statement, cash pilferage and audit
Balance sheet mis-statement checks
debts as a proportion of debtors more than six months, and (4) quality
contingent liability as a proportion of net worth.
(1) CWIP to gross block, and (2) cumulative CFO plus CFI to
Cash pilferage checks
median revenues
(1) Audit fees as a proportion of standalone revenues, and (2)
Audit quality checks
audit fees as a proportion of total auditor’s remuneration
Source: Ambit Capital research

Strategy
Each of the seven ‘greats’ is assessed relative to its own peers on accounting quality.
Companies that fall in the top quartile of its sector are rewarded the most whilst
companies that fall in the bottom quartile receive the lowest score.
Capital allocation
Capital allocation is perhaps the single most important decision through which a Capital allocation choices
management adds value to the firm’s shareholders. More importantly, effective significantly impact RoCEs
capital allocation is not just about growing but growing profitably.
Amongst the key capital allocation options available to a firm are: using capital for
business expansion (through either capital expenditure or acquisitions) or returning
surplus cash to stakeholders (through dividends, share buybacks or debt repayment) if
there are not profitable opportunities to invest it. We often see firms opting for a third
choice of doing nothing and letting cash accumulate on their balance sheets.
How each of these decisions in turn affects the firm’s return ratios are shown below.
Exhibit 9: Capital allocation decision impacts RoCEs - FY12 Exhibit 10: The cost of hoarding cash - RoCEs lower than
RoCEs of top quintiles based on use of cash RoICs for the top quintile on cash retention
Median FY12 ROCE Cost of retaining cash
Return ratios (pre-tax)

40% Cost of
Universe
hoarding
Cash returned (Q1)
30%
Capex (Q1) 20%
Acquisition (Q1) 10%

Cash retained (Q1) 0%
Median FY12 Median FY12
0% 10% 20% 30% 40%
ROIC ROCE
Source: Bloomberg, Capitaline, Ambit Capital research; Note: This exhibit has Source: Capitaline, Ambit Capital research; Note: This exhibit has been
been reproduced without any changes from our 31 July 2013 note. reproduced without any changes from our 31 July 2013 note. Both the return
ratios are pre-tax; whilst for RoIC calculation we remove interest plus dividend
income and cash from numerator and denominator respectively; for RoCE, we
retain these; the difference thus accounts for the cash drag to RoCEs
As an example, a summary of eClerx’s capital allocation on a cumulative basis over

the FY04-13 period is shown below.
Exhibit 11: Cash from operations remains eClerx’s primary Exhibit 12: Capex and expansion in the past 10 years has
source of funds been internally funded
Interest, Increase in Debt
dividend Others cash and repayment
recd 0% cash 0%
5% equivalents
31% Dividend
paid
Proceeds 37%
from Purchase of
shares Investments
12% -
Subsidiaries Interest
CFO & Others paid
83% 16% Purchase of 0%
Fixed
Assets
16%
Source: Source: Company, Ambit Capital research. Note: Size of the pie Source: Company, Ambit Capital research. Note: Size of the pie represents
represents cumulative funds raised (through various sources such as CFO, cumulative funds raised (through various sources such as CFO, equity, and
equity, and debt) and spent (on capex, debt repayment, interest, dividend debt) and spent (on capex, debt repayment, interest, dividend paid, etc) over
paid, etc) over FY04-13 FY04-13
In our analysis, we seek to ensure that value-accretive capital allocation decisions are
rewarded with higher scores whilst value-destructive decisions are penalised.
(For the questionnaire that we used to assess how each company fares on capital
allocation, please refer to Appendix 2 (Exhibit 180) on page 123.)

Strategy
Centrality of political connect

A performance comparison of Ambit’s ‘Connected Companies Index’ with the BSE500
shows that firms whose central competitive advantage is political connectivity
underperform in India and we believe this will continue to be an unsustainable way
of doing business in India.
Exhibit 13: Ambit’s Connected Companies Index has underperformed the BSE500
Index since the publication of the CAG report
300 Publication of CAG report in
260 Oct' 10 was an inflection point
220
180
140
100
60
Jan/09
May/09
Sep/09
Jan/10
May/10
Sep/10
Jan/11
May/11
Sep/11
Jan/12
May/12
Sep/12
Jan/13
May/13
Sep/13
Jan/14
May/14
Ambit Connected Cos Index BSE 500
Source: Bloomberg, Ambit Capital research; Note: Both Ambit’s Connected Companies Index and BSE500 have
been rebased to 100 at the beginning of 2009
We assess the seven ‘greats’ on the extent of political connectivity of the

promoter/promoter group. Companies that appear to have any visible nexus with
politicians receive a lower score whilst companies that do not display any visible,
direct connections with any political party are rewarded the most.
(For the questionnaire that we used to assess how each company fares on centrality
of political connect, please refer to Appendix 2 (Exhibit 183) on page 124.)
Treatment of minorities
What good is a firm’s outstanding performance if the profits are not justly shared with
minority shareholders! Does the company go beyond the mandated disclosure norms
and outline its strategy to help minorities understand their plans better? Has the
company refrained from indulging in questionable transactions at the cost of
minorities? We assess all the companies featured in this note on similar parameters
to decipher if the company has a good corporate governance track record so that
minority shareholders get their fair share in the firm’s success.
(For the questionnaire that we used to assess how each company fares on treatment
of minorities, please refer to Appendix 2 (Exhibit 182) on page 124.)
Succession planning
‘Key man risk’ often poses a challenge on sustaining greatness over longer
timeframes for businesses; the leadership handover from one generation to another
(or from one CEO to another) can be particularly disruptive and can potentially
trigger a fall from zenith for even the most successful of firms.
Does the company have a professional CEO or is it a promoter-driven company? Has
the promoter given way to professional management? Is the company making efforts
to reward and promote talent internally? Has the top management stayed relatively
stable over the past decade? We answer these (and similar questions) for these seven
companies to assess their succession plans.
(For the questionnaire that we used to assess how each company fares on succession
planning, please refer to Appendix 2 (Exhibit 181) on page 123.)
In the rest of this note we analyse the potential ‘greats’ identified in Exhibit 3 -
Marico, Page Industries, Balkrishna Industries, eClerx Services, Astral Poly,
V-Guard Industries and Mayur Uniquoters - using the ‘STAR’ framework. Our
research is based on extensive discussions with these firms’ customers, competitors,
suppliers, ex-employees, regulators, former advisors and consultants in addition to an
extensive analysis of the financial statements and other publically available
information on these firms over 10 years.

Strategy
Marico Limited
"We love to be boringly consistent.”
– Saugata Gupta, Managing Director and Chief Executive Officer (CEO), Marico
Limited, in a conversation with us at their Mumbai office (June 2014).
Marico has operated in the niche coconut hair oil and premium edible oil
segment, delivering 16% sales CAGR and 20% PAT CAGR over FY01-14.
Through consistent investment behind its brands, the company has created
strong brands such as Parachute and Saffola. It has entered high-growth
categories (like hair creams, gels, body lotions and breakfast cereals) by
leveraging its existing brands and through acquisitions. Although its return
ratios were dampened due to a slew of acquisitions in Africa and South East
Asia over FY06-12, we believe the company will follow a more calibrated
approach towards capital allocation in the future, alleviating investor
concerns around the same. Strong brand equity and presence in categories
and geographies, which will propel growth in the future, should help Marico
deliver sales and PAT growth ahead of its peers. We expect annual
shareholder returns of around 20% over the next decade through consistent
EPS growth of approximately 18% YoY and dividend yield of 2%.
Exhibit 14: Stock details
Criteria
Market Cap (US$mn) 2,592
3m ADV (US$mn) 1.3
Share price CAGR (%)
1-year 17%
3-year 14%
10-year 35%
RoCE (high/low) over FY05-14 (%) 42.2/23.6
Source: Bloomberg, Ambit Capital research
Exhibit 15: Marico Limited – Three ‘quarters of the pie’ on our STAR framework
Criteria Score (%) Comment
Market leader in its coconut hair oil and premium edible oil categories despite tough MNC
Competitive advantage
competition.
Marico’s accounting quality is poorer than its FMCG peers. Specifically, we have concerns
around the company’s 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.
Capital allocation Superior relative to peers but lower-margin international business weighs on overall margins.
Marico is not part of Ambit’s Connected Companies Index and does not appear to rely on
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 Mariwala’s son
Succession planning Rishabh is independently pursuing his venture and is not involved with Marico. Though, at a
later stage, Rishabh’s involvement with Marico cannot be ruled out.
Total (%)
Low-margin international businesses remain a drag; high competition in new segments like
Weaknesses
packaged food and deodorants and slowdown in core hair oil business.
Source: Company, Ambit Capital research. Note: = rating of 4/4; = rating of 3/ 4 and so on

Strategy
Exhibit 16: Marico Limited - Timeline

Year Events
Harsh Mariwala incorporated an FMCG company under the name Marico Foods Ltd on 13 October 1988. The company was in the business
1988
of manufacturing and marketing personal care products and edible oils
1989 The company changed its name to Marico Industries Limited (MIL)
The company entered into a Registered Users Agreement with Bombay Oil Industries Limited (BOIL) for the use of the brands ‘Parachute’ and
1990
‘Saffola’ for an initial period of 3 years. MIL was to pay BOIL royalty of 0.1%, 0.75% and 0.5% on sales for the first three years respectively.
1991 Launches ‘Hair & Care’ a non-sticky hair oil; Sweekar sunflower oil launched in 1990 goes national
1992 Shifts headquarters from Masjid Bunder to Bandra
1994 Moves from being an exporter to an overseas marketer - sets up first overseas office in Dubai
1994 ‘Revive’ fabric starch launched
1995 Marico acquires the marketing rights for SIL from Kanmoor Foods Limited (KFL), a part of BOIL Group
1996 In March 1996, Marico lists on the stock exchange
1999 Company goes on the offensive against HUL through 'Parachute ki Kasam' campaign
1999 Marico acquires 'Mediker' anti-lice oil from P&G in order to stave off competition in the value-added hair oil segment
1999 HUL acquired Cococare from Recon, signalling intentions to compete in the coconut oil segment
1999 Marico Acquires 'Oil of Malabar' from West Coast India Ltd to compete against Nihar from HUL
1999 Expands with first manufacturing facility in Bangladesh
2001 Acquires 'Parachute' and 'Saffola' brands from Bombay Oils Ltd for `300mn. Prior to this, Marico was paying 0.75% of sales as royalty to BOIL
Marico increased focus on the Value-Added Hair Oil (VAHO) segment through several new launches: Parachute Jasmine, Shanti Amla,
2000-05
Mediker hair oil and variants in Hair & Care; introduced innovative blends in Saffola premium edible oil
2002 Launches first Kaya Skin Clinic in Mumbai
2003 Sets up copra collection centres to collect copra directly from farmers
SIL is put on the block as a 'non-core' brand as part of portfolio rationalisation; was the #2 Jam brand but faced tough competition from
2003
Kissan
2004 Announces 1:1 bonus shares
2006 Acquires Nihar brand from HUL; acquires herbal bathing soap brand 'Manjal' from Oriental Extractions Pvt Ltd
2006 In September 2006, Marico acquires Egypt's haircare brand ‘Fiancee’ from the Ready Group
In October 2007, Marico acquires the consumer products division of Enaleni Pharmaceuticals, South Africa; the brands are Caivil, Black Chic
2007
and Hercules
2008 Sells SIL to Danish business house, Good Food Group, for an undisclosed amount
2009 Launches IPO of its Bangladesh subsidiary
2010 Acquires male grooming brand ‘Code 10’ in Malaysia; Kaya Ltd, a subsidiary of Marico, acquires skincare brand ‘Derma Rx’ in Singapore
2010 Launches Saffola ‘Masala Oats’
2011 Launches Parachute ‘Advanced Body Lotion’
2011 Launches Parachute ‘Gold Hair Cream’ in the Middle East
Marico acquires Vietnamese male grooming products company, International Consumer Products (ICP) for a consideration of US$55mn-
2011
60mn
2011 Cargill acquires ‘Sweekar’ for `600mn
2012 Acquires Paras’ personal care brands ‘Set Wet’ and ‘Livon’ for `7.5bn from Reckitt Benckiser
2012 Raises `5bn equity through placement to Baring Private Equity and GIC
Source: Company, Ambit Capital research
Company history
Marico has its roots in Bombay Oil Industries Limited (BOIL), India’s oldest spice
trading company run by the Mariwala family. Harsh Mariwala joined BOIL in 1971,
heading the consumer products division. He then had the vision of creating brands
(Parachute and Saffola) which subsequently allowed him to command a premium vs
the wafer-thin margins in a trading business. In 1990, BOIL was split into four
separate companies run by different family members, with BOIL as the holding
company. This restructuring was to allow the new generation more independence in
running their individual business.

Strategy
Phase zero - incorporation to IPO: Professionalising Marico

In 1990, the consumer products division was carved out of BOIL as ‘Marico Industries After incorporating Marico, Harsh
Limited’ headed by Harsh Mariwala. With a separate corporate identity, Mariwala Mariwala tried to professionalise
went about setting up a professional structure in the organisation with its own the company before its stockmarket
mission and value statement. The company also shifted its head office from the debut
commodity market of Masjid Bunder to the more upscale neighbourhood of Bandra
headquarters. This was also with an eye to attract and retain the best talent to run
the company. Marico setup an office in Dubai, turning it into an international
marketer than just an exporter. These initiatives, we believe, laid the foundation for a
professionally run organization whilst moving away from the template of being a
promoter-driven business.
Marico’s evolution
Exhibit 17: Marico’s revenue growth has remained steady in the past decade and
RoCEs are on the rebound
40% 45%
35% Kaya business 40%
30% de-merged in 35%
FY14 30%
25%
25%
20%
20%
15%
15%
10% 10%
5% 5%
0% 0%
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
Revenue Growth (LHS) ROCE (RHS)
Source: Company, Ambit Capital research. Note: FY14 revenue growth appears low due to de-merger of Kaya.
Like-to-like revenue growth is 10% YoY in FY14.
Phase 1: Taking on HUL in the late 1990s (1998-2004)

HLL’s acquisition bid: In the 1990s, post the opening up of the Indian economy,
HLL (Hindustan Unilever, then called Hindustan Lever) was on an acquisition spree. It
had already executed big-ticket acquisitions like Tata Oil Mills Company (TOMCO)
and Brooke Bond Lipton India Ltd (BBLIL) in the mid-1990s. With HLL’s reputation of
acquiring its competition, Marico was believed to be on HLL’s radar to get a
stronghold in the branded coconut hair oil and edible oil segments. This led to a
sharp run-up in Marico’s share price. But refusal by Harsh Mariwala to sell-out to K
Dadiseth-led HLL saw the beginning of an intense price war in the coconut oil
segment.
Price war with HLL: HLL competed in the branded coconut oil segment through
After rejecting an acquisition bid
‘Nihar’ which it had acquired through its TOMCO acquisition in 1993 and through
price warrior brand ‘Cococare’ acquired from Redcon in 1999. Marico tried to from HUL, Marico got into a
counter this challenge by re-launching ‘Oil of Malabar’ at a discount to Nihar. HLL pricing war with HLL in the coconut
tried to limit Parachute’s growth by targeting the loose coconut oil market through a hair oil segment
wider rural distribution. Through a mix of investing behind brands (higher A&P
spends), increased rural distribution and competing prudently on pricing, Marico held
on to its coconut oil market share. After an initial increase in market share, Nihar
started losing market share to Parachute. Consequently, HLL divested Nihar to Marico
in 2006. This acquisition gave Marico around 60% market share in the coconut oil
market and a stronger presence in eastern India through Nihar.
Reducing dependence on Parachute through new launches: By the first half of Marico reduced dependence on
2000, Marico had reduced the dependence on its flagship Parachute brand from 70% coconut oil through new launches
of total revenues in the 1990s to 40% in FY03. This it achieved through several new in VAHO and acquisition of
launches in the value-added hair oil (VAHO) segment and innovative blends in Mediker
premium edible oils. It products included Parachute Jasmine (perfumed coconut oil),

Strategy
Amla-based ‘Shanti Amla’ hair oil, cooling oils (Shanti Thanda Tel), new non-sticky
hair oils (Hair & Care) and anti-lice oil ‘Mediker’. Similarly, Marico increased blends
in Saffola (Saffola Nutri-blend and Saffola Tasty Blend). These new products
contributed c20% of total sales in FY03 vs less than 2% in FY2000. In FY03, Marico
also entered the skin care services segment with the launch of Kaya Skin Clinics.
With its financial performance remaining intact, Marico’s stock price outperformed
the broader Sensex during this phase.
Exhibit 18: Marico’s share price increased at a CAGR of 12% over CY98-04; the company faced an acquisition threat from
HLL in 1999
(`)/share Share price

20
18 Prospects of an Managed to increase market share

acquisition by HUL in coconut oil despite competition;
led to a run up in increased focus on VAHO
16 its share price
14
Faced intense competition
12 from HLL's Nihar and
Cococare brand of coconut oil Launched first Kaya skin clinic
10
4
Dec 97 Dec 98 Dec 99 Dec 00 Dec 01 Dec 02 Dec 03 Dec 04
During FY98-05, Marico reported revenue CAGR and PAT CAGR of 9% and 11%
respectively with a share price CAGR of ~12%. The company weathered HLL’s attack
in the coconut oil segment by investing behind brands, increased rural distribution
and straddling the coconut oil pricing pyramid. It reduced its dependence on
Parachute coconut oil through new launches in VAHO and Saffola edible oils and
also moved from a volume focus to value focus across its product portfolio.
Exhibit 19: Revenue growth hampered due to the price Exhibit 20: PAT growth was robust; RoCE dampened due to
war with HLL a series of acquisitions over FY99-00
800 PAT (Rsm) (LHS) ROCE (RHS) 43%
10,500
Revenue (Rs. Mn)
41%
9,500 700
39%
8,500 600
37%
Revenue CAGR of 9%
7,500 over FY98-05 500 35%
6,500 400 33%
31%
5,500 300
29%
4,500 200
27%
3,500 100 25%
FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05
Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Strategy
Phase 2: Acquisitions fuel growth (2005-2012)

This phase is characterised by: (a) Overseas and domestic acquisitions driving the
next leg of growth, (b) Entry into new categories through brand extensions, and (c)
Portfolio rationalisation through divestments.
Overseas acquisitions drive growth: By FY05, Marico’s international businesses (in In order to become an emerging
the Middle East and Bangladesh), which it had commenced in the 1990s, contributed market FMCG player, Marico did a
10% of its turnover. In markets like Bangladesh, Marico had 50% of the market share series of overseas acquisitions
for coconut oil. With ambitions of becoming an emerging market FMCG player,
Marico made many acquisitions and divestments over FY05-13 (see the exhibit
below).
Exhibit 21: Acquisitions and divestments by Marico over FY05-13
Brand/Company Market
2006 Marico Bangladesh acquires toilet soap brands ‘Camelia’ and ‘Aromatic’ Bangladesh
Acquires coconut oil brand ‘Nihar’ for `2.3bn from HLL; acquires herbal bath
2006 India
soap brand ‘Manjal’
2007 Acquires Fiancee, HairCode in Egypt Egypt
2008 Black Chic, Hercules (Enali Pharma) South Africa
2008 Sells SIL packaged food brand to Denmark-based Good Food Group India
Acquires male grooming brand “Code 10” in Malaysia; Kaya Ltd acquires skin Malaysia,
2010
care brand “Derma Rx” in Singapore Singapore
Acquires male grooming products company, International Consumer Products
2011 Vietnam
(ICP) for US$55mn-60mn
2011 Sells Sweekar edible oil brand to Cargill India
2012 Acquires Paras’ personal care brands from Reckitt Benckiser for `7.5bn India
Source: Company, Ambit Capital Research
This series of overseas acquisitions increased Marico’s proportion of international In 2006, Marico acquired HLL’s
sales as a percentage of total sales from 10% in FY05 to 22% in FY13. Nihar’s Nihar brand of coconut oil, giving
acquisition was significant for Marico, as this gave Marico almost 60% market share it almost 60% market share in the
in the coconut oil segment. Nihar had a higher operating margin due to a higher segment
proportion of value-added coconut oil in its portfolio. Following a series of
acquisitions, SIL was its first divestment, as Marico decided to exit the processed food
segment and focus on beauty and wellness. With Marico turning its focus towards
high-margin products, Sweekar was divested in 2011 due to the commoditised nature
of its product portfolio.
Entering new product categories: Marico’s acquisition of Paras’ personal care Acquisition of Paras’ personal care
brands in 2012 gave it an entry into Indian men’s grooming categories like portfolio gave Marico an entry into
deodorants, hair gels and other personal care categories like hair serums and skin new categories like men’s
creams. This acquisition also provides opportunities for cross-pollination of Marico’s grooming and skin care
international portfolio of personal care brands. Marico has also extended its Saffola
brand into the functional foods category with the launch of ‘Masala oats’. Parachute
Advansed has been extended into the body lotion category.
During FY05-13, revenue grew at a CAGR of 21% propelled by domestic and
overseas acquisitions. This, however, compressed RoCEs from ~50% in FY08 to 24%
in FY13. The company also cut its dividend payout from 52% in FY05 to 21% in FY13
to conserve capital for acquisitions. The share price grew at 31% CAGR over FY05-13
but reflected some concerns over capital allocation over FY13-14.

Strategy
Exhibit 22: Over 2005-12, Marico did a series of acquisitions; in 2012, it acquired Paras’s personal care portfolio for `7.5bn
(`/share) Marico Share price

250
Acquires Paras' personal
220 Acquires "Code 10" care portfolio
in Malaysia,
190 "Derma Rx" in
Acquires consumer products Singapore
160 Acquires Fiancee division of Enaleni Pharma,
Acquired Nihar in Egypt South Africa
130
coconut oil from
100
70
40
10
Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Dec 12
Exhibit 23: Series of acquisitions bumped up revenues… Exhibit 24: ..but weighed on Marico’s RoCEs as well
50,000 Rev. (Rs. Mn) Intl. biz. %of rev.(RHS) 30% 6,000 PAT (Rs. mn) ROCE (RHS) 45%
45,000 25% 25% 25% 25% 40%
24%
25% 5,000
40,000 35%
19%
35,000
17% 20% 4,000 30%
30,000
25%
25,000 12% 15% 3,000
20%
20,000
8% 10% 2,000 15%
15,000
10,000 10%
5% 1,000
5,000 5%
0 0% 0 0%
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
Phase 3: Change of guard (2013 onwards)

In March 2014, Harsh Mariwala stepped down as the MD, elevating CEO Saugata Harsh Mariwala stepped down as
Gupta to the MD’s position. Towards the end of FY13, Marico restructured its MD and handed over the baton to
business, merging the domestic and international FMCG business. Marico also Saugata Gupta who till then was
decided to demerge the Kaya arm, boosting RoCEs. Our recent discussions with the the company’s CEO for the
management suggest that they have shifted focus back to improving the RoCEs of the consumer products division
business through better capital allocation.
Exhibit 25: Marico’s stock price continued its strong run in Phase 3
(`/ Share) Marico share price

Clarity around dividend policy
275
alleviated capital allocation
Concerns around capital allocation
concerns
depressed the share price in 2013-14
250
225
200
175
Jan 13 Apr 13 Jul 13 Oct 13 Jan 14 Apr 14 Jul 14

Strategy
Increase in dividend payout: Marico’s RoCEs halved to 24% in FY13 from 50% in Marico has addressed investor
FY08 due to large acquisitions like Paras as well as the lower-margin International concerns around capital allocation
Business Group. In FY14, RoCEs improved mainly due to a hike in dividend payout to through higher dividend payout in
47.3% (24.1%, excluding a one-time dividend payment of `1.75/share) vs 19.3% in FY14 and lesser acquisition focus
FY13. If the company does not pursue any big-ticket acquisitions, we believe, the
company should maintain a dividend payout ratio of around 50% from now onwards.
Marico’s Chairman, Mr. Harsh Mariwala, acknowledged this in an interview to Forbes
India: “There are some other issues like dividend payout which, in our case, was lower
than some other FMCG companies as a percentage of profit. We have taken one jump
and, maybe, over a period of time, we will take one more.” (Source:
http://forbesindia.com/article/boardroom/marico-3.0-from-singlebrand-to-
diversified-consumer-goods/37958/0)
Large-scale M&A transactions unlikely at least over the next couple of years:
Based on our recent discussions with the management team, Marico does not intend
to acquire more businesses over the next 2-3 years, having recently acquired the
Paras business for `7.5bn (with revenues of `1.5bn). Mr. Saugata Gupta, MD and
CEO, told us in June 2014, “Acquisitions had become an escape button for not
growing domestic. We need to grow organically.”
 Demerger of the Kaya business will help improve RoCEs by 400bps: Kaya’s
Demerger of Kaya has benefited
demerger into a separate listed entity (owned by the shareholders of Marico) is
existing Marico shareholders
likely to benefit the existing shareholders because: (1) it removes the drag on net
through a positive impact on
profit that Kaya brought to Marico’s consolidated accounts; (2) it positively
EBITDA margins and return ratios
impacts EBITDA margins and return ratios, as it reduces the capital employed in
the core Marico business (its FY13 pre-tax RoCE would rise by 400bps from
20.8% to 24.8% if the Kaya business were to be excluded); (3) it gives investors
the option of separately investing in the non-core Kaya business; and (4) it is
value-accretive for shareholders, as a loss-making entity will be valued
separately.
Exhibit 26: Impact of Kaya demerger on Marico’s RoCEs (` mn)
Marico (ex-Kaya) Kaya Marico (incl Kaya)
Revenues 42,602 3,360 45,962
EBIT 5,952 (185) 5,767
EBIT Margin (%) 14.0% -5.5% 12.5%
Capital Employed 24,022 3,700 27,722
Pre-tax ROCE (%) 24.8% -5.0% 20.8%
Change in incentive structure for the management: Marico changed its incentive The incentive structure is a mix of
structure where only 50% of the variable pay is linked to short-term objectives like short- and longer-term objectives
achieving topline and bottomline targets. The remaining 50% of the variable pay is with an aim to develop capability
linked to longer-term objectives like product pipeline over the next 2-3 years, ahead of growth
creating future leaders in the team.
We expect this phase to demonstrate continued outperformance for Marico with
consistent EPS growth and strong RoCEs due to a combination of factors highlighted
in our competitive advantage framework in the next section.

Strategy
Rating framework
Marico receives Three STA` (out of a maximum of four) based on the following
parameters:
Overall score of : Innovation - , Brands/Reputation - , Architecture - ,
and Strategic Asset -
Despite being in the business of selling a simple product such as coconut oil, Marico
has been able to retain its market leadership, with more than 50% market share over
the last two decades. This competitive advantage has been due to a combination of
factors assessed through John Kay’s IBAS framework to assess Marico’s competitive
advantages:
Innovation: Although Marico trades in categories that do not demand extensive
innovation, Marico undertook various measures which contributed towards its Marico has succeeded through
competitive advantage. In the 1980s, Marico was the first to move to plastic bottles innovation in product packaging,
away from the bulkier tin packing, marking an industry-wide shift. Marico was the positioning and also through an
first to enter Bangladesh and it now commands c80% of the coconut hair oil market innovative incentive structure for
there. In its Saffola portfolio, realising the increasingly commoditised nature of the top management
edible oils market, Marico made the shift from ingredient-based edible oil to a
blended edible oil strategy focused on preventive heart care. This positioning has
helped Marico counter competition from ingredient-based edible oil competitors.
Innovative incentive structure for the top management: As highlighted earlier,
Marico has a unique incentive structure where only 50% of the variable pay is linked
to short-term objectives like achieving topline and bottomline targets. To avoid
malpractices in achieving these targets, the company has set guardrails like
maximum distributor stock level. The remaining 50% of the variable pay is linked to
longer-term objectives like product pipeline over the next 2-3 years, creating future
leaders in the team. This incentive structure has been extended to the top-100
managers. Through an innovative incentive structure, the company aims to create
capability ahead of growth for sustainable future growth.
Brands/Reputation: Marico’s main brands – Parachute and Saffola – have sustained
their leadership over the past 20 years. Parachute, one of the strongest brands in the
hair oil space, controls more than 55% of the coconut oil market and 28% of the
value-added hair oil market. Saffola, on the other hand, controls ~58% market share
in the premium edible oils market, and Sundrop is its key competitor. We summarise
below Marico’s strength across brands:
a) Parachute brand: As mentioned in our 27 November 2013 note, ‘Headwinds
priced in’, Marico’s ‘Parachute’ is synonymous with the coconut oil market in India
and hence it enjoys some of the strongest brand equity across all staples product
categories in India. This, combined with the strongest distribution in the segment Marico’s expansion in rural
(~4mn outlets), gives Parachute a strong platform on which it can capitalise in the distribution helped it to capitalise
future. The firm’s successful rural initiatives include: (a) expansion of distribution into on the pickup in rural demand over
rural areas (30% of total revenues are currently derived from rural sales); and (b) the last five years
effective use of lower-priced recruiter packs to incentivise consumers to shift from
loose oil to Parachute, especially in rural areas.
Parachute’s strong brand equity has led to strong brand loyalty, with very few
consumers switching away from the brand. Marico is the price maker in the hair oils
segment. Price increases taken by Marico in the past have not resulted in volume
growth coming off. As mentioned in our 04 June 2013 consumer thematic, ‘The party
is over’, organised competitors of Parachute (highlighted in the table below) do not
possess as strong a brand recall or as wide a distribution network as that of
Parachute. This has allowed Marico to gain substantial market share from its peers in
the coconut oil segment over the past few years (refer to the chart below).

Strategy
Exhibit 27: Marico’s coconut hair oil share
60.0% Marico Coconut oil share
Parachute’s strong brand equity

58.0%
has helped it hold on to at least
50% market share in the last
56.0%
decade
54.0%
52.0%
50.0%
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
Parachute has leveraged its strong brand equity to enter new categories through
brand extensions. Parachute Body Lotion has also met with success, gaining market
share of over 7% in the body lotions category within two years of launch. Whilst the
product currently contributes to 1% of consolidated revenues, we expect it continue to
expand faster than the `5.5bn body lotion category (likely category growth of 20%).
b) Saffola Brand: Saffola is the most aspirational brand in the edible oil space, with
its strategic heart-focused health positioning being substantially stronger than its Strong brand equity has allowed
peers. Marico has also extended the Saffola brand into breakfast foods, with its entry Parachute and Saffola to extend
in the oats and muesli categories. Not only are the growth rates for the category their brand in new product
robust (>30%) but competition from MNCs is also restricted to Pepsico in oats and categories
Kelloggs in muesli. In both oats and muesli, Marico is the second-ranked player
already (with a share of ~13% in oats).
c) As an employer: The FMCG industry in India is dominated by MNCs like HUL,
Nestle, and GSK. Due to Indians’ fascination with MNCs, their reputation among B-
School students is higher as compared to Indian FMCG majors like Dabur, Marico
and GCPL (also see the next section on Architecture). Marico has maintained an
excellent reputation on this front where it leads Indian competition. We spoke to a
headhunter on how candidates perceived Marico as a place to work for and he said:
- “Among the domestic FMCG companies, Marico and Asian Paints are considered in
Marico is the employer of choice
the top tier, whilst Dabur and GCPL are a notch below.
among domestic FMCG companies
- “In terms of pay scale, Marico pays an IIM-grad 25-30% higher than Dabur and and even some MNC FMCG
GCPL.” companies
- “Marico has been able to create substantial brand equity making it the employer of
choice among the domestic FMCG peers.”
- “Employees of MNC FMCG's like Mondelez and HUL seek opportunities with domestic
FMCGs like Marico as these companies are in a higher growth trajectory which allows
their staff to grow at a faster rate as well. This has allowed Marico to attract some of
the best talent in the market.”
- Domestics FMCGs are known to treat their employees in a very family-like
atmosphere and are less demanding than some of the MNCs. The ‘hire and fire’ culture
of the MNCs is absent in the domestic FMCG companies.”
Architecture: Marico has strong relationships with its dealer community, some of
which go back to the BOIL days working with the Mariwala family. A senior employee
at a MNC confectionary major told us that other than itself, the only other company
that FMCG dealers loved doing business with was Marico. The company has put in
systems and processes which help the distributor in claiming loss for damaged or
expired in timely manner as compared to the tedious processes laid out by its peers.
Marico has installed software at the distributor end which allows the distributor to use
it to manage not only Marico’s orders but also of other companies. Initiatives such as
these enable distributors to improve their overall efficiency. An ex-employee of the

Strategy
company told us, “Marico is extra careful when it comes to softer aspects. When it
comes to business associates, self-esteem is maintained, no matter how big or small a
distributor you might be.”
Within the company, Marico has fostered a competitive, professional culture amongst
Even distributors prefer to work
employees that is focused on performance. These practices place Marico on par with
with Marico due to the systems and
its MNC FMCG competition like HUL and Nestle. As the ex-employee told us, “There processes put in place by the
are goal sheets with targets. As an employee, you get a chance to explain if the targets company
are unrealistic, or if you need extra support or if the target rate of growth is not
achievable”.
Marico does not lead the FMCG industry in terms of salaries and whilst ESOPs are in
place, these are restricted to the top employees in the company. Saugata Gupta, MD
and CEO or Marico, who has worked his way up to the top post after joining the
company in 2004, told us, “We invested a lot in culture building and talent building.
There is a high sense of belonging. Salaries are based on a judicious mix of fixed and
variable portion. We want to create a balance between short-term and long-term
goals. Variable pay is also based on people related goals and not just bottom line.”
Marico’s professional culture is well-known in the industry and the company is able to
attract talent. However, for some middle/senior management, the growth
opportunities within the company can be relatively limited. As the ex-employee from
Marico told us, “A senior employee would have more growth opportunities in an HUL,
or a GSK, or a Nestle. This is a structural issue with smaller Indian FMCG companies
like Marico. Once an employee reaches a senior level, there is no room to grow
beyond that.”
Strategic Asset: Marico’s distribution reach of more than 4mn outlets, out of which
the direct distribution reach stands at around 1mn outlets, is a key strategic asset. Distribution reach of over 4mn
Not only does the company have a wide distribution reach but it also has a very loyal outlets, the Paras portfolio and its
distributor base, with relationships dating back to the BOIL days. Our discussions with overseas markets can be counted
Marico’s distributors indicate that they have a sense of pride in doing business with among its strategic assets
the company. This allows the company to try innovative products in the market
without concerns that a product failure could lead to distributor attrition. Other
strategic assets include:
a) Paras portfolio – growth engine for the future: Marico’s acquisition of Paras’
personal care product portfolio gave the company an entry into categories like
deodorants, hair gels, hair serums and skin creams where it previously had no
presence. In Paras’ portfolio, Marico has categories of future which should
significantly assist growth in the next decade. We would like to flag off our concern
over its deodorant portfolio (33% of Paras portfolio) which would need significant
brand investment in a hyper-competitive deodorant market. Whilst these brands
currently form only ~4% of Marico’s revenues, the superior growth rates in these
categories should ensure that they form a larger part of Marico’s portfolio in the
future.
Exhibit 28: Strong market shares in niche categories
Category Brand Market share Rank Market size (` bn) Market growth
Deodorants Set Wet/Zatak 5% 4 14 25%
Post wash leave on serum Livon/Silk & Shine 80% 1 1 20%
Hair cream/gels Set Wet/ Parachute After Shower 43% 1 2 20%
b) Overseas markets: Over the past six years, Marico has expanded outside India
through acquisitions (except for Bangladesh and the Middle East where it has
expanded organically). Marico has built its global presence through six international
acquisitions, with reasons varying from building an emerging market presence to
strengthening its skin clinic portfolio. The company plans to expand its international
portfolio through expansion of existing international businesses into adjacent
geographies. This we believe should deliver 15-20% YoY growth over the next decade
with acquisitions to be used only as ‘growth top-ups’.

Strategy
Accounting quality
Marico had a working capital cycle of 45 days (in FY13) which is amongst the poorest Marico fares poorly on accounting
in the FMCG space. Over FY06-13, as compared to its peers, Marico has reported quality metrics as compared to its
weak cash conversion, high contingent liabilities as a percentage of its net worth, YoY peers; it has the highest working
changes in depreciation rates and also high CWIP as a percentage of gross block. capital requirements among its
However, the company fares well on lower non-operating expenses, high cash yields peers
and higher provisioning for debtors as compared to its peers. The deterioration we
believe is partially explained by the integration issues the company has faced post its
overseas acquisitions.
Exhibit 29: Marico has the highest net working capital requirement in our coverage
Net Working Capital (days) for FY13

60 45
40 33
20
0
-1
-20 -11
-40 -28
-60 -46
-61 -58
-80
GSK CH HUL Colgate Nestle Britannia GCPL Dabur Marico
Capital allocation
Given the cash-generative nature of FMCG firms, capital allocation remains a critical
issue. Hence, whilst CFO remains the primary source of funds raised for Marico,
deployment has been sub-optimal, with the company choosing to deploy funds in the
low-margin international business rather than returning it to shareholders.
Exhibit 30: Cash generated from operations for Marico Exhibit 31: …has gone to fund low-margin international
(FY05-13)… expansion
Interest Dividend Increase in

received, Purchase of cash and Debt
received,
1% Investments cash repayment
2%
- equivalents 4%
Subsidiaries 2% Dividend
& Others paid
6% 12%
Debt
raised, 26% Net Capex Interest
CFO, 54% (incl. paid
internation 7%
al
acquisitions
Proceeds 69%
from
shares,
18%
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.
Marico’s RoCEs halved to 24% in FY13 from 50% in FY08 due to large acquisitions
like Paras as well as the lower-margin International Business Group. Marico’s
performance is thus inferior to MNC FMCG companies like HUL, Nestle and Colgate
Palmolive. We covered this aspect in detail in our 04 June 2013 consumer thematic,
‘The party is over’.

Strategy
Like Dabur and GCPL, Marico has ventured into new geographies/product categories
through M&A which has been funded by a combination of reduction in the dividend
payout ratio (see the exhibit below) and new capital raised in the form of equity and
debt. An analysis on the returns generated through these ‘non-core’ capital
deployment initiatives suggests that the incremental returns generated on these ’non-
core investments/international M&As have been either at or below par as compared
to the cost of equity of the corresponding capital employed.
Exhibit 32: Analysis of value created by the M&A strategy of Indian FMCG companies
Retained Standalone EPS Sum of

Sum of standalone Equity 13% Cost of
earnings/ share + Return on consolidated EPS % Gain
EPS (FY08-12) diluted/share Equity
(FY08-12) Equity (FY8-12)
Dabur 11.85 8.16 0 1.06 12.91 14.06 9%

Marico 19.17 15.54 0 2.02 21.19 19.52 -8%
GCPL 53.4 33.79 53.67 11.69 65.09 63.66 -2%
Source: Company, Ambit Capital research; Note: EPS is bonus adjusted and retained earnings/share is based on shares outstanding as on 31 March 2012.
In the Indian FMCG sector, we rate HUL, Nestle and Colgate Palmolive as the best
allocators of surplus capital, with dividend payouts and capex related to core
operations likely to continue forming over 80% of cash generated by these
companies. GCPL and Marico, on the other hand, have underperformed vis-à-vis
their peers on this metric, with their capital deployment initiatives NOT been value-
accretive for shareholders over the past five years. GSK Consumer and Dabur are
intermediately placed.
Exhibit 33: Avenues of capital deployment for various companies over FY03-12
100% Others
80%
Change in
60% cash
40% Non core

Inv./Intl.
20% M&A
0% Dividend
Paid
Dabur
GCPL
Nestle
Colgate
GSK CH
Marico
HUL
-20%
Investment
in core
Source: Company, Ambit Capital research; Note: height of the bar for each company refers to the sum of
operating cash flows, new equity raised and increase in gross debt.
Our recent discussions with Marico give us some comfort about the company’s capital
allocation plans. The management does not have an explicit target for RoCE but it
plans to keep increasing it every year. The company has initiated steps in this
direction, which are highlighted below:
Large-scale M&A transactions unlikely at least over the next couple of years:
Marico plans to use M&A as only ‘top-ups’ for growth unlike the earlier approach of
acquisitions as an ‘escape button’. The company plans to focus on organic growth for
international expansion. This should conserve capital for the company, which it can
return to shareholders through higher dividend payouts.
Increase in dividend payout: In FY14, RoCEs improved mainly due to a hike in
dividend payout to 47.3% (24.1%, excluding a one-time dividend payment of
`1.75/share) vs 19.3% in FY13. If the company does not pursue any big-ticket
acquisition, we believe, the company should maintain a dividend payout ratio of
around 50% from now onwards. This should help in driving an increase in RoCE from
23% currently to c35% in FY19.

Strategy
Exhibit 34: Summary of ratings around capital deployment
Company Historical capital

Deployment strategy Overall
deployment (FY05- Comments
in future rating
13)
High dividend payout ratio historically (ten-year average of 92%); high

HUL
RoEs (103%); strategy unlikely to change going forward
High (ten-year average of 80%) dividend payout ratio historically; high

Nestle
RoEs (70%); strategy unlikely to change going forward
Around `4.5bn cash on books; going by historical trends, surplus

Colgate
likely to be repatriated through special dividends
Average ten-year dividend payout ratio of 46% in the past; no

GSK Consumer additional capital deployment initiatives followed so far; management
highlights M&A as a likely option in the future
M&A has been value accretive in the past; acquisition of entities like
Dabur Namaste have not been successful; management intends to deploy
over `10bn of surplus towards M&A in India
M&A historically has NOT been value accretive; strategy going

Marico
forward focuses on acquisitions in Indonesia and Africa
M&A historically has NOT been value accretive for shareholders;

GCPL strategy going forward includes integration of Darling’s businesses in
Africa and debt repayment
Source: Company, Ambit Capital research; Note: indicates superior positioning; indicates intermediate positioning; indicates inferior positioning

Marico is not part of our Connected Companies Index and does not display any
visible, direct connections with any political party. The company also does not appear
to have any visible nexus with politicians or any questionable transactions with State
or Central Governments that indicate abuse of India’s public contracts system.
Marico remains the biggest business for the Mariwalas and the promoter stakes are
held through family trusts. Marico’s annual reports are detailed, outlining the
company’s vision, performance and detailed commentary on various businesses,
including a table on economic value added, financial performance and return ratios.
Over the past ten years, we could not spot any transaction that could negatively
impact minority shareholder interests.
Exhibit 35: Shareholding of Promoter and Promoter Group as at 31 March 2014
Number of As a % of grand
Name of the Shareholder
shares held (m) total
Harsh C Mariwala With Kishore V Mariwala For Valentine
1 73 11.4
Family Trust
Harsh C Mariwala With Kishore V Mariwala For Aquarius
2 73 11.4
Family Trust
Harsh C Mariwala With Kishore V Mariwala For Taurus
3 73 11.4
Family Trust
Harsh C Mariwala With Kishore V Mariwala For Gemini
4 73 11.4
Family Trust
5 Rajvi H Mariwala 13 2.0
6 Rishabh H Mariwala 13 2.0
7 Archana H Mariwala 12 1.9
8 Harsh C Mariwala 11 1.8
9 Arctic Investment & Trading Company Pvt Ltd 9 1.4
10 Ravindra Kishore Mariwala 7 1.0
11 Others (less than 1% individually) 26 4.1
Total 385 60

Strategy
Succession planning
Harsh Mariwala is among the few Indian promoters who have given way to
professional management. In a Spencer Stuart report in September 2010 on
succession, Mr. Mariwala has been quoted as saying, “To me, what is important is the
composition of the board, what gets discussed on the board and the interaction
between the board and the team. This constitutes succession for me.” (Source:
https://www.spencerstuart.com/~/media/PDF%20Files/Research%20and%20Insight%2
0PDFs/Succession-Planning-the-Indian-Perspective_08Sep2010.PDF)
In Marico, there are succession plans in place for the board as well as the
management. Independent Directors exceed the mandated limit and Marico’s Board
has formulated and implemented a model Code of Conduct. The Board, which has
independent directors higher than the mandated limit, consists of professionals like
Hema Ravichandar (an HR professional and ex-Infosys employee). They play an
instrumental role in major corporate decisions like acquisitions. Mr. Harsh Mariwala’s
son, Rishabh Mariwala, is currently not actively involved in Marico and runs his own
soaps business.
Weaknesses
International business: Marico’s international portfolio has been a drag on the
overall business, with its Bangladesh portfolio (40% of international revenues) and
MENA portfolio (25% of international revenues) struggling for growth.
High competition in new segments: Marico faces tough competition in the
deodorant segment for its ‘Zatak’ portfolio of deodorants. In the breakfast cereals
segment, Marico competes against two MNCs, Pepsi Co and Kelloggs, which could
thwart Marico’s progress through higher A&P spends and stronger product pipeline
backed by their respective parent companies. The downside for Marico is limited, as
we expect these segments to represent less than 10% of revenues in the next five
years.
Growth peaking out in core segments: High penetration levels (80% in urban,
67% in rural) in coconut hair oils could see volume growth coming off at an industry
level. This is a bigger threat for Marico which it has tried to placate by expanding its
portfolio in value-added hair oils. The proportion of Parachute coconut hair oil has
reduced from 70% in the 1990s to c25% in FY14.
Capital allocation: Our discussion with Marico’s management team suggests that
the immediate goal of the company is to bring its core operations in India to a
consistent double-digit YoY volume growth rate. Once this goal is achieved, the
company could explore M&A opportunities in Indonesia and Africa, with the intention
of evolving into an ’emerging market MNC firm‘. However, with an unattractive track
record of capital deployment through M&A over the past five years, we consider this
strategy to be a key risk to shareholder returns.

Strategy
Valued at an undeserving discount

Marico is trading at 22.3x FY16 EPS, a 16% discount to the FMCG sector average. We
believe this discount is excessive and should narrow, as the company’s volumes and
earnings would display the strength of its Parachute, Saffola and the Paras portfolios.
We expect the revenue and PAT to grow at a CAGR of 15% and 18% over FY14-19
respectively. With the management’s increased focus on capital allocation, we expect
the RoCE to improve from the current levels of 23% to 37% in FY19 led by an
increase in dividend payout and reduced focus on acquisitions.
DCF-based valuation of `258

Given the cash-generative nature of the business, we use a DCF-based model to Item Value
arrive at a fair value for Marico. The assumptions for the weighted average cost of Risk free rate (%) 8.5
capital and terminal growth rates are shown in the exhibit on the right. We have Beta (2-year monthly) 0.50
assumed marginal debt (debt:equity of 0.1) on Marico’s balance sheet in the future
Equity risk premium (%) 7.0
given its strong cash position and free cash flow generative business. Hence, the
company has enough surplus cash available on its balance sheet for capital Cost of equity (%) 12.0
expenditure in the future. Cost of debt (%) 10.0
Debt/Equity ratio (%) 10
We use a three-stage DCF approach for Marico. Stage 1 includes explicit forecasts
for the income statement and balance sheet for the next four years (FY14-19) with Tax rate (%) 26.0
sales CAGR of 15% (adjusted for the Kaya de-merger) and EPS CAGR of 18%. Stage WACC (%) 11.5
2 includes a decline in sales growth over eight years from 14% in FY20 to 7% in FY27 Terminal growth rate (%) 5.0
i.e. sales CAGR of 10% and free cash flow CAGR of 10% over this period. Stage 3
includes terminal growth forecasts with a growth rate to perpetuity of 5%.
The discount rate assumptions used in our DCF model are shown in the exhibit
alongside. Our model generates a target price of `258/share, a 6% upside and
implying an FY15 P/E multiple of 23.5x.
The cash flow and return profiles generated by our model are shown in the exhibits
below.
Exhibit 36: Cash flow profiles for Marico (` mn) Exhibit 37: Return profiles for Marico (%)
19,000
70% 60%
60% 50%
14,000
50% 40%
40% 30%
9,000
30% 20%
20% 10%
4,000
10% 0%
0% -10%
(1,000)
FY14E
FY15E
FY16E
FY17E
FY18E
FY19E
FY08
FY09
FY10
FY10
FY11
FY11
FY12
FY13
FY14E
FY15E
FY16E
FY17E
FY18E
FY19E
FY08
FY09
FY10
FY10
FY11
FY11
FY12
FY13
(6,000) ROE (LHS) EBITDA Margin

CFO (Rs mn) Free Cash Flow (Rs mn)
EPS Growth YoY Growth in sales
Source: Ambit Capital research; Note: FCF and CFO for FY14 are distorted Source: Ambit Capital research; Note: Sales and EPS growth for FY14 is
due to the demerger of Kaya Ltd. distorted due to the demerger of Kaya Ltd.

Strategy
Long-term gains from consistent EPS growth

Although our DCF suggests a limited upside, for long-term investors, Marico
is likely to generate ~20% annualised shareholder returns given an
expected EPS CAGR of 18% over FY14-18 and dividend yield of ~2%.
Additional returns are possible from a re-rating of the stock due to the
following: (a) Turnaround in the international business and stabilisation of
the Paras portfolio, and (b) prudence in capital allocation through higher
dividend payouts and lesser focus on big ticket acquisitions.
Marico is currently trading at a ~16% discount to the FMCG average. We believe that
Marico deserves to trade at a ~10% discount to the FMCG average multiple due to its
exposure to commodity risks and the weak performance of its international
businesses. However, given the improving RoCEs and sustained competitive
positioning of its brands, Parachute and Saffola, the current quantum of discount for
Marico on P/E multiples is not justified.
Exhibit 38: One-year forward P/E bands for Marico Exhibit 39: One-year forward EV/EBITDA bands for Marico
350 350
300 30x 300 20x
250 26x 250 17x

200 22x 200 14x
18x
150 150 11x
14x 8x
100 100
50 50
0 0
Jul-08
Jul-09
Jul-10
Jul-11
Jul-12
Jul-13
Jul-14
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
Source: Bloomberg, Ambit Capital research Source: Bloomberg, Ambit Capital research
Risks to our BUY stance

 Volume growth remaining under pressure: Volume growth for both Saffola
and Parachute Coconut Oil could remain under pressure owing to: (1) subdued
discretionary consumption growth; (2) increasing penetration in the coconut hair
oil segment; and (3) unfavourable movement of raw material prices.
 Rising raw material costs could impact gross margins: Copra prices doubled
in FY14. Marico tried to offset this increase by sufficient price hikes. However, a
continued increase in raw material prices in FY15 and Marico’s inability to pass
on the price hikes would put gross margins under pressure.
Catalysts
Things to watch out for over the next six months
 Further increase in dividend payout ratio: Marico is focused on improving its
RoCEs. With the company likely to turn net cash this year post the demerger of
the Kaya business, the dividend payout is likely to increase meaningfully. An
indicator of the management’s intention to do so is the increase in dividend
payout for FY14 to 47.3% (24.1%, excluding a one-time dividend payment of
`1.75/share) vs 19.3% in FY13.
 Revival in volume growth: With consumer demand likely to remain subdued in
1HFY15, volume growth is likely to pick up from 2HFY15. We expect the Saffola
foods business, value-added hair oil portfolio and the personal care business
acquired from the erstwhile Paras Pharma to be the growth drivers in the future.

Strategy
Balance Sheet (` mn)

Year to March FY12 FY13 FY14E FY15E FY16E
Shareholders' equity 615 645 645 645 645
Reserves & surpluses 10,815 19,170 12,961 16,093 19,679
Total net worth 11,430 19,815 13,606 16,738 20,324
Minority Interest 249 351 358 561 784
Debt 7,629 7,907 5,259 3,259 -
Deferred tax liability (223) 58 96 96 96
Total liabilities 19,084 28,131 19,319 20,654 21,204
Gross block 9,015 17,009 11,289 12,289 13,289
Net block 4,924 12,748 6,278 6,595 6,891
CWIP 94 1,477 100 100 100
Goodwill 3,955 3,955 2,542 2,542 2,542
Investments 2,956 1,516 3,105 3,105 3,105
Cash & equivalents 1,588 2,667 4,064 4,672 4,360
Debtors 1,816 1,966 2,232 2,620 3,028
Inventory 7,202 8,627 7,962 8,733 10,095
Loans & advances 1,995 2,555 1,474 1,747 2,019
Other current assets 1,416 1,562 1,892 2,183 2,524
Total current assets 14,017 17,376 17,624 19,955 22,026
Current liabilities 5,665 7,727 9,473 10,189 11,777
Provisions 1,197 1,214 857 1,456 1,682
Total current liabilities 6,862 8,941 10,330 11,645 13,460
Net current assets 7,155 8,435 7,294 8,311 8,566
Total assets 19,084 28,131 19,319 20,654 21,204
Income statement (` mn)

Operating income 40,083 45,962 46,862 53,128 61,409
% growth 27.9% 14.7% 2.0% 13.4% 15.6%
Operating expenditure 35,239 39,704 39,158 44,512 51,204
EBITDA 4,844 6,258 7,704 8,616 10,205
% growth 15.8% 29.2% 23.1% 11.8% 18.4%
Depreciation 725 866 750 682 705
EBIT 4,118 5,392 6,954 7,934 9,501
Interest expenditure 424 580 344 256 98
Non-operating income 326 375 576 527 528
Adjusted PBT 4,020 5,187 7,186 8,206 9,931
Tax 783 1,462 1,904 2,134 2,632
Adjusted PAT/ Net profit 3,238 3,725 5,281 6,072 7,299
% growth 33.5% 15.0% 41.8% 15.0% 20.2%
Extraordinaries (18) 332 - - -
Reported PAT / Net profit 3,220 4,057 5,281 6,072 7,299
Minority Interest 50 98 183 203 223
Share of associates - - - - -
Adjusted Consolidated net profit 3,171 3,959 5,098 5,869 7,076
Reported Consolidated net profit 3,171 3,959 5,098 5,869 7,076

Strategy
Cash Flow statement (` mn)

EBIT 4,444 5,767 7,530 8,461 10,029
Depreciation 725 866 750 682 705
Others (368) (295) (482) (256) (98)
Tax (783) (1,462) (1,904) (2,134) (2,632)
(Incr) / decr in net working capital (916) (201) 2,538 (409) (567)
Cash flow from operations 3,103 4,675 8,431 6,346 7,437
Capex (1,166) (10,072) 7,097 (1,000) (1,000)
(Incr) / decr in investments (2,046) 1,440 (176) - -
Others - - - - -
Cash flow from investments (3,212) (8,632) 6,920 (1,000) (1,000)
Net borrowings 405 278 (2,648) (2,000) (3,259)
Interest paid (424) (580) (344) (256) (98)
Dividend paid (501) (749) (2,632) (2,256) (3,008)
Others 12 6,088 (8,331) (226) (384)
Cash flow from financing (509) 5,036 (13,955) (4,738) (6,749)
Net change in cash (618) 1,079 1,397 608 (312)
Closing cash balance 1,588 2,667 4,064 4,672 4,360
Free cash flow 1,937 (5,397) 15,528 5,346 6,437
Ratio Analysis
Gross margin (%) 47.6% 51.9% 49.3% 50.0% 50.2%
EBITDA margin (%) 12.1% 13.6% 16.4% 16.2% 16.6%
EBIT margin (%) 11.1% 12.5% 16.1% 15.9% 16.3%
Net profit margin (%) 8.0% 7.9% 10.9% 11.0% 11.5%
Dividend payout ratio (%) 15.8% 18.9% 51.6% 38.4% 42.5%
Net debt: equity (x) 0.5 0.3 0.1 (0.1) (0.2)
Working capital turnover (x) 7.2 8.0 14.5 14.6 14.6
Gross block turnover (x) 4.4 2.7 4.2 4.3 4.6
RoCE (%) 20.0% 17.1% 22.6% 30.3% 34.2%
RoE (%) 31.0% 23.2% 30.5% 38.7% 38.2%
Valuation Parameter
EPS (`) 5.2 5.6 7.9 9.1 11.0
Diluted EPS (`) 5.2 5.6 7.9 9.1 11.0
Book value per share (`) 18.6 32.2 22.1 27.2 33.1
Dividend per share (`) 0.70 1.00 3.50 3.00 4.00
P/E (x) 49.8 45.9 32.6 28.3 23.5
P/BV (x) 13.9 8.0 11.7 9.5 7.8
EV/EBITDA (x) 34.0 27.4 21.8 19.1 15.9
Price/Sales (x) 4.0 3.6 3.6 3.1 2.7

Strategy
Page Industries
"When I opened my shop in 1995, people used to laugh at me because I was the only
one selling underwear in Commercial Street, Bangalore.”
— Page Industries’ largest dealer in Bangalore (June 2014)
Page is operating in the premium and mid-premium categories of innerwear
market, delivering revenue CAGR of 36% and earnings CAGR of 38% over
FY06-14. Page’s conscious decision to invest in establishing its brand appeal
in the premium and mid-premium segment much ahead of its competitors
helped the company to build its central competitive advantage around
brand. Page has focused on expanding its retail network and, at the same
time, committed to providing high-quality innerwear by resorting to in-house
manufacturing. Over FY05-13, the company has used 45% of its internal
accruals and net funds raised (equity & debt) to expand its manufacturing
capacities whilst 47% has been given back to shareholders as dividends. We
expect the company to continue to allocate its capital efficiently and maintain
its competitive advantages around: (a) Technical and commercial advantage
given its size as compared to competitors; (b) Control on product quality
given in-house manufacturing; (c) High focus around product development
and R&D; (c) Wide distribution network; (d) Strong brand recall; and (e)
Professionally run management team.
Criteria
Market cap (US$mn) 1,472
3m ADV (US$mn) 1.0
1-year 82%
3-year 61%
10-year DNA
Exhibit 41: Page Industries gets a ‘Full pie’ on our STAR framework
Near monopoly within its segment; strong brand and
well-entrenched dealer network.
Accounting quality Superior accounting quality as compared to peers.
Cash-generative business; management has
Capital allocation maintained financial discipline and a high dividend
payout.
Page is not part of Ambit’s Connected Companies Index
Centrality of political connect and does not appear to have any questionable political
connections.
Promoters have a non-competing apparel business in
Treatment of minorities India, but good overall track record of corporate
governance.
Promoter-driven business; lack of clarity on the next line
Succession planning
of command.
Total (%)
Rising labour force could strain management bandwidth
Weaknesses and there is always the threat of competition getting its
act together and escalating competitive intensity.

Strategy
Exhibit 42: Page Industries timeline

Year Events
1994 Company Incorporated
1997 Jockey products for women was launched under the style of 'Jockey For Her'
The middle range of men's undergarments was launched
2001 Retail network touched 100 towns
2003 Turnover crossed `500 million
Retail network of 10,000 outlets
Achieved production of 1 million pieces a month
2004 Launch of sub brand 'Jockey Zone'
2005 Launch of Jockey brassieres in India
Initiated massive advertisement strategies in print media and hoarding to strengthen the brand
image
Tested new products in outwear category, garnered good response
Technology received from Jockey International Inc was fully absorbed which resulted in
upgradation of machineries in terms of capacity and quality
2006 Jockey introduces 'No Panty Line Promise' range for women
The turnover of the company crossed `1,000 million in terms of factory selling price for the
year-ended March 31, 2006
June production crossed 2 million pieces per month
Company listed, raising ~`500mn of fresh capital, out of which nearly half was intended
2007
towards a building brand exercise
Page had 3,377 employees at the end of FY07
Added 22 needle looms for elastic production, resulting in capacity expansion to ~18mn metres
2008
annually as at FY09 vs ~4mn in FY08
Doubled its socks manufacturing capacity as management cited that the demand for socks is
growing at a fast rate
2009 Page implemented SAP ERP to improve production efficiencies and internal controls
Page had 6,358 employees at the end of FY09
Page was given the 'International Licensee of the year' Award; it outperformed 40 other licensees
and distributors in 130 countries
Launched new products under the Women's 24 X 7 stretch, comfort stretch and sports range
Launched a new brand campaign 'Just Jockeying' to extend its brand recall from strong men's
brand to unisex and a leisurewear brand
2010 Page renewed its licence agreement with Jockey International Inc USA for a period of 20 years
Launched new products under the Lace Essence, Signature Stretch, Zone Stretch and Comfort
Plus range
Opened the first 'Jockey woman' store
Commenced automated laying and cutting of garments at the Kodichikkanahalli complex
Started its own training centre to train freshers/employees in multi-skilled operations
2011 Page Industries signs an exclusive licensing agreement with Speedo for India
Launched 'Jockey Kids' along with new products under Fashion Stretch, Essence and women's
leisurewear range
Business Intelligence/Business Objects (an extension of SAP) was implemented to create
management reports which will aid in decision making
2012 Commercial production started at the new unit at Manganapalya, Bangalore
Page Industries strengthened its distribution to 71 EBOs and 19,000 retail stores across 1,200
cities and towns
Launched 'Speedo' brand of products in January 2012
Introduced shapewear range in women and microfibre seam-free innerwear in men's category
Also introduced a new product under the thermals category and POP collection (premium
innerwear)
Started the first factory outside Bangalore in Hassan to mitigate labour availability risk

Strategy
Company history
Bangalore-based Page Industries, set up by the Genomal family in 1995, is the sole
exclusive licensee for the Jockey brand in India, Sri Lanka, Bangladesh, Nepal and
the UAE. Over the years, Page has grown into a near-monopoly in India’s premium
innerwear market. Page’s royalty-based agreement with Jockey is in place till 2030.
As at September 2013, Jockey employed 16,000 people in its manufacturing facilities
which are based in and around Bangalore. Page’s distribution network spans more
than 25,000 retail outlets across 1,200 cities and towns. Page also launched the
Speedo range of swimwear, footwear, etc in 2012. Page raised `500mn from the
primary equity capital markets in India and it was listed on the bourses in March
2007.
Page Industries’ evolution
Exhibit 43: Predictable, steady revenue growth backed by a highly cash-generative
business that consistently generates high RoCEs
50% 100%
40% 80%
30% 60%
20% 40%
10% 20%
0% 0%
Phase 1: Setting up Jockey India (pre-IPO period from FY96 to FY06)

The Genomal family had been associated with Jockey International Inc for 36 years
as its sole licensee in the Philippines. In India, Page Industries was set up in 1995 to
launch the ‘Jockey’ brand of premium innerwear in the Indian market. In those days,
the innerwear garment industry was unorganised, with virtually no market for the The Genomal family had been
premium innerwear segment. Page created this market for premium innerwear and associated with Jockey
benefited from the post-liberalisation wave of strong growth (India’s GDP growth International Inc for 36 years as its
averaged 6.9% during FY96-2000 as compared to 4.8% during FY90-94). In this sole licensee in the Philippines
phase, Page introduced and expanded its premium innerwear range for men and
women. By 2003, Jockey had achieved production of 1 million pieces a month. To
ramp up its distribution network and strengthen its brand, Page initiated a large
advertisement strategy in print media and hoardings in 2005.
Exhibit 44: Page’s revenues rose at a 46% CAGR in its first decade of existence (FY96-
06)
1,200 (` mn)
1,000
800 46% CAGR as Jockey created the market

for organised, premium innerwear in
600 India
400
200
-

Strategy
Phase 2: Ramp up in capacities funded by IPO (FY07-10)

In FY07, Page raised `508mn through an IPO. By FY10, these funds were used
primarily (`270mn) to establish a new manufacturing facility at Bommasandra,
Bangalore. Funds raised in the IPO were also used for implementing SAP ERP to
improve production efficiencies and internal controls. Whilst Page had earmarked
`233mn from its IPO for brand building, it switched to using internal resources for
this purpose (as per its 2009 Annual Report).
Exhibit 45: After an initial lull, Page’s stock price took off backed by strong financial performance
(`) Launched new brand

1,000 campaign 'Just Jockeying' to
extend its brand recall from
900 strong men's brand to unisex
and a leisurewear brand
800 Page implemented
SAP ERP to improve
production
700 efficiencies and
Page IPO was at internal controls Increased employee
600 `360/share count to 8,732 by end-
FY10 (37% YoY
500 increase in headcount)
400
300 Page revenue

jumped by 41%
200 Page clocked revenue in FY08
Nalanda Capital Increased employee
growth of 35% and PAT
100 growth of 50% in FY07 acquired ~8% stake count to 6,358 by end-
for `350mn FY09 (51% YoY
increase in headcount)
-
Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10
Series1
Page's share price performance
During this phase, Page’s revenues were driven by an expansion in production

capacity (from 18m garments/year in FY07 to 48m garments/year in FY10, including
doubling capacity for socks), launch of new products (incl. innerwear for women). In
2009, Page also launched a new brand campaign, 'Just Jockeying,' to extend its
brand recall from a strong men's brand to a unisex and a leisurewear brand. Thus,
revenues grew at a 36% CAGR during this phase and whilst EBIT margins remained
stable, RoCEs dipped, as inflows of IPO funds expanded the balance sheet size. In
FY10, the Genomal family received the ‘International Licensee Award of the Year’
from Jockey, which also coincided with the Genomals completing 50 years of their
relationship with Jockey International.
Exhibit 46: Ramp up in production capacity and new Exhibit 47: Dip in RoCE was due to expansion in balance
launches drove revenues in Phase 2 sheet size post IPO
(` mn) 50%
4,000
3,500 40%
3,000 36% Cagr

30%
2,500
20%
2,000
1,500 10%
1,000
0%
500
FY07 FY08 FY09 FY10
-
FY07 FY08 FY09 FY10 Ebit (%) ROCE (%)

Strategy
Phase 3: Growth continues on a large base (from FY11 to date)

Jockey’s growth momentum in Phase 3 was maintained by constant additions to its
product portfolio (Jockey Kids, Lace Essence, Signature Stretch, Zone Stretch and
Comfort Plus range; shapewear range in women and microfibre seam-free innerwear
in the men's category). Jockey also launched the Speedo range of sportswear in FY12.
On the manufacturing front, Page started its first factory outside Bangalore in Hassan,
Karnataka, to mitigate labour availability risk.
Thus, as the Jockey brand nears two decades of existence in India, Page has grown
into a near monopoly in the premium innerwear industry. Revenue momentum
remains strong and Page is close to crossing the US$2bn revenue mark whilst
maintaining high capital efficiencies. During this period, Page’s stock saw a
significant re-rating: whilst Page’s earnings grew at a 38% CAGR, its stock price rose
at a 60% CAGR.
Exhibit 48: Sharp rerating in Page’s stock price in Phase 3
8,000
Page revenue grew
(`) Page revenue grew by
by 35% in FY14, PAT
40% in FY12, EBITDA
grew by 37% YoY
7,000 margin expansion of
170bps YoY led to PAT
growth of 54% YoY
6,000 Introduced Shapewear
Increased employee count Consensus expects range in women and
to 12,120 by end-FY11 Page to grow at 31% Microfibre seamfree
(39% YoY increase in CAGR over FY12-14 innerwear in men's
5,000 headcount) category
Jockey crosses
4,000 `1,000crs mark
Page clocked revenue (at MRP level) in
growth of 45% and PAT FY12
3,000 growth of 48% in FY11 Increased retail
presence from 19,000
Opened first stores in FY12 to more
2,000 'Jockey woman' than 25,000 stores by
store Launched
the end of FY14
Business Intelligence/Business 'Speedo' brand
Objects (an extension of SAP) of products in
1,000 Page renewed its license agreement with January 2012
was implemented to create
Jockey International Inc. USA for a period management reports which will
of 20 years through 2030 aid in decision making
-
Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14
Series1
Page's share price performance
Exhibit 49: Success of new products and new segments Exhibit 50: EBIT margins improved, driving up RoCEs in
fueled revenue growth in Phase 3 Phase 3
14,000 70%
(` mn)
12,000 60%
50%
10,000 34% CAGR
40%
8,000
30%
6,000 20%
4,000 10%
2,000 0%
FY11 FY12 FY13 FY14
-
FY11 FY12 FY13 FY14 Ebit (%) ROCE (%)

Strategy
Rating framework
Page gets a total of Four STA` based on the following parameters:
Overall score of - Innovation - , Brands/Reputation - , Architecture - , and
Strategic asset -
We use John Kay’s IBAS framework to assess Page Industries’ competitive
advantages.
Innovation: Page has a strong first mover advantage which is well supported by its
back-end infrastructure, huge distribution network and management’s commitment
to investing in the brand. We highlight four areas of innovation that differentiate
Page from its competition: Jockey International is more than
130 years old and has a tradition
(a) 50-year-old relationship with Jockey: Jockey International is more than 130 for generating innovation in the
years old and has a tradition for generating innovation in the undergarment
undergarment segment
segment. Its inventions include the world’s first-ever brief in 1934 followed by the
bikini brief, the string bikini, box packaging and a host of underwear fashion and
fabric innovations. The Genomal’s relationship with Jockey International has crossed
50 years and thanks to this tie-up, Page has access to Jockey’s innovations as well as
Jockey’s line of new products every year.
(b) Outsourcing: Jockey has an innovative mix of in-house and outsourced
processes. It has vendors to supply yarn and it has dedicated fabric knitting and
processing facilities. Once these materials are in Page’s integrated manufacturing
facilities, Page’s large work-force (predominantly women) completes the remaining
processes and packages the product. The product is dispatched to distributors after
stringent in-house quality controls (see ‘brands and reputation’).
Exhibit 51: Page Industries - manufacturing process
Woven Fabric
Yarn Fabric Knitting Fabric Processing
Sourcing
Trims and
accessories
Material
inspection
Fabric Cutting
Garment Sewing
Garment
Checking
Garment
Finishing
Garment
Packing
Source: Page Prospectus, Ambit Capital research
(c) New product launches: Jockey has successfully expanded its initial niche of
premium men’s innerwear. The rising share of women’s innerwear and leisurewear in
Page’s overall revenues shows the success of products in these segments (see the
exhibit on the next page).

Strategy
Exhibit 52: Share of women’s wear and leisurewear has gradually risen over the years
% of revenues
100%
Others
80%
Bra
60%
Women's innerwear
40%
Leisurewear
20%
Mens innerwear
0%
FY10 FY11 FY12 FY13
(d) Distribution network: Distribution in India’s innerwear industry is largely

through mom & pop outlets and small hosiery stores. Page has stood apart and built
a sophisticated distribution system to ensure maximum reach for its brand. Page uses
five formats: (a) Chain stores (large format stores); (b) Multi Brand outlets (MBOs); (c)
Hosiery stores; (d) Multi-purpose stores; and (e) Exclusive JOCKEY brand outlets
(EBOs). Page has also created a ‘Jockey Comfort Zone’ (shop in shop) in the MBOs
and chain stores. Over the years Page has aggressively ramped up its EBO networks
which are best positioned to leverage off Jockey’s ‘international and lifestyle’ brand.
Exhibit 53: Big ramp-up in the Exclusive Brand Outlet (EBO) network
160
(number of EBOs) 139
140
120
100
100
80 67 71
60 53
43
40 30
18
20
0
IPO FY08 FY09 FY10 FY11 FY12 FY13 FY14
Brands/Reputation: Page has positioned Jockey as an aspirational, lifestyle brand

at a much higher price point than generic innerwear. Our discussions with dealers
reveal that the four factors with the highest recall for the Jockey brand are: high
quality, good design, comfortable fit and high but affordable pricing. These qualities Our discussions with dealers reveal
have created strong customer recall and have enabled Jockey to maintain its that the four factors with the
premium pricing. We highlight two aspects to Page’s enduring strong brand and highest recall for the Jockey brand
reputation. are: high quality, good design,
comfortable fit, and high but
(a) Strong in-house quality processes: Page adopts stringent norms of quality
affordable pricing
assurance at its vendors and its own manufacturing facilities. Page implements 100%
in-line quality checks after every process as well as on all products before packing
and moving the products to the finished goods warehouse. Over and above this, an
independent final audit is conducted with defined norms i.e. Acceptable Quality Level
(AQL) of 2.5 for workmanship and an AQL of 2.5 for label & packaging. The in-house
quality assurance team reports directly to the Managing Director and behaves as
external quality auditors.

Strategy
(b) Brand spend: Page has maintained a consistent advertising spend at 3-5% of
sales through the years and shown aggression at moving its brand higher up in terms
of aspiration levels by maintaining a unisex appeal and an international quotient
through a conscious decision of not using Indian celebrities in ad campaigns, unlike
its competitors. Advertising spends jumped in FY10 due to the ‘Just Jockeying’
campaign that established ‘Jockey’ as a lifestyle brand.
Exhibit 54: Consistent trend in advertising spends
(` mn)
350 'Just Jockeying' 6%
campaign
300 5%
250
4%
200
3%
150
2%
100
50 1%
- 0%
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13
Advertising (Rsm) % of sales
In its 2010 Directors Report, the company explained its rationale:

“Jockey is one of the most trusted brands in its category in India as it is all over the
world. The bold new campaign launched this year, called “Just Jockeying”, was aimed
at transforming Jockey into a lifestyle brand, extending it from being a just a
strong men’s brand to a unisex and a leisurewear brand, while enhancing stature
and brand leadership in the consumer’s mind. The campaign was different as it moved
from just portraying functional attributes to an emotional high ground.” (Emphasis is
ours.)
In FY14, Page backed the launch of ‘Seamless Shapewear’, a premium collection of
women’s wear with a targeted advertising campaign on Tata Sky premium High
Definition (HD) service at prime-time hours. Thus, Page has an established track
record of entrenching its brand within its target audience backed by aggressive Page has strong relationships with
advertising spending. its vendors and dealers; vendors
Architecture: Page has strong relationships with its vendors and dealers. Vendors have been able to deliver Page’s
have been able to deliver Page’s increased sourcing requirements whilst dealers have increased sourcing requirements
signed up to what remains a highly profitable franchise. Page has also instituted whilst dealers have signed up to
aggressive sales incentives to reward distributors for meeting and exceeding targets. what remains a highly profitable
These incentives equate to ~2% of incremental commission, with the YoY growth franchise
targets ranging anywhere between 25% and 40% for most distributors.
Our meetings with dealers in Bangalore and Delhi confirm that Page’s top
management takes good care of key dealer requirements such as timely stocking of
supplies. SKUs have consistently increased in response to customer demand and Page
has maintained the pace of new launches. The success of new lines in women’s
innerwear and leisurewear has also met with a good response, adding to dealer
sales. Page’s IT infrastructure with dealers is also strong; for example, Page offers the
option of remote solutions to dealer problems.
Page’s initiatives, combined with Jockey’s strong brand, have driven dealers to sign
up for more stores. We meet two Exclusive Brand Outlet (EBO) owners – one each in
Bangalore and Delhi – and both are adding at least 2-3 more EBOs after seeing their
first store do well. The EBO owner in Bangalore – Fashions, Jockey’s biggest dealer
(and also their first dealer) in Bangalore – told us in June 2014: “Jockey has improved
over the years. In the early days, convincing customers was challenging due to lack of
styles. Jockey responded by increasing SKUs. Today they have 400+ SKUs, as

Strategy
compared to 200 in 2007. Last year on the auspicious day of Id, we were open until
6am and did sales of `0.8m that night alone.”
The Jockey EBO owner in Delhi told us: “We are opening our 5th store on 15 August.
Customers know Jockey is #1 and we see no complaints. Take the example of leggings
for women: in case of other brands, these become loose and lose color over the years,
whereas Jockey’s leggings maintain the same fit and color. Page is very responsive to Page remains a promoter-driven
our problems and requirements.” company; however, Page’s top
management team, which includes
Whilst Page remains a promoter-driven company, Page’s top management team, COO, heads of sales and
which includes COO, heads of sales and marketing and other business heads, are marketing and other business
professionals. Page has instituted an aggressive variable pay structure for employees heads, are professionals
to achieve and exceed targets. Expenditure on employee benefits rose as a
percentage of sales from FY07 onwards but peaked off in FY11. However, in the
2013 Annual Report, we note that current liabilities include two items, i.e. employee
benefit expenses (`214m) and incentives payable (`136m) which accounted for 55%
of current liabilities and could represent staggered incentives to be paid in the current
year.
Exhibit 55: Spend on employees rose consistently and peaked in FY11
2,000 20%
1,500 15%
1,000 10%
500 5%
- 0%
Personnel expenses (Rsm) (LHS) % of sales (RHS)
Strategic assets: The Genomal family’s 50-year-old relationship with Jockey

International is a key strategic asset that strengthens its competitive positioning. Mr.
Timothy Wheeler, Jockey’s nominated Director, is on Page’s Board. Page was also
honoured by Jockey International Inc with the ‘International Licensee of the year’ The Genomal family’s 50-year-old
award for 2012-13 for outperforming 140 other countries in which the Jockey brand relationship with Jockey
is present. International is a key strategic
Page’s strong nationwide distribution network represents another strategic asset that asset that strengthens its
is difficult to replicate. As at March 2014, Jockey products were retailed through 139 competitive positioning
exclusive brand outlets and more than 25,000 retail stores in 1,200 cities and towns
across India. Speedo, launched in FY12, is retailed in 770 stores across 70 cities.
Jockey EBOs numbered 139, covering 99 stores in high streets and 40 stores in malls
across metros and tiers 1-3 cities.

Strategy
Accounting quality
Page features in the top quartile of its peer group on accounting quality. Since FY08,
Page’s RoCE has improved steadily from 25% to 43% in FY14. Given its outsourcing
model, Page’s business is inherently cash-generative and enjoys higher asset turns
than its competition. Page also scores on high cash conversion and good quality of
debtors.
Exhibit 56: High asset turns support strong capital efficiencies
8.0 70%
7.0 60%
6.0 50%
5.0
40%
4.0
30%
3.0
2.0 20%
1.0 10%
- 0%
FY08 FY09 FY10 FY11 FY12 FY13 FY14
Asset turn (x) (LHS) ROCE (%)
Page’s cash conversion cycle ranks the best across the board, which indicates that it
has the most-efficient working capital cycle in its peer group. The company has a
strong pre-tax CFO-to-EBITDA ratio (averaging 80% over FY09-12), indicating that
most of its EBITDA translates into free cash flows. It also ranks strongly on debtor
days (19 days vs peer median of 59 days in FY12) as well as inventory days (90 days
vs peer median of 118 days in FY12).
Exhibit 57: Cash conversion cycle

YoY change in CFO as % of
CFO as % of EBITDA Average Debtors days Average Inventory days
Company/metric EBITDA (bps)
FY10 FY11 FY12 FY13 FY11 FY12 FY13 FY14 FY11 FY12 FY13 FY14 FY11 FY12 FY13
Page 75% 33% 124% 79% 17 19 21 20 96 90 85 92 (4,219) 9,133 (4,561)
Maxwell 70% -15% 86% 16% 89 83 76 80 162 167 146 147 (8,545) 10,083 (6,968)
Rupa -32% -5% 69% 41% 58 59 60 62 102 118 114 122 2,739 7,361 (2,770)
Lovable 73% 29% 43% 80% 45 37 40 50 64 77 93 108 (4,349) 1,345 3,699
Peer group median
70% -5% 69% 41% 58 59 60 62 102 118 114 122 (4,349) 7,361 (2,770)
(Ex-Page)
Divergence with peer
5% 38% 56% 38% (41) (40) (39) (42) (6) (27) (29) (30) 130 1,772 (1,792)
group median
However, we highlight that whilst Page maintained conservative accounting policies

on depreciation, its average depreciation ratio has been falling.
Exhibit 58: Expenses manipulation
Average Depreciation rate YoY change in depreciation rate (bps)
Company/Metric FY09 FY10 FY11 FY12 FY13 FY10 FY11 FY12 FY13
Page 12.2% 10.5% 8.7% 7.7% 6.7% (167) (185) (96) (94)
Maxwell 3.3% 3.2% 2.5% 3.0% 3.6% (7) (79) 52 60
Rupa 5.0% 5.0% 4.4% 4.4% 4.1% (2) (55) 0 (28)
Lovable 3.4% 7.6% 7.8% 5.6% 4.4% 426 13 (219) (123)
Peer group median (Ex-Page) 3.4% 5.0% 4.4% 4.4% 4.1% (2) (55) 0 (28)
Divergence with peer group median 8.8% 5.5% 4.2% 3.3% 2.6% (165) (130) (97) (66)

Strategy
Capital allocation
Page has maintained an impressive discipline on capital allocation. Given the highly
cash-generative business model, the company has refrained from unrelated
diversification and returned cash to shareholders through high dividend payouts.
Exhibit 59: Page’s business model is highly cash Exhibit 60: Page has an impressive record of returning cash
generative; CFO remains the primary source of funds to shareholders
Dividend
FY05-13 FY05-13
and Net
Interest Purchase Increase in
received, of cash and
2% Investment
Proceeds cash
s, 1% equivalent
from
raising s, 1%
debt, 19%
Net
Capex,
45%
Proceeds Dividend
from CFO, 70% paid, 47%
equity Interest
shares, 9% paid, 7%
etc) and spent etc) and spent on capex, debt repayment, interest, dividend paid, etc over
FY05-13
Exhibit 61: Dividend payouts have ranged 44-70% (and it dipped in FY14 due to
capacity additions)
(` mn)
800 80%
700 70%
600 60%
500 50%
400 40%
300 30%
200 20%
100 10%
- 0%
Dividend (Rsm) As % of PAT

Page is not part of our Connected Companies Index and does not display any visible,
direct connections with any political party. The company also does not appear to have
any visible nexus with politicians or any questionable transactions with State or
Central Governments that indicate abuse of India’s public contracts system.

Strategy
Page has maintained a minority-friendly track record as seen in the high dividend
payout ratio and the absence of any transaction in the past that could raise red flags.
The Genomal family’s stake in the company is held in their personal names.
Exhibit 62: Shareholding of promoter and promoter group as at 31 March 2014
Name of the Shareholder Number of Shares held As a % of grand total
1 Nari Genomal 1,926,703 17.3
2 Ramesh Genomal 1,926,345 17.3
3 Sunder Genomal 1,925,961 17.3
4 Shamir Sundar Genomal 200 -
5 Shahendar Genomal 200 -
6 Sanjeev Genomal 200 -
7 Madhuri Genomal 120 -
Total 5,779,729 51.8
However we highlight two issues:

(a) Drop in promoter shareholding: The Genomal family has other businesses in
India in the apparel segment but these companies do not compete with Page. Over
the years, the Genomal family has reduced their stake in Page and they currently
hold a 52% stake in the company.
Exhibit 63: Trends in promoter holding for Page Industries
75% 72% 72%
70% 67%
65% 62%
60% 60%
60% 57%
55% 52%
50%
45%
40%
Mar/07 Mar/08 Mar/09 Mar/10 Mar/11 Mar/12 Mar/13 Mar/14
(b) Related party transactions: Loans and advances (as a percentage of net assets
for Page) are much higher than its peer median. Loans and advances to related
parties (as a percentage of overall loans and advances and as a proportion of net
assets) are also much higher than its peer average. The related party advance
pertains to a loan given to Page Garment Exports Private Limited, an entity controlled
by the promoters.
Exhibit 64: Loans and advances (based on FY13 numbers)
% of loans Loans and adv
Loans and
and adv. to to related
Company/Metric adv. as a % of
related parties as a % of
net assets
parties net assets
Page 13% 7% 1%
Maxwell 16% 0% 0%
Rupa 11% 2% 0%
Lovable 2% 0% 0%
Peer group median (Ex-Page) 11% 0% 0%
Divergence with peer group median 2% 7% 1%

Strategy
Succession planning
Page is run by the Genomal family which consists of three brothers (Sundar, Nari and Whilst Page does not have a
Ramesh Genomal), all of whom are on Page’s Board. Whilst Page does not have a professional CEO, it is run by a
professional CEO, it is run by a professional set of managers who have been with the professional set of managers who
company for a long time. For example, Mr. Pius Thomas (Director, Finance) has been have been with the company for a
with Page since 1995 whilst Mr Vedji Ticku (COO) has been with Page since 1997. long time
Mr. Sundar Genomal, Managing Director, is 60 years old and whilst there is no
explicitly stated succession plan, note that his son, Mr. Shamir Genomal, is General
Manager (Operations) and a part of the senior management team. The number of
Independent Directors on Page’s Board meets, but does not exceed, the mandated
limit.
Weaknesses
Growing labour force: Page currently employs more than 16,000 people and a
ramp-up in sales will require more workers (predominantly women). Relationships
with workers have been cordial and Page will have to ensure they remain so, as the
growth momentum continues.
Competition: Page has benefited from a lack of focused competition. However, in
February 2013, Arvind Limited acquired the Indian operations of Hanes, which owns
innerwear brands like Wonderbra. Arvind has stated its plans of increasing Hanes
point of sales in India from 5,000 to 15,000 in the next three years. Whilst Page has
built formidable entry barriers, an aggressive competitor can resort to higher dealer
incentives, price cuts, etc. to take Page on.

Strategy
Relative valuation
We do not have Page Industries currently under our coverage but, as shown in the
exhibit below, Page Industries’ current multiple of 40.4x FY15E EPS and 31.8x FY16E
EPS, in our view, is justified.
Page’s key valuation metrics compare favourably against the other quality
discretionary peers such as Bata India, Asian Paints, Jubilant Foodworks and TTK
Prestige in the following manner:
 Competitive advantages sustainable as compared to its peers: Compared
to competition faced by players operating in other discretionary product
categories, Page is aptly positioned in the innerwear market. The firm possesses
competitive advantages which are extremely difficult to replicate by its direct
peers around: (a) Technical and commercial advantage around manufacturing
given the support it receives from Jockey’s parent firm, and the scale and
predictability of business that it provide to its vendors for yarn procurement; (b)
efficient management of its labour workforce in a highly labour intensive
business; (c) Delivery of consistent and high quality product to consumers given
its in-house manufacturing and a high focus on R&D; (d) Wide distribution
network with strong performance based incentives for its distributors; (e)
Consistent focus on maintaining an aspirational brand recall; and (f)
Professionally run management team. Thus, we believe that the firm’s competitive
advantages are more sustainable and difficult to replicate compared to its peers
like Asian Paints, Bata India, Jubilant Foodworks in their respective product
categories.
 EPS CAGR better than its peers: Due to a combination of the factors
highlighted above, low category penetration, and strong run-rate of
premiumisation from economy to premium products, Page’s expected EPS CAGR
of 28% is higher than many of its discretionary consumption peers.
 RoCE twice than its peers: Due to much better asset turns, Page’s consensus
RoCE of 47% and 51% for FY15 and FY16 is more than twice its peers’ average of
23% and 25% respectively.
Therefore, whilst Page is currently trading at a ~20% premium to other high-quality
discretionary consumer stocks but we believe that the multiple is justified due the
factors highlighted above.
Exhibit 65: Relative valuation
Mkt cap
Company Name Country P/E (x) EPS CAGR RoCE (%) Sales CAGR
(US$ mn)
FY15E FY16E (FY14-16E) FY15E FY16E (FY14-16E)
Indian Companies
Page Industries India 1,336 40.4 31.8 28% 47.4 51.1 27%
Jubilant Foodworks* India 1,426 59.9 45.7 26% 23.2 24.9 29%
Asian Paints* India 9,347 35.4 28.7 26% 34.7 38.8 18%
TTK Prestige* India 751 29.6 23.3 30% 25.2 29.9 25%
Bata India* India 1,446 36.4 28.4 22% 25.3 27.3 19%
Arvind Limited India 963 12.9 10.5 24% 16.3 18.5 10%
Lovable Lingerie India 105 26.1 23.8 12% 12.6 12.9 12%
Average for this category
2,340 33.4 26.7 23% 22.9 25.4 19%
excluding Page Industries
Source: Bloomberg, Ambit Capital research; Note: * Data based on Ambit’s estimates

Strategy
Page is trading at its life-time high P/E multiple; however, given the consistency
displayed by the company in delivering more than a healthy growth rate in revenue
and earnings year after year (despite recent economic slowdown) and the competitive
advantage it has developed in the industry it operates in, we believe that such rich
P/E multiples are justified for the firm.
Exhibit 66: Page’s historical one-year forward P/E chart
8,000
40x
7,000
35x
6,000
30x
5,000
25x
4,000
20x
3,000
2,000
1,000
Jun-11
Dec-11
Jun-12
Dec-12
Jun-13
Dec-13
Jun-14
Source: Company, Bloomberg, Ambit Capital research

Strategy
Balance sheet (` mn)

Year to March FY10 FY11 FY12 FY13 FY14
Reserves & surplus 879 1,126 1,546 2,024 2,778
Total net worth 990 1,238 1,658 2,135 2,890
Loan funds 548 1,150 759 1,007 1,137
Deferred tax liability 20 26 36 57 57
Gross block 1,013 1,259 1,504 1,860 2,560
Net block 776 931 1,076 1,322 1,882
CWIP 49 102 165 138 138
Investments 30 30 18 10 0
Inventories 946 1,647 1,726 2,350 2,765
Debtors 205 258 437 581 651
Cash and cash equivalents 30 26 31 46 132
Loans & Advances 106 293 137 130 325
Other current assets 57 102 126 141 195
Creditors 217 251 373 473 585
Deposits from Dealers 124 192 278 323 475
Other current liabilities 280 454 456 507 748
Provisions 18 78 155 216 195
Total current liabilities 640 976 1,263 1,518 2,004
Net current assets 703 1,351 1,194 1,730 2,064
Total assets 1,558 2,414 2,453 3,199 4,084
Income statement (` mn)

Net Sales 3,441 4,977 6,966 8,758 11,872
% growth 33.2% 44.6% 40.0% 25.7% 35.6%
Raw materials Cost 1,527 2,248 3,296 4,203 5,659
Employees cost and comm. on sales 581 909 1,138 1,436 1,881
Royalty expenses 168 243 339 426 578
Advertisement expenses 176 123 206 287 389
Other Admin, S&D expenses 303 494 525 640 858
Total operating expenses 2,755 4,016 5,504 6,992 9,365
EBITDA 686 960 1,462 1,766 2,508
% growth 27.1% 40.0% 52.2% 20.8% 42.0%
Depreciation 90 98 106 114 139
EBIT 596 862 1,356 1,652 2,369
Non-operating Income 16 63 52 85 70
PBT 585 878 1,341 1,657 2,335
Tax expenses 189 292 441 531 797
Adjusted PAT 396 585 900 1,125 1,538
% growth 25.2% 47.8% 53.7% 25.1% 36.7%
Reported PAT / Net profit 396 585 900 1,125 1,538

Strategy
Cash flow statement (` mn)

PBT 585 878 1,341 1,657 2,335
Others 12 40 59 74 34
Tax (184) (298) (427) (516) (797)
(Increase)/Decrease in working capital (205) (720) 147 (457) (248)
Cash flow from operating activities 298 -2 1,226 871 1,463
Capex (247) (281) (271) (449) (700)
(Increase)/Decrease in investments 26 - 14 7 10
Interest income 11 8 4 8 70
Others 1 0 0 15 70
Cash flow from investing activities (209) (273) (253) (419) (620)
Net borrowings 178 603 (503) 238 130
Interest paid (27) (46) (63) (80) (104)
Dividend paid (313) (286) (402) (596) (783)
Cash flow from financing activities (162) 271 (968) (438) (757)
Net change in cash -73 -4 5 14 86
Closing cash balance 30 26 31 46 132
Free cash flow 62 (275) 959 430 833
Ratio analysis
Gross margin (%) 55.6 54.8 52.7 52.0 52.3
EBITDA margin (%) 19.9 19.3 21.0 20.2 21.1
EBIT margin (%) 17.3 17.3 19.5 18.9 20.0
Net profit margin (%) 11.5 11.8 12.9 12.8 13.0
Dividend payout ratio (%) 69 58 53 58 51
Net debt/equity (x) 0.5 0.9 0.4 0.5 0.3
Asset turnover excluding cash (x) 2.4 2.5 2.9 3.2 3.3
RoCE (%) 29.3 31.4 39.3 42.4 44.8
ROE (%) 42.6 52.6 62.1 59.3 61.2
Valuation parameters
EPS (`) 35.5 52.5 80.7 100.9 137.9
Book value per share (`) 89 111 149 191 259
P/E (x) 202.7 137.2 89.2 71.4 52.2
P/BV (x) 81.1 64.9 48.4 37.6 27.8
EV/EBITDA (x) 117.8 84.8 55.4 46.0 32.4
Price/Sales (x) 23.3 16.1 11.5 9.2 6.8
Dividend yield (%) 0.3 0.4 0.5 0.7 0.8

Strategy
Balkrishna Industries
Balkrishna Industries (BKT) has built a substantive export business in the
niche area of off-highway tyres (OHT) over the years by successfully
leveraging its key competitive advantage – India’s low cost of manufacturing.
With its market share still at just around 4%, with the new Bhuj facility
enabling expansion of its product portfolio (in the industrial and mining
tyres) and with the company’s rising focus on the OEM segment and newer
geographies, we believe BKT is poised to continue gaining market share
from its global peers.
"The market for Off-Highway Tyres (OHT) is US$15bn. Today BKT is at just a 4% market
share. We are unlikely to face intense competition. The market is large enough for
everyone.”
– BK Bansal, Director (Finance), Balkrishna Industries (June 2014)
Criteria
Market Cap (US$mn) 1,130
3m ADV (US$mn) 1.0
1-year 208%
3-year 62%
10-year 41%
Exhibit 68: Balkrishna Industries - Three ‘quarters of the pie’ on our STAR framework
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 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
Accounting quality reason for BKT having a relatively modest score on accounting
quality. That said, BKT’s 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 (new plant at Bhuj), nearly 88% of CFO
Capital allocation has been reinvested in capex. This and the consequent low pay-
outs to shareholders adversely impact BKT's scoring on capital
allocation.
Centrality of political BKT is not part of Ambit’s Connected Companies Index and does
connect not appear to rely on political connections for its profitability.
Our study of BKT’s annual report suggests that BKT has refrained
Treatment of minorities from transactions that could impact minority shareholder
interests.
BKT is a promoter-driven company. It is run by the second
Succession planning generation of the Poddar family and the third generation has also
joined the ranks.
Total (%)
Some of the key weaknesses of BKT's business model are: (a)
Tyres remain a commodity business subject to fluctuations in
rubber prices, the key raw material; (b) any sharper-than-
Weaknesses expected rise in wages in India in the future can impact BKT’s key
competitive advantage i.e. lower cost vs global peers; and (c) any
changes in import/export duties in India and/or levy of anti-
dumping levies in the western markets can negatively impact BKT.

Strategy
Exhibit 69: BKT timeline

Year Events
Incorporated as Papchoni Corporation to carry on the manufacture of pulp & paper and
1961
processing of synthetics fabrics
First tyre manufacturing unit set up in Aurangabad, Maharashtra, for manufacture of two-wheeler
1988
tyres
1992 LCV tyres launched in the international market
1995 Foray into off-highway tyres
1996 Commenced exports of agricultural tyres to Europe and North America
2002 Second manufacturing unit established in Bhiwadi, Rajasthan, doubling the production capacity
2003 Launch of earthmover, all-terrain vehicle, lawn and garden tyres
2006 Third manufacturing unit established in Chopanki, Rajasthan
2006 Separation of the Mahansaria family from the business
2009 Gross turnover crosses `10bn
2012 Commissioning of Phase 1 of the fourth plant at Bhuj, Gujarat; gross turnover crosses `20bn
2013 Gross turnover crosses `30bn
Current achievable production capacity increased to 200,000* MT (from 156,000 MT in FY12)
2014
post the part-commissioning of the Bhuj plant
Source: Company, Ambit Capital research; Note: *Post full commissioning of the new Bhuj plant, the total
achievable capacity will increase to 300,000 MT
Company history
Incorporated in 1961, BKT tried its hand at different businesses such as paper, bicycle
tyres, scooter tyres and commercial vehicle tyres before finding success with the off-
highway tyre (OHT) business. Currently, BKT is the leading exporter of OHT from
India, with exports accounting for nearly 90% of the company’s standalone revenues.
BKT’s volumes and revenues have grown significantly in recent years on the back of
market share gains from the global tyre majors. BKT is currently being managed by
Arvind Poddar, a second-generation member of the Poddar family.
BKT’s evolution
Exhibit 70: BKT’s RoCEs have remained stable whilst revenue growth has averaged a
strong 26% over the past 10 years
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
Revenue Growth ROCE

Strategy
Historical stock price chart for BKT

Exhibit 71: During FY04-14, BKT has reported 32% EPS CAGR and its stock price has risen at a 33% CAGR

Strategy
Phase 1: Foray into the OHT segment and the tough initial years
(1995-2001)
In 1988, BKT established its first manufacturing unit at Aurangabad to manufacture
two-wheeler (2W) tyres. This was followed by the launch of LCV tyres in 1992.
However, this foray into the business of automobile tyres failed to take off. As per the
management, this was due to the lack of brand and distribution network. Also, the
presence of Dewan Tyres in the global off-highway tyre (OHT) segment spurred BKT Given the long gestation
to narrow its focus on this niche segment in 1995. During that period, the nature of the OHT business,
Mahansarias (Ashok Mahansaria and his son Yogesh Mahansaria) who are related to the initial years (later part of
the Poddar family through marriage were actively involved in BKT. (As per BKT’s 1990s) were tough for BKT
1998-99 Annual Report, Ashok Mahansaria was designated as the Managing
Director and Yogesh Mahansaria was designated as an Executive Director).
As is expected with the long gestation nature of the OHT business, the initial years
(later part of 1990s) were tough for BKT. Furthermore, there were setbacks such as
the unfortunate demise of an executive director, Pramodkumar Poddar, in a tragic
airplane crash in October 2000 whilst he was on a business trip. BKT’s financial
performance was weak during this phase. Its revenues grew at a meagre 8% CAGR
over 1994-2001. Its margin performance was volatile with a high of 16.7% in
FY1999 and a low of 9.3% in FY01 (EBITDA CAGR of only 5% during this phase).
However, post the initial challenging years, the business started to show positive
traction towards the start of the 2000s, with revenues posting strong growth between
FY01 and FY02 (CAGR of 33%).
Exhibit 72: Revenues during this phase remained weak Exhibit 73: …and margin and return ratio performance
with only 8% CAGR… remained volatile
1,500 30% 18.0%
1,400 20% 16.0%

14.0%
1,300 10%
12.0%
1,200 0%
10.0%
1,100 -10% 8.0%
1,000 -20% 6.0%
900 -30% 4.0%

2.0%
800 -40% FY95 FY96 FY97 FY98 FY99 FY00 FY01
EBITDA margin RoCE
Revenues (Rs mn) YoY growth - RHS
Phase 2: Tasting success in the OHT business (2002-2006)

BKT saw a sharp improvement in its fortunes as it improved upon its product portfolio
and expanded its presence across several geographies. BKT was also helped to a
significant extent by a continuing lack of attention from other Indian players towards Continuing lack of attention
the OHT segment. from other Indian players
helped BKT gain foothold in
During this phase, BKT’s revenues grew at a robust 32% CAGR whilst RoCEs averaged the global OHT market
20%, as EBITDA margins rose from 12.1% in FY02 to 22.6% in FY06. In 2002, BKT
commenced production at its second manufacturing facility (in Bhiwadi, northern
India), thereby doubling its capacity.

Strategy
Exhibit 74: During Phase 2, BKT’s revenues rose three-fold Exhibit 75: RoCEs improved led by a rise in margins
as its foray into OHT took off
6,800 50% 32.0%
5,800 45% 27.0%
4,800 40% 22.0%
3,800 35% 17.0%
12.0%
2,800 30%
7.0%
1,800 25%
2.0%
800 20% FY02 FY03 FY04 FY05 FY06
FY02 FY03 FY04 FY05 FY06
EBITDA margin RoCE
Revenues (Rs mn) YoY growth - RHS
Phase 3: Exit of the Mahansaria family but BKT continues on the

growth path (2007-2009)
The Mahansarias exited the company in FY07 (the company had achieved a turnover
of `6.2bn in FY06). The reason for the split between them and the Poddars is not
known and in a Forbes India article1, Mr. Yogesh Mahansaria was quoted as saying:
“That’s a personal issue I would not like to comment on”. Following the split, Mr.
Arvind Poddar was named the Vice Chairman and Managing Director of BKT in FY07.
At the time of their exit, Ashok Mahansaria was designated as Vice Chairman and
Managing Director; and Yogesh Mahansaria was designated as Executive Director of
the company. The Poddars bought the 5.4% stake held by Mahansaria’s in BKT at the
time of their exit. The Mahansarias joined hands with Warburg Pincus to run the
Alliance Group, a direct competitor to BKT in the OHT segment.
Despite the setback from the
Despite the setback from the Mahansarias’ exit, BKT continued on its growth path. Mahansarias’ exit, BKT
The overall revenue growth remained robust (19%) driven by rising penetration continued on its growth path
beyond the European market. The share of Europe in BKT’s overall volumes declined with revenues witnessing 19%
from 63% in FY05 to 54% in FY09. However, on the margin front, the picture was not CAGR in FY07-09
as good, since volatility in commodity prices lead to a 3 percentage point contraction
in BKT’s EBITDA margins in FY09. As a result, the net earnings recorded a modest
12% CAGR over FY07-09.
With a volatile business performance during this period (exit of Mahansarias, rubber
price volatility and global financial crisis), BKT’s share price significantly
underperformed the Sensex (BKT’s stock price fell by 45%, more than the 14% fall in
the Sensex).
1
http://forbesindia.com/article/boardroom/yogesh-mahansarias-second-coming-
with-alliance-tires/36197/0#ixzz35YEXn2aB

Strategy
Exhibit 76: Whilst BKT’s revenue growth in Phase 3 Exhibit 77: …its stock price fell more than the Sensex
withstood the global financial crisis…
24% 50% 200

180
22% 40% 160
140
20% 30% 120
100
80
18% 20%
60
40
16% 10% 20
-
Jul-06
Jul-07
Jul-08
14% 0%
Apr-06
Oct-06
Jan-07
Apr-07
Oct-07
Jan-08
Apr-08
Oct-08
Jan-09
FY07 FY08 FY09
EBITDA margin ROCE
Revenue growth - RHS Sensex BKT
Source: Company, Ambit Capital research. Note: Stock prices in the above Source: Company, Ambit Capital research. Note: Stock prices in the above
chart are rebased to 100 as on 1 April 2006 chart are rebased to 100 as on 1 April 2006
Phase 4: BKT sets an ambitious expansion plan, rubber prices and

currency help margins (FY10-14)
As BKT expanded in Europe and America, it gained market share in those
geographies from peers like Michelin, Trelleborg and Titan International. Given the
capacity constraints faced by the company historically, BKT embarked on an
ambitious expansion plan. In FY10, it announced a new green-field capacity in Bhuj
(Gujarat) to raise its overall capacity by nearly 69%. This new plan would be financed
mostly by external commercial borrowings. The work on the Bhuj plant commenced in
2011 and the first phase of the plant became operational in October 2012.
The company has a mixed revenue and margin performance during this phase. The
revenues increased sharply in FY10 and FY11 (CAGR of 44%) following the recovery
in the global markets. However, rubber prices increased sharply in FY11, resulting in Softening of rubber prices led
EBITDA margins nearly halving from 26.7% in FY11 to 14.4% in FY12. As a result, to strong margin expansion
despite a strong top-line growth, the EBITDA CAGR was much weaker at 8% over since FY13
FY10-12.
However, the scenario was reversed for the next two years (FY13 and FY14). With
global demand once again witnessing a contraction, the revenue growth was
relatively weaker at 13% CAGR over FY13 and FY14. On the other hand, rubber
prices began correcting in FY12 and eased off significantly in FY14. Besides the
benign rubber price environment, depreciation in INR relative to Euro and USD in
FY13 and FY14 also played to BKT’s advantage (being a significant net exporter).
Consequently, EBITDA margins after bottoming out in FY11 (14.4%), improved
sharply by FY14 (24.7%).
With demand staging a recovery in 2HFY14 and at the same time, rubber prices and
currency movement remaining benign, BKT’s stock price rose nearly 3x between
October 2013 and July 2014. Overall, BKT’s share price rose at a 77% CAGR from
March 2009 to March 2014 vs 18% for the Sensex during the same period, a strong
outperformance.

Strategy
Exhibit 78: Market share gains over international peers… Exhibit 79: … drove the strong revenue momentum in
Phase 4
Revenue CAGR FY09-14 40 (`bn)

30%
35
25% 24%
30
20% 25
15% 20
13%
15
10%
6% 10
5% 2% 5
0% 0
BKT Michelin Trelleborg Titan FY10 FY11 FY12 FY13 FY14
Source: Company filings, Ambit Capital research. Notes: (1) For Michelin: Source: Company filings, Ambit Capital research
specialty segment revenues which houses OHT tyres considered; (2) For
Trelleborg: revenues of wheel systems division which houses OHT tyres
considered; and (3) Titan’s FY14 revenues exclude additional sales from
Goodyear’s Latin American operations acquired by Titan during the year
Exhibit 80: Easing in rubber prices during FY11-14… Exhibit 81: …drove up BKT’s margins and RoCEs
220
`/kg 30.0%
200 27.5%
180 25.0%
22.5%
160
20.0%
140
17.5%
120 15.0%
100 12.5%
FY10
FY11
FY12
FY13
FY14
1QFY15
EBITDA margin RoCE

Strategy
Rating framework
BKT gets a total of Three STA` (out of a maximum of four) based on the following
parameters:
Overall score of - Innovation , Brands/Reputation , Architecture
, Strategic Asset
We analyse BKT’s competitive advantages using the IBAS framework:
a) Innovation: BKT’s R&D spend is less than 1% of sales and it does not appear to
us that there is any great science in what the company manufactures. Further,
BKT holds no patents for its products and does not have any technological tie-ups
for its products. Whilst BKT holds a first mover advantage among Indian
companies in the OHT segment, globally it faces competition from Michelin,
Titan, etc.
b) Brands/Reputation: BKT sells under its own brand name (BKT). The company
does not spend significantly on advertising nor has its own point of sales (retail
outlets). BKT follows a distributor-centric model wherein it provides a 15% margin
to dealers/distributors as compared to the 6-8% margin given by global tyre
manufacturers.
Independent point of sales would indeed yield some advantages such as higher
brand visibility. However, this would however entail higher distribution costs and
carry inventory risks. (Currently the inventory risk lies with dealers, as BKT strictly
manufactures on an order basis.) We believe BKT has evaluated this option in the
past and decided against this. The company currently tries to gain brand visibility
in the export markets through participation in trade fairs & exhibitions,
advertisement in the local newspapers/magazines, and distribution of product BKT has been able to capture
catalogues. significant market share in the
farm tyre replacement market
over the years
Furthermore, BKT has been able to create a brand name particularly in the farm
tyre replacement market. According to Modern Tire Dealer2, BKT has a market
share of nearly 20% in the radial rear farm tire replacement segment and 40% in
the bias rear farm replacement tire, which indicates strong customer acceptance
of the brand.
Exhibit 82: BKT’s inventory days and sales & marketing expenses lower vs peers
FY08 FY09 FY10 FY11 FY12 FY13
Avg inventory days
BKT 57 45 43 58 58 52
Michelin 72 78 82 69 74 77
Sales and mktg exp. as % of sales
BKT 0.7% 1.2% 2.5% 1.8% 1.8% 1.6%
Michelin 10.7% 10.5% 11.1% 10.3% 9.4% 9.6%
Source: Company filings
c) Architecture: Given the higher commission paid to dealers, BKT shares a better BKT pays significantly higher
relationship with them as compared to its competitors. BKT remains a promoter- commissions to dealers than
led company and there are no ESOPs or any specific measures, beyond peers
appraisals, in place to foster and encourage loyalty and performance within
employees.
d) Strategic assets: BKT’s biggest advantage against foreign competition is its cost BKT’s low-cost manufacturing
structure which allows it to sell at prices significantly cheaper than foreign capacity is its biggest
players. BKT has the largest ‘low-cost’ manufacturing capacity given that its entire competitive advantage against
manufacturing capacity is based in India whereas the competitors are situated the global peers
2
http://mtd.epubxp.com/i/231837/45

Strategy
primarily in the high-cost geographies of Europe and North America.

Furthermore, BKT (along with other export oriented players) enjoys export
incentives such as zero excise duty on exports (which is 90% of its total sales) and
no payment of import duties on rubber due to its export model.
Exhibit 83: BKT’s aggressive pricing has been the driver for its market share gains
BKT price Peer price Avg. BKT’s discount
Tyre type Application
(US$/tyre) (US$/tyre) to peers
9.5X 24 Farm 215 311 -31%
11.2X24 Farm 208 339 -39%
10.5/80X18 Industrial 281 323 -13%
12.5/80X18 Industrial 328 371 -12%
Source: Quotes from Tires-USA.com, Ambit Capital research
Exhibit 84: BKT’s employee costs significantly lower vs peers (as % of sales)
BKT 4.4% 4.9% 4.6% 4.5% 5.3% 6.4%
Michelin 28.1% 30.5% 26.7% 24.2% 25.0% 26.1%
Trelleborg 26.1% 29.6% 27.5% 26.3% 28.4% 28.9%
Source: Company filings, Ambit Capital research
To sum up, BKT’s scores modestly on the IBAS framework, reflecting the lack of a
moat to protect it from other players in the domestic segment from encroaching on its
territory. In fact, the Mahansaria family and Warburg Pincus head The Alliance Group
which competes with BKT on the OHT space. However, we highlight five factors from
our June 2012 initiating coverage note on the stock that underscore BKT’s
competitive advantages vis-à-vis competition:
1) De-focus of global ‘secular’ players from the OHT space: Whilst global Contribution from the OHT
giants (Michelin, Bridgestone, Pirelli and Trelleborg) dominate the OHT space, segment to overall revenues is
the contribution from OHT to overall revenues is just 10-12% for these only 10-12% for the global
companies. Whilst the margin in OHT is high, the segment has its own set of players
challenges in the form of high degree of customisation, relatively high labour
costs (particularly in developed economies) and relatively higher capital
requirements. These coupled with the fact that OHT forms a small portion
(~10%) of the total tyre market means that there is increasing de-focus of global
giants in this space. This has led to the exit of some of the global players such as
Continental and Goodyear from the OHT business.
Exhibit 85: Some instances of global tyre makers divesting their OHT segments
Year Seller Acquirer Business transferred
2004 Continental Mitas Farm tyre business
2005 Goodyear Titan International North American farm tyre assets
2006 Continental Titan International North American off-the-road (OTR) assets
2011 Goodyear Titan International North American farm tyre assets
2012 Goodyear Titan International European farm tyre business
Source: Company annual reports, Press articles
2) A ‘high variety low volume’ and ‘difficult to manage business’: BKT has
over the years developed more than 2,000 SKUs, reflecting the niche and highly
customised nature of the business. The company adds nearly 100-150 SKUs “The biggest barrier to enter
annually. We believe over a substantial time period, significant capital the OHT business is the
investment and effort is required to replicate this business model. This is ‘attitude’ of conventional tyre
particularly difficult for domestic conventional tyre makers that are accustomed makers who are used to seeing
to high volumes of standardised passenger car and commercial vehicle tyres. high volumes in their existing
business and do not possess
3) Relatively low threat from Chinese imports: The Chinese advantage comes the patience that is required in
from mass production of standardised products. The ‘high variety low volume’ the OHT business.”
nature of OHT has kept the Chinese companies out of this business. We do not - OHT business head of a
foresee any threat from Chinese players in the near future in the OHT space. leading domestic commercial
vehicle tyre manufacturer

Strategy
4) Near-term focus of domestic tyre manufacturers on domestic truck tyre

bus radial capacity expansion and managing their already high debt
levels: Given the increasing preference for radialised tyres in the domestic
commercial vehicle space, almost all the domestic tyre makers have undertaken
Domestic players would be
a significant capex towards building truck & bus radial capacities. As a result, we
more focused towards truck
believe these players’ focus in the near to medium term would be towards
and bus radial segments in the
ensuring timely commissioning and ramping up of their truck & bus radial
near to medium term
facilities rather than getting into new segments such as OHT. Furthermore, the
existing debt-equity ratio of domestic tyre manufacturers leaves little headroom
to incur further capex for the new segment.
5) Redundant commercial bias capacities are hard to convert to OHT: With

domestic commercial vehicle tyres getting increasingly radialised, a lot of bias
capacities of the domestic players are getting freed. Against this backdrop, there
is increasing concern in some corners that idle capacities may be used by the
domestic players to enter the OHT export business. However, our discussions
with industry sources suggest that this is not an easy task, given that many
critical equipments such as curing press and vulcanising equipments are
completely different for OHT as compared to passenger car/commercial vehicle
tyres and require a high level of investments.
6) No major current and upcoming competitor in India catering to OHT

export business in the near to medium term: Besides BKT, the other
significant pure play OHT player in India is the Alliance Group (ATC Tires Pvt.
Ltd.) which is jointly owned by Warbug Pincus and the Mahansaria family (the
erstwhile co-promoters of BKT). We draw comfort from the fact that it is nearly
ten years since the separation of the Mahansaria family from BKT (and eight
years since Warburg Pincus and the Mahansaria family jointly acquired Alliance
Group) and in these seven years, Alliance does not seem to have emerged as a
significant competitor to BKT.
Accounting quality
BKT is in the third quartile as compared to its peers on accounting quality. The
relatively lower score on accounting quality is primarily due to: (a) higher inventory
BKT’s working capital cycle is
days as compared to peers; and (b) lower payable days relative to competitors. BKT’s
much higher vs peers but its
debtors’ days are significantly higher as compared to peers. However, this is primarily
cash generation is best in class
due to its global customer base but centralised manufacturing structure (in India)
which results in a significant transit time in delivering the goods to the customers
(OEM/distributors). Overall, a much higher working capital cycle is the primary
reason for BKT receiving a relatively modest score on accounting quality. That said,
BKT’s cash generation is best in class and the company is ranked 1 on pre-tax
CFO/EBITDA among its peers.
Exhibit 86: BKT’s performance on accounting parameters vs peers
BKT MRF Apollo JK Tyre Ceat
Pre-tax CFO/EBITDA 96% 95% 88% 71% 74%
Receivable days 56 40 11 47 46
Inventory days 51 49 46 43 45
Payable days 21 31 36 53 48
Gross block turnover 2.2 2.6 2.1 1.8 2.3
L&A as % of net-worth 17% 10% 16% 52% 27%
Percentage of debtors o/s over six months 0% 0% 2% 2% 1%
Source: Companies, Ambit Corporate research. Note: Above financials are an average of FY09-13. * Loans and
advances

Strategy
Capital allocation
Funds raised by BKT in the past 10 years have broadly been in the ratio of 45:55
(cash flow from operations-debt). Given the strong growth, BKT has made
investments to raise capacities including a new plant in Bhuj, Gujarat. Thus, 88% of
funds raised have gone to fund capex. However, at no point has BKT pushed its
balance sheet beyond a net debt:EBITDA of 2.7x.
Exhibit 87: BKT uses funds mainly for capex to fund its strong underlying growth
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 FY04-13.

BKT is not part of our Connected Companies Index and does not display any visible,
direct connections to any political party. The company also does not appear to have
BKT is the primary business for the Poddar family and prior to the family division, it
was the flagship company of the Siyaram Poddar Group. BKT’s subsidiaries are in the
legacy businesses of paper and synthetics whilst overseas subsidiaries have been
formed for operations in Europe and the US. Our study of BKT’s annual report
suggests that BKT has refrained from transactions that could impact minority
shareholder interests.
Name of the Shareholder Number of shares held (mn) % of total
1 AKP Enterprises LLP 23.6 24.39
2 RAP Enterprises LLP 23.3 24.07
3 Khushboo Rajiv Poddar 3.8 3.93
4 GPP Enterprises LLP 2.7 2.79
5 Others (less than 1% individually) 3.0 3.11
Total 56 58.30

Strategy
Succession planning
BKT is a promoter-driven company. Mr. Arvind Poddar is currently the Managing
Director. Whilst there is no explicitly stated succession plan, it appears that Mr. Rajiv
Poddar, currently on the Board and Arvind Poddar’s son, will take over as the next
generation of the promoter to run the company. BKT has a board size of 11
members, out of which six were Independent Directors, as per the FY13 Annual
Report.
Weaknesses/threats
Commodity business: Tyres remain a commodity business subject to fluctuations in
rubber prices. BKT’s key raw material, rubber, is an extremely volatile commodity.
Whilst currently the price of rubber continues to be benign, any significant increases
in rubber prices from the current levels could have sharp negative impacts on
margins particularly given that there may be some lag and limitation in raising the
prices of tyres to compensate for a rise in rubber prices. Like other tyre
manufacturers, BKT’s margin has also been impacted in the past (though the impact
was lower as compared to peers) due to the sudden increase in rubber prices.
Exhibit 89: Sudden increase in rubber prices in FY11 adversely impacted margin
200 55.0%
180
50.0%
160
140 45.0%
120 40.0%
100
35.0%
80
60 30.0%
FY14*
FY07
FY08
FY09
FY10
FY11
FY12
FY13
Avg rubber Rs/kg Gross margin - RHS

Source: Company, Ambit Capital research. Note: *Average rubber prices (Rs/kg) for FY14 are Ambit estimates
Rising labour costs: Low staff costs remain a key factor for BKT’s competitive
pricing. Any sharper-than-expected rise in wages in India in the future can impact
BKT’s competitive advantage.
Exhibit 90: BKT’s employee costs are lower than its peers
2,500 7.0%
6.5%
2,000
6.0%
1,500 5.5%
5.0%
1,000 4.5%
4.0%
500
3.5%
- 3.0%
Employee+Labour costs (Rs mn) as % of sales - RHS

Change in duty structure: The chances of changes in export/import duty in India
remain limited. However, the levy of anti-dumping duty in foreign markets can
impact BKT. Given that BKT prices its products significantly lower than its peers and
given that it has its production facility in India, adverse protectionist regulations in
any of the key geographies (US and Europe) such as the imposition of anti-dumping
duty could have a significant impact on BKT’s volumes and margin. Whilst there have
been anti-dumping levies on Chinese OHT in North America, we have not come
across any instance of such levies on Indian manufactured tyres in the past.

Strategy
Valuation
Given the continuing slide in rubber prices (current international rubber
prices at `118/kg are down 15% in the last three months), we believe our
current estimates for BKT’s EBITDA margin (25.5% for FY15 and 24.8% for
FY16) face upside risks (the company recorded an EBITDA margin of 25.9% in
4QFY14). As a result, we have put our estimates and valuation on the stock
UNDER REVIEW. Our last published valuation on May 23, 2014 was `670.
Whilst BKT has recorded strong revenue growth over the last decade, we believe
there are further levers to revenue growth coming from:
(a) Increasing focus in the off-the-road (OTR) segment (industrial/construction and
mining tyres space): OTR tyres account for nearly two-thirds of the total OHT
market (one-third accounted by farm tyres) but BKT has a very low market share
in the OTR segment (<2%). The new Bhuj facility would help the company bridge
the gaps in the OTR offerings.
(b) Current share of OEM at ~19-20% of total volumes: Historically, capacity
constraints prevented BKT from focussing on the OEM segment. However, with
more than adequate capacity, BKT can afford to focus on OEM. The company
aims to increase this to 30% in the next two years.
(c) Penetration into newer geographies such as Russia, CIS and South America in
both the replacement as well as OEM segments and across all user categories:
Whilst volumes from these geographies currently constitute a very small
proportion of overall sales, they may contribute meaningful volumes 2-3 years
later.
(d) The current market share for the company at just around 4.0% in the global off-
highway tyre (OHT) market, indicating a strong opportunity for market share
gains.
Whilst we expect the overall global OHT industry growth to be modest (mid-single
digit), with a significant cost advantage and the increasing de-focus of global majors
on the OHT space, we expect BKT to gain significant market share. Furthermore, BKT
has relatively few threats from new entrants. The ‘high variety, low volume’ niche
nature of OHT acts as a strong entry barrier and has kept Chinese imports and
domestic conventional tyre makers from entering the OHT space.
Overall, we expect BKT to record a healthy revenue growth of 15% CAGR over FY14-
20E (based on our last published estimates). This is much higher than the revenue
growth outlook for domestic conventional tyre makers, which have seen significant
capacity additions and face the threat of over-capacity. As a result, the rate of decay
in revenue growth to the long-term sustainable revenue growth is lower for BKT as
compared to these players.
Exhibit 91: Long-term revenue growth assumptions
FY09-14 FY14-18 FY18-25 Terminal
BKT* 23% 16% 10% 4%
Apollo 16% 8% 5% 4%
Source: Company filings, Ambit Capital research; Note: Standalone accounts considered for Apollo Tyres and
BKT; * BKT estimates are Under Review, and the figures in the above exhibit are last published estimates.
BKT earns significantly better RoIC than its domestic as well as global peers. (We have
used RoIC instead of RoE to neutralise the impact of BKT’s cheap cost of external
commercial borrowings.) A further analysis of RoIC indicates that BKT’s source of
higher returns is its operating margin advantages over both domestic and
international peers. BKT’s EBITDA margin averaged 20.6% over FY09-14 vs Apollo
Tyres’ 10.7%, Michelin’s 14.1% and Titan International’s 9.1% over the same period.

Strategy
Exhibit 92: BKT’s RoIC (pre-tax) is better than peers

FY09 FY10 FY11 FY12 FY13 FY14 Average
Balkrishna Industries 18.7% 29.3% 15.9% 21.7% 19.4% 19.7%* 20.8%
Apollo Tyres 15.7% 34.1% 13.7% 13.3% 17.2% 20.5% 19.1%
Michelin 8.8% 8.3% 15.5% 14.8% 17.4% 16.5% 13.5%
Titan International 18.7% -1.8% 8.0% 27.5% 22.2% 9.8% 14.1%
Source: Company, Ambit Capital research. Note: standalone accounts for BKT and Apollo; consolidated accounts
for others; * BKT’s RoIC was adversely impacted in FY14 due to low utilisation of the partly commissioned new
Bhuj plant
Lower employee and marketing costs give it an edge over its Western peers of
around 30% of revenues. Its export-oriented model, besides providing savings on
excise & import duty, gives it a natural currency hedge against sourcing raw material
through imports, something not available to domestic tyre makers. BKT’s near-term
margins should be helped by softening rubber prices and its long-term margins
should benefit from a favourable industry structure and the opportunity to reduce the
price discount to peers.
Relative valuation: Cheap on P/E
On a comparative valuation, BKT is currently trading at a premium of 15% to
domestic peers’ average on FY16 P/E. Whilst BKT’s FY16 P/E is more or less in line
with that of MRF, it is at a premium of 30% to Apollo Tyres. This is largely due to
BKT’s FY15 and FY16 net earnings to be somewhat impacted by higher depreciation
and interest expense due to capitalisation of the Bhuj facility. Furthermore, given
BKT’s higher core earnings and return ratios (RoIC and RoE), we believe BKT should
justifiably trade at a premium to its peers.
On a global comparison, BKT is trading at ~20% discount to its European and North
American peers on FY16 P/E. However, on FY16 EV/EBITDA, it is trading at ~40%
premium to most of its peers. As compared to a pure-play OHT competitor, Titan
International, BKT is trading at a discount on both P/E and EV/EBITDA multiples for
FY15 and FY16.
Exhibit 93: Relative valuation
Mcap EV/EBITDA (x) P/E (x) CAGR (FY14-16) ROE (%) Price perf (%)
US$ mn FY14 FY15 FY16 FY14 FY15 FY16 Sales EBITDA EPS FY14 FY15 FY16 3m 6m 1 yr
India
MRF# 1,620 5.5 5.4 4.7 12.1 11.5 9.6 12 9 12 25 20 20 2 19 83
Apollo Tyres 1,543 5.1 5.0 4.6 9.2 8.9 8.0 9 5 7 25 21 19 9 66 190
Balkrishna^ 1,122 9.2 8.6 7.4 13.7 11.9 10.2 17 12 16 30 25 23 41 117 199
Average (ex-BKT) 5.3 5.2 4.6 10.6 10.2 8.8
Other Asia/Japan*
Bridgestone Corp 29,751 5.3 4.9 4.7 11.2 9.5 9.0 5 6 12 17 16 15 4 (5) 0
Sumitomo Rubber 3,811 6.0 5.3 5.1 9.3 8.0 7.5 6 9 11 15 14 14 8 (4) (15)
Average 5.6 5.1 4.9 10.2 8.8 8.2
Europe*
Pirelli & C SpA 7,831 7.1 6.8 6.2 16.0 13.1 11.3 3 7 19 14 16 17 1 0 33
Continental AG 44,768 7.7 7.0 6.3 14.6 13.0 11.5 7 11 13 23 25 23 (4) 4 48
Michelin 21,509 5.0 4.7 4.3 11.3 10.8 9.5 2 8 9 15 15 16 (7) 9 17
Nokian Renkaat 5,166 7.7 8.2 7.4 12.9 14.1 12.0 2 2 3 17 19 22 (1) (15) (13)
Delticom AG 505 0.5 0.9 1.4 27.1 31.3 20.9 12 19 14 22 22 28 (16) (2) (18)
Average 5.6 5.5 5.1 16.4 16.5 13.1
North America*
Goodyear Tire 6,691 6.4 5.8 5.3 10.7 9.3 8.3 (0) 11 14 64 36 30 3 7 64
Cooper Tire 1,850 5.7 4.7 4.6 16.4 11.1 11.0 4 11 22 13 16 14 19 16 (13)
Titan 899 6.5 11.9 7.3 18.3 44.1 18.2 1 (6) 0 11 8 NA (11) (2) (2)
Average 6.2 7.5 5.7 15.1 21.5 12.5
Source: Bloomberg, Ambit Capital research. Note: (a) * indicates December-ending hence CY13=FY14; (b) ^ indicates that financials pertain to the standalone
entity; (c) # indicates September-ending company

Strategy
Cross-cycle valuation
On cross-cycle P/E comparison, BKT is currently trading at 11.6x, a premium of 70%
to its four-year average P/E multiple. As mentioned earlier, we expect FY15 and FY16
net earnings to be somewhat impacted by higher depreciation and interest expense
due to capitalisation of the Bhuj facility.
Exhibit 94: Cross-cycle P/E Exhibit 95: Cross-cycle EV/EBITDA
24 14
12
20
10
16
8
12
6
8
4
4 2
0 0
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
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Apr-11
Apr-12
Apr-13
Apr-14
Oct-05
Oct-06
Oct-07
Oct-08
Oct-09
Oct-10
Oct-11
Oct-12
Oct-13
BKT P/E 6 year average 4 year average EV/EBITDA 6 year average 4 year average
Source: Bloomberg, Ambit Capital research. Note: P/E bands arrived at using Source: Bloomberg, Ambit Capital research. Note: EV/EBITDA bands arrived
Bloomberg consensus estimates for respective periods at using Bloomberg consensus estimates for respective periods

Strategy
Balance sheet (standalone) – UNDER REVIEW

Year to March (` mn) FY12 FY13 FY14 FY15E FY16E
Reserves and surpluses 10,608 13,996 18,655 24,101 30,182
Total net worth 10,801 14,190 18,848 24,295 30,376
Debt 16,732 20,744 23,500 23,500 20,000
Deferred tax liability 626 999 1,722 1,722 1,722
Gross block 12,267 17,842 30,013 38,983 39,479
Net block 8,282 12,777 23,298 30,025 27,972
CWIP 6,748 11,810 5,470 500 500
Investments (non-current) 322 329 4,265 4,265 4,265
Cash & cash equivalents 3,574 2,663 98 1,320 3,798
Debtors 4,796 5,045 6,185 7,498 8,618
Inventory 4,811 4,326 5,291 6,415 7,373
Loans & advances 3,883 2,938 4,134 5,000 5,740
Current liabilities 2,803 3,740 4,394 5,209 5,850
Provisions 1,454 215 276 298 319
Total current liabilities 4,257 3,955 4,670 5,507 6,169
Net current assets 12,807 11,017 11,037 14,726 19,360
Total assets 28,159 35,933 44,070 49,517 52,098
Income statement (standalone) – UNDER REVIEW

Net Sales 28,200 31,906 35,767 43,364 49,842
% growth 46% 13% 12% 21% 15%
EBITDA 5,058 6,644 8,824 11,043 12,372
% growth 81% 31% 33% 25% 12%
Depreciation 831 1,077 1,650 2,242 2,550
EBIT 4,227 5,567 7,174 8,801 9,822
Non-operating income 32 37 138 149 178
Adjusted PBT 3,981 5,347 7,058 8,548 9,447
Tax 1,297 1,794 2,293 2,863 3,118
Adjusted PAT 2,684 3,553 4,764 5,684 6,330
Extraordinary expense/(income) (1) (5) 144 - -
Reported PAT after minority interest 2,685 3,558 4,621 5,684 6,330

Strategy
Cash flow statement (standalone) – UNDER REVIEW

Year to March (` mn) FY12 FY13 FY14E FY15E FY16E
Net profit before tax 3,982 5,352 7,058 8,548 9,447
Depreciation 831 1,077 1,650 2,242 2,550
Others 273 191 106 400 544
Tax (1,505) (1,410) (1,570) (2,863) (3,118)
(Incr)/decr in net working capital (2,846) 291 (2,642) (2,479) (2,167)
Cash flow from operations 736 5,501 4,602 5,848 7,257
Capex (net) (6,751) (9,605) (3,075) (4,000) (497)
(Incr)/decr in investments - (7) (3,936) - -
Other income (expenditure) (20) 19 5 2 8
Cash flow from investments (6,771) (9,593) (7,006) (3,998) (488)
Net borrowings 9,856 3,610 264 0 (3,500)
Interest paid (201) (261) (254) (403) (553)
Dividend paid (157) (169) (170) (226) (237)
Cash flow from financing 9,497 3,181 (160) (629) (4,290)
Net change in cash 3,462 (911) (2,565) 1,222 2,479
Closing cash balance 3,571 2,662 98 1,320 3,798
Free cash flow (6,015) (4,104) 1,526 1,848 6,760
Ratio analysis (standalone) – UNDER REVIEW

Year to March (%) FY12 FY13 FY14E FY15E FY16E
EBITDA margin (%) 17.9% 20.8% 24.7% 25.5% 24.8%
EBIT margin (%) 15.0% 17.4% 20.1% 20.3% 19.7%
Net prof. margin (%) 9.5% 11.1% 13.3% 13.1% 12.7%
Dividend payout ratio (%) 5.4% 4.1% 4.2% 3.6% 3.4%
Net debt: equity (x) 1.2 1.3 1.2 0.9 0.5
RoCE (pre-tax) (%) 21.7% 19.4% 19.7% 21.0% 22.2%
RoIC (%) 14.6% 12.9% 13.3% 13.9% 14.9%
RoE (%) 28.1% 28.4% 28.8% 26.4% 23.2%
Valuation parameters (standalone) – UNDER REVIEW

Diluted EPS (`) 27.8 36.8 49.3 58.8 65.5
Book value per share (`) 112 147 195 251 314
P/E (x) 25.0 18.9 14.1 11.8 10.6
P/BV (x) 6.2 4.7 3.6 2.8 2.2
EV/EBITDA (x) 17.6 13.4 10.1 8.1 7.2
EV/EBIT (x) 21.1 16.0 12.4 10.1 9.1

Strategy
Astral PolyTechnik
Astral’s revenue growth (more than 40% CAGR in FY08-14) significantly
exceeded its organised peers due to (1) continuous product (pipes and fitting)
expansion across CPVC/PVC portfolio; (2) unmatched thrust on “pipes” brand
building and (3) widening distribution reach with concurrent manufacturing
capacities expansion. Astral reported average FY04-14 RoCE of 22.5% owing
to increase in working capital turnover, and capacity expansions funded by
internal accruals. Astral is likely to record 25% revenue CAGR over FY13-16,
ahead of the Indian plastic pipes industry, due to: (a) higher penetration of
recently launched products: composite column pipes (~`800mn of sales in
FY15) and bendable pipes (~`170mn of sales in FY15), (b) new product
launches for fire protection, electrical wiring and agri use, and (c) increase in
manufacturing reach by setting up a new manufacturing plant at Hosur,
Karnataka in South India.
"When I started this venture, nobody wanted to change the pipes they used. They never
trusted plastic would be able to take sulfuric acid at 900C"
– Sandeep Engineer, Promoter, Astral PolyTechnik
(Source: http://www.youtube.com/watch?v=MD1-OPCdqaw)
Criteria
Market Cap (US$mn) 631
3m ADV (US$mn) 0.4
1-year 197%
3-year 107%
10-year DNA
Exhibit 97: Astral PolyTechnik gets a ‘Full pie’ on our STAR framework
Astral scores high on innovation (78/100) and
branding (75/100) on the IBAS framework.
Astral is in the first quartile among peers on
Accounting quality
accounting checks.
High cash generation boosts scores but dividend
Capital allocation
payout has room to improve.
Astral is not part of Ambit’s Connected Companies
Centrality of political connect Index and does not appear to have questionable
Mr. Engineer’s ownership in Astral is direct and the
Treatment of minorities company does not indulge in transactions that
disadvantage minority shareholders.
First-generation promoter runs the company well and
Succession planning
his son is currently at managerial position.
Total (%)
Regional as compared to larger players like Supreme;
Weaknesses
core business remains commoditised and competitive

Strategy
Exhibit 98: Astral PolyTechnik timeline

Year Events
Entered into a JV with Specialty Process LLC, and entered into the Corzan Processor Agreement with B.F.
1995
Goodrich Co
1996 Company incorporated
1998 Entered into the FlowGuard CPVC Processor Agreement with B.F. Goodrich
1999 Entered into a Technology License Agreement in continuation of the CPVC
2001 Commenced manufacturing of CPVC fittings, expansion of manufacturing facilities at Santej, Gujarat
2002 Set up branch offices at Delhi and Mumbai and a sales depot at Bangalore
2004 Launched a new product range of lead-free PVC pipes
2005 Set up a second manufacturing facility at Baddi, Himachal Pradesh
2006 Entered into the BlazeMaster Processor Agreement with Noveon
2008 Entered into JV with a Kenya-based group
2011 Set up solvent cement manufacturing
2013 Received BIS approval for selling BlazeMaster in India
2014 Set up a new plant in Hosur, Karnataka, with an initial capacity of 9,000 tonnes
Astral: Market leader in CPVC

Astral PolyTechnik (Astral) is one of the fastest-growing pipe companies in India, with
~47% CAGR over the last ten years. Astral was founded by Mr. Sandeep Engineer in
March 1996 and listed on the Indian bourses in 2007. Astral is the domestic market
leader in Chlorinated Poly Vinyl Chloride (CPVC) and it is a leading player in Poly Astral has a market share of more
Vinyl Chloride (PVC) piping and plumbing systems. Astral has production facilities in than 60% in the domestic CPVC
Gujarat (Santej and Dholka), Himachal Pradesh (Baddi) and Tamil Nadu (Hosur). The pipes market
company has increased its focus on CPVC pipes (58% of FY14 sales), as their margins
are better than PVC pipes. The company has a tie-up with Lubrizol for CPVC raw
material sourcing.
Exhibit 99: Astral’s product portfolio
Revenue Share of Indicative EBIT
Key Products Brand Applications
Share (%) Fittings (%) margins (%)*
CPVC FlowGuard Bendable (owned by
Hot and cold water applications in homes and commercial buildings
(Residential) Lubrizol)
Metal treating, pulp and paper, power sector, sugar industries,
CPVC water treatment plants, chloro-alkali, fertiliser and chemical
Corzan (owned by Lubrizol)
(Industrial) industries, steel industries, shipping industries, mining and chemical 58% 40% 12.8%
processing
CPVC fire
Approved for use in all light rooms and light hazardous in both new
sprinkler Blazemaster (owned by Lubrizol)
and retrofit construction
systems
Ring lines/down take lines, swimming pools, salt water lines,
sugar and paper industries, pipes for hand pumps, industrial process
PVC pipes Aquarius
lines, aggressive corrosive fluid transportation, dye plants, chrome,
42% 35% 10.8%
zinc platting and tanning plants, coal wasting and ash handling
PVC drainage Ultra Drain, DWV, Aquasafe, Sewage water, rain water, underground application, drain and
system Wavin, Under Ground, Foam Core waste traps
Source: Company, Ambit Capital research. Note: * Ambit estimates
CPVC: Unique product

Chlorinated poly-vinyl chloride (CPVC) pipes are used for hot and cold water
applications whereas PVC pipes are used only for cold water applications. Lubrizol
and Kaneka are the two major suppliers of CPVC resin. The total global industry
capacity for CPVC is likely to be 150,000 tonnes, out of which India consumes
50,000-60,000 tonnes. Globally, polypropylene random (PP-R) pipes are more
popular than CPVC pipes, because PP-R pipes have higher strength and no chlorine
content. However, PP-R is not used in India, as it requires electricity for installation, a
skill not available in the unorganised Indian plumbing industry. A few points worth
considering for CPVC pipe demand:
 Whilst institutional demand for CPVC pipes has slowed down, retail demand is
still resilient, as retail house builders use CPVC for refurbishment of toilets; and
 Expensive copper pipes are substituted by cheaper, lightweight CPVC pipes.

Strategy
Exhibit 100: Advantages of CPVC over substitutes

vs Copper vs Polyethylene (PE-X) vs Polypropylene random (PP-R)
No leaching of hazardous
Superior chlorine resistance Superior chlorine resistance
metals
Light weight (six times less Straight, professional Thinner walls with same pressure bearing
the weight) appearance capability (less material required)
Strong, rigid system (three times
Maintains flow rate Greater UV resistance
the tensile strength)
Lower material costs No insert fitting – full flow system No expensive tooling required
Four times lower noise
Technology tie-ups key to new launches

Astral’s management has pro-actively adopted new technologies such as CPVC pipes
through a tie-up with Lubrizol for CPVC compound. Astral is the only Indian company
with a Lubrizol licence for all its CPVC products such as FlowGuard, BlazeMaster and
Astral is the only company that has
Corzan. In addition to importing compounds, Astral also bought moulding equipment
a tie-up with Lubrizol for all its
for bendable pipes from Lubrizol for US$1.4mn. The management expects sales of
CPVC piping products
`600mn from bendable pipes in FY15. Astral developed the technology for CPVC and
PVC pipes in-house through a JV with Specialty Process.
Exhibit 101: Technology and sourcing tie-ups
Product Technology/sourcing partner
Specialty Process is the world leader in manufacturing
CPVC and PVC pipes FlowGuard CPVC pipes and fittings in the US since 28 years
and it is a subsidiary of Thompson Plastics
IPS, USA, is a leading manufacturer of solvent cements,
Cement solvent & solvent chemicals
primers and sealants for all markets and applications
Hunter Plastics, UK, has a strong worldwide reputation as
Underground specialty fittings a manufacturer of high quality above- and below-ground
products
Harvell Plastics, USA, is the industry's leading
PVC fittings (sourcing) manufacturer of PVC and CPVC piping systems,
thermoplastic duct systems, and machining stock extrusions
CPVC and PVC fittings, flanges and valves Spears, USA, manufactures PVC pipes and fittings
(sourcing) specialising in golf course and turf applications
Astral’s rapid evolution

Exhibit 102: Astral has maintained a revenue growth of more than 30% YoY and RoCE
of ~20% in the last 10 years (revenues crossed US$1bn in FY13)
90% 1.6
80% 1.4
70% 1.2
60%
1.0
50%
0.8
40%
0.6
30%
20% 0.4
10% 0.2
0% -
revenue growth YoY (%) RoCE (%) Debt:Equity (RHS)

Strategy
Historical stock price chart for Astral

Exhibit 103: After a crash post listing, Astral’s stock price has grown at a 97% CAGR and EPS grown at CAGR of 40%
800
Got BIS approval to
700 Formed JV with Launched SWR pipes, foam sell blazemaster
Set-up new capacity
600 Kenya in FY08 core pipes, acquired at Dholka
500 Advanced adhesives in FY10
Launched column pipes
400 IPO in FY07 to and bendable pipes
300 increase capacity
200
100
0
Jun-07
Sep-07
Dec-07
Mar-08
Jun-08
Sep-08
Dec-08
Mar-09
Jun-09
Sep-09
Dec-09
Mar-10
Jun-10
Sep-10
Dec-10
Mar-11
Jun-11
Sep-11
Dec-11
Mar-12
Jun-12
Sep-12
Dec-12
Mar-07
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Astral PolyTechnik share price (Rs)
Phase 1 (1996-2003): Early entrepreneur days and the launch of CPVC

Astral was incorporated in 1996 by Mr. Sandeep Engineer, a Chemical Engineer and
a first-generation entrepreneur. After a brief stint in Cadila Pharma, Mr. Engineer
created his own firm, Shree Chemicals, in 1986 and then ventured into the
manufacturing of bulk drugs in 1992. After facing various issues related to
permissions and pollution clearances, Mr. Engineer ventured into CPVC in the late
1990s.
In a meeting with Mr. Engineer at his office in Ahmedabad in June 2014, he told us,
“I had seen CPVC back in (engineering) college days. BF Goodrich (USA) used to come
often to India to convince companies about CPVC. So I decided to make a new product
which does not have problems of licences and permissions and pollution control.”
BF Goodrich based in Huntsville, Alabama, was then a leading player in the
development of CPVC and held a patent for CPVC resin technology. The technology
adds characteristics like tensile strength and capability to withstand high-pressure to
traditional PVC by chlorination. Whilst the process increases the density and viscosity Astral’s foray in CPVC pipes for
of the material, it maintains the extruding and moulding characteristics of PVC. In industrial applications through the
April 1998, Astral entered into a joint venture agreement with Specialty Processes Corzan brand was a failure
LLC, a division of BF Goodrich, which, after various shareholder changes from 1998
to 2004, came to be known as Lubrizol and was eventually acquired by Berkshire
Hathaway in 2011.
In 1999, Astral launched CPVC pipes in India for industrial applications. The initial
days were tough for Astral given that acceptance of CPVC in India was very low due
to its price being high in comparison to the then more commonly used galvanised
iron (GI) pipes. To make things worse, Astral’s bankers, Madhavpura Mercantile Co-
operative Bank, collapsed in 2001 after being involved in misappropriation of
depositor funds.
After consulting with its technical partner, BF Goodrich, Astral shifted its focus to
CPVC fittings, whilst its banking needs were taken care of by Corporation Bank
(whose erstwhile Executive Director, Mr. K. R. Shenoy, is currently Astral’s Chairman).
As per its Initial Public Offering (IPO) prospectus, Astral reported revenues of `81mn
and a loss of `13mn in FY02. Astral’s operations then started gathering momentum
and by 2003, it had expanded outside of Gujarat by setting up offices in Delhi and
Mumbai and a depot in Bangalore. In FY03, revenues had grown to `131mn and the
company reported a profit of `11mn.

Strategy
Phase 2: Pre-IPO growth phase (FY03-07)

The changes in Astral’s strategy that were made in Phase 1 paid off and in the four
year period between FY03 and FY07, Astral’s revenues rose seven-fold and profits
eight-fold. Astral was the first company in India to launch lead-free PVC (FY04) and
rising sales of the product contributed to the overall momentum in revenues during
this phase (65% revenue CAGR). Astral’s phase 2 success mantra:
CPVC housing pipes priced lower
In FY05, Astral took its brand nationwide to attract more distributors. It hired Mudra, than galvanised iron pipes
a leading Indian ad agency, for an aggressive ad campaign. Recalling the move, Mr.
Engineer had this to say in a press article: “That year, we ploughed our profit of `2.5
crore into branding. I was certain there was a huge replacement market in galvanised
iron and we needed a pan-India brand if we had to matter.” (Source:
http://www.outlookbusiness.com/article_v3.aspx?artid=290444)
In FY07, Astral raised `342mn from its IPO to fund the expansion of its
manufacturing and production facilities for its existing product lines at units based at
Gujarat and Himachal Pradesh. The market response to the IPO was tepid and the
stock price dipped below its issue price (`115 on a `10/paid up share) when it listed
in February 2007.
Exhibit 104: Astral’s revenues picked up after a shift in Exhibit 105: A big bet on branding in FY05 drove up sales
strategy in the early 2000s and distribution (S&D) expenditure
600 (` mn) 70 (` mn) 20%

60
500
Others 50 15%
400 40
10%
Lead free 30
300 PVC
20 5%
200 CPVC 10
100 0 0%
-
FY02 FY03 FY04 FY05 FY06 S&D (Rsm) (LHS) S&D (% of rev) (RHS)
Phase 3: Strong growth driven by launch of PVC pipes and higher acceptance
of CPVC pipes (FY08-14)
Astral’s revenue growth was driven by: (a) outperformance of PVC pipes (40%
revenue share in FY13 vs nil in FY04); (b) higher acceptance of CPVC pipes; and (c) In phase 3, Astral laid a platform
new products and aggressive brand building which increased retail demand. In for sustainable revenue CAGR of
addition, Astral increased its product portfolio through consistent launches of new more than 20% in FY14-17
fittings. Our channel checks suggest that fittings have significantly higher EBITDA
margins (~20% EBITDA margin) than plastic pipes.
Astral has set-up a greenfield plant at Hosur, with an initial capacity of 8,000 tonnes,
which would be increased to 30,000 tonnes in just 18 months. In addition, the
company has launched several new products such as composite column pipes and
bendable pipes. The addressable market size of composite column pipes for borewell
application is `30bn. Bendable pipes have a higher combination of flexibility and
strength owing to a layer of alumina between two layers of CPVC. Further, Astral has
received the BIS approval for ‘Blazemaster’, the CPVC fire sprinkler system. According
to Astral’s management, the addressable opportunity for Blazemaster is `15bn (shift
from copper pipes).

Strategy
Exhibit 106: Ramp-up in capacities driven by rising Exhibit 107: EBIT margins remained stable whilst RoCEs
acceptance of CPVC and launch of PVC improved substantially during Phase 3
100000 (MT) 30%

90000
25%
80000
70000 20%
60000 15%
50000
10%
40000
30000 5%
20000 0%
10000 FY08 FY09 FY10 FY11 FY12 FY13 FY14
0
FY08 FY09 FY10 FY11 FY12 FY13 FY14 ROCE Ebit margins
Astral’s financial performance improved significantly in Phase 2 owing to unmatched

competitive advantages, such as: (a) first mover advantage in fast-growing CPVC
pipes through a licence with Lubrizol; (b) pro-active management which is always on
the look-out for new products in plastic pipes and fittings; and (c) increased Astral’s unmatched competitive
manufacturing and distribution reach. As mentioned in our 01 October 2013 note, advantages are: (a) first mover
‘More than meets the eye,’ Astral increased its capacity to 77K tonnes in FY13 (50% advantage in CPVC through tie-up
CAGR in last 10 years) without putting stress on its balance sheet (FY13 net debt-to- with Lubrizol and (b) high-quality
equity of 0.3). Astral has consistently improved its capital employed turnover (2.7x in management
FY13 vs 1.6x in FY09) due to lower working capital cycle and economies of scale. This
improvement in financials and Astral’s rising stature as a CPVC player was reflected
in Astral’s stock price performance. During Phase 3 (FY08-14), whilst Astral’s EPS
grew at a 34% CAGR, its stock price rose at a 56% CAGR.
Exhibit 108: Capacity expansion mainly funded through Exhibit 109: Consistent decline in working capital due to
internal accruals lower debtor days and lower inventory days
1,000 0.6 27 10
800 0.5 25 8
23
600 0.4 6
21
400 0.3 4
19
200 0.2 2
17
0 0.1 15 0
FY08 FY09 FY10 FY11 FY12 FY13 FY08 FY09 FY10 FY11 FY12 FY13
-200 0.0
CFO (Rs mn) RoCE (%)
Capex (Rs mn) Capital Employed turnover (x) (RHS)
Gross debt-to-equity (x) (RHS)
Working capital Employed turnover (x) (RHS)

Strategy
Rating framework
Overall score of - Innovation , Brands/Reputation , Architecture
, Strategic Asset
We use John Kay’s IBAS framework to assess Astral’s competitive advantages. Astral
is ranked highly on innovation, as the company was the first mover in CPVC pipes for
housing and composite column pipes and the company will be first to introduce
Blazemaster pipes in India. Further, Astral has built a strong brand name in CPVC
pipes through higher than industry average advertising spend and promotion.
However, the company’s score is average on strategic asset, as it does not have the
widest manufacturing and distribution reach amongst its peers.
Astral is India’s largest manufacturer of CPVC pipes and fittings and also a major
player in the PVC industry. Plastics is a commodity business and Astral faces
formidable competition from established players like Supreme Industries. We have
built a scorecard to evaluate the competitive positioning of the six large organised Based on our competitive
PVC pipe players in India. We have selected five parameters that we believe are scorecard, Supreme is the best
important for their performance—three-year average RoIC, revenue size and growth, player in the industry followed by
financial leverage, product diversity, and distribution network. Astral PolyTechnik
Exhibit 110: Supreme is the leader amongst its peers (based on the Exhibit that
follows)
3-year Piping revenue size Financial Product Distribution Overall
average RoIC and growth Leverage diversity network Rank
Supreme 2 1 2 1 1 1
Astral
3 2 1 2 2 2
PolyTechnik
Finolex 4 3 3 5 4 4
Jain
5 5 5 6 5 6
Irrigation
Ashirvad
1 4 4 4 6 3
Pipes
Prince Pipes 6 6 6 3 3 5
Source: Company, Ambit Capital research; Note: Rank 1 indicates the best player on each parameter in the
industry whilst rank 6 implies the worst-placed player. We have assigned equal weightages to each of the five
parameters.
Exhibit 111: The numbers behind our scorecard
3-year FY14 pipe 3-year pipes
Company FY14 Net Product Line Most important Pipe manufacturing
average revenue revenue Distributors
name debt/Equity (x) beyond uPVC client plants
RoIC (` bn) CAGR
CPVC, PE, PP-
North, Central and
Supreme 25.2 20.7 24.8% 0.4 R pipes and Housing 700+
West India
fittings
CPVC pipes
Astral 28.6 10.7 37.2% 0.3 Housing North and West India 400+
and fittings
Finolex 12.9 15.7 19.5% 0.6 Fittings Agriculture West India 500+
PE pipes and 2
Jain Irrigation 8.4 12.2 8.9% 1.6 Agriculture West and South India 3000+
fitting products
CPVC and
Ashirvad Pipes 31.8* 9.0 36.5 0.84* Housing South India 4000 retailers
fittings
CPVC, PP-R Housing and
Prince Pipes 7.0* 5.2* 16.4%* 2.37* West and North India
and fittings agriculture
Source: Company, Industry, Ambit Capital research; Note: *For Supreme we have used Ambit Estimates, for the unlisted players, Ashirvad Pipes and Prince Pipes,
we have taken only FY12 numbers from the Ministry of Corporate Affairs’ website to evaluate financial performance.

Strategy
In our thematic note on Industrials in 05 March 2014, ‘Market share gains from better
reach’, we also compared Astral with its biggest competitors – Supreme Industries
and Finolex Industries – using the IBAS framework. Whilst Supreme stood out as the
highest ranking company overall, Astral came a close second. We reproduce the IBAS
framework below:
Astral and Supreme - leaders in innovation: Astral was the first company to
introduce CPVC pipes in India and it has recently introduced new products such as
composite column pipes, Blazemaster and bendable pipes. Supreme Industries has
more than 5,800 products in pipes and fittings developed through feedback from
distributors. Further, Supreme has plans to launch composite cylinders after getting
approval from the Petroleum and Explosives Safety Organisation (PESO). In addition,
the company would launch other composite products such as pipes and pallets and
fire resistant pipes.
Brand equity: Supreme has the strongest brand in urban India for PVC pipes. Astral
also has high brand equity for CPVC pipes in urban India. Finolex Industries has the
highest brand equity in rural markets. Supreme has superior architecture. It has a
pan-India manufacturing reach through 22 manufacturing plants across India not
only for PVC pipes but also for other products such as protective packaging. Finolex’s
manufacturing plants are mainly located in west India. Astral is expanding its reach
through a new plant at Hosur, Karnataka, in south India.
Strategic asset: Astral’s first mover advantage in CPVC pipes through a tie-up with According to the largest plastic
Lubrizol is a key source of advantage. In our opinion, Supreme’s unmatched pan- piping distributor in Mumbai with a
India manufacturing reach (22 manufacturing plants), pan-India distribution reach more than 60% market share, a first
(700+ distributors) and its exclusive patent licence for cross-laminated film product in mover advantage led by strong
South East Asia are its strategic assets. relationships with large distributors
Exhibit 112: IBAS framework for organised PVC pipe players is the key to higher penetration
Strategic Overall
Innovation Brand Architecture
asset rank
Manufacturing Distribution
Rural Urban
reach reach
Supreme Industries
Astral PolyTechnik
Finolex Industries
Source: Ambit Capital research;
Note: - Strong; - Relatively Strong; - Average; - Relatively weak.
Meeting takeaways: We add to the IBAS analysis with takeaways from our recent
meetings with Mr. Sandeep Engineer (MD, Astral), Mr. Hiranand Savlani (CFO, Astral)
and Mr. Pankaj Kajaria of Kajaria Pipes (a leading dealer of pipes based in Mumbai).
Mr. Engineer stands out as a risk-taking first-generation entrepreneur who is also
grounded and humble. Whilst Astral’s products stand out in innovations due its tie-up
with Lubrizol (Astral was the first CPVC company to introduce bar-coding on pipes,
foam core within pipes, composite pipes, sound-free pipes, etc), Mr. Engineer’s ability
to take risks with new initiatives has also paid off. Astral’s aggressive 2005
advertising campaign stands out as does its decision to conduct plumber training in
India. Mr. Engineer says: "The plumber is also my customer. I give him the most
importance." Even as Astral’s size has grown over the years, Mr. Engineer has fostered
a culture of loyalty within the organisation. Says Mr. Savlani of Mr. Engineer, “His
biggest strength is simplicity and humility. There has been no change in his personality
even after the manifold increase in Astral. He still drinks tea from a roadside stall along
with his dealers.”
Mr. Kajaria, who is also a dealer for other companies such as Supreme and Prince,
attributes the success of CPVC in India to Astral. Mr. Kajaria said, ‘Astral's branding is
the most aggressive. Astral knows how to catch hold of the right intermediaries. They “Astral is known for innovation.”
have good-quality products and have created a great brand by doing frequent – A large plastic pipe distributor
meetings with dealer and plumber meets. Astral has a lot of buzz in the industry.
People look forward to new launches from them.”

Strategy
Accounting quality
Astral is in the top quartile of companies in the Indian plastics industry on accounting
quality. Astral has the highest CFO/pre-tax EBITDA amongst peers on account of
negative working capital cycle of CPVC products (accounting for 58% of FY13 sales).
Astral gets 120 days credit from Lubrizol (CPVC compound supplier) but gives only 30
days credit to its dealers. The improvement in the cash conversion cycle in FY10-13
was driven by lower debtor days and lower inventory days.
Astral’s unclassified loans to advances have been the lowest amongst its peers for the
last three years. Whilst contingent liabilities were a key concern until FY12 (10% of
net worth), Astral’s contingent liabilities have declined in FY13, as its income tax
issues have been resolved.
Exhibit 113: Accounting flags
Field Score Comments
In our accounting analysis of plastic piping processing companies, Astral has the second-highest RoE
owing to its better asset turnover and net margins. Further, Astral has the best CFO/pre-tax EBITDA on
Accounting GREEN
account of lower working capital cycle. CPVC accounting for 58% of Astral's revenues has negative working
capital cycle.
The company has given detailed disclosures along with sales and capital expenditure guidance. Astral has
Predictability GREEN
consistently over-achieved its piping volume and sales guidance.
Over the last six months, consensus EPS estimates for FY14 and FY15 have been revised upward by 15-
Earnings momentum GREEN
20%.
Capital allocation
As mentioned above, Astral’s business model is cash generative given its negative
working capital cycle and given its high asset turns. Astral has ramped up capacities
over the years without stretching its balance sheet and without hurting its RoCE. Astral’s more than 40% growth in
Capital raised in the past 10 years has gone primarily towards capex, debt FY08-14 was funded through
repayments and interest payments. Thus, Astral scores well on the capital allocation internal accruals without hurting its
front. However, dividend payout has remained poor (average 8% of profits from FY08 RoCE
to FY13) and the company does not have an explicitly stated dividend policy.
Exhibit 114: Astral’s business model is highly cash Exhibit 115: Capex and expansion in the past 10 years has
generative been internally funded
Proceeds Dividend
from paid, 3% Interest
shares Purchase paid, 16%
15% of
Investmen
ts, 0%
CFO
85%
Net
Capex,
78%
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 (via various sources such as CFO, equity, debt, etc)
etc) and spent (on capex, debt repayment, interest, dividend paid, etc) over and spent (on capex, debt repayment, interest, dividend paid, etc) over FY04-
FY04-13. 13.

Strategy

Astral is not part of our Connected Companies Index and does not display any visible,
direct connections with any political party. The company also does not appear to have
Astral remains the primary business for Mr. Engineer and his family. Astral has two
subsidiaries, Astral Biochem and Advanced Adhesives. Of these, Astral Biochem did
not have any operations in FY13, whilst Advanced Adhesives commenced commercial
production of CPVC solvent cement. So far, Astral has refrained from transactions
such as questionable transfer of divisions and merger of unlisted entities, which could
negatively impact the interests of the minority shareholders. The promoters (including
Specialty Process) hold 64% in the company mainly through direct holdings and
related companies.
Name of the Shareholder Number of shares (m) % of total
1 SANDEEP PRAVINBHAI ENGINEER 11.8 21.1
2 SAUMYA POLYMERS LLP 7.9 14.0
3 JAGRUTI SANDEEP ENGINEER 4.6 8.1
4 SPECIALTY PROCESS LLC. 4.0 7.1
5 HANSA PRAVINBHAI ENGINEER 3.3 5.9
6 SAUMYA POLYMERS LLP 2.8 4.9
7 KAIRAV CHEMICALS LIMITED 1.2 2.1
8 BIPIN RANCHODBHAI MEHTA 0.3 0.6
Total 35.9 63.8
Succession planning
Astral remains a promoter-driven company with Mr. Sandeep Engineer at the helm.
However, we note that the company had hired a professional to run a company in
the past, viz., Mr. Mayur Vakil from Supreme Industries (who was President of Astral
from 2004 to 2010). As per the FY13 Annual Report, Astral’s Board had just four
directors, excluding the Chairman, Mr. Shenoy. Of these four, there was one
Independent Director (Mr. Pradip Desai) and one non-Executive Director (Kyle
Thompson). In FY12, Mr. Engineer’s son Kairav was appointed as Manager–Business
Development of the company. Currently, there is no explicitly stated succession plan
for Astral.
Exhibit 117: Management background
Name Designation Background
Chairman He served as the Chairman and the CEO of Lakshmi Vilas Bank Ltd in Karur, Tamil Nadu, until 2002. He has 37 years of
Mr. K Raghunath
experience in the banking sector. He also served in various positions and retired as an Executive Director of Corporation
Shenoy (Non-Executive) Bank Ltd in 1992. He also served in various capacities in the RBI and retired in 1973.
He has been the Managing Director of Astral Poly Technik Limited since 1 April 2006. Mr. Engineer diversified into the
Mr. Sandeep Managing
plastic pipe industry by collaborating with Specialty Process LLC, for further growth and development of Astral Poly Technik
Engineer Director
Limited, and for introduction of CPVC in the Indian markets. He owns 21% shares of Astral PolyTechnik.
Ms. Engineer has been an Executive Director of Astral Poly Technik Limited since 29 September 2006. She is responsible for
Executive
Ms. Jagruti Engineer Director the daily administrative activities of Astral PolyTechnik Limited. She also possesses experience in activities related to Human
Resource Management. She holds a Bachelor of Arts degree. She owns 8.1% shares of Astral PolyTechnik.
He started his career by setting up his sole proprietorship firm which was a manufacturing unit of PVC conduit pipes and
pressure pipes which was operational for seven years. He has been an Independent & Non-Executive Director at Astral Poly
Independent
Mr. Pradip Desai Technik Limited since 23 September 2006. He was a committee member of the Gujarat Chamber of Commerce for 10
Director
years and the Vice President of the All India Federation of Paper Traders’ Association. Mr. Desai holds a B.Sc. in Physics
from Gujarat University.
Non-Executive Mr. Kyle A. Thompson serves as Vice President of Operations at Thompson Plastics, Inc. Thompson through its subsidiary
Mr. Kyle Thompson Director Specialty Process has a 9.2% stake in Astral PolyTechnik.

Strategy
Weaknesses
 Intense competition in a commoditised industry: The plastics business is a
commoditised and competitive space. Astral is the third best player to Supreme
(#1 player) and Finolex Industries (#2 player). Supreme and Astral have strong
brands in urban markets but in rural markets, Finolex has the strongest brand
followed by Supreme.
 High dependency on CPVC: The CPVC segment accounts for 58% of Astral’s
revenues. Whilst CPVC is a fast-growing industry, it is a niche market with an
industry size of `11bn in comparison to the PVC pipe industry (`120bn industry
size). A demand slowdown in CPVC or substitution of CPVC by PP-R or HDPE
pipes could materially affect Astral’s revenues.
Trading at a sustainable valuation

We believe Astral’s current valuation of 24.2x FY16E consensus EPS is sustainable,
considering its high RoEs (five-year average of 24%), strong competitive advantages
in fast-growing engineered plastics and high-quality management. Reduction in
working capital days and operating leverage should improve RoCEs. Whilst Astral’s
revenues and stock liquidity are lower than its direct plastic piping peer, Supreme
Industries, Astral trades at a premium to Supreme due to higher FY14-16E revenue
growth consensus estimates. In our opinion, Supreme should not trade at a discount
to Astral PolyTechnik, as Supreme has higher RoEs, larger revenue size and a
diversified plastics product portfolio.
Exhibit 118: Astral trades at a premium to peers
Revenues EBITDA PAT margin
Mcap Revenues RoE (%) PE (x) EV/EBITDA (x)
(US$mn) margin (%) (%)
Companies
CAGR FY14-
US$ mn FY14 FY15 FY15 FY15 FY15E FY16E FY15E FY16E
16
Astral Poly Technik 633 152 27.2 14.1 8.4 31.7 32.2 24.3 19.9 16.0
Supreme Industries* 1,182 627 18.0 14.7 8.0 29.8 19.4 15.7 9.2 8.2
Motherson Sumi 5,194 4,655 16.6 10.2 3.6 36.9 24.5 18.0 9.7 7.6
Jain Irrigation 871 923 16.6 13.9 3.7 11.0 21.4 14.0 9.2 7.8
Sintex Industries 491 934 14.1 16.7 6.2 10.9 7.1 5.6 5.7 4.8
Time Technoplast 170 331 14.6 14.1 4.9 11.7 9.1 7.3 4.9 4.3
Finolex Industries 583 394 9.5 10.7 8.3 24.5 16.0 13.4 16.2 14.4
Nilkamal 1,182 627 16.6 15.3 8.4 34.3 13.1 10.7 7.5 5.6
Average 18.4 13.8 10.9 9.2
Source: Company, Bloomberg, Ambit Capital research; Note (a) * June-ending companies, rest are March-ending and we have used Ambit estimates for Supreme,
(b) Market cap is as on 9 July 2014, (c) We have adjusted the financial performance of plastics of Supreme Industries for comparison with its peers.
Note that the history of Astral’s forward trading multiples is limited due to limited
analyst coverage and low liquidity.
Exhibit 119: Astral is trading at high but sustainable Exhibit 120: Valuations supported high revenue growth
valuations and high RoEs
35 45%
30
40%
25
20 35%
15 30%
10
5 25%
0 20%
Sep-12
Sep-13
Mar-12
May-12
Jul-12
Nov-12
Jan-13
Mar-13
May-13
Jul-13
Nov-13
Jan-14
Mar-14
May-14
Jul-14
15%
10%
FY11 FY12 FY13 FY14
Astral 1-year forward PE
2 year average 1-year forward PE ROE % YoY revenue growth
Source: Bloomberg, Ambit Capital research. Note: We have taken 24-month Source: Company, Ambit Capital research
average one-year forward P/E due to limited available history

Strategy
Income statement
Particulars (` mn) FY11 FY12 FY13 FY14
Operating Income 4,108 5,793 8,211 10,732
EBITDA 560 818 1,116 1,556
EBITDA margin 13.6% 14.1% 13.6% 14.5%
Net depreciation / amortisation 107 134 177 213
EBIT 465 723 960 1,364
Interest Expense/(income) 44 228 181 82
Adjusted PBT 422 496 779 1,013
Adjusted PAT 334 512 679 976
EPS (Adjusted) (`) 5.9 9.1 12.1 17.4
Balance Sheet
Particulars (` mn) FY11 FY12 FY13 FY14
Total Networth 1,488 1,856 2,418 3,148
Loans 448 887 895 941
Sources of funds 1,953 2,760 3,401 4,219
Net block 1,040 1,551 2,055 2,745
Cash and bank balances 102 350 114 11
Sundry debtors 1,133 1,692 1,700 1,805
Inventories 862 1,255 1,481 1,892
Loans and advances 395 427 575 587
Total Current Assets 2,143 3,057 3,217 3,915
Current Liabilities 1,280 1,943 1,928 2,548
Provisions 32 48 75 65
Net current assets 831 1,067 1,214 1,303
Cash flow statement
Particulars (` mn) FY11 FY12 FY13 FY14E*
PBT 422 504 779 1,013
Change in working capital (3) 66 (373) (175)
CFO (post -exceptions) 461 841 688 870
Purchase of fixed assets (335) (687) (681) (940)
CFI (328) (668) (717) (919)
CFF (70) 75 (207) (62)
Free cash flow 126 154 7 (70)
Source: Company, Ambit Capital research. Note: *Astral has not reported cash flow statement. FY14 cash flow
statement is based on Ambit estimates.
Key ratios
Particulars FY11 FY12 FY13 FY14
Net debt/Equity 0.2 0.3 0.3 0.3
Working capital turnover (x) 6.1 8.0 9.0 9.0
Gross block turnover (x) 3.3 3.4 3.5 3.4
Adj. ROCE 21.4% 25.4% 23.6% 27.7%
Adj. ROE 25.0% 30.6% 31.8% 35.1%
P/E (x) 112.8 73.6 55.5 38.6
P/B (x) 25.3 20.3 15.6 12.0
EV/EBITDA (x) 67.9 46.7 34.4 24.8

Strategy
eClerx Services Limited

Founded in 2000, eClerx has been able to sustain high revenue growth over
the last ten years (44% CAGR) whilst simultaneously sustaining high return
ratios (average RoCE of 111% and five-year average of 48%). It has
managed to achieve this despite operating in the relatively ‘commoditised’
space of middle and back office operations offshoring. eClerx’s business
model depends on the cost arbitrage between low-cost resources (average
cost per employee in FY14 at US$6,600) and high-quality work that can be
billed at high rates (FY14 revenue per employee of US$20,231). eClerx has
done this through: (1) robust domain expertise; and (2) knowledge
management system, which aids training and automation through which it
has proven itself to be indispensable to clients. Indeed, eClerx survived the
Lehman crises by winning businesses from its successor entities, which proves
the client stickiness enjoyed by eClerx.
If the company is successful in adding new clients (a problem recently),
coupled with the customer stickiness and high margins it currently enjoys,
eClerx could potentially be on the ‘cusp of greatness’. eClerx is currently
trading at 13.0x/12.0x FY15/FY16 consensus earnings, in line with its IT
services peers and its historical average.
"I think if we go back to the problem statement, we have a very modest objective which
is to win contracts from big Fortune 500 companies. It is our basic value proposition.”
– Anjan Malik, Client Engagement lead, eClerx, in an interview with Forbes
magazine (February 2014)
Criteria
Market cap (US$mn) 623
3m ADV (US$mn) 0.8
1-year 59%
3-year 13%
10-year NA
Source: Bloomberg, Ambit Capital Research
Exhibit 122: eClerx – ‘Full pie’ on our STAR framework

eClerx scores on technology processes but is vulnerable to
competition from large IT companies.
Accounting quality eClerx is in the top quartile among peers on this criteria.
eClerx’s business model generates high RoCEs and dividend payout

Capital allocation
has been high.
Centrality of political eClerx is not part of Ambit’s Connected Companies Index and does
connect not have any questionable political connection.
Promoters hold shares in their individual names and there have been
no anti-minority transactions so far.
Promoters are relatively young (under 45 years of age) and have a
Succession planning
professional background.
Total (%)
Concentrated revenues leaves eClerx vulnerable to changes in the
Weaknesses top-5 clients. Rising competition from captives can also be a key
threat.

Strategy
Exhibit 123: eClerx timeline

Year Events
2000 Company incorporated
2001 Sales office set up in the US
Acquisition of Agentica Corp (provided access to Travel and Hospitality verticals; also
2007
strengthened sales presence in Europe)
2007 Listing
Lehman Brothers bankruptcy (Lehman was one of eClerx’s largest clients). eClerx settled
2008
US$1mn dues from Lehman for US$0.56mn.
Agilyst acquisition - entry into the Cable vertical (revenue assurance and customer care
2012
services)
Dell privatisation (the largest client) followed by cost containment initiatives (growth
2013
stagnation in the account)
Company history
Founded in 2000, eClerx Services Limited (eClerx) is a knowledge process
outsourcing company that specialises in middle and back office support to over 30
Fortune 500 companies. It has five delivery centers and employee strength of over
6,000. Founded by Anjan Malik and PD Mundhra, the company listed in 2007.
eClerx has a distinctive business model where it has created a niche in its domains
(financial services, sales & marketing services and cable & telecom services). It has
evolved execution strategies that: (a) control costs, leading to higher profitability, and
(b) ensure portability of its business model across domains. Mr. Malik leads client
engagement from London, whilst Mr. Mundhra (‘PD’) focuses on operations from
Mumbai.
Evolution
Phase 1: Early days of high growth at a ‘start-up’ (FY02-07)
The founders of the company, Anjan Malik (AM) and PD Mundhra (PD) studied
together at Wharton Business School in the late 1990s. After a few years in their
respective careers (PD with Citibank Mumbai and Anjan with Lehman Brothers, New
York) they decided to start an IT/ITes company.
eClerx’s initial focus was on web content management to which eClerx added more
web-based services such as search engine operations and managing online traffic
amongst others. These eventually formed the ‘Sales and Marketing Services’ (SMS)
vertical for the company. The company got its first big break in 2002 when an
opportunity to bid for web content management to a Fortune 500 company presented
itself. eClerx won the bid against significant competition. Remarkably, eClerx
continues to work with the client till today!
Exhibit 124: eClerx enjoyed a period of high revenue growth and profitability eClerx was named so when the
founders drew up website names
100% 600% that were not taken and it chose
82% the best name still available
78% 500%
80%
400%
60% 50% 47%
42% 300%
40%
23% 200%
20% 15%
5% 100%
3%
0% 0%
Revenue growth (LHS) EBIT margin (LHS) RoCE (RHS)

Strategy
Mr. Malik joined the company full time in 2004. Given his background in finance, Mr.
Malik understood the pain points of the industry. Hence, eClerx began its journey into
the US financial sector with services in data offshoring and analytics. During the
period of strong economic growth in the US in 2004-07, exotic instruments were
booming which led to back-office and processing issues. eClerx grasped the
opportunity and positioned itself as a service provider to financial institutions.
According to eClerx CFO, Rohitash Gupta, Lehman Brothers was amongst the first Lehman Brothers was amongst the
few clients signed up by the company. The company differentiated itself by focusing first few clients signed up by the
on the back/middle office segment in derivatives for clients in the US financial company; the company
services sector. For example, eClerx was the first company to offer post-trade differentiated itself by focusing on
settlement services in financial derivatives. the back/middle office segment in
derivatives for clients in the US
During this phase (FY02-07), eClerx’s revenues grew at a rapid 154% CAGR, as the
financial services sector
boom in US financial services translated into plentiful business for the company. EBIT
margins remained high, as the company’s business model involved the cost arbitrage
between Indian and American salaries. Further, eClerx also began to automate and
create proprietary processes to increase productivity.
“How do you give value addition in a small process?”
– Mr. Rohitash Gupta, CFO, eClerx
A clear example of such visionary thinking was the setting up of eClerx’s Knowledge The Knowledge Management
Management department. According to the company’s CFO, Mr. Gupta, the department at eClerx has 150
management recognised the need for strong training processes as well as value- employees with robust systems that
added services for clients. The company seeded the new department in 2005 to give the company the ability to
strengthen its knowledge management and training led by their then Head of train new employees in one month
Operations, Mr. Hoshi Mistry. The Knowledge Management department at eClerx has and allow for just-in-time hiring
150 employees and robust systems that give the company the ability to train new
employees in a month and allow for just-in-time hiring.
Exhibit 125: eClerx’s revenue concentration was high as of 1QFY08
Percentage of total
revenues
100% 96%
90% 87%
84%
80%
70%
60%
50%
USD revenues North America revenues Top 5 clients
On the flipside, whilst the company grew in size, revenues remained concentrated by
clients, location and currency, as shown in the exhibit above. Whilst eClerx was
providing critical services to its clients with an impressive client roster, it was unable
to materially grow its customer base. The company says it was focused on accounting
mining. This did not serve the company well during the next phase, as discussed
below.
Phase 2: Recovering from the Lehman collapse (FY08-11)

eClerx listed on the bourses in December 2007 after its Initial Public Offering (IPO).
In the following year, the company was directly exposed to the sub-prime mortgage
crises, as its largest customers were financial services majors (including Lehman Despite the gloomy outlook, the
Brothers that accounted for 13% of eClerx’s revenues). eClerx had US$1mn in company did not fire any of its
receivables (~2.5% of FY09 revenues) and was facing the prospect of revenue employees

Strategy
decline. One of the company’s clients went bankrupt whilst two more were acquired
by peers.
However, despite the gloomy outlook, the company did not fire any of its employees.
(although it must be noted that eClerx’s business model operates at 30-40% attrition
which reduced the necessity of downsizing through firing).
“If you are doing core sticky work for your clients, then even in the worst case you will
retain their business because even the acquirer will value your importance. Internally, eClerx was able to retain its
your employees have to be your first priority because those employees who are not relationship with the successor
affected by the crisis look up to the company in times of crisis.” entity of the bankrupt client and
– Mr. Rohitash Gupta, CFO, eClerx with the acquirer entity of clients
that were acquired post the
Lehman crises
Exhibit 126: Business from successor entities helped stem Exhibit 127: eClerx has witnessed significant account
losses due to Lehman bankruptcy mining in the last five years
12 US$ mn Revenues Revenue per Top 5 client account per
10 -1.4 1.3 2,000 month (US$ '000s)
0.4
8
1,500
6
11 10.5
4 1,000
2
500
0
2QFY09
3QFY09
bankruptcy
Other clients
movements
0
Currency
Lehman
successor
4QFY09
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11
2QFY11
3QFY11
4QFY11
1QFY12
2QFY12
3QFY12
4QFY12
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
3QFY14
4QFY14
entity
and
Source: Company filings, Ambit Capital research Source: Company filings, Ambit Capital research
The company performed remarkably well (given the circumstances) in the following
quarters boosted by more account mining and retention of successor entities (please
see the exhibit above). The company was successfully able to replace the Lehman
revenues within a quarter. It retained its business with the successor entity of the
bankrupt client and with the acquiring entities of the merged clients. Moreover,
revenue per top-5 account per month witnessed a 26% CAGR over 4QFY09-
4QFY14.
Exhibit 128: After a dip in 3QFY09, eClerx’s revenue growth resumed Moreover, revenue per top-5
QoQ US$ Revenue Growth account per month has witnessed a
20%
15.5% 26% CAGR over 4QFY09-4QFY14
15% Lehman filed 13.2%
for bankruptcy
8.9%
10% 6.5% 6.0% 6.3%
5% 1.9%
0%
-5%
-4.5%
-10%
Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10
eClerx grew revenues at 41% CAGR over FY08-11. In FY09, despite the collapse of
Lehman, eClerx still clocked a 39% USD-denominated revenue growth. During this
phase (FY08-11), eClerx’s stock price grew at a 58% CAGR, sharply outperforming
the Sensex (8% CAGR over the same period).

Strategy
Phase 3: Revenue growth moderates; Agilyst acquisition (from FY12 to date)

During this phase (FY12-14), eClerx’s revenue CAGR (33%) was below its ten-year
average (44%). Specifically, in FY13, eClerx’s stock price (-18%) underperformed the
Sensex (+8%). This was due to: (a) its capital market business facing demand
weakness and greater competition from larger peers (such as TCS, Cognizant, and
Wipro) and (b) its retail business struggling with the risk of changes to terms of trade
pending the Dell (an SMS client) leveraged buyout.
The company saw weakness in new client additions, and revenue concentration
remained high. To diversify its services, eClerx acquired Agilyst in April 2012. Agilyst
was a niche back-office operational and analytics company focused on the North To diversify its services, eClerx
American media industry. Agilyst focuses on providing revenue assurance and acquired Agilyst in April 2012; like
customer care services to Fortune 500 companies such as Comcast. Agilyst had eClerx, Agilyst relied on domain
revenues of ~US$10mn in FY12 (~10% of eClerx’s FY12 revenues) and had a similar knowledge and automation
operating model as the company. Like eClerx, Agilyst relied on domain knowledge
and automation.
By FY14, eClerx’s integration of Agilyst was on track, with a new middle
management, somewhat reduced dependence on top-5 clients and expansion of
eClerx’s footprint at its largest client. However, revenue growth continued to
moderate, with USD revenues growing ~14% in FY14. Agilyst was the main driver,
with revenues from that business growing at ~35% YoY through FY14. Share prices,
which gained through FY14 due to the INR depreciation, came under pressure from
fears of cable consolidation in the US, with Comcast trying to acquire Time Warner
Cable.
Exhibit 129: The dividend payout ratio has remained high Exhibit 130: EBIT margins and RoCEs remained stable in
Phase 3
70% EBIT and RoCE

Dividend payout ratio
60%
51% 49%
60% 48% 48%
50%
50% 37% 37% 38%
40% 35%
40% 30%
30% 20%
20% 10%
10% 0%
2011 2012 2013 2014
0%
2009 2010 2011 2012 2013 2014 RoCE EBIT margins
However, despite slowing growth during this phase, it must be highlighted that the
company continued to deliver strong return ratios and rewarded its shareholders.
Average dividend payout ratio during FY12-14 was ~41%. Further, as shown in
Exhibit 127 above, revenue per top-5 account per month has recorded a 26% CAGR
over 4QFY09-4QFY14.

Strategy
Historical stock price chart for eClerx

Exhibit 131: eClerx’s stock price has risen at 30% CAGR since listing (December 2007)
1600 `
INR appreciation and US Cable
consolidation pressure
1400
1200
Strong mining of large accounts enabled
1000 eClerx to grow revenues at 32% CAGR over INR begins to depreciate
FY09-12, mitigating the headwind from
Lehman Brothers bankruptcy
800
Lehman Brothers
600 bankruptcy (eClerx had
US$1mn exposure)
400 Revenue growth moderation in Capital markets (~43% of business) and
Sales and Marketing Services (~40% of revenues, largely led by stagnation
in its largest account - Dell) due to deceleration in the pace of account
200
farming. Growth led by strong momentum in its acquired Agilyst business
(up ~50% YoY). The stock price was largely driven by INR/USD movement.
0
Feb-08
Apr-08
Feb-09
Apr-09
Feb-10
Apr-10
Feb-11
Apr-11
Feb-12
Apr-12
Feb-13
Apr-13
Feb-14
Dec-07
Aug-08
Jun-08
Oct-08
Dec-08
Aug-09
Aug-10
Dec-10
Aug-11
Jun-09
Oct-09
Dec-09
Jun-10
Oct-10
Jun-11
Oct-11
Dec-11
Aug-12
Aug-13
Jun-12
Oct-12
Dec-12
Jun-13
Oct-13
Dec-13

Strategy
Rating framework
eClerx scores a total of Four STA` based on the following parameters:
Competitive advantages -
Overall score - : Innovation - , Brands/Reputation - , Architecture - ,
and Strategic asset -
We use John Kay’s IBAS framework to assess eClerx’s competitive advantages:
Innovation: eClerx pioneered the Capital markets mid- and back-office offshoring
model back in the early 2000s. The company does not own any patents, intellectual
property or other strategic assets. Given the ‘commoditised’ nature of its services, it is
likely to face pressure from captives and competitors for market share. As shown in
the exhibit below, eClerx has been unable to increase revenue per employee
materially in the last five years. However, the company’s expertise lies in its strong
domain knowledge, its ability to build processes, its knowledge management system
and its strong relationships with its clients. None of these are easy to replicate.
Exhibit 132: eClerx’s revenue per employee has remained relatively flat
23,000 Revenue per employee per year (US$)
22,000
21,000
20,000
19,000
18,000
17,000
The company continues its automation focus with a technology team that develops
tools and processes even before a project is started. Further, relationships and
domain knowledge cultivated over years are important to the company’s success. The
processes developed by the company are its competitive advantage. Hence the
company scores reasonably well on innovation.
Brands/Reputation: eClerx crossed the US$100mn mark in FY13, more than 10
years since it started business and it remains a mid-tier IT company. It is relatively
well recognised in its segment due to its strong domain knowledge and its ability to
provide critical support at low cost. eClerx’s relationships with clients remain strong,
as shown by its ability to win more business from its top-5 clients.
Exhibit 133: eClerx managed to maintain and grow revenues from its top-5 clients
US$ mn Revenue from top-5 clients

20
15
10
0
1QFY0
2QFY0
3QFY0
4QFY0
1QFY1
2QFY1
3QFY1
4QFY1
1QFY1
2QFY1
3QFY1
4QFY1
9

Strategy
Architecture: eClerx fares poorly on this front given high attrition (which is inherent
in its business model) and given the lack of measures to retain employees. The
company’s core business model relies on managing optimum attrition of its
employees who are usually fresh graduates (average employee compensation of
`0.4mn per annum). As a result, the architecture score of the company lies in the
bottom quartile.
Exhibit 134: Attrition is relatively high to keep a check on employee costs
Attrition of employees (India)

45%
39%
40%
35% 31% 31% 30%
30% 27%
25%
20%
15%
10%
5%
0%
The company has developed training methods and processes to shorten the lead time
of new employees. Knowledge management is a relatively more important element
for its business.
Strategic asset: eClerx’s low-cost offshoring model means its employee
management practices are a key margin driver. Historically, it has been able to
demonstrate its ability to sustain its competitive edge through a low-cost proposition
and domain expertise, a combination of which may be difficult to replicate. The
company scores reasonably well on this front.
Accounting quality
eClerx is in the top quartile of mid-cap IT companies on accounting quality. It scores
well on cash generation (CFO/EBITDA has averaged 71% in the past 10 years) and
robust capital efficiencies.
eClerx’s people business model supports high RoEs (10-year average of 112% and
five-year average of 50%) and high RoCEs (10-year average of 111% and five-year
average of 48%) largely due to superior PAT margins vis-à-vis its peers. eClerx also
performs well on cash conversion cycles (~48 days in FY13; FY11-13 average skewed
due to an unusual FY11) and low volatility on depreciation rates on its tangible assets
(0.1% volatility over FY11-13). On all these parameters, the company ranks in the top
quartile amongst tier-2 IT peers.
Exhibit 135: Summary of accounting checks
Tier 2 peer
Eclerx Divergence (bps)
average
CFO/EBITDA
Average 72% 55% 1,695
Volatility 15% 20% (544)
Cash conversion cycle
Average days 61 50 11
Du Pont Analysis
RoE 52% 21% 3,081
PAT Margins 32% 12% 1,959
Asset Turnover 1.6 1.6 35
Leverage 1.0 1.1 (680)
Tangible asset depreciation
Average 19.3% 9.6% 971
Volatility 0.1% 0.8% (75)
Source: Company, Ambit Capital research; Note: Average refers to FY11-13 average

Strategy
Capital allocation
eClerx scores well on this front as well given the high beat of its RoE over our filter
rate of 15%. Capital allocation decisions have been made sensibly by the
management = funds devoted to capex and funds spent on inorganic growth have
been broadly similar in the past 10 years. eClerx’s management also has a track
record of returning capital to shareholders through high dividend payouts. The
company also proposed a buyback in 2013 but was unable to complete the buyback
as the stock price rose considerably above the buyback price.
Exhibit 136: Cash from operations remains eClerx’s primary Exhibit 137: Capex and expansion in the past 10 years
source of funds have been internally funded
Interest, Increase in Debt
Others cash and repayment
dividend 0% 0%
cash
recd
equivalents
5% 31% Dividend
paid
37%
Proceeds
from shares Purchase of
12% Investments
-
CFO Subsidiaries Interest
83% & Others paid
16% 0%
Purchase of
Fixed Assets
16%
Source: Source: Company, Ambit Capital research. Note: Size of the pie Source: Company, Ambit Capital research. Note: Size of the pie represents
represents cumulative funds raised (through various sources such as CFO, cumulative funds raised (through various sources such as CFO, equity, debt,
equity, debt, etc) and spent (on capex, debt repayment, interest, dividend etc) and spent (on capex, debt repayment, interest, dividend paid, etc) over
paid, etc) over FY04-13 FY04-13
Exhibit 138: List of acquisitions made by eClerx

Date Target Consideration paid
25-Jun-07 Igentica GBP0.85-1.5 mn
04-May-12 Agilyst US$15.75 mn with a variable component ranging from US$ 0-13mn

eClerx is not part of our Connected Companies Index and does not display any
Whilst Mr. PD Mundhra has varied business interests outside of eClerx, none of these
clash with eClerx’s business. Both promoters hold their stake in the company in their
individual names and the holding structure is transparent. Further, whilst the
promoters have other businesses, there are no significant related party transactions.
Name of the Shareholder Number of Shares held ('000) % of total
1 Anjan Malik 7,922 26.3
2 Priyadarshan Mundhra 7,918 26.2
3 Vijay Kumar Mundhra 32 0.1
4 Pawan Malik 24 0.1
5 Supriya Modi 14 0.1
6 Shweta Mundhra 0 -
Total 15,911 52.7

Strategy
As per their FY13 Annual Report, eClerx has four subsidiaries (all of which are 100%
held), including eClerx Investments which holds an ownership stake in Agilyst). eClerx
maintains reasonably high levels of disclosure and transparency, with detailed
investor presentations every quarter.
Succession planning
eClerx’s promoters – Mr. Anjan Malik (age 44 years) and PD Mundhra (41 years) –
are young and currently succession is not a significant issue. The company’s Board
also consists of IT industry professionals and Independent Directors exceed the
mandated limited of 50%. Further, top management has remained stable. Senior
management like Mr. Mistry and Mr. Gupta have been with the organisation for more
than 10 years. Further, our discussions with the management suggest that the
company is making efforts to reward and promote talent internally.
Weaknesses
Client concentration: Whilst eClerx has managed to reduce dependence on its top-
5 clients (share in revenues down from 82% in FY10 to 74% in FY13), concentration
remains high and any weakness in top-5 clients can still impact overall revenue
growth. Further, despite the management’s effort to diversify its revenues, eClerx is
seemingly more adept at account mining rather than new wins.
Exhibit 140: Client concentration
Top 5 clients' proportion of revenue

90% 87%
85% 86%
Possibly enabled by
85% the Agilyst acquisition
80% 78%
75%
75% 73%
70%
65%
4QFY09 4QFY10 4QFY11 4QFY12 4QFY13 4QFY14
Competition from captives: With sustained INR depreciation, the captive centres of
eClerx's key customers have become more price competitive (because captives tend to
follow a cost-plus model). However, creating a robust process-driven organisation is
a challenging process and eClerx’s steps to create strong training processes and
automation would create reasonable barriers in terms of efficiency and productivity.
Slowing momentum: eClerx’s strategy of targeting tier-2 is yielding limited success.
In the SMS segment, its largest client (Dell) is seeing softer traction. Finally, the
intensified consolidation war in the US cable industry can create an overhang in
eClerx’s fastest-growing cable business (given that one of its largest accounts, Time
Warner Cable, is widely speculated to be a takeover target). It could face material
business loss if Time Warner is acquired by Charter Communications (not an existing
client).
Valuation
eClerx is currently trading at 13x/12x FY15/ FY16 consensus earnings. As shown in
the exhibit below, the valuations are currently on par with the historical average of
the company (12.0x one-year forward). Valuations dipped beginning 2012, as
explained earlier, since the company faced challenges around revenue concentration,
demand weakness and increasing competition. However, the valuations have
recovered since.

Strategy
Exhibit 141: eClerx is currently trading at its five-year average earnings multiple
`/ Share
2,000 Current price
1,750 Average PE
1,500
1,250
1,000
750
500
250
0
Dec-09
Mar-10
Jun-10
Sep-10
Dec-10
Mar-11
Jun-11
Sep-11
Dec-11
Mar-12
Jun-12
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Source: Reuters, Ambit Capital research
On a relative basis, eClerx’s P/E is in line with Indian midcap IT services companies. It
trades at a discount to Genpact, an American outsourcing company, possibly due to
differences in scale. Genpact’s FY15 profits are likely to be 5x more than eClerx’s.
Exhibit 142: Valuations are also in line with its peers

Revenue CAGR EV/Sales EBITDA CAGR EV/EBITDA PAT CAGR P/E
Company
In US$ FY11-14 FY15 FY16 IN LC FY11-14 FY15 FY16 In LC FY11-14 FY15 FY16
eClerx 22.6% 3.6 3.2 22.6% 9.0 8.1 27.5% 13.3 11.9
Indian Largecaps
Cognizant 24.1% 2.5 2.1 23.9% 12.2 10.4 18.6% 20.3 17.3
HCL Tech 14.6% 2.6 2.3 47.7% 10.2 8.9 55.6% 14.7 12.9
Infosys 10.8% 3.0 2.7 14.9% 11.1 9.6 15.8% 16.5 14.2
TCS 17.8% 4.8 4.2 30.6% 16.2 14.3 29.6% 21.8 18.9
TechM 39.6% 2.1 1.8 60.2% 9.9 8.4 66.7% 14.3 12.2
Wipro 8.1% 2.9 2.6 14.9% 11.0 9.9 13.6% 15.2 13.6
Mean 19.2% 3.0 2.6 32.0% 11.8 10.3 33.3% 17.1 14.9
Median 16.2% 2.7 2.4 27.3% 11.1 9.7 24.1% 15.9 13.9
Indian Midcaps
eClerx 22.6% 3.6 3.2 22.6% 9.0 8.1 27.5% 13.3 11.9
Hexaware 19.0% 1.6 1.5 76.8% 8.1 7.4 51.5% 12.8 11.3
KPIT 26.9% 1.2 1.1 37.2% 7.5 6.4 37.6% 11.4 9.8
Mindtree 14.6% 1.9 1.6 50.2% 10.2 8.2 63.6% 16.0 12.9
Mphasis NA 1.2 1.1 NA 7.0 6.4 NA 11.1 10.2
NIIT Tech -16.7% 0.9 0.8 -26.7% 10.0 7.9 -41.9% 12.0 8.9
OFSS -2.0% 4.9 4.4 7.6% 12.8 11.2 6.9% 18.6 16.7
Persistent 17.3% 2.2 1.9 39.0% 8.8 7.5 21.0% 15.5 13.2
Polaris 4.6% 0.6 0.6 4.5% 4.4 4.1 -0.5% 9.2 7.6
Mean 10.8% 2.0 1.8 26.4% 8.7 7.5 20.7% 13.3 11.4
Median 15.9% 1.6 1.5 29.9% 8.8 7.5 24.3% 12.8 11.3
Genpact 19.0% 1.8 1.6 15.1% 10.4 9.3 17.2% 17.4 15.3

Strategy
Balance sheet
Year to March (` mn) FY10 FY11 FY12 FY13 FY14
Share Capital 190 289 291 299 302
Share Premium 740 667 696 761 731
Reserves 1,088 1,445 2,451 3,284 4,818
ESOPs 2 3 6 9 9
Net Worth 1,999 2,384 3,432 4,383 5,890
Minority Interest
Loans 0 0 0 0 0
Others (net) 0 2 10 19
Capital Employed 1,999 2,384 3,434 4,393 5,908
Net Block 199 305 444 594 607
CWIP 22 65 45 7 12
Other LT Assets
Investments 775 279 999 352 1,155
Goodwill 101 0 0 754 941
Current Assets 1,366 2,873 3,119 4,292 4,983
Debtors 393 659 422 655 996
Cash & Bank Balance 472 1,515 1,687 2,349 2,406
Loans & Advances 501 698 1,010 1,288 1,581
Current Liab. & Prov 471 1,144 1,182 1,628 2,005
Creditors 67 103 161 225 259
Other liabilities 16 48 108 164 196
Provisions 388 994 913 1,239 1,551
Net Current Assets 895 1,728 1,936 2,663 2,978
Deferred tax asset 7 7 9 23 37
Application of Funds 1,999 2,385 3,434 4,393 5,908
Source: Company
Income statement
Sales 2,570 3,420 4,729 6,605 8,410
Change (%) 30.3 33.1 38.3 39.7 27.3
Cost of Services 1,078 1,190 1,584 2,254 2,743
SG&A Expenses 489 886 1,246 1,806 2,132
EBITDA 1,004 1,345 1,899 2,546 3,535
% of Net Sales 39.0 39.3 40.2 38.5 42.0
Other Income -105 240 223 -181 110
PBT 829 1,494 1,993 2,109 3,314
Tax 93 166 394 393 759
Rate (%) 11.2 11.1 19.8 18.6 22.9
PAT 736 1,328 1,599 1,716 2,555
Extraordinary 0 -103 0 0 0
Net Income 736 1,225 1,599 1,716 2,555
Change (%) 19.1 66.5 30.5 7.3 48.9
Source: Company

Strategy
Cash flow statement

Net Profit Before Tax 828 1,392 1,992 2,110 3,314
Depreciation/amortisation 70 91 129 180 331
(Inc)/dec in working capital (240) (490) (271) (751) (1,328)
Others (52) 27 (129) (5) (110)
Net cash from operations (a) 606 1,020 1,721 1,533 2,206
(Inc)/dec in investments (net) 79 496 (721) 647 (982)
Capex (89) (240) (251) (267) (212)
Others 51 76 139 (729) (213)
Cash flow from inv. (b) 41 332 (832) (349) (1,407)
Inc/(dec) in capital 5 25 33 70 (27)
Dividends paid + dividend tax (389) (335) (758) (597) (874)
Inc/dec in loans - - - - -
Others - - - - -
Financial cash flow ( c ) (384) (310) (725) (527) (901)
Net inc/dec in cash (a+b+c) 263 1,042 163 658 (102)
Opening cash balance 211 472 1,515 1,687 2,349
Exchange difference (3) 1 8 4 -
Closing cash balance 471 1,515 1,686 2,349 2,247
Source: Company
Key ratios
Basic (`)
EPS 24.8 44.1 52.9 56.7 84.5
Cash EPS 28.3 49.4 59.7 68.1 99.7
Book Value 67.3 79.2 113.4 144.9 194.7
DPS 13.1 28.8 23.0 25.0 35.0
Payout %(Incl.Div.Taxes) 53.0 70.8 46.8 49.3 46.4
CFO/EBITDA 60% 76% 91% 60% 62%
Valuation (x)
P/E 49.7 27.9 23.3 21.7 14.6
Cash P/E 43.5 24.9 20.6 18.1 12.4
EV/EBITDA 30.3 22.6 16.0 11.9 8.6
EV/Sales 11.8 8.9 6.4 4.6 3.6
Price/Book Value 18.3 15.5 10.9 8.5 6.3
Dividend Yield (%) 1.1 2.3 1.9 2.0 2.8
Profitability Ratios (%)
RoE 40.3 60.6 55.0 43.9 49.7
RoCE 45.4 50.9 48.8 47.6 48.0
Turnover Ratios
Debtors (Days) 56 70 33 36 43
Fixed Asset Turnover (x) 5.8 5.4 5.4 5.4 5.9
Leverage Ratio
Debt/Equity Ratio(x) 0.0 0.0 0.0 0.0 0.0
Source: Company

Strategy
V-Guard Industries
V-Guard has recorded 28% revenue CAGR and 35% PAT CAGR over FY04-14
due to its leadership in southern India and successful expansion in the non-
southern market through innovative sourcing, competitive pricing, and
expansion of its product portfolio. Whilst V-Guard has successfully increased
its revenue share from 5% in FY08 to 30% in FY14 in the non-south market, it
may face a challenge in expanding its market share further in the non-south
given the dominant position of Havells in north India and of Polycab and
Bajaj in west India. We believe market share gain in the non-south market
coupled with the strength and discipline of the promoter would be the key
drivers for V-Guard going forward.
"Until V-Guard doesn’t get a minimum of 60% of its revenues from north India, I will
not blow my trumpet.”
– Mithun Chittilapilly, Managing Director, V-Guard Industries in an interview with
Ambit (June 2014)
Criteria
3m ADV (US$mn) 0.7
1-year 27%
3-year 40%
10-year DNA
Exhibit 144: V-Guard Industries gets ‘three quarters of the pie’ on our STAR
framework
Whilst V-Guard is ranked 1 in light electricals in
Kerala, it is still not ranked among the top-five players
in the non-south market. Competition in the sector
remains tough.
V-Guard is in the second quartile; expansion beyond
Accounting quality
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 Ambit’s Connected Companies
Centrality of political connect Index and does not appear to have any questionable
The promoter family has other unrelated businesses;
no major anti-minority transactions so far.
Business remains promoter driven, with the second
Succession planning
generation currently in charge.
Total (%)
Use of stabilisers could become redundant in the
future, and beyond stabilisers, V-Guard’s newer
Weaknesses
products are more competitive. V-Guard remains a
regional player.

Strategy
Exhibit 145: V-Guard Industries Limited – timeline

Year Events
1977 Mr. Kochouseph Chittilappilly starts a stabiliser manufacturing business in Kochi, Kerala
1986 Opened branch in Tamil Nadu and Karnataka
1991 Opened branch in Andhra Pradesh
1992 Launched V-Guard Pumps
Converted proprietor business to a public limited company; launched water heaters and wiring
1996
cables
1998 Launched UPS
1999 Launched digital stabilisers; set up cable manufacturing unit at Coimbatore, Tamil Nadu
2000 Turnover crosses `1 bn
2001 Converted company to private limited
2002 Launched solar water heaters
Set up a solar water heater factory and pumps manufacturing facility at Coimbatore; opens
2003
branch office in Delhi
Mr Mithun Chittilappilly (son of Kochouseph) joins as Executive director; launched fans;
2006
opened branches in Pune and Bhubaneswar
2007 Converted company to public limited; opens more non-south branches
2008 Went public by raising `656 mn; increased focus on non-south market
Opens L.T. cable factory at Coimbatore; wires & cable factory at Kashipur, Uttarakhand; water
2009
heaters and fans factory at Kala Amb, Himachal Pradesh
Share of non-south increases from 9% in FY09 to 15% in FY10; V-Guard launches
2010
advertisement campaign at the national level by sponsoring the Kochi team in the IPL
Turnover crosses `10bn; baton is passed over to Mithun with his appointment as the MD; V-
2012
Ramachandran joins as Director (Marketing & Strategy)
Launched induction cooktop, domestic appliances and switchgear; sets up doubles wires
2013
capacity at the Kasipur plant and new solar water heater facility at Perundurai, Tamil Nadu
2014 Turnover crosses `15bn.
Company history
Promoted by Mr. Kochouseph Chittilappilly in 1977, the company is a dominant
player in the south Indian electrical market. Beginning with its flagship product,
voltage stabilisers (in which it is the market leader), the company has, over the years,
expanded its product profile to include PVC insulated cables, large tension (LT) power
cables, fans, geysers, pumps, UPS and inverters. The company, which went public in
2008, currently has four manufacturing facilities apart from tie-ups with various
vendors from whom its sources around 60% of its product portfolio. The company has
been focusing on turning into a pan-India player and has taken appropriate steps to V-Guard outsources manufacturing
increase its presence in other regions of India apart from south India, where it is of 60% of its product portfolio
already in the top-3 across key states such as Kerala, Karnataka, Tamil Nadu and
Andhra Pradesh. Mr. Kochouseph Chittilappilly’s son Mr. Mithun Chittilappilly is
currently the Managing Director of the company.

Strategy
V-Guard’s evolution over the past decade
Exhibit 146: Revenue growth has averaged a high 29% in the past decade, whilst
RoCEs have averaged a robust 27% for V-Guard in the past decade
70% 40%
60% 35%
50% 30%
25%
40%
20%
30%
15%
20% 10%
10% 5%
0% 0%
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Historical stock price chart for V-Guard Industries Limited
Exhibit 147: After a weak start post-IPO, V-Guard’s stock price has multiplied 7.7x since IPO in FY08 driven by the
company’s strong financial performance
1000 `/share
Achieves break-even Crosses `10bn Disappointing
900 in non-south topline in FY13 4QFY13 due to Reported 120%
V-Guard sponsors the inventory write- YoY increase in
Kochi team in IPL PAT in 4QFY14
800
700
600 Baton is passed over

to Mithun (promoter's
Share of non-south younger son)
500 PAT increases
increases to 15% in
FY10 (vs 9% in FY09) by 67% YoY in
400 FY12
300
200
100
0
Mar-08
Sep-08
Dec-08
Mar-09
Sep-09
Dec-09
Mar-10
Sep-10
Dec-10
Mar-11
Sep-11
Dec-11
Mar-12
Sep-12
Dec-12
Mar-13
Sep-13
Dec-13
Mar-14
Jun-08
Jun-09
Jun-10
Jun-11
Jun-12
Jun-13
Jun-14

Strategy
Phase 1: Pre-IPO phase (FY03-09)

V-Guard Industries (V-Guard) began as a Partnership Concern (‘Premiere Electronics’)
set-up by the promoter, Mr. Kochouseph Chittilappilly, in 1977. The company
manufactured voltage stabilisers under the brand name ‘V-Guard’ (V stands for
Voltage). By the time V-Guard was incorporated in 1996, it had added pumps and
water heaters to its product portfolio. When the company went for its maiden Initial
Public Offering (IPO) in 2007, its product portfolio had expanded from stabilisers,
pumps, Uninterrupted Power Systems (UPS) and heaters to include other electrical
products such as fans and cables. V-Guard also started manufacturing its own
products to supplement its trading activity where it sourced products from small-scale
manufacturing units.
However, even in FY08, stabilisers remained the dominant product for V-Guard, “Investment bankers told us, ‘We
accounting for 37% of its revenues and 49% of its profits. Thus, the perception of V- don't handle IPOs less than `3bn’.
Guard was that of a single-product (stabilisers), single-region (south India) company, This was a tough time for us but
with its core product running the risk of becoming redundant, as improvement in the our issue went through. My father
supply of power would reduce the requirement for voltage stabilisers. Additionally, its received support from banks and
IPO size at `656mn was also small, considering the heady days of the noughties bull financial institutions in south
market, with the Sensex rising 47% in 2007. Recalling those days, Mr Mithun India.”
Chittilapilly, Managing Director, V-Guard Industries, told us, “Investment Bankers told – Mithun Chittilapilly on V-
us, ‘We don't handle IPOs less than `3bn’. This was a tough time for us but our issue Guard’s IPO
went through. My father received support from banks and financial institutions in South
India. The retail portion of the IPO was oversubscribed 4.5 times thanks to investors
from our home state of Kerala.”
Even though V-Guard was able to raise funds via the IPO, the stock price was
impacted by the aftermath of the global financial crisis (the Sensex fell 38% in FY09). “When I got married in January
As compared to its issue price of `85/share, V-Guard’s stock price fell to a low of `40 2009, the share was trading at
and bottomed out with the Sensex in March 2009. In a November 2013 Forbes about `40. V-Guard owned land
article, Mr Mithun Chittilapilly stated, “When I got married in January 2009, the share that was valued higher than its
was trading at about ` 40. V-Guard owned land that was valued higher than its market market capitalisation.”
capitalisation.” (Click here) – Mithun Chittilapilly
Exhibit 148: V-Guard’s revenue growth in Phase 1 (FY03- Exhibit 149: V-Guard’s stock price bottomed out along with
09) was below its 10-year average of 27% (in ` mn) the Sensex in March 2009 (share price to the base of 100)
3,500 125
115
3,000 105
95
2,500 20% CAGR 85
75
2,000 65
55
1,500 45
35
1,000
May-08
Sep-08
Nov-08
Dec-08
Mar-08
Apr-08
Jun-08
Jul-08
Aug-08
Oct-08
Jan-09
Feb-09
Mar-09
500
-
FY04 FY05 FY06 FY07 FY08 FY09 V-Guard Sensex
Source: Company, Ambit Capital research Source: Company, Ambit Capital research; Note: We have taken March-08
prices as base of 100 for V-Guard and Sensex

Strategy
Phase 2: Expansion beyond south (from FY10 to date)

V-Guard’s trump card in its attempt to penetrate in the non-south market is
stabilisers. This is because this product is unique to V-Guard, as other electrical
companies such as Havells, Crompton Greaves and Finolex Cables do not sell
stabilisers. With the commissioning of manufacturing units in Uttarakhand and
Himachal Pradesh in FY09 and FY10, V-Guard successfully ramped up its presence
outside the south Indian market. V-Guard’s strong brand name in the south was also
a key factor in signing up distributors. For example, in western regions like
Revenues from the non-south
Mumbai/Thane, Mr. Mithun Chittilapilly told us “We started doing well in places with a
market increased to 21% in FY12
south Indian population like Vashi and Panvel.” Driven by this focused effort, the share
from 5% in FY08
of revenues from regions other than south India increased to 21% by FY12 from 5%
in FY08. With this ramp-up in revenues, V-Guard also achieved breakeven in non-
south in five years. During this phase (FY10-14), V-Guard’s revenues expanded at a
rapid 35% CAGR. Thus, by FY14, V-Guard’s revenues had increased to `15bn in
FY14, a more than 10x rise in ten years from `1.3bn in FY05.
Exhibit 150: Ramp-up in cable production capacities aided Exhibit 151: …and led to higher revenues in Phase 2
expansion in the north…
2,500 375 16
2,000 300 14 35% CAGR

12
1,500 225
10
1,000 150 8
500 75 6
4
- -
2
FY07
FY08
FY09
FY10
FY11
0
Cable sales (Rsm) (LHS)
FY10
FY11
FY12
FY13
FY14
Cable production (m mtrs) (RHS)

Strategy
Rating framework
V-Guard gets a total of Three STARs (out of a maximum of four) based on the
following parameters:
Overall score - Innovation , Brands/Reputation , Architecture , and
Strategic asset
V-Guard’s low scores on competitive advantage are mainly due to the nature of its
largest product and the competitiveness of the light electrical industry. Stabilisers
remain V-Guard’s mainstay, still accounting for 17.5% of revenues and 42% of profits
in FY13. Whilst V-Guard has a monopoly in this product led by its superior quality,
this business is also under threat of redundancy, as improvement in the quality of
power reduces the requirement for voltage stabilisers. The organised part of India’s
light electrical industry remains competitive, with the presence of large players like
Havells, Bajaj Electricals and Finolex. Thus, V-Guard faces stiff competition from these
companies in products other than stabilisers.
Innovation: V-Guard’s products are indigenously manufactured and its stabilisers
are run-of-the-mill, low-technology products. Thus, the company has no patents to
speak of and no technological tie-up that can help it remain ahead of the curve in the
industry. Whilst the company does have a dedicated team to undertake constant
innovations and product improvement, the nature of the industry and ease in reverse
engineering of light electrical products makes the competitive advantage due to
innovation temporary.
Brands/Reputation: V-Guard’s spending on advertising and promotion is similar to
its competitors. In the north, brands like Havells have a significantly stronger brand
name in the consumer electrical industry. Whilst V-Guard has sponsored the Kochi
team in the Indian Premier League (IPL), Havells has also sponsored the tournament
in the past.
Architecture:
(a) Sourcing: Over the years, V-Guard has meticulously built a network of small-
scale manufacturing units for sourcing its stabilisers.
As mentioned in our report in August 2012, ‘Light electricals in the darkness’ V-Guard follows a unique
(Click here) through which we initiated coverage on the light electrical sector, V- outsourcing strategy wherein it has
Guard follows a unique outsourcing strategy wherein it has tied up with around 70 tied up with around 70 charitable
charitable organisations/women’s self-help groups (all based in south India) which organisations that exclusively
exclusively manufacture this product for the company. The advantage of using these manufacture stabilisers for the
vendors is the excise benefit (charitable organisations/women’s self-help groups are company
not subject to excise duty) which provides competitive pricing/margin. The function of
the vendor is to manufacture the products as per the specifications of V-Guard. The
company assists these vendors in the procurement of raw material and also helps
them to maintain quality and testing standards by ensuring the presence of their own
quality inspectors at these units.
Replicating this model in the non-south markets should not be a big challenge, as the
cost of freight is marginal at 1-2% of revenues as compared to gross margins of 35%
(as per the management). Also, the scalability of the south-based vendors will not be
a constraint, as their installed manufacturing capacity can be expanded by as much
as 50% from the current level (currently operating at 70% capacity) through the
introduction of semi-automated machines at a minimal additional capex of `0.5mn-
0.6mn/facility which will be incurred by the vendor and not by V-Guard.
We also note that relative to other products manufactured by electrical companies,
stabilisers are the most labour-intensive. Hence, if organised players want to be
competitive against the unorganised players, the only way out is to outsource
production, as this would reduce the labour cost by at least 50%. This is not easy V-Guard manages more than 70
because: (a) It requires significant time and effort to build and maintain a large vendors to generate a topline of
`2bn

Strategy
vendor network. For instance, V-Guard manages more than 70 vendors to generate a
topline of `2bn, implying a turnover of `30mn per vendor. (b) Relative to the other
organised players (Blue Bird and Everest), V-Guard’s brand is far stronger, owing to
its pan-India presence and brand recall post its successful advertising campaign in
the Indian Premier League.
Furthermore, our discussions with unlisted electrical companies suggests that V-
Guard has limited competition from Everest in the north, given that Everest is more of
a regional player (based in Chennai) with a limited presence in the north. The only
competition in north India in voltage stabiliser is from Blue Bird (based in Delhi).
However, Blue Bird is more focused on the industrial side, according to our primary
data experts. The firm is known for its industrial stabilisers (like Servo and constant
voltage stabilisers) which are used in IT parks, call centres, X-ray machines, ECG
machines, CT scans, etc.
(b) Community: V-Guard’s founder, Mr. Kochouseph Chittilappilly, is a community
leader in Kerala. His goodwill was on display during the IPO when financial
institutions, high net worth individuals, retail, etc., from Kerala helped sail him to Mr Kochouseph has also earned a
through the issue. The closely knit groups of SHGs in Kerala thus have a long- good reputation post the donation
standing relationship with the Chittilappilly family. Mr Kochouseph has also earned a of his kidney to a truck driver
good reputation post the donation of his kidney to a truck driver. He is at the
forefront of the organ donation movement in Kerala.
(c) Employees: Loyalty within employees was built during the IPO when promoters
kept aside 5% of the issue for all employees. “Right from driver to senior
management. Thus, everybody participated when the stock price went up. This created
huge goodwill and helped us retain talent.” stated Mithun Chittilappilly. V-Guard has
granted employee stock options of 3.1% (out of which 1.3% pertains to senior
management) of FY14 share capital under the 2013 ESOP scheme.
Strategic Asset: V-Guard’s unique sourcing strategy in stabilisers remains a strategic
asset and enables the company to scale up production easily as demand grows.
Accounting quality
V-Guard is in the second quartile for accounting quality within its peers, as its
expansion outside the southern region of India has depressed cashflows in
comparison to its peers.
Whilst the company’s cash conversion (CFO/EBITDA) has historically been negative,
the ratio in FY12 not only turned positive but exceeded EBITDA (ratio was 106%).
Further, in FY12, the company performed well related to its peer group on the
following: (a) number of transactions with related parties was low, (b) the ratio of
contingent liabilities remained low (at around 5% of net worth), and (c) loans and
advances as a percentage to net worth (at 13%) was also one of the lowest amongst
its peers.
V-Guard’s cash conversion will also improve as it launches vendor financing. Unlike
Havells which has successfully launched channel financing, we believe V-Guard is
better off choosing vendor financing. This is because its vendors are small-scale
industrial units which come under priority sector lending for bankers and hence get
lower interest rates. Also, delinquency risk is lower given that the payment to the
bank is to be made by V-Guard (as compared to the dealer in the case of channel
financing).

Strategy
Exhibit 152: V-Guard is placed in the second best quartile

V-Guard Bajaj Havells TTK Finolex Quartile
Average over FY08-13
Pre-tax CFO/EBITDA (%) 42% 86% 102% 103% 85%
Receivable days 54 113 12 39 21
Inventory days 62 36 53 51 49
Payable days 34 81 45 32 20
Average over FY11-13
Change in Depreciation rate (bps) 2 (29) 56 (11) 7
L&A as % of net-worth 13.3% 28.4% 5.5% 38.7% 11.6%
L&A to related party as % of net-worth 0.0% 5.3% 0.0% 0.0% 0.4%
% of debtors outstanding over six
1.6% 28.1% 4.7% 3.7% 8.4%
months
% provision on debtors 1.0% 1.5% 2.9% 1.8% 1.7%
Average Quartile
Capital allocation
V-Guard scores well on this front: (a) V-Guard’s RoCE for the past 10 years at 27% is
significantly higher than our filter rate of 15%; (b) the company has not diversified
into low-margin businesses for the sake of growth; (c) expansion outside the south
has already achieved breakeven; and (d) V-Guard’s dividend payout has remained
healthy at 33% of profit since listing.
V-Guard does not score well on our capital allocation matrix because the company
has been unable to fund capex through internal accruals (capex/CFO over the past
ten years has been 1.4x). However, as ~33% of the total capex outlay of the past ten
years was consequent to the successful IPO, we do not see this as a concern.
Exhibit 153: Debt forms the largest component of funds Exhibit 154: High spend on capex to fund rising growth
raised over the past decade (FY04-13) momentum (FY04-13)
Investments
(net), 3%
CFO, 32% Others, 6%
Debt, 47% Dividend,
27%
capex, 45%
Capital Interest,
Interest, raised, 19% 23%
dividend
recd, 2%
etc) and spent (on capex, debt repayment, interest, dividend paid, etc) in the etc) and spent (on capex, debt repayment, interest, dividend paid, etc) in the
past 10 years past 10 years
V-Guard earns attractive RoCEs because ~60% of its product portfolio is fully
outsourced to vendors (primarily based in India) which translates into higher asset
turns for the company. Interestingly, despite its outsourcing model, the company’s
EBITDA margins have held up. Higher RoCE due to the outsourcing model has been
the case with all light electrical companies. We believe cheaper labour cost, timely
delivery and longer credit periods offered by vendors are the reasons for outsourcing.

Strategy
Exhibit 155: Strong asset turns translates into strong RoCE for V-Guard (chart pertains
to FY14; asset turnover on RHS)
100% 12
80% 10
8
60%
6
40%
4
20% 2
0% 0
Havells Finolex V-Guard Bajaj
RoCE (%) EBITDA margin (%) Asset Turnover (X)

V-Guard is not part of our Connected Companies Index and does not display any
Wonderla Holidays and V-Star
Whilst V-Guard remains the largest company for the Chittilapilly family, it is also
Creations are two unrelated
involved in other businesses such as theme parks (Wonderla Holidays, which was
businesses of the promoter
listed in May 2014) and garments (V-Star Creations). So far, there 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.
Name of the Shareholder No. of Shares held (m) As a % of grand total
1 Kochouseph Chittilappilly 7.4 24.68
2 Sheela Kochouseph 3.3 11.12
3 Arun K Chittilappilly 4.0 13.30
4 Mithun K Chittilappilly 5.1 17.05
Total 19.7 66.16
Succession planning Mr. Mithun Chittilapilly is only 33

Whilst V-Guard does not have an explicitly stated succession plan, Mr. Mithun years old and took over from his
Chittilapilly is only 33 years old and he took over from his father as the Managing father as the Managing Director in
Director in FY12. V-Guard remains a promoter-driven company, but it has also FY12
attracted talent from larger companies. V. Ramachandran, who is on the Board, has
worked with Hindustan Unilever and LG India.
Apart from being a promoter-driven company, V-Guard scores low in the succession
planning matrix because:
 Mithun joined V-Guard at a young age of 26 years in 2006 directly as executive
director rather than making his through various middle-level roles.
 Whilst other companies in the matrix have a majority of independent directors on
the board, V-Guard scores low with only 50% of independent directors. Also,
none of the independent directors have a background in the light electrical
industry.
However, despite the low score on this front, we believe the strength and the
discipline the promoter has shown in running the company is laudable. Mithun who is
a post graduate in finance from the University of Melbourne, Australia, has proven
himself in the past eight years. V-Guard’s revenues have registered a CAGR of 37%
since the time he joined V-Guard. Moreover, he played a pivotal role in executing the
public issue during the difficult times of 2008.

Strategy
V-Guard could be a multi-bagger in the

long term
We believe V-Guard is likely to re-create the impressive past performance
for the next 5 years at least due to:
 Expansion of market share in non-south: Despite the dominant position of
Havells, Bajaj and Polycab in the non-south market, V-Guard has been
successfully entering the non-south market (share of non-south revenues Revenue share of non-south has
increased from 5% in FY08 to 30% in FY14). The market share of V-Guard in the increased from 5% in FY08 to
non-south market still remains low, as the size of the non-south market is 4.0x 30% in FY14
the size of the southern market. V-Guard is well placed to gain market share
from the leaders in the non-south market, due to: (a) an aggressive sales push in
comparison with the incumbents in the non-south market, as suggested by our
channel checks; (b) leveraging dealer contact of the recently joined senior
marketing staff in the non-south market who have strong relationships with the
light electrical dealers since more than a decade. Our discussions with industry
participants suggest that V-Guard is successfully attracting talents from the
incumbents.
Increase in the market share of the non-south market will not only drive the
revenue growth but also provide enough room for margin expansion, as the non- V-Guard’s non-south margins are
south margins for V-Guard are ~350bps lower than the south margins (industry ~350bps lower than its southern
level margins are identical in the south and non-south market). The lower margin market margins
in the non-south market is due to the additional discount to distributors to
compensate for the absence of scale. However, the revenue per distributor is
rising in the non-south market, and consequently, V-Guard’s ability to negotiate
better terms with non-south distributors are improving.
Exhibit 157: Whist the revenue per distributor in south India Exhibit 158: …the revenue per distributor in the non-
has registered a CAGR of 21% over FY08-14… south market has posted a CAGR of 47% over FY08-14
140 CAGR of 21% 45 CAGR of 32%
120 over FY11-14 40 over FY08-11
35
100 CAGR of 21% CAGR of 63%
over FY08-11 30 over FY08-11
80 25
60 20
40 15
20 10
5
-
-
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Sales per distributor (Rsmn) Sales per distributor (Rsmn)
 Diversification of product portfolio: V-Guard was primarily a stabiliser

company until the early 2000s. However, in the past two decades, it has
diversified into a wider range of products in the light electrical space. V-Guard
has not only added new products but also has expanded them into sizeable
revenues. For instance, Large tension (LT) wires which were launched in FY10
registered a revenue of `709mn in FY14. Over the last three years, V-Guard has
added induction cooktops, domestic appliances and switchgears to its product
offering. Strong brand recall, aggressive marketing and effective sweating of the Large tension (LT) wires which
distribution channel has helped the company in product additions. Given the past were launched in FY10 registered
trend, there are very few reasons to believe that V-Guard would not be successful revenues of `709mn in FY14
in the new product categories. If the company successfully continues to introduce
new products and gains market share in the recently launched product, we
believe V-Guard could show positive surprise in its earnings and revenue growth.

Strategy
Exhibit 159: V-Guard has a diversified product range (`mn)

Electronics
Stabilisers 938 968 1,220 1,667 2,006 2,378 2,664
UPS - - 180 272 421 483 363
Inverters - - 87 216 727 1,733 1,477
Total 938 968 1,487 2,155 3,154 4,594 4,504
Electromechanical
Pumps 561 662 764 1,212 1,515 2,053 2,022
Housing wires 596 695 1,199 2,061 2,779 3,735 4,757
LT cables - - 152 410 570 728 709
Water heater 271 331 362 600 863 1,103 1,358
Fans - - 254 532 638 797 1,024
Others (includes induction
- - - - - 268 410
Cooktops, switchgears, etc)
Total 1,428 1,688 2,731 4,815 6,364 8,684 10,280
Others
Solar water heater 125 155 163 213 257 325 393
Others 80 160 160 80 160 - -
Total 205 315 323 293 417 325 393
Total Revenues 2,571 2,971 4,541 7,263 9,935 13,603 15,177

 Superior strength of management: As highlighted in the architecture section

and succession planning section, V-Guard has a strong and disciplined promoter
background. Mr Kochouseph Chittilappilly commands tremendous goodwill in
Kerala and so does his family (including Mithun). An investment banker has
highlighted that the promoter has aggressive return targets for investments which
is corroborated from the fact that the groups’ other company’s returns, Wonderla
(an amusement park company) earned an RoE of 31.0% in FY13 vs 14.1% for Pan
India Paryatan (Essel Worlds’ holding company) and 10.5% for Walt Disney
(amusement parks in USA, France, Hong Kong, etc.).
Even our own experience suggests that the promoter has a major focus on
expanding the company. In the past three years, our team has approached Mr
Kochouseph many times to get a block deal for our clients; however, every time
he has rejected the idea of any stake sale/equity dilution, citing strong confidence
in the fortunes of the company in the future.

Strategy
Why the near-term outlook is also good?

We expect V-Guard to deliver EPS CAGR of 25% over FY14-16 due to:
 Strong growth in pumps and stabilisers given a strong summer season: We expect
a growth of 20% and 17% in pumps and stabilisers as compared to 0% and 10%
in FY14 respectively.
 100bps higher EBITDA margins in FY15 vs FY14 given that stabilisers enjoy
higher EBITDA margin: the FY13 EBITDA margin for stabilisers was at 18.3% vs
the company’s blended margin of 8.1%. Stabilisers contributed 40% of V-Guard’s
FY13 EBITDA.
 Strong growth in inverters given the weak monsoon in FY15: Power outages
increase, especially in south India, due to poor monsoons, as the contribution of
hydro power during the monsoons in the south is as high as 33% of overall power
generation.
 Gross margin expansion of 100bps due to softening raw material prices.
Our DCF-based fair value of V-
Guard is `710/share which implies
Our DCF-based fair value of V-Guard is `710/share which implies 19.4x FY16 P/E, a 19.4x FY16 P/E
93% premium to its five-year historical average. However, given the strong revenue
CAGR of 16% over FY14-16 and improvement of RoE from 24.3% in FY14 to 26.2%
in FY16, we remain BUYers on the stock.
Relative valuation: At CMP, the stock is trading at 17.4x FY16 P/E, a 5% premium
to its peers and 74% premium to its five-year average. On comparison with Havells it
On comparison with Havells, V-
trades at an 18% discount on FY16 P/E despite higher FY14-16 EPS CAGR of 27% vs
Guard trades at an 18% discount
Havells’ 19%. Whilst Havells’ FY16 RoE of 30% looks impressive to V-Guard’s 26%,
on FY16 P/E despite higher FY14-
there are multiple levers for V-Guard to improve its RoE once it achieves scale in the
16 EPS CAGR of 27% vs Havells’
non-south market. Note that Havells is the closest peer to V-Guard, as both the 19%.
companies have a diversified range of products in light electricals, with a limited
presence in unrelated business. Finolex is a single product-line company, with
electrical wires accounting for a revenue share of 87%; Bajaj is not a complete light
electrical company, with its E&P business accounting for a revenue share of 28% in
FY14. The only segment where V-Guard’s and TTK Prestige’s product portfolio
overlaps is induction cooktop, which accounts for less than 2% of V-Guard’s
revenues.
Exhibit 160: V-Guard is trading at an 18% discount to Havells on FY16 P/E
CAGR
CMP Mcap P/E P/B EV/EBITDA RoE (%)
(FY14-16)
Company INR US$mn FY15 FY16 FY15 FY16 FY15 FY16 FY14 FY15 FY16 Revenue EPS
Finolex Cables 202 515 13.5 10.3 2.4 2.1 10.2 7.8 20.5 19.3 22.1 23.8 23.4
Bajaj 339 563 16.7 12.7 3.9 3.2 9.0 7.2 (0.7) 25.7 27.7 20.2 NA
TTK Prestige 3,784 737 29.9 22.3 7.2 6.7 19.5 14.9 22.8 23.2 29.5 23.4 33.5
Havells 1,189 2,484 24.8 21.3 7.2 5.9 16.0 13.9 29.9 31.2 30.0 10.5 18.9
V-Guard 640 318 20.3 17.4 4.9 4.2 12.8 11.2 24.3 26.7 26.2 16.0 26.9
Average (excl. V-
21.2 16.6 5.2 4.5 13.7 10.9 18.1 24.9 27.3 19.5 25.3
Guard)
Divergence -4% 5% -5% -8% -6% 2% 620bps 180bps -110bps -18% 6%
Source: Bloomberg, Ambit Capital research, Note – valuation as on 9 July 2014

Strategy
Exhibit 161: V-Guard is trading at a 73% premium to its five-year average one-year
forward P/E
830 19x
730
630 15x
530
11x
430
330 7x
230
130 3x
30
Apr-09
Oct-09
Apr-10
Oct-10
Apr-11
Oct-11
Apr-12
Oct-12
Apr-13
Oct-13
Apr-14
Catalysts:
Pick-up in realty sector: A pick-up in the realty sector in 2HFY15 augurs well for V-
Guard, as new houses aid in a demand pick-up. Electrical wires, stabilisers, investors
and fans would be the key beneficiaries of a pick-up in real estate demand.
Weak monsoon: A weak monsoon and an extended summer season augur well for
stabilisers, fans, pumps and inverters, which account for more than 65% of V-Guard’s
FY14 EBITDA.
Risks:
Redundancy of core product: Stabilisers remain a product for power quality
deficiencies. As India improves its power supply over the years, the requirement for
voltage stabilisers could come down.
Still a small player in non-south market: The light electrical industry in India has
strong regional brands: Havells dominates north India whilst Polycab and Bajaj
Electricals dominate west India. Hence, V-Guard would face a tall task to gain market
share in north and west India.
Low credit cycle: V-Guard lacks bargaining power with vendors manufacturing
stabilisers, as it cannot afford to delay payments given their 100% dependence on the
company. Hence, the creditor days for V-Guard are the lowest amongst its peers.

Strategy
Balance sheet
Cash 34 150 28 149 548
Debtors 1,478 1,988 2,121 2,498 2,816
Inventory 1,574 2,486 2,525 3,147 3,564
Loans & advances 215 454 381 593 682
Other Current Assets 0 2 1 1 1
Investments - - - - -
Fixed assets 1,341 1,470 1,662 1,794 2,051
Miscellaneous - - - - -
Total assets 4,643 6,549 6,718 8,182 9,661
Current liabilities & provisions 1,478 2,282 2,473 3,173 3,761
Debt 1,049 1,574 992 992 992
Other liabilities - Deferred Tax
9 79 95 95 95
Liability
Reserves & surpluses 1,808 2,315 2,859 3,623 4,515
Total networth 2,106 2,613 3,158 3,921 4,813
Net working capital 1,790 2,646 2,554 3,064 3,300
Net debt (cash) 1,016 1,425 964 843 444
Income Statement
Operating income 9,936 13,602 15,176 17,755 20,418
% growth 36.7 36.9 11.6 17.0 15.0
EBITDA 1,225 1,099 1,226 1,598 1,838
% growth 67.6 (10.3) 11.5 30.4 15.0
Depreciation 97 114 120 168 193
EBIT 1,128 985 1,106 1,430 1,645
Non-operational income /
24 36 48 36 44
Exceptional items
PBT 982 822 943 1,327 1,549
Tax 184 193 241 332 387
Reported PAT 798 629 702 995 1,162
Adjustments - - - - -
Adjusted PAT 798 629 702 995 1,162
% growth 98.7 (21.2) 11.6 41.8 16.8

Strategy
Cash flow statement

PBT 692 822 943 1,327 1,549
Depreciation 97 114 120 168 193
Interest 170 180 191 139 139
Tax (157) (255) (189) (332) (387)
(Incr) / decr in net working capital 30 (772) (23) (510) (236)
Others (1) 16 66 - -
Cash flow from operating
830 105 1,108 792 1,258
activities
(Incr) / decr in capital expenditure (293) (253) (324) (300) (450)
(Incr) / decr in investments 7 - 25 - -
Others 8 - 19 - -
Cash flow from investing
(277) (253) (280) (300) (450)
activities
Issuance of equity - (2) - - -
Incr / (decr) in borrowings (303) 560 (567) - 0
Others (287) (310) (359) (370) (409)
Cash flow from financing
(590) 248 (926) (370) (409)
activities
Net change in cash (37) 100 (98) 122 399
Ratio Analysis
Year to March (%) FY12 FY13 FY14 FY15E FY16E
EBITDA margin 12.3 8.1 8.1 9.0 9.0
EBIT margin 11.4 7.2 7.3 8.1 8.1
Net profit margin 8.0 4.6 4.6 5.6 5.7
Return on capital employed 29.3 20.6 19.9 23.7 23.0
Return on equity 41.7 26.7 24.3 28.1 26.6
Current ratio (x) 2.2 2.2 2.0 2.0 2.0
Valuation Parameters
Year to March FY12 FY13 FY14 FY15E FY16E
EPS (`) 26.7 21.1 23.6 33.4 37.7
Book value per share (`) 70.6 87.7 106.0 131.6 156.3
P/E (x) 23.9 30.3 27.2 19.2 17.0
P/BV (x) 9.1 7.3 6.0 4.9 4.1
EV/EBITDA (x) 16.4 18.3 16.4 12.6 10.9
EV/Sales (x) 2.0 1.5 1.3 1.1 1.0
EV/EBIT (x) 17.8 20.4 18.2 14.0 12.2

Strategy
Mayur Uniquoters Limited

Mayur Uniquoters’ capacity leadership (both scale and quality) and strong
relationships with Indian footwear manufacturers, domestic and global auto
OEMs, set it apart in the fragmented Indian synthetic leather industry.
Continuous capacity expansion, improving quality and rising exports focus
(60% CAGR over FY09-13) not only led to 29%/39% sales/EBITDA CAGR over
FY05-14 but more importantly led to sharp RoCE improvement (to 51% in
FY14 as against 16% in FY05). Rising supplies to global OEMs (tie-up with
Ford and Chrysler and likely addition of BMW and GM) provides visibility for
future volume growth alongside premium realisations. The stock is trading at
16.6x FY16 EPS; consensus estimates imply 25% EPS CAGR over FY14-16.
"They can produce material of European standards in India."
– Rajan Gandhi, RP Autostyles, a Delhi-based car-seat manufacturer who buys
artificial leather from Mayur Uniquoters (May 2013) (Source:
http://www.outlookbusiness.com/article_v3.aspx?artid=285339)
Criteria
3m ADV (US$mn) 0.2
1-year 260%
3-year 107%
10-year 90%
Source: Bloomberg, Ambit Capital Research
Exhibit 163: Mayur Uniquoters — ‘Full pie’ on our STAR framework

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

Strategy
Exhibit 164: Mayur Uniquoters - summary of key events

Year Events
1992 Company incorporated, started production in Rajasthan
1994 Listed as a public limited company
2000 Started exporting to Sri Lanka, Mauritius and South Africa
2002 ITID - Quality excellence award
2004 New coating line commissioned; 60% increase in installed capacity
2005 Increased product line in upholstery and furnishing
2006 Installation of online embossing machine; ISO 9001:2000 registration
2008 Commissioned third coating line; production increased by 36%
2009 Tied up supply agreements with global OEMs like Ford and Chrysler
2009 Sales cross `1bn; RoCE improves to 31% from 17% in FY05
2011 Sales cross `2bn; RoCE improves to 68% from 31% in FY09
2011 Commissioned fourth coating line
2012 Sales cross `3bn; selected as Forbes Asia top 200 under US$1bn enterprise
2013 Backward integration: Commissions knitted fabric plant (0.6mn metres)
2014 Sales cross `4bn; WestBridge buys 11% stake
Company profile
Mayur Uniquoters, India’s largest synthetic leather manufacturer, has built strong
manufacturing capabilities in its two decades of existence (with five Italian coating
lines and addition of the sixth line is likely in FY15). In a seemingly commoditised
business segment, the company built its competitive advantage by: (a) investing in In a commoditised business
high-quality manufacturing capabilities, (b) forging strong relationships with India’s segment, the company built its
largest footwear manufacturers, domestic OEMs and lately with global OEMs. competitive advantage by: (a)
investing in high-quality
The footwear industry comprises more than 50% of the company’s revenues given its
marquee clientele such as Bata, Relaxo, Liberty and the VKC Group. Recent tie-ups manufacturing capabilities, (b)
with global OEMs like Ford and Chrysler has reduced domestic dependency (export forging strong relationships with
contribution increased to 21% of overall sales in FY14 as against 10% in FY10) and India’s largest footwear
confers higher realisations (as compared to footwears and domestic OEMs). The manufacturers, domestic/global
company is in the advanced stages of adding large global OEMs like BMW and GM to OEMs
its clientele, which would further enhance its exports contribution to sales. Apart from
the organised players, the company also supplies artificial leather to mid-to-small-
sized manufacturers of automobile seat-covers and upholstery (~20% of overall
sales).
Exhibit 165: Key segments of Mayur Uniquoters
Segment % of sales Key clients Management/Primary Data commentary
One of the leading south India based footwear manufacturers stated,
Footwear 50% Bata, Relaxo, Paragon, VKC "We source three-fourth of our requirement from Mayur Uniquoters, and
they assure regular supply and quality."
Mayur's management has said, "After Korea-based LG Chemicals, we are
Ford, Chrysler (BMW, GM in the
Global OEMs 20% the only supplier of artificial leather from Asia Pacific to the United
pipeline)
States”.
Mayur’s management has stated: “We are reducing supplies to domestic
Domestic OEMs 10% Maruti, Mahindra, Tata, Ford (India) etc
OEMs as they squeeze us on margins.”
A Delhi-based car seat manufacturer stated: "They can reproduce
Auto replacement and
20% Multiple mid-to-small-sized companies material of European standards in India. Starting from 500 metres per
upholstery
month, we now procure 150,000 metres from them."
Source: Industry Sources, Company, Ambit Capital research

Strategy
Mayur’s evolution explained in four distinct phases

Mayur enjoyed a stellar run in the last ten years, clocking sales/EBITDA CAGR of
28%/33%. The company improved margins to 19% in FY14 (vs 11% in FY04) and
RoCE to 51% (from 24% in FY04). We believe that apart from a strong manufacturing
set-up, the company’s core competitiveness lies in its established relationships with
footwear and OEMs (global and domestic). The company’s growth in the last ten
years should be understood in four distinct phases:
Exhibit 166: Mayur Uniquoters’ evolution
(Rs mn)
Forging domestic Investing for growth Thriving organised footwear+ exports growth
The initial struggle partnerships Sa les CAGR: 32.5%
5,000 Sales CAGR: 8% Sa l es CAGR: 23.0% 80%
Sa les CAGR: 12.8% EBI TDA CAGR:19.5% EB ITDA CAGR : 48%
EBITDA CAGR: 8.3% EBITDA CAGR: 14.7% RoCE a vg: 15% RoCE a vg: 38% 70%
RoCE avg: 12% RoCE a vg: 21%
4,000
60%
3,000 50%
40%
2,000 30%
20%
1,000
10%
0 0%
FY9 6 FY98 FY99 FY00 FY01 FY0 2 FY03 FY04 FY05 FY06 FY0 7 FY08 FY09 FY10 FY1 1 FY1 2 FY13 FY14
Sales RoCE-Pretax-RHS
The initial struggle: 1996-2000

Mayur has invested in high-quality manufacturing capabilities since early 1990s. The
promoter, Mr Suresh Poddar traveled to Germany and Italy, to understand the The fragmented and unorganised
process of high-quality synthetic leather manufacturing; he then set up a nature of the Indian footwear
manufacturing plant by importing all the machinery from Italy (to produce superior industry meant that the company’s
synthetic leather). Whilst footwear was the major client base, the fragmented and superior quality did not fetch
unorganised nature of the Indian footwear industry meant that the company’s superior realisation/margins
superior quality did not fetch superior realisation/margins. Mayur recorded 8% sales
CAGR and 8.3% EBITDA CAGR over FY96-00, and average RoCE remained fairly low
at 12%.
Forging domestic partnerships: FY2000-04

The Indian footwear industry saw two key structural changes during FY98-04: (a) shift
from unorganised to organised (rising acceptance of superior quality and branded Mayur forged strong relationships
footwear led to a requirement of consistent quality and supply of artificial leather) with domestic footwear
and (b) emergence of south India as a major footwear manufacturing hub alongside manufacturers and was the first
the entry of players like VKC and Paragon. organised manufacturer to target
Mayur’s capacity leadership and superior quality helped the company establish the fast-growing south India
relationships with extant footwear manufacturers like Bata. Furthermore, Mayur was footwear industry
the first organised manufacturer to target the fast-growing footwear industry in south
India by ensuring a consistent supply of artificial leather, by training their employees,
etc. As a result, the company established itself as the supplier of choice for these
companies. For instance, VKC continues to source 70-80% of its artificial leather
requirement from Mayur, given its decade-long ties with the company.

Strategy
Investing for growth: FY04-08

The company meticulously planned capacity additions and made sure than capacity
was not a bottleneck as sales picked up. Mayur’s capacity has increased to ~30mn
metres by FY14 from 6mn metres in FY04. It has generated cumulative cash flows of
`1.1bn over the last ten years, out of which it re-invested 80% for capacity additions.The company continuously re-
Furthermore, the company invested in increasing efficiencies (as the OEMs were invested for scale elevation and it
extremely strict about processes in their quality audits) and adopted a three-year doubled capacity in four years; it
road-map for process improvement. also improved efficiencies at the
Mr Manav Poddar stated in a media interview, “We actually copied the culture and plant level and increased supplies
processes of Japanese auto majors. From the blue uniforms that the workers wear, to to domestic OEMs
the safety and productivity slogans displayed across the plant. Our speed of execution
and professionalism has improved in a big way. This transformation is also a major
factor behind the high growth rate we have achieved”.
We believe that the improvement in processes and professionalism has been a major
driver of the company’s ability to attract large OEMs for their artificial leather
requirements. During 2004-08, the company clocked 23% sales CAGR and 19.5%
EBITDA CAGR. However, the company’s RoCE dropped to 15% as against 21% in the
previous phase, due to rising capex investments and a slight drop in EBITDA margin
(higher employee training costs and inability to pass on raw material cost inflation).
Exhibit 167: Mayur generated cumulative CFO of `1.1bn over FY03-13 and re-
invested 80% of it in capacity expansions
(` mn)
500 25
400 CFO
20
300
200 15 FCF
100 10
- Capacity
(mn
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
5
(100) metres)
(200) -
Source: Company Ambit Capital research
Thriving organised footwear industry; higher exports growth: FY08-14

The Indian organised footwear industry recorded a 20% sales CAGR over FY08-14, It tied up with US-based OEMs,
driving revenue growth of well-established players like Mayur. The most important Ford and Chrysler, driving exports
development in this phase was the addition of US car manufacturers, Ford and growth (55% CAGR over FY08-13)
Chrysler, in its clientele. Mayur is the only Indian synthetic leather and margin expansion (19% in
manufacturer and the second manufacturer in Asia Pacific (ex-China) to FY14 against 10.7% in FY09)
supply synthetic leather to US-based OEMs. Post these tie-ups, the company’s
exports grew at a sharp 60% CAGR over FY09-13, taking its export sales contribution
to 21% as against 10% in FY09. Alongside strong sales growth, superior export
realisations resulted in Mayur’s margin expanding to 18.7% in FY14 as against 10.7%
in FY09. The company has reduced supplies to domestic OEMs like Maruti. As per Mr
Suresh Poddar, “sales to Maruti dropped to 35,000-40,000 metres per month from
1,50,000 metres five years back”, given lower realisations. The company has
increased its focus on exports. Mayur’s management highlights that they are in the
advanced stages of adding BMW and GM to its clientele, which will further fuel the
company’s exports growth.
Furthermore, the company is installing a plant to manufacture Polyurethane (PU)
based synthetic leather plant in Rajasthan. PU-based synthetic leather has a closer to
leather feel and fetches premium realisations compared to Polyvinyl chloride (PVC),
which forms the majority of the artificial leather manufactured in India.

Strategy
Exhibit 168: Exports grew at a 55% CAGR over FY08-13… Exhibit 169: …driving realisation growth and margin
expansion
900 25% (` mn)

800 21% 240 20%
Exports
19% 20% (Rs mn) 220
700 18%
16% 200
600
15% 16%
500 10% 180
Exports
400 11% 160
10% as a % 14%
300 10% of sales 140
200 (RHS) 12%
5% 120
100 100 10%
- 0% FY08 FY09 FY10 FY11 FY12 FY13
FY08
FY09
FY10
FY11
FY12
FY13
Realisations (Rs/metre) Exports (% of sales) (RHS)
Strong operational performance driving sharp share price growth

Mayur’s stellar financial performance in the last five years resulted in multiple re-
rating of the company’s stock (165% share price CAGR over the last five years as
against a 22% CAGR over FY04-09). The chart below highlights the key events which
drove the stock price performance of the company.
Exhibit 170: Sharp increase in share price driven by stellar financial performance in the last decade
400
Continued WestBridge
64% sales growth in Fourth coating line sales/exports
350 invests
FY10, 700bps margin commisioned; growth momentum `1.1bn for
300 expansion, RoCE doubled capacity increased and RoCE 11% stake
Tie-up with US- to 64%, with rising scale to 23mn metres expansion
250 based auto and increasing exports from 15mn metres Announcem
Commisioned third manufacturers, ent of fifth
contribution
coating line; capacity Ford and Chrysler coating line
200
increased to 15mn addition
150 metres from 10mn
metres
100
50
0
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14

Strategy
Rating framework
Mayur Uniquoters gets a total of Four STA` based on the following parameters:
Overall score of - Innovation - , Brands/Reputation - , Architecture - , and
Strategic asset -
We use John Kay’s IBAS framework to assess Mayur’s competitive advantages. For
this purpose, we rate the company on several parameters (as described in
Appendices 1 & 2) to judge whether the company has sustainable competitive
advantages.
Innovation
Mayur does not own any process patents or intellectual property rights, and neither
does it have an edge through technological tie-ups with global majors, which will The company does not own
shield it from rising competition. Hence, we do not see a significant entry barrier (due process patents/IP`; however it is
to Mayur’s innovation) from a manufacturing standpoint. ahead of competition in innovation
in terms of design and quality-
That said, primary sources indicate that innovation in terms of designs and additional enhancing features
quality features is a key attribute for a successful franchise. Not only do the clients
require high quality and consistent supplies, they expect the company to
continuously develop new designs and improvise the quality by adding
features like anti-fogging, superior cleaning, flammability, and abrasion
resistance. The company has invested in analytical laboratories and special plant
and machinery, which have enabled it to produce artificial leather which suits the
needs of global OEMs.
The company has established a prototype laboratory which enables the company to
produce 90-100 prototypes every day (the highest amongst Indian artificial leather
manufacturers), which are first sent as samples to clients and then taken up for mass
production. According to the management, providing superior quality samples to the
customers helps the company in garnering larger orders.
Management commentary on innovation

2012 Annual Report
“Mayur’s R&D has developed environment-friendly products for global OEM market
requirements, which will replace conventional solvent-based finishes, eliminating the
use of chemicals which are restricted in US and European markets.”
2013 Annual Report
“Mayur lays significant emphasis on improvements in methods and processes of

manufacturing and operations, thus continuously improving its business through high
quality research and development (R&D) activities. The in-house Research &
Development division of the Company has been recognized by the Department of
Scientific and Industrial Research, Ministry of Science and Technology, Government of
India. In addition to new technologies and formulation, innovations R&D has increased
the consumer value of existing products, product cost reduction and packing
innovations”
“In the forthcoming years, R&D will continue for developing new formulations, cost
control, and Mayur will continue to commercialize its innovations.”

Strategy
Brands/Reputation
Given that Mayur’s business segment is largely B2B, it is difficult to gauge its brand
strength from primary checks. However, we believe the following aspects indicate the
strength of the company’s brand:
a) It is the only Indian supplier to Ford and Chrysler, which is a testament of the
company’s quality and brand perception. Mayur is the only Indian artificial
b) Supplier of choice to large Indian footwear manufacturers like Bata, Paragon, and leather manufacturer to supply to
VKC (meets 70-80% of their artificial leather needs). US based OEMs
c) It supplies to large Indian OEMs like Maruti, Tata, and Mahindra though Mayur is
consciously reducing supplies to them to improve margins.
d) Investment in superior machinery is enabling it to produce artificial leather with
better designs/features than competition (as per a Delhi-based seat cover
manufacturer).
e) Several awards highlight the companies excellence: ITID-quality excellence award
(2002), ISO 9001:2000 registration (2006), Dun and Bradstreet, global database
certificate (2008), Export house certificate from Ministry of commerce (2008), Inc
India 500, Certificate of excellence (2008,2013), and Star export house certificate
(2013).
Architecture
Mayur’s strong relationships with clients are visible through repeat orders (80% from
existing clients, as per management’s estimate) and through the fact that it is the
Mayur received the Best Employer
largest supplier for most Indian footwear manufacturers. Whilst the company does
Award from the Employers
not incentivise its employees through ESOPs, the management highlights that they
Association of Rajasthan in 2011
train the employees through various initiatives, like training for technical and
managerial staff, to improve employee productivity and keep motivation levels high.
In FY13, the company implemented a Global Leadership Development Programme
for senior managerial personnel. Specific human resource steps which highlight
investment in employee training include: (a) leadership development and succession
planning and (b) career planning and job rotation. We highlight that Mayur received
the Best Employer Award from the Employers Association of Rajasthan in 2011.
Strategic asset
We believe the following are the key strategic assets of Mayur:
Size: In a largely fragmented sector (50% of the industry capacity held by
unorganised players), size and economies of scale are a key differentiating factor,
enabling better fixed cost recovery and aiding margin expansion. Mayur is the largest
synthetic leather manufacturer in India (nearest competitor is ~50% of his capacity)
and it is further elevating scale (to 30mn metres in FY15 from 24mn metres
currently). We believe the size of the company enables it to ensure consistent and
timely supplies and instils confidence in OEMs to choose Mayur as their key supplier.
Relationships: Whilst size can be replicated by competition, we believe a more
fundamental strategic asset of Mayur is its well-entrenched relationship with domestic
footwear manufacturers (for over a decade), Indian OEMs (supplies to all major
domestic OEMs) and global OEMs (Ford and Chrysler; in the advanced stages of
adding BMW, General Motors and Mercedes (Daimler). These relationships are
developed over several years (global OEMs take 3-4 years before they empanel an
ancillary supplier, given their strict quality control requirements). We believe this
competitive edge of the company is not easily replicable.
Backward integration for knitted fabric
Knitted fabric is the base on which the chemical rests and constitutes 12-15% of the Backward integration for knitted
raw material costs. The company set up a plant (`250mn investment) for fabric will reduce rejections and
manufacturing knitted fabric for its artificial leather production. This will lead to cost ensure high-quality supply of
savings by reducing the rejection rate (from 7-8% currently to 2-4%) and ensuring knitted fabric
consistent and high-quality supply of knitted fabric to meet the needs of quality-
conscious global OEMs.

Strategy
Management commentary on backward integration in 2013 Annual Report

The company and its employees on 28 September 2012 celebrated the launch of
production of new knitted fabric unit at the Dodhsar plant. With state-of-the-art
knitting machines from Terrot and Mayer & CIE Germany, an interlocking knitting
machine from Fukuhara (Japan) and a brand new Stenter from Bruckner (Germany),
the plant is housed in a building of 75,000 sq ft. The biggest advantage with
backward integration would be availability of good-quality knitted fabric, which is the
basic raw material for the production of synthetic leather. This would support
production of high-quality products, thereby reducing rejections and increasing
margins.
Accounting quality
Given the dearth of listed entities in artificial leather manufacturing (and hence no Mayur ranks 11th in the chosen
major comparable companies), we compare Mayur Uniquoters to 127 mid-cap universe of 127 mid-cap stocks
companies in BSE-500 based on our accounting screener (market cap of `5bn-20bn) (market cap of `5bn-20bn), based
on: (a) Balance sheet mis-statement, (b) P&L mis-statement and (c) cash pilferage on our accounting screener
checks. Mayur ranks 11th in the chosen universe of 127 mid-cap stocks due to
its high CFO/EBITDA (80% conversion ratio), low audit fees (as a percentage of sales)
and no material contingent liabilities.
Capital allocation
Ambit’s greatness framework (refer to Appendix 3 on page 124) identifies companies
that have consistently: (a) invested capital, (b) turned investment into sales, (c) turned
sales into profits, (d) improved balance sheet strength, (e) generated strong free cash
flows, and (f) re-invested for future growth. On these parameters, Mayur’s capital
allocation has been exemplary over the last decade, visible through sharp sales
growth, increase in asset turnover, EBITDA margin and RoCE expansion. We assess
the company’s capital allocation on the five parameters:
a) Investment (Gross block): The company has refrained from hoarding cash and Mayur reinvested 80% of the CFO
has invested 80% of the `1.15bn CFO generated over FY03-13 for capacity for increasing capacities and grew
expansions. As a result, its capacity increased from 5mn metres in FY03 to 23mn sales/EBITDA sharply, leading to
metres by FY13, ramping up further to 30mn metres. material RoCE improvement
b) Conversion of investment to sales: The company’s sales grew at a 28% CAGR
over FY04-14; average asset turnover improved to 3.5x over FY08-14 against
2.4x during 2004-08.
c) Pricing discipline: Mayur’s average EBITDA margin improved to 16.6% during
FY09-14 as against 11% during FY04-08. It has reported an EBITDA CAGR of
33% over FY04-14.
d) Balance sheet: Mayur turned into a net cash company by FY10 (as against a net
debt equity of 0.3x of FY04). However, the net debt/equity has increased to 0.07x
in FY14 due to a debt intake for capacity expansions. Mayur’s RoCE averaged
52% over FY08-14 as against 22% over FY04-08, as a higher scale lead to
margin expansion and improvement in asset turnover.
e) CFO: Mayur generated CFO of `1.15bn over FY03-13; CFO-EBITDA averaged
80% during FY03-13.
Overall, the company’s capital allocation has been meticulous in its core business
and the management has not digressed in unrelated businesses.

Strategy
Exhibit 171: CFO accounted for 81% of cash source over Exhibit 172: Almost two-thirds of funds generated/raised
FY03-13 have been deployed for capacity expansions
Increase in
Interest, cash and
dividend recd cash
4% Debt equivalents, Purchase of
Proceeds Dividend
3% Investments -
14% paid, 19%
Subsidiaries
& Others,
10% Interest paid,
Proceeds
4%
from shares
1%
CFO Net Capex ,

81% 64%
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

Mayur is not part of our Connected Companies Index and does not display any
to have any visible nexus with politicians nor any questionable transactions with State
Mayur’s high score on this metric has been a function of:
a) Prudent behaviour of the Promoter group: Mayur remains the largest Mayur has been fair to minorities
business interest of the promoters, and they have not digressed in other business and has not created a complex
verticals at the expense of the minority. The promoter has not formed unlisted holding structure and has not
subsidiaries and the business is conducted through the listed entity. engaged in material related party
b) No complexity in the holding structure: The promoter does not hold any transactions
shares in the company through unlisted subsidiaries. We have not observed any
material related party transactions hurting minority interests.
c) No material insider transactions: We do note any instances of insider
transactions (selling/buying shares ahead of a corporate announcement).
d) Reasonable management remuneration: Mayur’s management remuneration
as a percentage of PBT average over the last four years was 4.2%, which is fair, in
our view (lower than the 5% threshold, as per the Companies Act).
Exhibit 173: Shareholding of the Promoter and Promoter Group as at 3 April 2014
Name of the Shareholder Number of shares held As a % of grand total
1 Suresh Kumar Poddar 16,264,312 37.6
2 Manav Poddar 7,615,912 17.6
3 Suresh Kumar Poddar 3,451,600 8.0
4 Kiran Poddar 1,150,080 2.7
5 Puja Poddar 970,000 2.2
6 Dolly Bagaria 610,000 1.4
7 Arun Kumar Bagaria 600,000 1.4
Total 30,661,904 70.8
Exhibit 174: Managerial remuneration as a percentage of PBT

Particulars 2010 2011 2012 2013 CAGR FY10-13
Remuneration 9.48 13.86 22.99 27.57 42.75%
PBT 252 375 492 642 36.56%
Rem as % of PBT 3.76% 3.70% 4.67% 4.30% 4.2%

Strategy
Succession planning
Mayur is a first-generation promoter-driven company, wherein the business is largely
built by Mr Suresh Poddar. Later his son, Mr Manav Poddar, and son-in-law, Mr Arun The company has not hired
Kumar Bagaria, were inducted into the board. The company scores low on succession external professionals and there is
planning, as we could not find (through our discussions with the management) any no indication of any explicit
explicit succession planning in place. The company has neither moved for an external succession planning
professional CEO nor has it sought professional help in planning succession. In all
likelihood, Mr Manav Poddar and Mr Arun Bagaria will be leading the business. Our
discussions with industry participants suggest that Mr Manav has ably led the business
since his joining in 2003 and he has developed several manufacturing efficiencies.
He drove the initiative to instate quality control practices of Japanese OEMs over a
three-year period to equip Mayur to deliver high-quality products to its clients.
Weaknesses
Increasing competition in global auto OEM segment
The domestic manufacturers do not pose a material risk to Mayur, given the
company’s market share leadership and well-established relationships. The company
could face stiff competition from global peers (both Chinese manufacturers and
European manufacturers) especially when its supplies to global OEMs ramp up. The
Chinese and European manufacturers are significantly larger is size as compared to
Mayur and could resort to price wars to gain market share.
Management bandwidth
Whilst the company has been efficiently run by the promoter group till now, the
company’s rapid expansion and aggressive entry in export markets would need
enhanced management bandwidth. Given that the promoter group has been largely
driving the business, we believe the company lacks the management bandwidth to
sustain the growth trajectory.
Valuations
Mayur’s multiple re-ratings in the last five years were a function of consistent
earnings growth (and a sharp improvement in RoIC/RoE). The stock is currently
trading at 16.5x FY16 P/E; consensus expects 25% earnings CAGR over FY14-16. We
do not cover the stock.
Exhibit 175: The stock has re-rated multiple times over the Exhibit 176: …driven by strong RoIC/RoE
last four years…
(X) 50%
25
40%
20
30%
15
20%
10
10%
5
0%
0
Jan/10 Jan/11 Jan/12 Jan/13 Jan/14
One-yr fwd P/E 5-yr avg P/E RoIC RoE
Source: Bloomberg, Company, Ambit Capital research Source:, Company, Ambit Capital research

Strategy
Balance Sheet
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 96 113 275 359
Deferred tax liability (net) 17 20 30 36 59
Sources of funds 482 726 1,002 1,496 2,029
Net block including CWIP 231 313 451 547 977
CWIP 3 34 40 189 266
Investments 1 1 117 137 98
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 28 159 179 260 140
Other Current Assets 7 13 35 75 80
Total Current Assets 586 862 1,118 1,449 1,663
Current liabilities and provisions 338 484 723 825 975
Net current assets 248 378 395 623 688
Application of funds 482 726 1,002 1,496 2,029
Income statement
Revenue 1,647 2,486 3,174 3,805 4,696
yoy growth 43.2% 50.9% 27.7% 19.9% 23.4%
Total expenses 1,382 2,087 2,641 3,127 3,764
EBITDA 266 399 533 678 932
yoy growth 122.3% 50.2% 33.6% 27.2% 37.4%
Net depreciation 22 27 39 52 70
EBIT 244 372 494 627 862
Interest and financial charges 13 19 20 24 43
Other income 22 21 17 40 17
PBT 252 375 492 642 837
Provision for taxation 90 122 158 206 269
PAT 162 253 334 436 568

Strategy
Cash Flow statement

PBT 252 375 492 642 837
Others (Including Interest Expense) 7 1 (5) (15) 25
CFO before Change In Working Capital 281 402 525 679 932
Direct taxes paid (83) (141) (142) (194) (269)
Change in working capital 17 (202) (91) (213) 20
CFO 216 59 292 272 684
Net Capex (25) (130) (127) (365) (577)
Net Investments 10 - (117) (19) 17
Interest received 6 8 9 14 -
Dividends Income 0 0 3 12 -
CFI (9) (122) (231) (359) (559)
Proceeds from borrowings (34) 34 (23) 181 149
Interest paid (6) (7) (8) (9) (43)
Dividends paid (including tax) (28) (45) (80) (96) (200)
CFF (69) (18) (111) 77 (94)
Net Increase in Cash 138 (81) (50) (10) 31
FCF 191 (71) 165 (93) 107
Source: Company, Ambit Capital research, Note: All financials pertain to IFRS consolidated accounts
Ratio Analysis
Year to March (%) FY10 FY11 FY12 FY13 FY14
Revenue growth 43.2% 50.9% 27.7% 19.9% 23.4%
EBITDA growth 122.3% 50.2% 33.6% 27.2% 37.4%
PAT growth 167.5% 55.9% 32.0% 30.7% 30.2%
EPS norm (dil) growth 167.5% 55.9% 32.0% 30.7% 30.2%
EBITDA margin 16.1% 16.1% 16.8% 17.8% 19.9%
EBIT margin 14.8% 15.0% 15.6% 16.5% 18.4%
Net margin 9.8% 10.2% 10.5% 11.5% 12.1%
RoCE 47.9% 55.4% 51.9% 47.0% 46.8%
RoIC 52.0% 64.1% 56.3% 43.7% 38.4%
RoE 43.6% 47.3% 43.9% 41.4% 39.3%
Valuation Parameter
P/E (x) 4.8 5.4 7.3 10.2 25.0
P/B(x) 0.2 0.3 0.4 0.9 8.8
Debt/Equity(x) 0.1 0.2 0.1 0.2 0.2
Net debt/Equity(x) (0.4) (0.2) (0.1) 0.1 0.1
EV/Sales(x) 10.3 6.8 5.4 4.5 3.6
EV/EBITDA(x) 63.9 42.6 31.9 25.0 18.2
Source: Company, Ambit Capital research, Note: All financials pertain to IFRS consolidated accounts

Strategy
Appendix 1: John Kay’s IBAS framework

“I don’t want an easy business for competitors. I want a business with a moat around it.
I want a very valuable castle in the middle and I want the duke who is in charge of that
castle to be very honest and hardworking and able. Then I want a moat around that
castle. The moat can be various things. The moat around our auto insurance business,
GEICO, is low cost.”
– Warren Buffett
“I always try and spend the last few minutes… to touch on a competitor, or a company
they do business with, such as a supplier or a customer. Although not all managements
will talk about other companies, when they do, it can be very revealing. The ultimate
commendation is when a company talks positively about a competitor. I always put a
strong weight on such a view.”
– Anthony Bolton, the legendary fund manager who ran the Fidelity Special Situations
fund
Sustainable competitive
Sustainable competitive advantages allow firms to add more value than their rivals advantages allow firms to add
and to continue doing so over long periods of time. But where do these competitive value and continue doing so over
advantages come from? And why is it that certain firms seem to have more of these long periods
advantages than others?
In his 1993 book, ‘Foundations of Corporate Success’, John Kay, the British economist
and Financial Times columnist, wrote more comprehensibly and clearly about this
than any other business guru. John states that “sustainable competitive advantage is
what helps a firm ensure that the value that it adds cannot be competed away by its
rivals”. He goes on to state that sustainable competitive advantages can come from
two sources: distinctive capabilities or strategic assets. Whilst strategic assets can be
in the form of intellectual property (patents and proprietary know-how), legal rights
(licenses and concessions) or a natural monopoly, the distinctive capabilities are more
intangible in nature.
Distinctive capabilities, says Kay, are those relationships that a firm has with its
customers, suppliers or employees, which cannot be replicated by other competing
firms and which allow the firm to generate more value additions than its competitors.
He further divides distinctive capabilities into three categories:
 Brands and reputation John Kay’s framework focusses on
‘Innovation’, ‘Brands’,
 Architecture ‘Architecture’ and ‘Strategic Assets’
 Innovation as sources of sustainable
competitive advantage
Let us delve into these in more detail, as understanding them is at the core of
understanding the strength of a company’s franchise.
Brands and reputation

"A product can be quickly outdated, but a successful brand is timeless."
– Stephen King, American novelist, author & TV Producer
In many markets, product quality, in spite of being an important driver of the

purchase decision, can only be ascertained by a long-term experience of using that
“A product can be quickly
product. Examples of such products are insurance policies and healthcare. In many
outdated, but a successful brand is
other markets, the ticket price of the product is high; hence, consumers are only able
timeless”
to assess the quality of the product only after they have parted with their cash. A few
examples of such products would be cars and high-end TVs.
In both these markets, customers use the strength of the company’s reputation as a
proxy for the quality of the product or the service. For example, we gravitate towards

Strategy
the best hospital in town for critical surgery and we tend to prefer world-class brands
whilst buying expensive home entertainment equipment. Since the reputation for
such high-end services or expensive electronics takes many years to build, reputation
tends to be difficult and costly to create. This in turn makes it a very powerful source
for a competitive advantage.
For products that we use daily, we tend to be generally aware of the strength of a
firm’s brand. In more niche products or B2B products (eg. industrial cables, mining
equipment, municipal water purification, and semiconductors), investors often do not
have first-hand knowledge of the key brands in the relevant market. In such
instances, to assess the strength of the brand, they turn to:
 Brand recognition surveys conducted by the trade press.
 The length of the warranties offered by the firm (the longer the warranties, the
more unequivocal the statement it makes about the firm’s brand).
 The amount of time the firm has been in that market (eg. “Established 1905” is a
fairly credible way of telling the world that since you have been in business for
over a century, your product must have something distinctive about it).
 How much the firm spends on its marketing and publicity (a large marketing
spend figure, relative to the firm’s revenues, is usually a reassuring sign).
 How much of a price premium the firm is able to charge vis-a-vis its peers.
One way to appreciate the power of brands and reputation to generate sustained
profits and hence, shareholder returns, is to look at how India’s most-trusted brands,
according to an annual Economic Times survey, have fared over the last decade. As
can be seen in the table below, over the past decade, the listed companies with the
most powerful brands have comfortably beaten the most widely acknowledged
frontline stockmarket index by a comfortable margin on revenues, earnings and share
price movement.
Exhibit 177: Performance of listed companies with the most-trusted brands
Listed companies with the most-
# Company Trusted Brands* 10-year Growth (FY04-14) (% CAGR)**
trusted brands have beaten the
Revenues EPS Share price*** benchmark index on revenues,
Colgate- earnings and share price
1 Colgate (1) 14 17 27
Palmolive
Clinic Plus (4), Lifebuoy
performance
Hindustan
2 (10), Rin (12), Surf (13), Lux 10 8 15
Unilever
(14), Ponds, etc
Maggi (9), Nestle Milk
3 Nestle 15 16 23
Chocolate (62), etc
GSK
4 Horlicks (16) 15 21 33
Consumer
5 Bharti Airtel Airtel (18) 33 18 15
Average for the listed companies with
18 16 22
the top 5 brands
For the index, Nifty 12 13 14
Source: Economic Times and Ambit Capital analysis using Bloomberg data. Note: * Figures in brackets indicate
the rank in the 2012 Economic Times ‘brand equity’ survey to find the 100 most-trusted brands in India. ** The
FY14 data is based on Bloomberg consensus as on 7 April 2014. *** Share price performance has been
measured from Mar-04 to Mar-14
Architecture
“A dream you dream alone is only a dream. A dream you dream together is reality.”
– John Lennon
‘Architecture’ refers to the network of contracts, formal and informal, that a firm has ‘Architecture’ refers to the network
with its employees, suppliers and customers. Thus, architecture would include the of contracts, formal and informal,
formal employment contracts that a firm has with its employees and it would also that a firm has with its employees,
include the more informal obligation it has to provide ongoing training to its suppliers and customers
employees. Similarly, architecture would include the firm’s legal obligation to pay its

Strategy
suppliers on time and its more informal obligation to warn its suppliers in advance if
it were planning to cut production in three months.
Such architecture is most often found in firms with a distinctive organisational style or
ethos, because such firms tend to have a well-organised and long-established set of
processes or routines for doing business. So, for example, if you have ever taken a
home loan in India, you will find a marked difference in the speed and
professionalism with which HDFC processes a home loan application as compared to
other lenders. The HDFC branch manager asks the applicant more specific questions
than other lenders do and this home loan provider’s due diligence on the applicant
and the property appears to be done more swiftly and thoroughly than most other
lenders in India.
So, how can an investor assess whether the firm they are scrutinising has architecture
or not? In fact, whilst investors will often not know the exact processes or procedures
of the firm in question, they can assess whether a firm has such processes and
procedures by gauging the:
 extent to which the employees of the firm co-operate with each other across
various departments and locations.
 rate of staff attrition (sometimes given in the Annual Report).
 extent to which the staff in different parts of the firm give the same message
when asked the same question.
 extent to which the firm is able to generate innovations in its products or services
or production processes on an ongoing basis.
At the core of successful architecture is co-operation (within teams, across various HDFC and GCMMF are the most
teams in a firm and between a firm and its suppliers) and sharing (of ideas, striking demonstrations of
information, customer insights and, ultimately, rewards). Built properly, architecture architecture in India
allows a firm with ordinary people to produce extraordinary results.
Perhaps the most striking demonstration of architecture in India is the unlisted non-
profit agricultural co-operative, Gujarat Cooperative Milk Marketing Federation Ltd
(GCMMF), better known to millions of Indians as ‘Amul’.
With its roots stretching back to India’s freedom movement, GCMMF was founded by
the legendary Verghese Kurien in 1973. This farmer’s co-operative generated
revenues of `137bn (around US$2.1bn) in FY13, thus making it significantly larger
than its main private sector competitor, Nestle (FY13 revenues of `91bn or around
US$1.5bn). Furthermore, GCMMF’s revenues have grown over the past five years by
21% as opposed to Nestle’s 16% over the same period. In fact, GCMMF’s revenue
growth is markedly superior to the vast majority of the top Indian brands shown in
Exhibit 6.
GCMMF’s daily milk procurement of 13 million litres from over 16,000 village milk
co-operative societies (which include 3.2 million milk producer members) has become
legendary. The way GCMMF aggregates the milk produced by over 3 million families
into the village co-operative dairy and then further aggregates that into the district
co-operative which in turn feeds into the mother dairy has been studied by numerous
management experts.
Not only does the GCMMF possess impressive logistical skills, its marketing acumen is
comparable to that of the multinational giants cited in the table shown above: In key
FMCG product categories such as butter, cheese and packaged milk, Amul has been
the longstanding market leader in the face of sustained efforts by the multinationals
to break its dominance. GCMMF is also India’s largest exporter of dairy products.
So how does GCMMF do it? How does it give a fair deal to farmers, its management
team (which includes the alumnus from India’s best business schools), its 5,000

Strategy
dealers, its 1 million retailers and its hundreds of millions of customers? Although
numerous case studies have been written on GCMMF, at the core of this co-
operative’s success appears to be: (a) its 50-year old brand with its distinctive
imagery of the little girl in the polka red dotted dress; (b) the idea of a fair deal for
the small farmer and the linked idea of the disintermediation of the unfair middle
man; and (c) the spirit of Indian nationalism in an industry dominated by globe
girdling for-profit corporates.
Innovation
“Learning is not compulsory … neither is survival.”
– W Edwards Deming, American statistician, professor, author. The world’s
most famous prize for manufacturing excellence is named after him.
"Innovation distinguishes between a leader and a follower."

– Steve Jobs
Whilst innovation is often talked about as a source of competitive advantage, Whilst most talked about,
especially in the Technology and Pharmaceutical sectors, it is actually the most ‘Innovation’ is also the most
tenuous source of sustainable competitive advantage as: tenuous source of sustainable
 Innovation is expensive. competitive advantage…
 Innovation is uncertain - the innovation process tends to be a ‘hit or miss’.

 Innovation is hard to manage due to the random nature of the process.
Furthermore, even when the expensive innovation process yields a commercially

useful result, the benefits can be competed away, as other firms replicate the
innovator and/or employees who have driven the innovation process tend to extract
the benefits of innovation through higher compensation.
In fact, innovation is more powerful when it is twinned with the two other distinctive
capabilities we have described above – reputation and architecture. Apple is the most
celebrated example of a contemporary firm which has clearly built a reputation for
innovation (think of the slew of products from Apple over the past decade which first
changed how we access music, then changed how we perceive our phones and
finally, how we use our personal computers).
Strategic assets
In contrast to the three distinctive capabilities discussed above, strategic assets are …’strategic assets’ on the other
easier to identify as sources of competitive advantages. Such assets can come in hand are easier to identify
different guises:
 Intellectual property i.e. patents or proprietary know-how (eg. the recipe for
Coke’s famous syrup which is a closely held secret and kept in the company’s
museum in Atlanta, Georgia);
 Licences and regulatory permissions to provide a certain service to the public, eg.,
telecom, power, gas or public transport;
 Access to natural resources such as coal or iron-ore mines;
 Political contacts either at the national, state or city level;
 Sunk costs incurred by the first mover which result in other potential competitors
deciding to stay away from that market eg. given that there already is a Mumbai-
Pune highway operated by IRB, it does not make sense for anyone else to set up
a competing road; and
 Natural monopolies i.e. sectors or markets which accommodate only one or two
firms; for example, the market for supplying power in Mumbai is restricted to one
firm, Tata Power.

Strategy
Whilst strategic assets can come in different forms, all of them result in a lower per Access to captive coal and iron ore
unit cost of production for the firm owning the asset relative to its competitors. For results in more money per tonne of
example, Tata Steel’s decades-old access to coal and iron-ore from its captive mines steel for Tata Steel vs its
allows it to make more money per tonne of steel produced than any other steel competitors due to lower cost of
manufacturer in India. According to Ambit Capital’s analysts, on a tonne of steel production
produced, Tata Steel earns `45,000 vs `39,000 for SAIL and `38,000 for JSW Steel.
Unsurprisingly therefore among the top-50 companies by market cap in India since
the Nifty was launched in 1995, there is only one conglomerate – Tata Sons - which
has had three companies which have been in the index more or less throughout this
period i.e., Tata Power, Tata Steel and Tata Motors.
Upon closer examination, the Tatas are an almost text book case of how to build The Tatas have combined
businesses which, without being the most innovative players in town, combine architecture with brand to create
architecture and brands to great effect, thereby creating robust sources of sustainable robust sources of sustainable
competitive advantages. The group seems to have created at least three specific competitive advantages
mechanisms to ensure that these sources of competitive advantage endure:
Firstly, Tata Sons, an unlisted company (owned by several philanthropic trusts

endowed by members of the Tata family), is the promoter of the major operating Tata
companies and holds significant shareholdings in these companies. Tata Sons’
patient, long-term orientation in terms of building large and robust businesses
gradually has played a major role in the stability of the listed Tata businesses.
Secondly, Tata Quality Management Services (TQMS), a division of Tata Sons, assists
Tata companies in their business excellence initiatives through the Tata Business
Excellence Model, Management of Business Ethics and the Tata Code of
Conduct. TQMS, quite literally, provides the architecture to harmonise practices in
various parts of the Tata empire.
Thirdly, Tata Sons is also the owner of the Tata name and several Tata trademarks,
which are registered in India and around the world. These are used by various Tata
companies under a license from Tata Sons as part of their corporate name and/or in
relation to their products and services. The terms of use of the group mark and logo
by Tata companies are governed by the Brand Equity and Business Promotion
Agreement entered into between Tata Sons and Tata companies.

Strategy
Appendix 2: Questionnaire used to assign

scores based on ‘STAR’ framework
Exhibit 178: Questionnaire used to grade these firms on competitive advantages
Max
Particulars Scoring criteria
Score
Innovation
1 Does the company hold any patents (product, process, IPR, etc)? Yes = 1, No = 0 1
0-5% = 1, more than 5% =
2 What is R&D spend as a percentage of sales? 2
2
3 Does the company have an agreement with a foreign partner for technology? Yes = 1, No = 0 1
4 Has the company won any international awards of repute for innovation? Yes = 1, No = 0 1
5 Does the company use a technology/product/process (mfg, IT, ERP, etc) that none of its competitors use? Yes = 1, No = 0 1
6 Was the company the first to innovate and have competitors copied it? Yes = 1, No = 0 1
7 Was the company the first to enter a market/region? Yes = 1, No = 0 1
8 Does the company have the explicit support of the Government for its technology as an industry standard? Yes = 1, No = 0 1
9
Brands/Reputation
9 What is the ranking of the company in the industry? 1 - 5, 2 - 4, 3-3, 4-2, 5-1 5
10 Does the company spend more than the industry on advertising, sales promotion, and publicity? Yes = 1, No = 0 1
11 Are the company's brands recognised by industry as leaders (through awards, rankings, etc) Yes = 1, No = 0 1
12 Does the company's largest-selling product command a premium? Yes = 1, No = 0 1
13 Does the company offer extended warranties and guarantees that none of its competition does? Yes = 1, No = 0 1
Does the company invest more than competition in training distributors, franchisees, customers, suppliers,
14 Yes = 1, No = 0 1
etc?
15 Does the company hire talent only from the top B-schools? Yes = 1, No = 0 1
16 Does the company use big-ticket brand ambassador that are relevant for its products? Yes = 1, No = 0 1
12
Architecture
17 Does the company treat its employees better than competition (check attrition, ESOPs, etc)? Yes = 1, No = 0 1
18 Does the company spend more than its competitors on training its employees? Yes = 1, No = 0 1
19 Does the company hire internally for its top management position? Yes = 1, No = 0 1
20 Does the company have a culture for firing low performers? Yes = 1, No = 0 1
21 Has the company been featured in any reputed survey such as ‘Best place to work for’? Yes = 1, No = 0 1
22 Are the company's training practices for employees known to be an industry standard? Yes = 1, No = 0 1
Does the company treat its dealers and distributors ostensibly better than competition (schemes, products,
23 Yes = 1, No = 0 1
etc)?
24 Does the company treat its customers ostensibly better than competition (showrooms, product experience)? Yes = 1, No = 0 1
8
Strategic Asset
25 Does the company have a natural monopoly that cannot be corroded by competition? Yes = 1, No = 0 1
1-5 years =1, 5-15 years =
26 In case the company has a foreign partner, how old is the tie-up? 3
2, more than 15 years = 3
27 Does the company have more manufacturing facilities in India than its competition? Yes = 1, No = 0 1
28 Does the company have a larger and stronger dealer network than its competition? Yes = 1, No = 0 1
Does the company hold natural resources (mines, spectrum, etc) that give it a cheaper cost structure than
29 Yes = 1, No = 0 1
competition?
30 Does the company hold more licences that give it a cheaper cost structure than competition? Yes = 1, No = 0 1
31 Does the company have long-term contracts with the Government that give it an edge? Yes = 1, No = 0 1
32 Does the company have a demonstrably cost competitive edge over competition? Yes = 1, No = 0 1
10
Total 39

Strategy
Exhibit 179: Questionnaire used to grade these firms on accounting quality

Max
Score
Top quartile=3, 2nd from top
quartile=2, 2nd from bottom
1 Which quartile does the company fall in vs its peers on accounting quality? 3
quartile=1, Bottom
quartile=0
Total 3
Exhibit 180: Questionnaire used to grade these firms on capital allocation

Max
Score
by 1-5%: 1, by 6-10%: 2,
1 By what margin has the company's average RoCE beaten the 15% benchmark? 4
by11-20%: 3, by 20%: 4
2 Does the company have an explicit policy on target return ratios? Yes = 1, No = 0 1
3 In case the company made a loss-making/lower-margin diversification, did it correct this decision? Yes = 1, No = 0 1
<5-10%: 3, 10-15%: 2, 15-
4 What is the share of the lower-margin business to the overall business in capital employed? 3
25%: 1, >25%: 0
5 What is the share of CFO in money raised over the past 10 years? >50%: 1, <50%: 0 1
<50%: 3, 50-100%: 2,
6 What is the share of capex as a percentage of CFO spent over the past 10 years? 3
>100%: 1
7 For its future capex, does the company plan to broadly stick to its core business? Yes = 1, No = 0 1
8 Have the company's acquisitions been broadly successful (i.e. cash/EPS/RoCE-generative/accretive)? Yes = 1, No = 0 1
How much of cash as a percentage of CFO has been paid back to shareholders in the form of dividends, 50%+: 3, 25-50%: 2, <20%:
9 3
buybacks, etc.? 1
10 Does the company refrain from hoarding cash and hence depressing RoCEs? Yes = 1, No = 0 1
Total 19
Exhibit 181: Questionnaire used to grade these firms on succession planning

Max
Score
50-65 years: 1, more than 65
1 How old is the current Chairman/MD/CEO? 1
years: 0
In case of a second-generation entrepreneur, does the company currently have a professional CEO,
2 Yes = 1, No = 0 1
unrelated to the promoter?
3 Did the company consciously move to a professional CEO from a family CEO in the past 10 years? Yes = 1, No = 0 1
4 Has the company explicitly stated a succession plan? Yes = 1, No = 0 1
Has the company hired a professional consultant or actively sought outside professional help for its
5 Yes = 1, No = 0 1
succession plan?
6 Does the percentage of independent directors to total directors exceed the mandated limit? Yes = 1, No = 0 1
7 Within the independent directors, how many are from the company's core business? >50%: 1, <50%: 0 1
Has the next generation of the promoter worked his way up in the company or inducted directly into the
8 Yes = 1, No = 0 1
Board?
9 Is the company known for grooming, promoting and rewarding talent? Yes = 1, No = 0 1
Has the top management of the company (CEO, Divisional Heads, etc) remained stable over the past 10
10 Yes = 1, No = 0 1
years?
Total 10

Strategy
Exhibit 182: Questionnaire used to grade these firms on treatment of minorities

Max
score
1 Is the listed company the sole business of the promoter? Yes = 1, No = 0 1
2 Does the promoter hold shares directly (not through an unlisted subsidiary) in the listed company? Yes = 1, No = 0 1
3 Is the holding structure of the promoter, family, relatives, etc., transparent and not complex? Yes = 1, No = 0 1
Is the business of the company conducted mainly and primarily from within the listed company? (i.e. no
4 Yes = 1, No = 0 1
complex related parties)
Have all capital-raising issues (including rights, preferential issues, QIPs, etc) been transparent and without
5 Yes = 1, No = 0 1
controversy?
In case the company pays royalty to a majority shareholder, have sales increased faster than royalty in the
6 Yes = 1, No = 0 1
past 10 years?
7 Has the company refrained from merging unlisted subsidiaries with the listed company? Yes = 1, No = 0 1
8 If the company has merged unlisted subsidiaries, has it done so at fair/transparent/market valuations? Yes = 1, No = 0 1
Has the company refrained from demerging/divesting profitable divisions/subsidiaries from the listed
9 Yes = 1, No = 0 1
company?
10 Has the company refrained from repatriating cash from subsidiaries to promoters at the cost of minorities? Yes = 1, No = 0 1
Has the company refrained from setting up unlisted subsidiaries that would compete with the listed
11 Yes = 1, No = 0 1
company?
Has the company refrained from doing transactions with a promoter owned company at unfavourable terms
12 Yes = 1, No = 0 1
to the listed company?
Has the company refrained from giving shares of another company to senior management that would affect
13 Yes = 1, No = 0 1
senior management interest to the listed company?
Have open offers made by the company been concluded without any questions on share price rigging near
14 Yes = 1, No = 0 1
the offer?
15 Do company insiders refrain from indulging in excessive or abnormal insider trading in the company stock? Yes = 1, No = 0 1
Does the company go beyond the mandated disclosure norms and outline its strategy to help minorities
16 Yes = 1, No = 0 1
understand their plans better (examples: detailed MDA, frequent conference calls, analyst meets, etc)?
Total 16
Exhibit 183: Questionnaire used to grade these firms on centrality of political connect
Max
score
1 Is the company excluded from Ambit's ‘Connected Companies Index’? Yes = 1, No = 0 1
Are the promoters, their families and key management personnel demonstrably free from political
2 Yes = 1, No = 0 1
connections?
3 Has the company refrained from making large political donations? Yes = 1, No = 0 1
Is the company free from major litigation (civil, criminal, etc) against its promoters/key management
4 Yes = 1, No = 0 1
personnel?
Are the natural resources owned or bid for by the company (land, spectrum, mines, licences, etc) free from
5 Yes = 1, No = 0 1
litigation?
In case the company depends on contracts from the Government, did it win these contracts purely on merit
6 Yes = 1, No = 0 1
(not just lowest cost)?
7 Does the company utilise all its land for its operations (or does it keep it vacant for long)? Yes = 1, No = 0 1
8 Does the company finish all Government projects on time without asking for major constant cost increases? Yes = 1, No = 0 1
Are all projects properly funded without major questions on source and use of funding (eg, unnecessary debt
9 Yes = 1, No = 0 1
raising)?
Does the company refrain from doing business with any country against which India has ongoing
10 Yes = 1, No = 0 1
tax/political issues with?
Total 10

Strategy
Appendix 3: Summary of our previous

work on ‘greatness’
The ‘greatness’ framework
‘’Greatness is not in where we stand, but in what direction we are moving….’’
– Oliver Wendell Holmes
Over the last few years, we have developed our ’greatness framework‘, a framework We recap some of our work on the
built to analyse the capital allocation decisions of India Inc., which is then used to subject of analysing management
identify structurally sound businesses in India. We study a firm’s structural strengths strategies and their impact on the
by focusing not on absolutes but rather on improvements over a period of time and fate of their firms
the consistency of those improvements. These firms have gone on to become parts of
our very successful ten-bagger portfolios (click here for the latest iteration published
on 26 November 2013) and our Good & Clean portfolios (click here for the latest
iteration published on 22 April 2014). We look for companies, which have over a six-
year period, shown that they can consistently invest in their business and at the same
time generate profits and cash flows.
The framework essentially hinges on using publicly available historical data to assess
which firms have, over a sustained period of time (FY08-13), been able to relentlessly
and consistently: Historically, we have used our
(a) Invest capital; greatness framework to identify
structurally sound businesses in
(b) Turn investment into sales; India
(c) Turn sales into profit;
(d) Turn profit into balance sheet strength;
(e) Turn all of that into free cash flow; and
(f) Invest free cash flows again.
The ’greatness‘ score consists of six equally weighted headings—investments,
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: (1) Percentage improvements in
performance over FY11-13 vs FY08-10; and (2) Consistency in performance over
FY08-13 i.e. improvements adjusted for underlying volatility in financial data.
Exhibit 184: The ’greatness‘ framework
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)

Strategy
The various metrics used to quantify greatness can be seen in the following exhibit:
Exhibit 185: Factors used for quantifying greatness (as used in the 2013 model)
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
5 Cash generation and PAT improvement a. Above median CFO increase (FY11-13 over FY08-10)*
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).
Why do great Indian companies self-destruct?

Whilst the greatness framework was initially built to identify sound businesses in India Over 80% of firms that are great
for our model portfolios, in our thematic published on 7 June 2013, ‘Why do great on our framework slide into
Indian companies self-destruct?’, we used the framework to understand the propensity mediocrity over a five-year
of leading Indian companies to fade away to mediocrity. The note highlighted that: timeframe…
 Over 80% of ‘great’ Indian companies slide to mediocrity in a short span of time
led by poor strategic decision-making fuelled by ’hubris and arrogance‘. Such
faulty strategic decisions usually result in poor capital allocation which destroys
RoCE and creates financial stress.
 The average probability of a sector leader remaining a sector leader five years …thanks primarily to faulty capital
later is only 17%. allocation induced by management
 The average probability of a ‘great’ company becoming a sector laggard five hubris and arrogance
years later is 25%.
Further, in this note, using the work of Jim Collins and William Thorndike, we also
presented a ‘five-stage’ framework to analyse capital allocation to evaluate why great
companies slide.

Strategy
Greatness at ‘risk’
In a follow-up note published on 14 August 2013, we had highlighted specific
markers which investors can use to identify ‘great’ firms which are on the cusp of Is ‘greatness’ at risk for Asian
sliding to mediocrity. Using these markers, we had discussed the risk of greatness Paints, Titan and Sun Pharma
fading for Asian Paints, Titan and Sun Pharma. The markers used were: now?
 Hubris and arrogance: This is the single-largest factor that leads to
deterioration in performance. And this is also one of the markers that is easily
discernible, especially if the analyst or investor has been meeting a particular
company management or its promoters over several years; executives gripped by
this malaise love to ‘talk down‘ to investors and/or outline grandiose visions for
global domination. Other indicators are: an obsession with the trappings of
corporate success and waning investor access to the promoter/CEO.
 Shift in strategy: A dramatic shift in strategic stance is another flag to watch out
for and should be of concern if the rationale for the shift is difficult to decipher or
the same is not well articulated by the company. Our research suggests that
instances of such abrupt changes in strategy are more frequent than investors
would like them to be.
 Inter-generational shift or tension within promoters or change in
management: The handover from one generation to another (or from one CEO
to another) is particularly sensitive. The run-up to this transition and the year
following the change tend to be marked by tussles within the firm around capital
allocation, key personnel and corporate turf.
 Capital allocation: Finally the first three factors discussed above –
overconfidence, abrupt changes in strategy, and tensions within the company –
result in poor capital allocation decisions. The inability of these companies to
successfully re-allocate capital is at the core of why over 80% of successful Indian
companies slide to mediocrity.
Using the greatness framework to identify turnarounds
This set of notes was followed by our 15 January 2014 note, ‘Deep dives into five We have also used the framework
turnaround plays’ where we looked at the other end of the greatness spectrum, i.e. at to identify turnaround plays…
fallen companies that could potentially turn around.
We used the same framework to assess the probability that sector laggards (defined
as firms which fall in the bottom quartile in their sectors) from five years ago are
amongst today’s sector leaders (i.e. they are in the top quartile of their sector). This,
essentially, is the probability of a firm turning around over a five-year timeframe.
We contrasted this against the probability of enduring ‘greatness’ i.e. what is the
probability that sector leaders from five years ago are still sector leaders today. … Bajaj Electricals, Ashok Leyland,
Our analysis (see Exhibit 186) suggested that the average probability of a laggard Britannia, Bharti and Wipro are five
company turning around over a five-year period is far greater than the average firms that we had analysed for
probability of a great company staying great over this timeframe. In effect, our turnaround prospects in a January
analysis highlighted how difficult it is for great Indian companies to endure greatness 2014 note
over meaningful timeframes.
Exhibit 186: Probability of ‘turning around’ vs probability of enduring ‘greatness’
Years
2003-08 2004-09 2005-10 2006-11 2007-12 2008-13 average
Probability that sector leaders in Year-0 stay sector leaders in Year-5? 12% 20% 19% 10% 17% 28% 17%
Probability that sector laggards in Year-0 become sector leaders in Year-5? 37% 23% 42% 39% 28% 34% 34%
Source: Ambit Capital research; Note: 2003-08 indicates the probability in Year-5 (2008) for a sector leader in Year-0 (2003)
The above exhibit clearly shows the probability of a company sustaining leadership is
nearly half the probability of a company turning itself around. Whilst the average
probability of a sector laggard becoming a sector leader five years later is 34%, the
average probability of a sector leader remaining a sector leader is only 17%.

Strategy
Appendix 4: Potential ‘greats’ - Financial

summary
Exhibit 187: Potential 'greats' - Financial snapshot
Sales growth, Change in Change in EBIT EPS growth, Change in
Mcap 3M ADV Float FY14 FY14 EBIT FY14
Company Ticker (FY14 over RoCE (FY14 margins (FY14 (FY14 over RoE (FY14
(US$ mn) (US$ mn) (%) RoCE margins RoE
FY09) over FY09) over FY09) FY09) over FY09)
Marico MRCO IN 2,592 1.3 40.3 14% 30.8 (4.5) 16.1 4.3 19% 30.5 (22.5)
Page Industries PAG IN 1,472 1.0 48.2 36% 66.6 24.7 20.0 1.9 37% 61.2 22.7
Balkrishna Inds BIL IN 1,130 1.0 41.7 22% 18.6 2.6 20.1 5.6 -3% 28.8 3.8
Astral Poly ASTRA IN 631 0.4 36.2 41% 38.8 22.4 12.7 1.6 47% 35.1 18.6
eClerx Services ECLX IN 623 0.8 47.3 34% 64.6 18.6 38.1 0.9 31% 49.7 8.4
V-Guard Inds. VGRD IN 312 0.7 33.8 35% 27.6 7.1 7.3 (1.5) 33% 24.3 10.1
Mayur Uniquote MUNI IN 279 0.2 29.2 32% 52.3 21.6 18.4 9.4 56% 39.0 17.8
Source: Bloomberg, Capitaline, Ambit Capital research
Exhibit 188: Potential 'greats' - Forward-looking data using consensus estimates

EPS CAGR BVPS CAGR
Company name Ticker FY16 P/E FY16 P/B FY16 EV/EBITDA FY16 RoE (est.)
(estimated, 3 yrs) (estimated, 3 yrs)
Marico MRCO IN 23.6 6.0 15.8 13% 25% 29.5
Page Industries PAG IN 34.7 17.0 22.2 29% 35% 55.1
Balkrishna Inds BIL IN 10.1 2.2 7.1 14% 25% 23.1
Astral Poly ASTRA IN 24.2 6.6 15.9 33% 33% 31.4
eClerx Services ECLX IN 12.0 4.2 8.2 10% 22% 38.7
V-Guard Inds. VGRD IN 18.3 4.1 11.5 32% 26% 24.1
Mayur Uniquote MUNI IN 16.4 4.5 11.5 1% 7% 29.5
Source: Bloomberg

Strategy
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 / Infrastructure / Cement (022) 30433241 nitinbhasin@ambitcapital.com
Aadesh Mehta Banking / Financial Services (022) 30433239 aadeshmehta@ambitcapital.com
Achint Bhagat Cement / Infrastructure (022) 30433178 achintbhagat@ambitcapital.com
Aditya Khemka Healthcare (022) 30433272 adityakhemka@ambitcapital.com
Akshay Wadhwa Banking & Financial Services (022) 30433005 akshaywadhwa@ambitcapital.com
Ashvin Shetty, CFA Automobile (022) 30433285 ashvinshetty@ambitcapital.com
Bhargav Buddhadev Power / Capital Goods (022) 30433252 bhargavbuddhadev@ambitcapital.com
Dayanand Mittal, CFA Oil & Gas / Metals & Mining (022) 30433202 dayanandmittal@ambitcapital.com
Deepesh Agarwal Power / 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 Healthcare (022) 30433212 pareshdave@ambitcapital.com
Parita Ashar Metals & Mining / Oil & Gas (022) 30433223 paritaashar@ambitcapital.com
Pratik Singhania Retail (022) 30433264 pratiksinghania@ambitcapital.com
Rakshit Ranjan, CFA Consumer / Retail (022) 30433201 rakshitranjan@ambitcapital.com
Ravi Singh Banking / Financial Services (022) 30433181 ravisingh@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
Tanuj Mukhija, CFA E&C / Infrastructure (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
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

Strategy
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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Ambit - Strategy Err GRP - On The Cusp of Greatness

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Ambit - Strategy Err GRP - On The Cusp of Greatness

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STRATEGY

Thematic: On the cusp of greatness

Enduring greatness is rare……………………………………………………………………..4

Small firms on the cusp of greatness…………………………………………………………6

The ‘STAR’ framework…………………………………………………………………………. 9

- eClerx Services Limited……………………………………………………………………. 77

- Mayur Uniquoters Limited………………………………………………………………..105

Appendix 1: John Kay’s IBAS framework………………………………………………… 117

Appendix 2: Questionnaire used to assign scores based on ‘STAR’ framework…… 122

Appendix 3: Summary of our previous work on ‘greatness’………………………… ..125

Appendix 4: Potential ‘greats’ – Financial summary…………………………............. 128

July 14, 2014 Ambit Capital Pvt. Ltd. Page 2

THEMATIC July 14, 2014

On the cusp of greatness Stocks discussed in this report

“Greatness” is elusive Balkrishna Ind

Enduring greatness is rare

…hence we look at firms that have

July 14, 2014 Ambit Capital Pvt. Ltd. Page 4

July 14, 2014 Ambit Capital Pvt. Ltd. Page 5

Small firms on the cusp of greatness

July 14, 2014 Ambit Capital Pvt. Ltd. Page 6

500 Cusp of 23%

July 14, 2014 Ambit Capital Pvt. Ltd. Page 7

This rolling one-year forward back-test suggests significant share price

July 14, 2014 Ambit Capital Pvt. Ltd. Page 8

The ‘STAR’ framework

July 14, 2014 Ambit Capital Pvt. Ltd. Page 9

 Architecture: ‘Architecture’ refers to the network of contracts, formal and

July 14, 2014 Ambit Capital Pvt. Ltd. Page 10

Median FY12 ROCE Cost of retaining cash

Return ratios (pre-tax)

Capex (Q1) 20%

Acquisition (Q1) 10%

As an example, a summary of eClerx’s capital allocation on a cumulative basis over

July 14, 2014 Ambit Capital Pvt. Ltd. Page 11

Centrality of political connect

We assess the seven ‘greats’ on the extent of political connectivity of the

July 14, 2014 Ambit Capital Pvt. Ltd. Page 12

July 14, 2014 Ambit Capital Pvt. Ltd. Page 13

Exhibit 16: Marico Limited - Timeline

July 14, 2014 Ambit Capital Pvt. Ltd. Page 14

Phase zero - incorporation to IPO: Professionalising Marico

Revenue Growth (LHS) ROCE (RHS)

Phase 1: Taking on HUL in the late 1990s (1998-2004)

July 14, 2014 Ambit Capital Pvt. Ltd. Page 15

(`)/share Share price

18 Prospects of an Managed to increase market share

Source: Bloomberg, Ambit Capital research

6,500 400 33%

July 14, 2014 Ambit Capital Pvt. Ltd. Page 16

Phase 2: Acquisitions fuel growth (2005-2012)

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

(`/share) Marico Share price

Source: Bloomberg, Ambit Capital research

Phase 3: Change of guard (2013 onwards)

(`/ Share) Marico share price

Source: Bloomberg, Ambit Capital research

July 14, 2014 Ambit Capital Pvt. Ltd. Page 18

July 14, 2014 Ambit Capital Pvt. Ltd. Page 19

July 14, 2014 Ambit Capital Pvt. Ltd. Page 20

Exhibit 27: Marico’s coconut hair oil share

60.0% Marico Coconut oil share

Parachute’s strong brand equity