Ambit Strategy Thematic Sensexentriesandexitsthedecadalstory 19sept2016

STRATEGY
September 2016
US$4K
Per Capita Income
S
RIE
ST
DU
IN
GE
PA
US$2K
Sensex in 2016 Sensex in 2025
Sensex entries and exits - the decadal story

Research Analysts: Ravi Singh Paresh Dave, CFA Rakshit Ranjan, CFA
ravi.singh@ambit.co paresh.dave@ambit.co rakshit.ranjan@ambit.co
Ritika Mankar Mukherjee, CFA
ritika.mankar@ambit.co Pankaj Agarwal, CFA Sagar Rastogi Vivekanand Subbaraman, CFA
Tel: +91 22 3043 3175 pankaj.agarwal@ambit.co sagar.rastogi@ambit.co vivekanand.s@ambit.co
Aditi Singh Ritesh Gupta, CFA Bhargav Buddhadev Abhishek Ranganathan, CFA
aditi.singh@ambit.co ritesh.gupta@ambit.co bhargav.buddhadev@ambit.co abhishek.r@ambit.co
Nitin Bhasin Ashvin Shetty, CFA Parita Ashar, CFA

nitin.bhasin@ambit.co ashvin.shetty@ambit.co parita.ashar@ambit.co
Strategy
CONTENTS
SECTOR
Sensex entries and exits: the decadal story ..3
Section 1: Dissecting Indias GDP growth model 4
Section 2: How have economies with similar growth .8
drivers as India evolved?
Section 3: Market cap changes as per capita income rises to $4000 ..12
Section 4: Predicting the sectoral composition of the Sensex in 2025 .17
Section 5: Entries into the Sensex by FY25..19
Section 6: Predicting exits from the Sensex.32
Appendix 1: Comparison with our Sensex entry and exit 40
predictions from last year
COMPANIES
Kotak Mahindra Bank (SELL)45
IOCL (BUY)..49
HCL Tech (BUY)..55
UltraTech Cement (BUY)..59
BPCL (BUY)..65
IndusInd Bank (BUY).71
Eicher Motors (SELL)..75
Ambuja Cement (BUY).81
Pidilite Industries (BUY).. 87
Torrent Pharma (NOT RATED)... 93
Page Industries (BUY)99
Reliance Inds. (NOT RATED) 105
Coal India (BUY). 109
ONGC (NOT RATED). 115
State Bank of India (SELL). 119
Larsen & Toubro (SELL). 123
Bharti Airtel (NOT RATED) 129
NTPC (SELL). 135
Wipro (SELL).141
Mahindra & Mahindra (SELL).. 145
Hero Motocorp (SELL) 151
Adani Ports (NOT RATED). 157
Dr Reddy's Labs (SELL).. 163
GAIL (India) (SELL)..169
Cipla (NOT RATED) 175
Tata Steel (SELL)..181
September 19, 2016 Ambit Capital Pvt. Ltd. Page 2

Strategy
THEMATIC September 19, 2016
Sensex entries and exits - the decadal story Sensex Entry and Exit Candidates
(FY16-25)
Powerful transformations underway in the Indian economy are likely to Entry Exit
manifest in the form of a high churn ratio in the Sensex. By CY25, we Ticker Ticker
Candidates Candidates
expect the Sensex to retain only 15 of the companies that currently Kotak Mahindra
KMB IN
Reliance
RIL IN
Bank Inds.
comprise the 30-stock index. In this note, we identify 15 exit candidates
IOCL IOCL IN Coal India COAL IN
and 15 new entrants with a combination of macroeconomic and financial
HCL Tech HCLT IN ONGC ONCG IN
filters. The macroeconomic filters focus on the evolutionary experience of
UltraTech State Bk of
5 countries that have the same growth model as that of India. After Cement
UTCEM IN
India
SBI IN
identifying the winning and losing sectors, we apply our proprietary BPCL BPCL IN
Larsen &
LT IN
filters to predict 11 entrants and 15 exits from the listed space. To Toubro
BHARTI
identify the remaining 4 entrants from the unlisted space, we pick from Indusind Bank IIB IN Bharti Airtel
IN
the three themes that we believe will dominate the next decade, i.e. e- Eicher Motors EIM IN NTPC NTPC IN
commerce, fin-tech and Insurance. Ambuja Cement ACEM IN Wipro WPRO IN
Sensex churn is set to rise Pidilite Industries PIDI IN M&M MM IN

Our 5th May 2015 report, Sensex exits: The decadal story, highlighted two Torrent Pharma TRPIN
Hero
HMCL IN
Motocorp
critical aspects on Sensex churn: (a) The constitution of the Sensex is dynamic
Page Industries PAG IN Adani Ports ADSEZ IN
and Indias churn ratios are higher than those of other large markets; and (b)
Dr Reddy's
Modis resets will transform the economy, sending Sensex churn soaring from Flipkart N/A DRRD IN
Labs
recent lows. After peaking at 67% in the years following the 1991 reforms, LIC N/A GAIL (India) GAIL IN
Sensex churn fell to a low of 27% from 2005 to 2015. We expect a reversion to Paytm N/A Cipla CIPLA IN
50% churn.
HDFC Life N/A Tata Steel TATA IN
Predicting the sectoral composition of the Sensex in CY25 Source: Bloomberg, Ambit Capital Research. Note: N/A =
Even if Indias per capita income were to grow at the same pace that it did over data not available since companies are not yet listed
the last decade, i.e. 9% CAGR. India will hit a per capita income of ~US$4000 in The Sensex in 2025: Current vs.
CY25. Cross-country experience suggests that: (1) The share of spending on Predicted sector weights
consumer discretionary products and Financial Services rises as per capita Current weight Predicted
incomes rise whilst spending on consumer staples declines; (2) The share of Sectors
(based on free weight (based
float market on economic
spending on healthcare services tends to follow a U-shaped pattern, with cap) FY15 insights) FY25
spending falling/stagnating until per capita GDP exceeds ~$10k; and (3) The Consumer
share of investment as a percentage of GDP rises with income. Combining these Discretionary + 41% 49%
Financial services
insights with an analysis of market capitalization data in these 5 countries we Industrials,
conclude that the share of Consumer Discretionary, Industrials + Materials + Materials, and 20% 25%
Energy
Energy and Financial Services in the Sensex will rise by CY25 whilst the share of Information
Consumer Staples, IT and Telecom will decline, and the share of Healthcare Technology and 17% 10%
Telecom
Services will marginally decline/stagnate. As regards Utilities, we do not expect
Consumer Staples 13% 8%
the market-cap share of utilities to change significantly as political imperatives do
not allow ROEs to go north of the cost of capital. Healthcare 6% 5%
Predicting the 15 entrants and exits Utilities 3% 3%

To predict the 15 entrants, we applied our proprietary filters while focusing on Total 100% 100%
the winning sectors derived from the macroeconomic analysis. This process yields Source: Bloomberg, Ambit Capital Research.
9 entrants from the 100 stocks just below the Sensex, namely Kotak Mahindra
Bank, IndusInd Bank (BFSI); Eicher Motors (Consumer Discretionary); and
IOCL, BPCL, Ultratech, Ambuja Cements, Pidilite Industries (Industrials + Research Analysts
Materials + Energy). We also expect HCL Tech (IT Services) to be an entrant
because though it belongs to a losing sector, it comfortably clears our proprietary Ritika Mankar Mukherjee, CFA
screens. To these 9 stocks from the top-100 by market-cap, we add Torrent 91 22 3043 3175
Pharma and Page Industries from the next 100 by market-cap. For the ritika.mankar@ambit.co
remaining 4 stocks that should enter through IPOs and M&A, we pick from the
Aditi Singh
three themes that will dominate the next decade, i.e. e-commerce (Flipkart),
Financial Technology (Paytm) and Insurance (HDFC Life Insurance and LIC). +91 22 3043 3284
We finally predict the 15 exits using the same filters as highlighted above. This aditi.singh@ambit.co
process yields the following exits namely SBI (BFSI); HeroMoto Corp, M&M Nitin Bhasin
(Consumer Discretionary); L&T, NTPC, Adani Ports, ONGC, GAIL, Coal India,
+91 22 3043 3241
Tata Steel (Industrials + Materials + Energy + Utilities), Dr. Reddys Labs and
Cipla (Pharma), Bharti Airtel (Telecom), Wipro (IT) and Reliance Industries. nitin.bhasin@ambit.co
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
Exhibit 1: Sensex Entry Candidates (FY16-25)

6M Compounding
Mcap
FF mkt ADV (in FF market
Ambit Accounting Greatness
Name Ticker cap cap) required Entry hypothesis
Stance (US$ Decile Score
(US$ bn) rank to enter the
mn) Sensex*
Kotak
Among the best-run private sector banks; expected to generate
Mahindra KMB IN SELL 22.3 11 22 N/A 79% 0%
synergies with the ING Vysya integration
Bank Ltd.
Largest Indian fuel retailer and second largest refiner;
IOCL IOCL IN BUY 21 19 15 D4 25% 5% competitive advantage will be driven by Paradip scale up and
increased autonomy in decision making by GoI
Leader in Infra Management Services and Engineering Services;
HCL Tech HCLT IN BUY 16.5 25 30 D2 92% 9% scores high on our capital allocation, portfolio mix, operational
excellence and management framework
Strong balance sheet/cash generative traits and access to large
UltraTech land parcels and limestone reserves will drive Utlratechs
UTCEM IN BUY 16.2 27 15 D5 29% 9%
Cement leadership position and make it a proxy play on India
infra/housing pick up
Leading fuel retailer and refiner in India with superior capital
BPCL BPCL IN BUY 12.9 30 24 D4 79% 10%
allocation and project execution
Leader in Commercial Vehicle financing; expansion in new
IndusInd
IIB IN BUY 10.6 18 22 N/A 93% 5% areas led by strong franchise will drive market share gains
Bank
strong loan book growth
Eicher Leader in niche motorcycle segment; well-placed to gain from
EIM IN SELL 9.2 35 18 D3 75% 13%
Motors rise in consumer discretionary spend
ACC will merge with Ambuja to create the second largest
Ambuja
ACEM IN BUY 8.1 49 10 D3 21% 17% cement entity. The combined entity will maximise plant
Cement
efficiencies and enjoy synergistic savings
Pidilite Sustainable brand leadership, superior fundamentals make
PIDI IN BUY 5.4 85 8 D4 54% 25%
Industries Pidilite a high-quality defensive play in consumer sector
Torrent Increasing presence in generics (US, Europe) and branded
TRP IN BUY 4.1 108 4 D6 67% 29%
Pharma markets (India and EMs); new management driving high RoCEs
Greater growth longevity than most consumer companies;
Page
PAG IN BUY 2.5 105 2 D3 88% 28% sustained competitive advantages will support premium
Industries
valuations
NOT India's biggest e-commerce company in terms of valuation; likely
Flipkart N/A N/A N/A N/A N/A N/A N/A
RATED to benefit from the ongoing growth in internet connectivity
NOT Play on increasing share of BFSI in general and insurance in
HDFC Life N/A N/A N/A N/A N/A N/A N/A
RATED specific as economic growth increases
Potential to be the most valued company if listed as stated by
the FM; controls 70% of life insurance market in terms of new
LIC N/A SELL N/A N/A N/A N/A N/A N/A business income and has assets under management of over
Rs22 lakh crore; has not lost its leading market position despite
16 years of privatisation.
NOT Increasingly taking on banks in the digital payments space;
PayTm N/A N/A N/A N/A N/A N/A N/A
RATED strong parentage with investment from Alibaba (China)
Source: Ambit Capital Research. Note: *Compounding refers to the compounding required in free float market cap assuming the smallest Sensex stock compounds
at 15% over the decade. As we do not have a greatness framework for NBFCs, we give an average score to HDFC (the only NBFC in the Sensex) on this parameter.
Greatness scores for non BFSI names are based on FY10-15 financials and for BFSI names FY09-14 financials. Accounting scores are based on FY09-14 financials.
Our accounting framework does not apply to BFSI names.

Strategy
Exhibit 2: Sensex Exit Candidates (FY16-25)

6M Compounding
Mcap
FF mkt ADV (in FF market
Ambit Accounting Greatness
Name Ticker cap cap) required Exit hypothesis
Stance (US$ Decile Score
(US$ bn) rank to remain in
mn) the Sensex*
Reliance NOT Uncertainty on profitability of large investments in retail and
RIL IN 50.9 5 53 D6 25% -6%
Industries RATED telecom; downstream margins likely to remain muted
Compromised pricing power and/or muted e-auction prices can
Coal India COAL IN BUY 31.5 26 21 D6 33% 9% pressurise margins; capital misallocation risks exist given CILs
plans to invest in projects with limited visibility on expected RoI.
NOT Falling subsidies unlikely to aid profitability; uncertainty on
ONGC ONGC IN 30.3 17 17 D9 25% 5%
RATED production growth makes earnings growth a challenge
Asset quality issues; weak profitability; rising capital
State Bank of
SBIN IN SELL 29.2 13 81 N/A 68% 3% requirements; competition from stronger private sector peers
India
and introduction of new players
High competitive intensity in a fragmented industry, no
Larsen &
LT IN SELL 21.1 7 43 D9 46% -3% discernible competitive advantages in most sectors; L&Ts large
Toubro
size will be a constraint
Persistently high capex to support data growth; Reliance Jios
NOT
Bharti Airtel BHARTI IN 19.7 23 18 D3 21% 9% entry; technology disruptions eroding competitive advantages
RATED
as cash rich media companies find alternate delivery modes
Limited growth opportunities in power generation; tariff
NTPC NTPC IN SELL 19.7 29 10 D4 29% 10% regulation likely to hit 2019 RoE; weakening competitive
positioning
Weak portfolio mix and culture; continued underperformance of
Wipro WPRO IN SELL 18.1 34 15 D6 71% 12% earnings growth relative to peers combined with deceasing
RoCE
Utility vehicle business under threat from foreign car
M&M MM IN SELL 13.3 15 23 D5 13% 4% companies superior; offerings; automotive business (esp.
2W/trucks) has limited chances of long-term success
Over-dependence on legacy models, uncertain indigenous
Hero
HMCL IN SELL 10.6 21 21 D1 0% 8% technology, shift towards scooters and rising competition from
Motocorp
Honda
NOT High capital intensity and capital allocation issues within the
Adani Ports ADSEZ IN 8.1 44 19 D9 67% 16%
RATED company; delays in enabling infrastructure could affect volumes
Dr Reddy's
DRRD IN SELL 7.8 31 21 D4 92% 10% Sub-par business mix and weak competitive positioning
Labs
Incremental investments in pipelines havent yielded results;
GAIL (India) GAIL IN SELL 7.3 48 9 D5 33% 17% artificially suppressed tariffs by regulator; rising competition
from GSPL and emerging gas supply sources
High management attrition hurting growth prospects; no
NOT
Cipla CIPLA IN 6.9 38 17 D7 58% 13% moated revenues; average ranking on our IBAS framework due
RATED
to weak brand equity and lack of investment in innovation
Tata Steel TATA IN SELL 5.4 43 41 D8 13% 15% Shrinking raw material advantage as well as margins
Source: Ambit Capital Research. Note: *Compounding refers to the compounding required in free float market cap assuming the smallest Sensex stock compounds
at 15% over the decade.. As we do not have a greatness framework for NBFCs, we give an average score to HDFC (the only NBFC in the Sensex) on this
parameter. Greatness scores for non BFSI names are based on FY10-15 financials and for BFSI names FY09-14 financials. Accounting scores are based on FY09-
14 financials. Our accounting framework does not apply to BFSI names.

Strategy
Section 1: Dissecting Indias GDP growth

model
A historical analysis of Indias growth model reveals two key insights into
Indias GDP growth process: (1) despite Indias youthful population structure, Indias growth engine has been
the contribution of labour to GDP growth is waning; and (2) the contribution driven by capital and TFP
of capital and total factor productivity (TFP) has been rising over the past improvements
three decades. More specifically, returns to capital have exceeded returns to
labour post the incremental, internal-oriented reforms of the 1980s and the
fundamental, external-oriented reforms of the 1990s.
The progressive refinement during the recent years in the measurement of the volume
of physical production in manufacturing suggests the possibility of attempting (1) to
measure the changes in the amount of labour and capital which have been used to
turn out this volume of goods, and (2) to determine what relationships existed between
the three factors of labour, capital and product.
- A theory of production by Charles
Cobb and Paul Douglas, 1928, The
American Economic Review
This simple yet powerful concept of decomposing GDP growth in labours share,
capitals share and a residual called Total Factor Productivity - hypothesised by the
two American economists can be used to objectively review Indias GDP growth over
the last three decades.
Mathematically the production function defined by Cobb & Douglas can be notified as
Q = A Ka L b, where Q refers to total output produced, K refers to capitals
contribution to the growth process and L refers to labours contribution to the
growth process. Finally A or total factor productivity refers to the technique applied
in combining labour and capital, whereby it is possible for the same quantum of
labour and capital to yield divergent output depending on the quantum of
labour/capital productivity. Meanwhile, a and b are factor coefficients which
represent the output elasticity of labour and capital respectively.
Looking back at Indias per capita income journey from around US$300 in CY91
when Indian policymakers administered the first dose of economic reforms to around
US$1600 today, it is clear that Indias growth engine was driven by improvements in
capital and TFP. Furthermore, despite Indias youthful population structure, the
contribution of labour to GDP growth is diminishing (see exhibit below).
Exhibit 3: Indias growth engine has been powered by capital and TFP
improvements even as labour has been a drag
Labour share
Drivers of GDP growth
Capital share
80%
Total factor productivity
(in%)
60%
40%
20%
0%
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
Source: The Next Generation of the Penn World Table - American Economic Review, Ambit Capital Research. In a
bid to obtain the Cobb-Douglas break-up of Indias GDP growth process, we refer to the "The Next Generation of
the Penn World Table" published in 2015. The dataset for Indias labour share to total output is taken from the
Central Statistical Offices contribution to the United Nations System of National Accounts. Capital share is
approximated by the share of gross capital formation of the GDP. Total factor productivity is calculated as the
residual. All three variables are calculated at current national prices.

Strategy
In specific, each of the drivers of growth can be intuitively explained as follows:
Factor#1: Labours share in the growth process

Although India is adding more labour (i.e. more people) to its economic workforce, As number of employed persons
every incremental unit of Indian labour is contributing lesser to output growth (i.e. goes up, total output increases. But
diminishing marginal returns). As a result, India is seeing a decrease in its output per the increase is at a decreasing rate
worker; i.e. the share of total economic pie available to each worker is decreasing.
The reduction in labours contribution to growth over the eighties and nineties is likely
to be the result of the incremental, internal economy oriented reforms of the eighties
and after that the more fundamental external, liberalisation-oriented reforms
undertaken in CY91. Both sets of reforms were aimed at improving the efficiency of
capital and technology but almost ignored critical changes required to be
administered to improve the productivity of labour. Indias labour share of GDP growth
reduced rapidly following reforms
For instance, the reforms allowed easier entry of foreign capital and technology into in the 1980s and 1990s
India. This resulted in higher accumulation of capital (i.e. K) as well as adoption of
productivity boosting technology (i.e. A) as the economy became more open. At the
same time, even as the working age population expanded, two problems hampered
the productivity of labour: (1) the State failed to provide healthcare and education to
the masses; and (2) there was excess supply of labour, resulting in workers being
available at very low wages.
Signs of stabilisation of labours contribution to GDP growth began to emerge from
CY08 but may have been due to low base effect from the nineties as well as
marginally improving education/skill levels. Relative to other emerging markets,
Indias labour productivity remains quite low.
In terms of international experience, countries like Malaysia, Korea, and Thailand Malaysia, Korea, and Thailand
have also been characterised by a declining or stagnating share of labour in output have also been characterised by
generation over the last two decades perhaps due to the same problems as those declining labour share in GDP
that confront India (see exhibit below). growth
Exhibit 4: Labours share of total output has been declining in Malaysia, Korea,
Thailand and India
Malaysia
Labour share of total output
80% Korea
Thailand
70%
India
60%
(in %)
50%
40%
30%
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
Source: The Next Generation of the Penn World Table - American Economic Review, Ambit Capital
Research.
Factor#2: Capitals share in the growth process
According to the Cobb-Douglas production function, an increase in the stock of
capital would increase both the level of output as well as the level of output per
worker. An economys rate of savings determines the size of its capital stocks and Capital accumulation, in the
hence the level of Q or output. Increase in savings and, as a result, increase in absence of technological progress,
capital causes a period of rapid growth by raising the levels of output and output per cannot drive growth forever
worker.
In Indias case, capitals contribution to the growth process has been rapidly rising
since the mid-nineties. In CY91, when Indias per capita income was around $300,
capital accounted for 22% of GDP whereas in CY14, when Indias per capita income
was around $1600, capital accounted for 34% of GDP.

Strategy
Note that at very low levels of per capita income (around US$420 in CY97), India Capital accumulation has been a
had close to 60% share of output coming from labour and just about 25% from key driver of Indias growth
capital. As the country became richer, increases in Indias output per worker, i.e. the process.
per capita GDP, has been driven by greater accumulation of capital per worker.
Furthermore, the increase in capital stock in India is expected to continue:
..though investment has slowed recently, the rate of gross fixed capital formation in
India is still high at around 30% of GDP and the growth of capital stock remains one of
the highest among emerging economiesAgain, barring the recent slowdown,
investment in infrastructure capital has been increasing over the years, and additions to
the physical stock of infrastructure, in terms of roads, rail, telecommunication networks,
remain strong
- Ila Patnaik and Madhavi Pundit,
Where is Indias Growth Headed?,
January 2016
In terms of international experience, countries like Korea, Indonesia and Peru have
also been characterised by rising share of capital in output generation since CY70
(see exhibit below).
Exhibit 5: Capitals share of total output has been rising in Korea, Indonesia, Peru
and India
Korea
Indonesia
Capital share of total output
50%
Peru
India
40%
30%
(in %)
20%
10%
0%
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
Source: The Next Generation of the Penn World Table- American Economic Review, Ambit Capital
Research.
Factor#3: The role of technology in the growth process TFP is the efficiency with which
capital and labour are employed to
TFP is the efficiency with which capital and labour are employed. An increase in the
share of TFP comes from innovation in methods of production due to improved produce output
technology or improved organisation. Increasing multifactor productivity due to
innovation is necessary for continued rapid growth. As pointed out earlier, capital
and labour are only finite and what is required ultimately is an increase in the
efficiency with which these two inputs are used to boost GDP growth.
In Indias own experience, TFP has been fluctuating but the trend has been upward.
The 1960s and 1970s were periods
During the 1960s and 1970s, Indias TFP growth was close to zero and the reasons
of low productivity in India due to a
for that are not very hard to find. External shocks like war (India-Pak War 1965, Sino-
closed, public sector e as well as
Indian War 1962, India-Pak War 1971 ), severe drought (1966,1969-70, 1972,
external shocks
1979) and the global oil shock of 1979 coupled with India largely being a closed
public-sector-driven economy meant productivity levels were extremely low.
However, the Indian economy has been experiencing a systematic improvement in
TFP since the introduction of reforms in the eighties and nineties. Hence, Indias
output growth in the past three decades has not only been driven by rapid capital
accumulation but also improvements in productivity.
Post the internal reforms of the
In terms of international experience, countries like Malaysia, Korea and Mexico have 1980s and 1990s, Indias TFP has
also been characterised by rising share of TFP in output generation since CY70 (see systematically improved
exhibit below).

Strategy
Exhibit 6: Total factor productivitys share of total output has been rising in Korea,
Malaysia, Mexico and India
Malaysia
Korea
share of total output (in %)
50%
Total factor productivity
Mexico
India
40%
30%
20%
10%
0%
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
Research.
It is worth noting that the brand of growth generation as Indias (i.e. a combination of
capital and TFP driven growth with labours contribution diminishing) has been seen
across East Asia, with countries like Malaysia, Thailand and Korea being the best
examples. On the other hand, the factor accumulation model (i.e. a combination of Capital deepening and TFP growth
capital and labour driven growth) has been most commonly seen in Latin America, drove the East Asian tigers
with countries like Chile and most of the Caribbean being the best examples. China,
however, stands out as the most extreme example of factor accumulation driven GDP
growth with limited or no improvements in TFP (see exhibit below).
Exhibit 7: Chinas growth engine has been powered by capital and labour
improvements even as TFP has been a drag
Labour Share
Capital Share
Drivers of GDP growth (in %)
70% Total Factor Productivity
50%
30%
10%
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
-10%
-30%
Research.

Strategy
Section 2: How have economies with

similar growth drivers as India evolved?
Even if Indias per capita income were to grow at the same pace that it did
over the last decade, i.e. 9% p.a. CAGR, India will hit a per capita income of
~US$4000 in CY25. Given that India is set to follow a capital and total factor
productivity driven growth model, we identify a set of true comparator
countries for India (as opposed to using emerging markets in general as a
comparator set). A cross-country analysis based on this refined peer set
suggests: (1) The share of spending on consumer discretionary products rises
with income, whilst that of consumer staples such as food tends to fall; (2)
The share of spending on financial services tends to rise with income; (3) the
share of spending on healthcare services tends to follow a U-shaped pattern,
with spending stagnating/falling until income exceeds ~$10k; and (4) the
share of investment as a percentage of GDP rises with income.
Identifying the true peer set for India

As opposed to using emerging markets in general as a comparator set for India, we
draw up a subset of five comparator countries using the following three steps:
We draw a subset of comparable
Step 1: From the superset of major emerging market economies, we eliminate the
emerging market economies with
major (in EM top 10) net commodity-based economies most sensitive to commodity
similar growth path as Indias.
price movements, namely Brazil, Russia and South Africa, given that India is a net
commodity importer.
Step 2: We also eliminate countries whose growth model differs from that of Indias
(refer to section 1 for details). This leads us to eliminate three more countries from
our comparator set, namely China, Indonesia and Chile. This is mainly because
China has a capital as well as labour driven model whilst Indonesia and Chile mainly
have a capital driven growth model.
Step 3: We finally eliminate countries from this subset which are yet to hit the US$4K
per capita income mark, namely Philippines and Sri Lanka. These two countries per
capita income currently stand at US$2,899 and US$3,926 respectively.
The final result is a subset of countries which are fit for being used for forecasting
economic transitions that India is set to undergo namely: Korea, Malaysia, Thailand,
Mexico, and Turkey.
Exhibit 8: Comparator set of emerging market economies we eliminate Chile,
Indonesia and China from this set
Average TFP Average capital Period under Current per capita
Country
share over period share over period consideration income (Current US$)
Korea 14% 28% CY82-88 27,222
Chile 34% 21% CY80-94 13,384
Malaysia 15% 32% CY83-95 9,766
Turkey 21% 24% CY89-98 9,130
Mexico 27% 22% CY80-92 9,009
China 0% 45% CY06-10 7,925
Thailand 32% 29% CY93-08 5,816
Indonesia 22% 33% CY08-15 3,346
India 1,582
Source: World Bank, Penn World Table, Ambit Capital research. Note: Period under consideration refers to the
time taken to double the per capita income from US$2k to US$4k.
The table below summarises details regarding the data used for each of the 4
countries that qualify as members of the refined peer set for India (Mexico is excluded
as data on its consumption breakdown is not available but in included in the market
cap analysis in Section 3)

Strategy
Exhibit 9: Details regarding the data used for the 4 country comparator set for India
Starting Ending Name of variable used to measure consumption related data

Country Source
PCI (in PCI (in
Automobiles/ Healthcare
Year current Year current Food Financial services
transport services
US$) US$)
Food and Non-
Korea CY70 292 CY15 27,222 Bank of Korea Transport Household: Services Health
alcohol Beverages
Department of
Food & Non Miscellaneous Goods &
Malaysia CY00 4,005 CY15 9,766 Statistics (CY10-15 are Transport Health
Alcoholic Beverages Services
on the new base)
National Economic
Food and Non-
Thailand CY90 1,508 CY15 5,816 and Social Transport Financial Services Health
alcoholic
Development Board.
Turkish Statistical Food and Miscellaneous Goods &
Turkey CY98 4,390 CY15 9,130 NA Health
Institute Beverages Services
Personal
Transport
Equipment +
Central Statistics Operation of
Offices (The values Food, Beverages Personal Miscellaneous Goods Medical Care and
India CY70 115 CY14 1,577
from CY 12-14 are on and Tobacco Transport and Services Health Services
the new base) Equipment
+Purchase of
Transport
Services
Source: CEIC, World Bank, Ambit Capital research
Insight#1: Indias spending on automobiles is set to rise

Rising purchasing power is typically
In a paper published by Hellebrandt and Mauro in CY15 titled World on the Move: accompanied by a reduction in the
The Changing Global Income Distribution and its Implications for Consumption share of food and increase in share
Patterns and Public Policies, the authors made the point that: of transport in overall expenditure
As purchasing power increases worldwide, people willreduce the share of food and
increase the share of transportation in their overall expenditures.
Cross-country evidence, in fact, indicates that as countries prospered in terms of their

per capita income, spending on automobiles and/or transport as a share of total
spending rose systematically (see exhibit below)
Exhibit 10: Thailands share of spending on transport Exhibit 11: Indias spending on transport goods is also on
goods has risen systematically the rise
20% 25%
R = 0.8726
Share of transport in
R = 0.5733
consumptione (in %)
Share of transport in
consumptione (in %)
18% 20%
household
16%
household
15%
14% 10%
12% 5%
10% 0%
0 2000 4000 6000 8000 0 500 1000 1500 2000
Per capita income (US$) Per capita income (US$)
Source: CEIC, Bloomberg, Ambit Capital research. Note: Data for Thailand Source: CEIC, Bloomberg, Capitaline, Ambit Capital research. Note: Data for
spans from CY90-15. India spans from CY70-14.
Indias own experience has reflected this cross-country trend. The share of spends on
transport rose from 3% in CY70 to 16% in CY14 as Indias per capita income rose Indias share of spends on
from US$114 to US$1577 (see exhibit above). transport rose from CY70-14 as its
per capita income increased
In fact, the transport equipment argument can also be extended to the consumer
discretionary sector in general. This is because not just transport but the entire non-
food component of spending tends to rise with increasing per capita income. The The entire non-food category tends
non-food component of spending includes key categories like spending on clothing to see an increase in spending as
and footwear, furnishings, hotels, restaurants, recreation and cultural services (see countries get richer
exhibit below).

Strategy
Exhibit 12: Non-food spending tends to rise as countries get richer
100% R = 0.6183
Share of non-food items in
household consumption
90%
80%
(in %)
70%
60%
50%
0 5000 10000 15000 20000 25000 30000
Per capita income(US$)
Source: CEIC, Bloomberg, Ambit Capital research. Note: Countries covered include Korea (CY70-15), Malaysia
(CY00-15), Thailand (CY9015), and Turkey (CY98-15).
Insight#2: Indias spending on staples is set to decline Conversely, the share of food
The reciprocal of the dynamic highlighted above also holds true, i.e. as countries get spending tends to decrease as
richer their consumption basket moves away from staples, which at low per capita countries get richer
income levels account for the lions share of consumer spends (see exhibit below).
Exhibit 13: Cross-country evidence suggests that the Exhibit 14: Indias spending on food has been falling
spending on food falls as per capita incomes rise rapidly
50% 80%
R = 0.9637
household consumption
consumption(in %)
40%
Share of food in
60% R = 0.946
Share of food in
household
30%
(in %)
40%
20%
20%
10%
0% 0%
0 10000 20000 30000 0 500 1000 1500 2000
Source: CEIC, Bloomberg, Ambit Capital research. Note: Countries covered Source: CEIC, Bloomberg, Capitaline, Ambit Capital research. Note: The
include Korea (CY70-15), Malaysia (CY00-15), Thailand (CY9015), and period under consideration for India is CY70-14.
Turkey (CY98-15).
Indias own experience has reflected this cross-country trend. The share of spends on Indias share of spends on food fell
food fell from 57% in CY70 to 31% in CY14 as Indias per capita income rose from systematically over CY70-14 as its
US$114 to US$1577 over the same period (see exhibit above). per capita income grew

Strategy
Insight#3: Indias spending on financial services is set to rise

Cross-country evidence also suggests that spending on financial services as a share of
total consumer spends also increases as per capita incomes rise (see exhibit below).
Exhibit 15: Thailands example suggests that share of Exhibit 16: Koreas spends on services has been rising
Financial Services spends rises as per capita income rises
6% R = 0.5268 70%
Share of spends on financial
Share of spends on
R = 0.954
60%
Services(in %)
5%
50%
services
(in %)
4%
40%
3%
30%
2% 20%
0 2000 4000 6000 8000 0.0 10000.0 20000.0 30000.0
Source: CEIC, Bloomberg, Ambit Capital research. Note: The period Source: CEIC, Bloomberg, Capitaline, Ambit Capital research. Note:
under consideration for Thailand is CY90-15. The period under consideration for India is CY70-14.
Thailands share of spends on financial services increased from 3% in CY90 to 6% in

CY15. Its per capita income rose from US$1508 in CY90 to US$5816 in CY15. Korea
too followed the same pattern. Its share of spending on services rose from 31% in
CY70 to 57% in CY15 while per capita income moved from US$292 to US$27222.
Due to non-availability of data, we have used spending on services in the case of
India (as a proxy for spend on Financial Services). The share of spends on services Indias spending share on services
rose from 4% in CY70 to 14% in CY14 as Indias per capita income rose from rose systematically over CY70-14
US$114 to US$1577 (see exhibit above).
Exhibit 17: Indias share of spending on services has been rising with per capita
income
R = 0.9477
16%
Share of spends on services
12%
(in %)
8%
4%
0%
0 500 1000 1500 2000
Per capita income (US$)
Source: CEIC, World Bank, Note: The period under consideration for Korea is from CY70-15.
Healthcares share of spending

tends to rise but only at higher
levels of per capita income.

Strategy
Insight#4: Indias spending on healthcare is likely to marginally

decline/stagnate
Healthcare spending also tends to increase as per capita incomes increase as per
cross-country evidence. However, this trend kicks-in only at a very high per capita
income level of ~US$10,000 and above (see exhibit below).
Exhibit 18: Spends on healthcare tend to marginally Exhibit 19: ..after attaining the US$10k level, the share of
decline/stagnate till US$10k level.. spends on healthcare rises
6% 6%
R = 0.1304 R = 0.8155
household consumption (in %)
household consumption (in %)

5%
Share of healthcare in
Share of healthcare in
5%
4%
3% 4%
2%
3%
1%
0% 2%
0 5000 10000 10000 15000 20000 25000 30000
Source: CEIC, Bloomberg, Ambit Capital Research. Note: Countries under Source: CEIC, Bloomberg, Ambit Capital Research. Note: Countries under
consideration are Korea (CY70-15), Malaysia (CY00-15), and India (CY70- consideration are Korea (CY70-15), Malaysia (CY00-15), and India (CY70-
14). 14).
Given that Indias per capita income is extremely low at this juncture, we highlight
that healthcare spends are unlikely to rise rapidly in the near term.
Insight#5: Indias investment spending as a share of GDP is likely to rise
Cross-country evidence suggests that investment spending as a share of GDP tends to
rise with per capita income till the US$4k level. The relationship beyond the US$4k
level is ambiguous. Since we are interested in the US$2k to US$4k transition period
for now, we highlight the cross country experience for this particular case below. (see
exhibit below).
Exhibit 20: Cross-country evidence suggests investments as Exhibit 21: Indias investment as a share of GDP has been
a percent of GDP rises as per capita income rises till the rising with rising per capita income
US$4k level
50% R = 0.9536
50% R = 0.3466
Investment's share (% of
Investment's share (% of
40%
40%
30% 30%
GDP)
GDP)
20% 20%
10% 10%
0% 0%
0 1000 2000 3000 4000 0 500 1000 1500 2000
Source: World Bank. Note : Countries included are Indonesia (CY70-15), Source: World Bank. Note: Data for India spans from CY70-14.
Korea (CY70-15), India (CY70-14), Mexico (CY70-15), and Turkey (CY70-15).
Indias own experience has been similar. The investment (gross capital formation) to Indias share of investments (gross
GDP ratio has increased from 15% in CY70 to 34% in CY14 as Indias per capita capital formation) as a percent of
income went from US$115 to US$1577. GDP is a healthy 34%

Strategy
Section 3: Market cap changes as per

capita income rises to $4000
An analysis of countries that have traversed the same per capita income
transition as India (i.e. $1500 to $4000) yields three critical insights into the
sectoral composition of the Sensex: (1) The market cap share of consumer
discretionary rises whilst that of consumer staples tends to fall; (2) The
market cap share of Financial Services rises; and (3) The market cap share of
Industrials does not follow any fixed pattern.
Details regarding the data used

The table below summarises details of the data used.
Exhibit 22: Details regarding the data used
Starting Ending
Country PCI PCI Benchmark Source Consumer Consumer
Financial services Industrials
Year (curr Year (curr Index discretionary Staples
US$) US$)
Transport Food and Financial
Korea CY94 10275 CY15 27222 KOSPI CEIC NA
Equipment Index beverages index institutions index
Consumer Industrials
Malaysia CY94 3686 CY15 9766 Bursa CEIC NA Finance Index
products index Index
Agri business and Materials and
Financial sector
Thailand CY94 2498 CY15 5816 SET CEIC Automotive index food & beverages machinery
index
index index
MSCI Turkey
MSCI Turkey MSCI Turkey MSCI Turkey
MSCI consumer
Turkey CY00 4215 CY15 9130 Bloomberg consumer staples financial services industrials
Turkey discretionary
index index index
index
MSCI Mexico
MSCI Mexico MSCI Mexico MSCI Mexico
MSCI consumer
Mexico CY00 6650 CY15 9009 Bloomberg consumer staples financial services industrials
Mexico discretionary
index index index
index
Consumer
India CY94 353 CY15 1582 BSE Capitaline Consumer Staples BFSI (incl. Realty) Industrials
Discretionary
Source: CEIC, Bloomberg, Capitaline, Ambit Capital research.
Insight#1: The market cap share of consumer staples in India is set to decline
over the next decade
Cross-country evidence suggests that the consumer staples sectors market cap share
tends to decline as per capita incomes rise (see exhibits below).
Exhibit 23: Cross-country evidence suggests consumer Exhibit 24: Indias consumer staples market cap share
staples market cap share dips as per capita income rises has been falling as its per capita income rises
15% R = 0.292 40% R = 0.7

Consumer staples' market
Consumer staples' market
12%
cap share (in %)
30%
cap share (in %)
9%
20%
6%
10%
3%
0% 0%
0 10000 20000 30000 0 500 1000 1500 2000
Source: CEIC, Bloomberg, Ambit Capital research. Note: Countries under Source: CEIC, Bloomberg, Capitaline, Ambit Capital research. Note: Period
consideration include Turkey (CY00-15), Korea (CY94-15), Thailand (CY94- under consideration is from CY94-15.
15), and Malaysia (CY94-15).

Strategy
Indias own experience so far too has been in-line with international experience. The The market cap share of consumer
consumer staples sectors market cap share declined from 22% in CY94 to 10% in staples has been falling
CY15 as Indias per capita income rose from around US$350 to US$1600 over the
same period (see exhibit above).
Insight#2: The market cap share of consumer discretionary in India is set to
rise over the next decade
Cross-country evidence also suggests that the consumer discretionary sectors market
cap share tends to rise as per capita incomes rise (see exhibit below).
Exhibit 25: Cross-country data suggests that the market Exhibit 26: Indias consumer discretionary market cap
cap share of consumer discretionary as a sector rises as share has been rising after an initial decline
per capita incomes rise
R = 0.2729 30%
16% R = 0.3729
Consumer discretionary's
market cap share (in %)
Consumer discretionary's
market cap share (in %)
12% 20%
8%
10%
4%
0% 0%
0 10000 20000 30000 0 500 1000 1500 2000
Source: CEIC, Bloomberg, Ambit Capital research. Note: Countries under Source: CEIC, Bloomberg, Capitaline, Ambit Capital research. Country under
consideration are Mexico (CY00-15), India (CY94-15), Korea (CY94-15), and consideration: India (CY94-15).
Thailand (CY94-15).
Indias own experience so far has also been in-line with international trends. After The market cap share of consumer
initially declining until the US$1k per capita income level was reached, the consumer discretionary sector has been rising
discretionary sectors market cap share rose from 3% in CY01 to 10% in CY15 as
Indias per capita income rose from around US$450 in CY01 to US$1600 in CY15
(see exhibit above).
Insight#3: The market cap share of Financial Services in India is set to rise
over the next decade
Cross-country evidence suggests that the Financial Services sectors market-cap share
rises as per capita incomes rises initially, but tends to decline marginally/stagnate at
higher per capita income levels (see exhibits below).
Exhibit 27: Cross-country evidence suggests that Financial Exhibit 28: however, at higher levels of per capita
Services market cap share initially increases as per capita income, the market cap share of Financial Services tends
income rise to decline/stagnate
60% R = 0.3297 30%
R = 0.4466
Financials' market cap
25%
share (in %)
40%
share (in %)
20%
20%
15%
0% 10%
0 1000 2000 3000 4000 4000 9000 14000 19000 24000 29000
Source: CEIC, Bloomberg, Ambit Capital research. Note: Countries under Source: CEIC, Bloomberg, Ambit Capital research. Note: Countries under
consideration are Thailand (CY94-15), Malaysia (CY94-15), India (CY94-15), consideration are Korea (CY94-15), Thailand (CY94-15), Malaysia (CY94-15).
Turkey (CY00-15).

Strategy
Indias own experience so far has also been in-line with international trends. The
The market cap share of Financial
Financial Services sectors market cap share rose from nothing in CY94 to 21% in
Services has been rising.
CY14 as Indias per capita income rose from US$353 to US$1577. The share of
savings in GDP in India rose from 24% in CY94 to 33% in CY14 (see exhibits below).
Exhibit 29: The share of savings in Indias GDP increased Exhibit 30: with a corresponding increase in the market
as per capita income rose... cap share of Financial Service
40% R = 0.9303 30%

R = 0.6586
Savings (% of GDP )

25%
30% 20%
share (in %)
15%
20% 10%
5%
10% 0%
0 500 1000 1500 2000 0 500 1000 1500 2000
Source: CEIC, Bloomberg, Ambit Capital research. Note: Period under Source: CEIC, Bloomberg, Capitaline, Ambit Capital research. Period under
consideration is from CY70-14. consideration CY94-15.
Insight#4: The market cap share of industrials shows no trend

Cross-country evidence suggests that the industrial sectors market cap share follows
no specific trend (see exhibits below).
Exhibit 31: At low levels of per capita income, the market Exhibit 32: and so is the case at higher per capita
cap share of the industrials appears unclear... income
15% 25%
Industrial's market cap
20%
share (in %)
share (in %)
10%
15%
10%
5%
5%
0%
0%
0 2000 4000 6000
0 5000 10000 15000
Source: CEIC, Bloomberg, Capitaline, Ambit Capital research. Note: Countries Source: CEIC, Bloomberg, Capitaline, Ambit Capital research. Note: Countries
under consideration Turkey (CY00-15), India (CY94-15), Malaysia (CY94-15), under consideration Mexico (CY00-15), Turkey data (CY00-15), Malaysia
and Thailand (CY06-15). Korea data not available. (CY94-15), and Thailand (CY06-15). Korea data not available.
Indias own experience so far has been reflective of this broader cross-country trend The market cap share of industrials
where the share of the industrials sectors market cap has followed no specific in India has followed no specific
pattern even as the share of investments in GDP rose from 22% in CY94 to 31% in trend
CY14 (see the exhibit below).

Strategy
Exhibit 33: The share of investments in India rose as its per Exhibit 34: but the trend of market cap share of
capita income rose industrials sector remains ambiguous
40% 15%
R = 0.97
Investments (% of GDP )

30%
share (in %)
10%
20% 5%
10% 0%
0 500 1000 1500 2000 0 500 1000 1500 2000
Source: CEIC, Bloomberg, Ambit Capital Research. CY94-14. Source: CEIC, Bloomberg, Capitaline, Ambit Capital Research.

Strategy
Section 4: Predicting the sectoral

composition of the Sensex in 2025
Combining the findings from Section 1, 2 and 3 we conclude the following:
The share of consumer discretionary and Financial Services will rise by The market cap share of consumer
FY25: We expect the share of spending on discretionary and Financial Services to discretionary + financial services,
rise by at least 10% points from the current ~30% of total consumption to ~40% and industrials + materials +
of total consumption. Given that cross-country experience suggests that the energy will rise and that of
market cap share of consumer discretionary and Financial Services tends to rise consumer staples, and IT +
as per capita income increases, we assume that the combined market cap share telecom will fall by FY25 while
of consumer discretionary and Financial Services sectors in the BSE Sensex index utilities and healthcare will
rises by 8-9% points by FY25. stagnate.
The share of consumer staples will fall further by FY25: We expect the share
of total consumption on food items to fall by at least ~5% points from the current
~30%. Given that cross-country experience suggests that the market cap share of
consumer staples tends to rise as per capita incomes rise, we assume that the
market cap share of consumer staples will fall by at least ~5% points by CY25.
The share of Industrials + Materials + Energy will rise by FY25: Given the
rising share of investments as well as the Indian Governments desire to increase
infrastructure spending (at least in the medium term), we assume that the
combined market cap share of these three sectors will rise by ~5% points by
CY25.
The share of healthcare will fall marginally/stagnate by FY25: We expect
the share of total consumption spend on healthcare services to fall/stagnate in
India as per capita income remains in the sub-US$10,000 category. Given that
cross-country experience suggests that the market cap share of the healthcare
sector tends to fall/stagnate at low per capita income levels, we assume that the
market cap share of this sector will stagnate and stay at 5-6% by FY25.
No change in the utilities market cap share by FY25: We do not expect the
market cap share of utilities to change significantly owing to the defensive and
domestic-oriented nature of the sector.
The share of IT and Telecom will fall by FY25: Adjusting for the above
changes, we expect the combined market cap share of these two sectors to fall by
~7% points by CY25. According to our Telecom analyst, Vivekanand
Subbaraman, the Indian telecom sector is currently benefitting from sharp data
services growth led by increased smartphone penetration and consolidation
among the top 4 players. However, unlike voice, data is much more capital
intensive, implying high recurring spends in spectrum and network infrastructure.
High capital intensity in data,
Thus, whilst the telecom sector can grow at low double digits (after 9% CAGR
technological risks, and threats
over FY11-16), capital intensity will remain high, implying that sector market cap
from content providers are key
growth will be in high single digits or low-double digits. The sector will also be
tailwinds to the Indian telecom
challenged by technological obsolescence and threats from content providers (like
sector over the next decade.
media companies) which will look to bypass telcos to reach customers.
The table below summarises the changes expected in sectoral market cap shares over
the next decade.

Strategy
Exhibit 35: Sectoral composition of the Sensex in FY25

Sectors FY95 FY05 FY15 FY25
Consumer Discretionary + Financial services 15% 25% 41% 49%
Industrials, Materials, and Energy 58% 35% 20% 25%
Information Technology and
0% 21% 17% 10%
Telecommunication Services
Consumer Staples 23% 12% 13% 8%
Healthcare 2% 5% 6% 5%
Utilities 2% 2% 3% 3%
Total 100% 100% 100% 100%
Source: Capitaline, Ambit Capital Research. Note: The weights from 2006 onwards are based on free float
market cap weights. Red indicates a decline in the sectors market cap weight whereas blue indicates an
increase.
Will changes in the shape of the underlying economy necessarily translate

into corresponding changes in the Sensex?
A cross-country analysis of the market capitalisation to GDP ratio of peer countries at
the point in time when each of these countries had a per capita income of US$2000
suggests that Indias market capitalisation as a share of GDP is already higher than
that of peers when they were at the same stage of development as India (see exhibit
below).
120
to GDP (in %) at US$2k
Market capitalisation
100
per capita icnome
80 Indias market cap to GDP ratio is

60 higher than that of peers when
their per capita incomes were
40 US$2000
20
0
Korea Indonesia Peru China India Malaysia Thailand
Source: World Bank, Ambit Capital Research. Note: Data for Korea pertains to CY82, for Indonesia pertains to
CY08, for Peru pertains to CY97, for China pertains to CY06, for Malaysia pertains to CY83, for Thailand pertains
to CY93, and for India pertains to CY15. Perus data is available from CY97 onwards though per capita income
touched US$2k in CY95. Data for Mexico and Turkey is not available for the desired period.
Indias high market capitalisation to GDP ratio suggests that there is a higher
probability of changes in the underlying economy being translated into changes in
the benchmark equity index.

Strategy
Section 5: Entries into the Sensex by FY25

Having identified the sectors that will gain market cap share over the next
decade, we use our proprietary filters such as the greatness framework and
the Coffee Can Portfolio to identify 11 already listed stocks that will enter the
Sensex, namely: Kotak Mahindra Bank, IOCL, HCL Technologies, Ultratech
Cement, IndusInd Bank, BPCL, Eicher Motors, Ambuja Cement, Pidilite
Industries, Torrent Pharma, and Page Industries. If history is any guide, four
Sensex entrants will come from new listings or M&A. Our entrants in this
category are Flipkart, LIC, HDFC Life, and Paytm.
Entrants from IPOs and M&A

We identify four unlisted companies that can potentially enter the Sensex. We start We identify four unlisted
with three underlying themes that will gain traction in the next decade. companies that can potentially
enter the Sensex
1. Sectors with significant private equity funding:
Indias e-commerce sector has attracted the attention of venture capital (VC) and
private equity (PE) funding thanks to a rapid increase in the number of Internet users
in general (306mn users as at December 2015, up from 19mn in December 2010)
and broadband access in particular. Mobile penetration which is instrumental in
increasing e-commerce adoption via apps on smartphones is now nearing 100% in
India with 980mn mobile phone subscribers (June 2015) in a population of 1.21bn
(Census 2011).
Nasscom expects Indias internet base to more than double and touch 730mn by
2020, with 75% of the new users coming from rural India (Source: goo.gl/ZpiJi4).
VC and PE players have chased this growth by funding e-commerce companies in
India. This funding has led to a proliferation of e-commerce platforms and the
emergence of brands such as Flipkart, Ola and Snapdeal in the past few years. More
specifically, there are currently nine Indian companies that are part of the Wall Street
Journals Global Billion Dollar Startup Club (see exhibit below).
Exhibit 36: The Indian companies in the WSJ's Billion Dollar Startup Club
Valuation Total Equity
Company Last Valuation
(US$bn) Funding (US$ mn)
Flipkart* 9.4 3,000 August 2016
Snapdeal 6.5 1,700 Feb 2016
Ola Cabs 5 903 September 2015
InMobi 2.5 216 Dec 2014
Paytm (One97 Comm)* 4.8 593 March 2015
Quikr 1.0 350 Sept 2014
Zomato 1.0 163 March 2015
Shopclues 1.1 468 January 2016
Hike 1.4 260 August 2016
Source: Wall Street Journal website, The Billion Dollar Startup Club section as on August 2016, Ambit Capital
research. * - Flipkarts valuation is from Morgan Stanley Institutional Fund Trust as of August 2016. Paytms
valuation is as per latest round of funding from Taiwan based Media Tek.
As these companies grow larger, VC/PE funds will seek exits. Whilst SEBIs current VC/PE investors seeking exits will
listing norms appear restrictive with regards to profits (track record of distributable drive large IPOs
profits for at least three out of the immediately preceding five years) and promoter
holding (locked in for three years), SEBI is reportedly mulling easing the rules for
listing for helping start-ups (Source: https://goo.gl/snjjlO).
Thus, whilst under current norms, a listing appears unlikely in the near term, we
believe that in the next decade these startups will look at IPO to: (a) fund their growth
on a larger scale; (b) provide exits to their PE investors; and (c) compete on a global
platform.
Our choices: Flipkart and Paytm

Strategy
Most likely Sensex entry candidates: As outlined above, we expect the large e-
commerce startups to list in the coming decade. Out of these, we choose Flipkart
and Paytm for their leading positions (both in terms of scale and valuation) among
competition. We have to admit that because these are unlisted firms, our judgments
are based on what we read in the press, which might mean that we do not have a
complete picture of the financial prospects of these firms.
2. Sectors that will come into play via disinvestment:

In the current Sensex, seven of 30 stocks had issued shares through an IPO in the
past 15 years (i.e. after 2000). Out of these seven stocks, we note that five (Coal
India, ONGC, Maruti, NTPC and GAIL) were driven by Government-led Big-ticket disinvestment will return
disinvestment. The listing of these stocks provided investors with stocks to play under the current Government
meaningful investment themes, ranging from passenger cars to coal mining. Their
IPOs were also large and eventually these stocks were included in the Sensex.
Exhibit 37: Large IPOs since 2000 that resulted in Sensex entry
Company Year of IPO IPO Size (Rs bn) Entered Sensex in
Coal India Oct 2010 150 2011
ONGC March 2004 95 2003
TCS Aug 2004 54 2005
NTPC Oct 2004 54 2005
Bharti Airtel Jan 2002 8 2003
Maruti Suzuki June 2003 10 2004
GAIL India Feb 2004 16 2012
Source: SEBI, BSE, Bloomberg, Ambit Capital research
In FY04, the last year of the then BJP-led National Democratic Alliance (NDA), the The BJP-led NDA Government has
Government raised Rs155bn, a record at that time. a track record for big-ticket IPOs of
Exhibit 38: Disinvestment trends from FY92 to FY04
public sector companies
(Rs bn)
Target Receipts Actual Receipts
180 Disinvestment receipts

160 touched a new record in FY04
140
120
100
80
60
40
20
0
FY92 FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04
Source: Department of Disinvestment, Ambit Capital research
Over the next decade, we expect the current NDA Government to aggressively divest
its stake in certain Central Public Sector Enterprises (CPSEs). For the current year, the
Government has set a disinvestment target is of Rs56,500crores (Source:
https://goo.gl/JWjU0g).
As most of the large (Maharatna and Navratna) CPSEs are already listed (except
Hindustan Aeronautics Limited and Rashtriya Ispat Nigam Limited), the Government
would look at Follow-up Public Offers (FPOs) for raising funds. For new issues, the
Government could choose from smaller CPSEs (Miniratna Category I with 55
companies and Category II with 17 companies). Airports Authority of India, Housing
& Urban Development Corporation (HUDCO), India Tourism Development
Corporation (ITDC), Indian Railway Catering & Tourism Corporation (IRCTC) are some
of the interesting CPSEs that could open up new investment themes if they were listed
in the next decade. We highlight recent media reports citing Government plans to
corporatise and sell shares of the Airports Authority of India (AAI) (Source:

Strategy
http://goo.gl/gMgpah) and the possibility of selling shares for the first time in Indian
Renewable Energy Development Agency and Housing and Urban Development
Corporation (Source: https://goo.gl/9cvBVO).
Furthermore, in early September 2016, the Finance Minister raised the possibility of
listing the Life Insurance Corporation of India (LIC). The FM stated how LIC would be
the most valuable company in the markets of the country and one of the most
formidable ones in the world(Source: https://goo.gl/z699KP).
Most likely Sensex entry candidate: We believe that the current NDA Government
Our choice for PSU divestment
would opt for at least one large IPO in the next decade to convey its commitment to
candidate: LIC
divestment. We believe LIC could top the list of profitable PSUs that will list over the
next decade.
3. Sectors where regulatory hurdles may potentially ease:

Increasing clarity on regulatory issues in sectors such as insurance and real estate
could lead to large IPOs from these sectors and provide potential entrants into the
Sensex.
In insurance, Parliament passed the Insurance Bill in March 2015 (Lok Sabha on 4 With regulatory hurdles lifted,
March 2015 and Rajya Sabha on 12 March 2015), paving the way for a hike in the Indias insurance sector could see
FDI limit in insurance companies to 49% from 26%. This will pave the way for large big-ticket listings
Banking and Financial Services (BFSI) entities like ICICI Bank and SBI to list their
insurance joint ventures.
Most likely Sensex entry candidates: From the clutch of large listed insurers that Our choice: HDFC Life
are likely to emerge, we choose HDFC Life as the most likely candidate to enter the
Sensex in the next decade. The merged entity of HDFC Life Insurance and Max Life
will be named HDFC Life. With Rs1.1tn in assets, the merged entity will overtake
ICICI Prudential Life Insurance to become the largest non-government insurer
(Source: https://goo.gl/DIU5gT).
We summarise our choices of companies that will enter the Sensex through IPOs in
the next decade in the following exhibit.
Exhibit 39: Four stocks that will enter the Sensex through IPOs/mergers
Name Sector Rationale
Already India's biggest e-commerce company in terms of valuations;
Flipkart Ecommerce
poised to benefit from the boom in ecommerce
Increasingly taking on banks in the digital payments space; strong
Paytm Digital Payments
parentage with investment from Alibaba (China)
Play on increasing share of BFSI in general and insurance in specific
HDFC Life Life Insurance
as economic growth increases
Potential to be the most valued company if listed as stated by the
FM, LIC controls 70% of life insurance market in terms of new
LIC Life Insurance business income and has assets under management of over Rs 22
lakh crore ($330bn), has not lost its leading market position despite
16 years of privatisation.
Source: Ambit Capital research

Strategy
Flipkart
The poster boy of Indian ecommerce
Flipkart is not only an ecommerce pioneer but has also revolutionized
customer outreach through initiatives such as cash on delivery and in-house
logistics. Moreover, Flipkart owns two of the largest fashion portals in India
Flipkart is the largest e-retail
controlling over 70% of fashion products sold online. This dominance over
company in India with 20 million
the fastest growing and most profitable category in ecommerce can make
products across more than 70
Flipkart profitable as the market grows and matures, thus, making it a
categories and has 70 million
prospective entrant in the Sensex.
registered users and 23,000
Introduction: Formed in September 2007 by Sachin Bansal and Binny Bansal, employees. Its Gross Merchandise
Bengaluru-based Flipkart is the largest e-retail company in India, with a gross Value run rate is at US$4bn.
merchandise value (GMV) run-rate of US$4bn. With downloads between 50-100
million on the Android store, it is the eighth most-downloaded free app in India. The
company stocks 20 million products across more than 70 categories and has 75
million registered users and 23,000 employees.
Financials: Flipkart is registered in Singapore and its financials are therefore, not in
the public domain. Its current gross merchandise value (GMV) run-rate is US$4bn.
This is higher than peers such as Snapdeal and Amazon India. Flipkarts various
Indian subsidiaries reported revenues of Rs100bn and losses of Rs19.3bn in FY15.
Funding: Flipkarts largest investors are Tiger Global and Intervision Services
Holding (Naspers, South Africa), which between them hold close to 50% in the
Singapore entity, whilst Sachin Bansal and Binny Bansal hold 8.7% each
(http://goo.gl/8txtbB). Flipkart raised US$1.9bn in 2014 (from DST Global, Tiger
Global and Naspers) and raised a further US$700mn in July 2015
(http://goo.gl/OMYUIu, http://goo.gl/OYZuMp, goo.gl/9HfvDC).
Rationale for inclusion as a Sensex entry candidate: Flipkarts current valuation
(US$9.4bn valuation, as per Morgan Stanleys markdown) (goo.gl/qNvrIv) already
places it ahead of many Sensex stocks. E-retail is already a compelling theme among Given its size and growth path,
private investors and, in the next decade, should move to the public investment Flipkart is well placed as a
domain. According to BCG, the Indian e-commerce markets size is likely to increase potential Sensex entrant.
from US$16bn-17bn in 2014 to US$45bn-50bn in 2020, an annual growth rate of
more than 20-25%. Also Flipkart controls over 70% of the fashion business in
ecommerce through Myntra and Jabaong. Apparel is the fastest growing category
(40%) and the second largest category by sales (35%) on ecommerce. It is also the
most profitable category (gross margins 35-40%). As it grows larger in size and
achieves profitability led by fashion, Flipkart has a good chance of finding its way into
the Sensex in the next decade.

Strategy
Paytm
The digital payments leader
Introduction: Paytm is the flagship brand of One97 Communications, a digital
goods and mobile commerce company founded by Vijay Shekhar Sharma. In FY13, Paytm is making rapid strides in
Paytm received a licence from the RBI for semi-closed digital wallet which it launched the digital payments space
in FY14. It also provides an online B2C marketplace. In 2015, Paytm received a
payments bank license from the RBI. As of September 2016, the company claims that
there are over 130 million wallets registered on its platform. Headquartered in New
Delhi, One97 has employee strength of 3,200.
Financials: Founder, Vijay Shekhar Sharma held a 21.3% stake in the company,
whilst SAIF Partners held 30.8%, as at August 29, 2016. On the e-retail marketplace,
Paytms current GMV run-rate is US$4.5bn in August 2016 and targets to achieve
GMV of US$10bn by end-current financial year (Source: https://goo.gl/TPt9ps).
Funding: Paytm has so far raised more than US$728million in funding. It shot into
the limelight in February 2015 when it raised funding from Alipay Financial (part of
Alibaba, the Chinese e-commerce company) for its mobile commerce and digital
wallet operations. The other key investors include ANT Financial, SAIF Partners, and
Intel Capital. In March 2015, Ratan Tata, Chairman Emeritus, Tata Sons, joined
Paytm as an advisor and made a minor investment in the company. On 31 August
2016, Paytm raised US$60 million reportedly from Taiwan based investment fund
MediaTek taking its valuation to ~US$5billion. (Source: https://goo.gl/L81Oa1)
Paytm can potentially disrupt Indias payments infrastructure over the longer term
Rationale for inclusion as a Sensex entry candidate: One97 also features on the
WSJs Billion Dollar Startup Club, with an estimated valuation of US$4.8bn. Given its
convenience over cash and ease of use via mobile apps, digital wallets are witnessing
rapid growth. Paytm is already a large player (130mn digital wallets) in this space.
Moreover, as a payments bank, it can potentially provide a wider array of financial
services (payments, remittances, small savings, distribution of financial products).
Access to wide transaction data of customers and vendors also places Paytm in a
formidable position in the emerging data-analytics led Financial Services landscape.
When it lists, it will likely be a significant Indian financial services company. The
presence of Alibaba provides a competitive edge.

Strategy
Life Insurance Corporation of India

The biggest life insurer in India
Introduction: Life Insurance Corporation of India (LIC) is a government-owned
insurance company. Set up in year 1956, it is the largest life insurance company in
India accounting for a staggering ~70% of market share. It generated premiums of
Rs2.7tn in FY16 and had ~Rs21tn in assets under management (AUM) at Mar-16.
Given LICs dominant position
LICs key strengths are: (i) a strong retail brand name; and (ii) a strong distribution
(AUM ~Rs21tn as of March 2016)
channel with presence of ~1.1mn agents.
and our thesis that financial
Rationale for inclusion as a Sensex entry candidate: LIC is a statutory services market cap share will
corporation brought into being by an Act of Parliament passed in 1956 and does not increase, LIC can have a good
fall under The Companys Act. Whilst we are not sure if a listing of LIC is currently chance of entering the Sensex over
feasible given the sheer size of the company, various media reports indicate that the the next decade
size of the issue can be as high as Rs10tn. Given LICs dominant position in the sector
and our thesis of Financial Services increasing its market cap share over the next
decade (as outlined in Section 4), we expect the company to stand a good chance of
entering the Sensex in the next decade.
Exhibit 40: LIC - premium growth Exhibit 41: LIC - AUM growth
3,000 15% 21,130 20%

2,662 17,863
20,000
2,395 15,743 15%
2,500 2,368 10%
10%
10,000
2,000 5%
5%
1,500 0% 0 0%
FY14 FY15 FY16 FY14 FY15 FY16
Total Premium (Rs bn) Growth (%, RHS) Assets under management (Rs bn)
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 42: LIC - Profitability growth Exhibit 43: LIC - profitability
600 50% 100

499 87.2
500 40% 90
400 361
327 80
30%
300 65.5
70 62.0
20%
200 60
100 10%
50
0 0%
40
FY14 FY15 FY16
FY14 FY15 FY16
Valuation surplus (Rs bn) Growth (%, RHS) Valuation surplus (% of networth)
Source: Company, Ambit Capital research

Strategy
HDFC Life Insurance

Arguably the biggest private life insurer
Introduction: HDFC Life was one of the first private sector insurance companies to
be formed in 2000 and was jointly promoted by HDFC Ltd and Standard Life. In June
2016, it announced that it would merge with Max Life Insurance. Post the merger,
The combined entity post-merger
Max Group will cease to be the promoters of the company in favour of HDFC and
with Max Group will be the biggest
Standard Life with 42.5% and 24.1% stakes respectively. The combined entity will be
private life insurance companies by
the biggest private life insurance company by AUM (Rs1.1tn) and market share (~7%
AUM (Rs1.1tn) and market share
market share). Moreover, the merger will also enhance the product distribution mix
(~7%)
and bring in revenue and cost efficiencies.
HDFC Lifes Key strengths are: (i) a strong retail brand name; (ii) a strong distribution
channel with bancassurance partnerships with HDFC Bank, Saraswat Bank, RBL Bank
and IDFC Bank; (iii) one of the lowest operating expense to total premium ratio
(11.6%) in industry, which gives it an advantage over peers in product designing; (iv)
a persistency ratio of ~79%, which is the highest in in the industry and is indicative of
a high quality business; (v) ROE of ~28%, amongst the highest in the industry.
Rationale for inclusion as a Sensex entry candidate: Post the proposed merger
with Max Life, the combined entity will be valued at 4.1x FY16 embedded value. This Given HDFC Lifes dominant
is much higher than recent transaction multiples in the sector (which were in range of position post-merger and our thesis
2.4-3.6x embedded value). With RoEs of ~28%, the company would need to deliver that financial services market cap
strong growth to justify the post-merger share price. Whilst the growth rates in the share will increase over the next
sector have sobered (2% growth in new business premium over FY11-16) relative to decade, HDFC Life stands a good
the past (27% over FY06-11), we believe that growth opportunities continue to be chance of entering the Sensex
robust in India given the huge under-penetration of protection-based insurance in the
country premiums are 3% of GDP in India versus 6-15% in developed countries.
Given HDFC Lifes dominant position in the sector post the merger and our thesis of
financial services increasing their market cap share over the next decade (as outlined
in Section 4 we believe HDFC Life can be a likely Sensex entrant over the next
decade.
Exhibit 44: HDFC - premium growth Exhibit 45: HDFC - AUM growth
200 25% 1,000 40%

163.1 743
148.3 20% 671
150 120.6 506
15% 500 20%
100
10%
50 5% 0 0%
0 0% FY14 FY15 FY16
FY14 FY15 FY16 Assets under management (Rs bn)
Total Premium (Rs bn) Growth (%, RHS) Growth (%, RHS)
Exhibit 46: HDFC - Profitability growth Exhibit 47: HDFC - profitability
10 80% 50 44.7
9 40 35.1
8.2 60% 28.7
7.9
8 7.3 30
40%
7 20
6 20%
10
5 0% 0
FY14 FY15 FY16 FY14 FY15 FY16
Profit After Tax (Rs bn) Growth (%, RHS) Return on Equity (%)

Strategy
Sensex-bound stocks from the currently listed universe

Before we identify the stocks from the currently listed universe, we examine where
Sensex entrants historically came from. As noted in our June 2015 Sensex thematic,
typically:
~50% of the entrants historically have come from the top-100 stocks based on Nearly half the entrants come from
market cap as of the beginning of the decade. This suggests that nearly half the the top-100 stocks below the
fresh entrants over a 10-year window belong to the top-100 stocks on beginning- Sensex
period market cap;
~10% stocks come from the next-100 stocks (i.e. beginning-period market cap
rank between 101-200);
~5% of the entrants come from the listed universe outside the top-200 stocks;
and
The remaining 35% of the stocks entered the index on account of fresh listings.
Exhibit 48: Nearly half the entrants historically have come from the top-100 stocks as
at the start of the decade
% entrants coming from:
Period 'Beyond top-200' 'Fresh issuances'
'Top-100' bucket '101-200' bucket
bucket bucket
1990-00 33% 11% 6% 50%
1991-01 33% 6% 11% 50%
1992-02 47% 16% 11% 26%
1993-03 45% 20% 15% 20%
1994-04 60% 10% 10% 20%
1995-05 50% 25% 5% 20%
1996-06 50% 7% 7% 36%
1997-07 46% 8% 0% 46%
1998-08 38% 8% 0% 54%
1999-00 43% 0% 7% 50%
2000-10 44% 0% 13% 44%
2001-11* 44% 6% 6% 44%
2002-12* 57% 7% 7% 29%
2003-13* 56% 11% 0% 33%
2004-14* 75% 13% 0% 13%
2005-15* 63% 13% 0% 25%
Average 49% 10% 6% 35%
Source: Bloomberg, Capitaline, Ambit Capital research. Note: * indicates this is on a free float market-cap basis
Owning a future Sensex entrant has been a winning proposition

On average, firms entering the index have delivered 29% returns (in CAGR terms) Firms that enter the index from
over the decade. However, what is more interesting is the composition of these outside of the top-200 stocks tend
returns. Firms that entered the index from the top-100 bucket (based on beginning- to be blazing winners
period market cap) managed to deliver 22% CAGR returns historically. Firms that
entered the index from the next 100 bucket managed to deliver an impressive 36%
CAGR return. Following this logic further, firms that entered the index from outside
the top-200 stocks, however, have been blazing winners (having delivered 60%
CAGR returns over the 10-year period).

Strategy
Exhibit 49: The further an entrant is from the Sensex at the beginning of the decade,
the higher its investment returns over the course of the decade
Average share price returns over the decade for stocks coming from:
Period 'Beyond top-200' 'Fresh issuances'
'Top-100' bucket '101-200' bucket
bucket bucket
1990-00 18% 25% 64% N/A
1991-01 13% 4% 50% N/A
1992-02 10% 34% 35% N/A
1993-03 12% 43% 57% N/A
1994-04 17% 28% 57% N/A
1995-05 24% 42% 67% N/A
1996-06 43% 35% 75% N/A
1997-07 35% 49% N/A N/A
1998-08 22% 39% N/A N/A
1999-00 23% N/A 65% N/A
2000-10 24% N/A 70% N/A
2001-11* 24% 68% 63% N/A
2002-12* 28% 54% 60% N/A
2003-13* 22% 30% N/A N/A
2004-14* 21% 24% N/A N/A
2005-15* 22% 37% N/A N/A
Average 22% 36% 60% N/A
Source: Bloomberg, Capitaline, Ambit Capital research. Note: This is the average share price performance over
the decade for firms entering the Sensex by the end of the decade. * indicates this is share price performance for
firms belonging to the respective buckets constructed on a free float market-cap basis.
Thus, close to half of the 15 Sensex entrants of the next decade are likely to come
from the top-100 stocks ranked by market cap today. Another 10% are likely to come
from the next 100 stocks by market cap (below the top 100). About 6% should come
from the universe beyond the top-200. Finally, a third of the entrants are likely to be
new offerings.
To identify potential Sensex entrants from the current listed universe, we use a five-
step process to identify 10 firms that are most likely to enter the index over the
coming decade.
Step 1: Efficient capital allocation
Over the past four years, we have successfully used our greatness framework to We use a five-step process to
measure the efficiency of a firms capital allocation. The framework looks for firms identify the ten firms from the
that judiciously invest capital and turn those investments into sales, profits, balance current listed universe
sheet strength and, most importantly, free cash flows which then feed back into the
future growth needs of the firm.
Exhibit 50: The greatness framework
a. Investment (gross b. Conversion of

block) investment to sales
(asset turnover, sales)
We start with our greatness

framework to identify the most
c. Pricing discipline efficient capital allocators
(PBIT margin)
e. Cash generation d. Balance sheet

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

Strategy
This framework has been the basis of stock selection for both our tenbagger and
Good & Clean portfolios. For more details on the framework please refer to our latest
iteration dated January 5, 2016 Ten baggers 5.0.
For a firm to be considered for Sensex inclusion, the greatness score should be 67%
or higher. Thus, at the first step, we weed out all firms that fail to meet this metric.
However, we make exceptions for IOCL, Ambuja, Ultratech, and Pidilite Industries:
Whilst IOCL and Ultratech do not score highly on the greatness model, they
require the least amount of compounding to get into the index given their size.
Ambuja will soon cease to exist in its current form as it will merge with ACC thus
creating the second-largest cement company in India with a combined market
cap in the region of $10.6bn and a highly likely Sensex entrant.
Pidilite is included due to our analysts conviction on the long term story for the
stock.
Step 2: Consistent financial performance

Once filtered for greatness, we test the universe for consistency of financial
performance using our twin filters of growth and profitability (we had used these
same filters for creating our Coffee Can Portfolio in November last year).
Consistent sales growth of more than 10%: With Indias nominal GDP having
grown at 15% per annum on average over the last 10 years (FY05-14), we
measure the consistency of growth by using a more relaxed filter of 10% sales
growth in at least seven of the past 10 years.
Consistent RoCE of over 15%: With 15% being the approximate cost of capital
in the country, we use a profitability filter of 15% or more on pre-tax ROCE in at
least seven of the past 10 years.
For Financial Services companies, we modify the filters on RoCE and sales growth as
follows:
RoAs of 1.1% for banks (and RoEs of 15% for non-banking financial
services): Whilst we have used RoE as the return measure for NBFCs, we have
used RoA for banks. Whilst the underlying profitability of operations reflects in
both RoA and RoE, RoE is also impacted by the leverage or capital position of the
bank. Historically, many banks (especially PSU banks) have delivered high RoEs
due to high leverage despite weak underlying profitability. Therefore, RoAs is a
better metric to use for banks.
We identify banks that have delivered RoAs in excess of 1.1% (and NBFCs that
have delivered RoEs in excess of 15%) in at least seven out of the last 10 years.
Loan growth of 15%: We believe consistency of loan growth is an indication of
a lenders ability to lend over business cycles. Strong lenders ride the downcycle
better as their competitive advantages surrounding their origination, appraisal
and collection process ensure that they continue their growth profitably either
through market share improvements or upping the ante in sectors which are
resilient during a downturn. Therefore, we identify lenders that managed to
deliver 15% loan growth in at least seven of the past 10 years.
Step 3: Ambits P-75 companies

We then screen the residual universe to eliminate stocks that are part of Ambits P-75
companies, i.e. companies whose core competitive advantage is political connectivity.
We believe such companies are on a weaker footing given the impact of Modis three We eliminate firms that are
resets, especially the one pertaining to disruption of crony capitalism. politically connected
Our P-75 index, the index of the 75 most politically connected companies in India,
neatly captures the demise of the connected company model in India.

Strategy
Exhibit 51: The connected companies index has consistently underperformed the
BSE500 since the release of the CAG report in October 2010
340
Publication of CAG report in
300
Oct' 10 was an inflection point
260
220
180
140
100
60
Sep-09
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
Jan-09
May-09
Jan-10
May-10
Jan-11
May-11
Jan-12
May-12
Jan-13
May-13
Jan-14
May-14
Jan-15
May-15
Jan-16
May-16
Ambit Connected Cos Index BSE 500 Index
Source: Bloomberg, Ambit Capital research
Thus, any company in our universe that is part of Ambits P-75 companies is
automatically disqualified from becoming a probable Sensex entrant.
Step 4: Market-cap buckets
The fourth filter that we use pertains to the size of the company at the beginning of The fourth filter relates to the size
the period. From our previous discussions, we note that nearly half of the Sensex of the company at the beginning of
entrants historically have been firms belonging to the top-100 stocks on free float the decade
market cap as of the beginning of the period. This would mean that around eight of
the 10 entrants from the current listed universe should belong to the top-100 stocks
on free-float market cap as of today.
Further, the remaining 15% entrants come from the universe outside of the top-100
companies. This would mean that the remaining two companies should belong to the
residual universe (outside of the top-100 companies).
Step 5: Pick and choose depending on sector
In the final step, from the stocks that clear all our filters, we give pre ference to Finally, we give preference to
stocks that belong to the sectors that are expected to gain market share - Consumer stocks which belong to our
Discretionary, Industrials, Energy, Materials, Financial Services. preferred sectors.
Exhibit 52: Stocks from the top-100 universe that are likely to enter*
ADVT-6M Mkt cap FF mkt
Company name Ticker Reasons for entry
(US$mn) (US$bn) cap rank
Among the best-run private sector banks; expected to generate synergies
Kotak Mahindra Bank KMB IN 22.3 11 22
with the ING Vysya integration
Largest Indian fuel retailer and second largest refiner; competitive
IOCL IOCL IN 21.0 19 15 advantage will be driven by Paradip scale up and increased autonomy in
decision making by GoI
Leader in Infra Management Services and Engineering Services; scores
HCL Tech HCLT IN 16.5 25 30 high on our capital allocation, portfolio mix, operational excellence and
management framework
Strong balance sheet/cash generative traits and access to large land
UltraTech Cement UTCEM IN 16.2 27 15 parcels and limestone reserves will drive Ultratechs leadership position
and make it a proxy play on India infra/housing pick up
Leading fuel retailer and refiner in India with superior capital allocation
BPCL BPCL IN 12.9 30 24
and project execution
Leader in Commercial Vehicle financing; expansion in new areas led by
IndusInd Bank IIB IN 10.6 18 22
strong franchise will drive market share gains strong loan book growth
Leader in niche motorcycle segment; well-placed to gain from rise in
Eicher Motors EIM IN 9.2 35 18
consumer discretionary spend
ACC will merge with Ambuja to create the second largest cement entity.
Ambuja Cement ACEM IN 8.1 49 10 The combined entity will maximise plant efficiencies and enjoy synergistic
savings
Sustainable brand leadership, superior fundamentals make Pidilite a
Pidilite Industries PIDI IN 5.4 85 8
high-quality defensive play in consumer sector
Source: Bloomberg, Capitaline, Ambit Capital research. * Note: At present, the smallest Sensex stock by market cap is Tata Steel with a market cap of $5.4bn

Strategy
Similarly, stocks from the next 100 universe on free-float market-cap that clear all our
filters and which we believe would likely enter the index over the next decade have
been shown in the exhibit below.
Exhibit 53: Stocks from the 101-200 universe that are likely to enter
Mkt cap FF mkt cap ADVT-6M
Company name Ticker Reasons for entry
(US$bn) rank (US$mn)
Increasing presence in generics (US, Europe) and branded markets
Torrent Pharma TRP IN 4.1 108 4
(India and EMs); new management driving high RoCEs
Greater growth longevity than most consumer companies;
Page Industries PAG IN 2.5 105 2
sustained competitive advantages will support premium valuations
Source: Bloomberg, Capitaline, Ambit Capital research. Greatness scores for non BFSI names are based on FY10-15 financials and for BFSI names FY09-14
financials. Accounting scores are based on FY09-14 financials. Our accounting framework does not apply to BFSI names.
The final list

We present the results of our five-step screening of the listed companies universe to
identify the most likely Sensex entry candidates over the next 10 years in the exhibit
below.
Exhibit 54: The most likely Sensex entry candidates over the coming decade
Mcap FF mkt FY16 FY16
6M ADV
Company Name Ticker cap Entry hypothesis
(US$ bn) (US$ mn) P/E P/B
rank
Entrants from the top 100 stocks below the Sensex on free-float mcap
Kotak Mahindra Among the best-run private sector banks; expected to generate synergies with
KMB IN 22.3 11 22 42.6 4.4
Bank Ltd. the ING Vysya integration
Largest Indian fuel retailer and second largest refiner; competitive advantage
IOCL IOCL IN 21.0 19 15 12.2 1.8 will be driven by Paradip scale up and increased autonomy in decision
making by GoI
Leader in Infra Management Services and Engineering Services; scores high
HCL Tech HCLT IN 16.5 25 30 14.2 3.8 on our capital allocation, portfolio mix, operational excellence and
management framework
Strong balance sheet/cash generative traits and access to large land parcels
UltraTech Cement UTCEM IN 16.2 27 15 47.3 5.1 and limestone reserves will drive Utlratechs leadership position and make it a
proxy play on India infra/housing pick up
Leading fuel retailer and refiner in India with superior capital allocation and
BPCL BPCL IN 12.9 30 24 10.4 3.0
project execution
Leader in Commercial Vehicle financing; expansion in new areas led by
IndusInd Bank IIB IN 10.6 18 22 29.1 3.9
strong franchise will drive market share gains strong loan book growth
Leader in niche motorcycle segment; well-placed to gain from rise in
Eicher Motors EIM IN 9.2 35 18 56.7 17.7
consumer discretionary spend
ACC will merge with Ambuja to create the second largest cement entity.
Ambuja Cement ACEM IN 8.1 49 10 50.7 4.0
The combined entity will maximise plant efficiencies and savings
Sustainable brand leadership, superior fundamentals make Pidilite a high-
Pidilite Industries PIDI IN 5.4 85 8 48.1 13.1
quality defensive play in consumer sector
Entrants from the next 100 stocks on free-float mcap
Increasing presence in generics (US, Europe) and branded markets (India and
Torrent Pharma TRP IN 4.1 108 4 16 8.1
EMs); new management driving high RoCEs
Greater growth longevity than most consumer companies; sustained
Page Industries PAG IN 2.5 105 2 71.1 32.7
competitive advantages will support premium valuations
Entrants from amongst currently unlisted stocks
India's biggest e-commerce company in terms of valuation; likely to benefit
Flipkart N/A N/A N/A N/A N/A N/A
from the ongoing growth in internet connectivity
Play on increasing share of BFSI in general and insurance in specific as
HDFC Life N/A N/A N/A N/A N/A N/A
economic growth increases
Potential to be the most valued company if listed as stated by the FM;
controls 70% of life insurance market in terms of new business income and has
LIC N/A N/A N/A N/A N/A N/A
assets under management of over Rs22 lakh crore; has not lost its leading
market position despite 16 years of privatisation.
Increasingly taking on banks in the digital payments space; strong parentage
PayTm N/A N/A N/A N/A N/A N/A
with investment from Alibaba (China)
Source: Bloomberg, Capitaline, Ambit Capital research. Note: We have also filtered this list for clean accounting quality using our forensic accounting framework. .
*While IndusInd Bank meets the RoA cut-off of 1.1% in six out of the last ten years, we have included the bank as it is ranked the best bank on our greatness
framework. Greatness scores for non BFSI names are based on FY10-15 financials and for BFSI names FY09-14 financials. Accounting scores are based on FY09-
14 financials. Our accounting framework does not apply to BFSI names.

Strategy
Note that in the exhibit above we have only considered firms from the top-200
companies on free-float market cap as of today. Historical trends suggest that ~5% of
the fresh entrants belong to the universe outside of the top-200 companies. Thus, in
todays context, this would mean that 1 of the likely 15 entrants may be from this
universe. However, given that we do not cover most of these names (in the universe
outside top-200), we could not pick a name to be included in the list of entrants.
However, for the universe outside of the top-200 companies, we have listed in the in
the exhibit below all the companies that meet all our criteria.
Exhibit 55: The list of firms outside of the top-200 companies that meet our criteria for inclusion
Mcap FF mkt 6M ADV
Company Name Ticker FY16 P/E FY16 P/B
(US$ mn) cap rank (US$ mn)
Hexaware Tech. HEXW IN 911 313 4.3 15.3 4.2
Relaxo Footwear RLXF IN 828 360 0.4 42.9 10.8
Persistent Sys PSYS IN 749 219 1.3 16.3 2.9
Greenply Inds. MTLM IN 488 340 0.6 25.2 5.3
Vinati Organics VO IN 458 476 0.4 23.6 5.7
Suprajit Engg. SEL IN 381 367 0.2 32.8 5.7
Huhtamaki PPL HPPL IN 307 535 0.2 25.9 3.2
Accelya Kale KALE IN 277 612 0.1 22.1 16
Caplin Point Lab CLPL IN 272 568 0.2 33.5 15.3
Poly Medicure PLM IN 260 462 0.1 36 7.6
Geometric GEO IN 223 455 1.9 14.1 3.2
V-Mart Retail VMART IN 140 648 0.1 34.5 4
KEI Inds. KEII IN 133 629 0.3 14.2 2.4
Kovai Medical KMC IN 131 634 0 21.5 5
Arcotech Ltd ATECH IN 117 897 1.4 20 3.7
Source: Bloomberg, Capitaline, Ambit Capital research. Note: We have also filtered this list for clean accounting quality using our forensic accounting framework.
Note: Assuming that the smallest constituent of the Sensex currently, i.e. Tata Steel,
compounds at 15% over the next 10 years, its free-float market cap would have
grown to Rs1000bn. The largest company on free-float market-cap from the universe
outside the top-200 (listed above) is Crompton Greaves. For it to reach this
milestone, it will have to compound at ~40% over the next 10 years. We cannot see
any of the companies in the exhibit shown above compounding their free float market
cap at 40% CAGR for the next ten years.

Strategy
Section 6: Predicting exits from the Sensex

With the PM, the RBI and technology driving structural changes similar to
those seen in the early 1990s, we expect the Sensex to churn by 50% over the
next 10 years. This implies that we will see 15 stocks exit the Sensex over the
next decade. Owning these Sensex exit candidates is a painful proposition as
they are likely to show massive underperformance until the time of exit. Our
15 exit candidates for the next decade are: Reliance Industries, ONGC, SBI,
Coal India, Bharti Airtel, L&T, NTPC, M&M, Wipro, Cipla, Adani Ports, Hero
Moto, Tata Steel, GAIL and Dr Reddys.
Sensex churn set to rise

In our note dated June 22, 2015 titled The Sensex in 2025, we noted how the
constitution of the Sensex is extremely dynamic and that churn in the Sensex is the
only constant.
Our analysis of Sensex churns over a 10-year window from 1986 to date (i.e. 1986- Sensex churn rises when the
1996, 1987-1997 and so on to 2005-2015) shows that the churn ratio of the Sensex economy undergoes irreversible
tends to rise when the economy is undergoing irreversible structural changes. For structural changes
instance, the 10-year period spanning 1991-2001, during which the era of the
License Raj came to an end, saw the Sensexs churn ratio rise to 60% (vs 53% over
1989-99).
Exhibit 56: Sensex churn ratio shows a tendency to rise when the economy undergoes
structural changes
Sensex churn- 10 yr window

% of sensex cos. churned out
70%
60%
over the next 10 yrs
50%
40%
30%
20%
10%
0%
86-96
87-97
88-98
89-99
90-00
91-01
92-02
93-03
94-04
95-05
96-06
97-07
98-08
99-09
00-10
01-11
02-12
03-13
04-14
05-15
Source: Ambit Capital research, Bloomberg. Note: Sensex churn has been calculated as the percentage number
of companies forming a part of the Sensex in year t that get exited from the index by year t+10. For example,
50% in the 1986-96 period suggests 15 of the 30 Sensex constituents in Dec86 were no longer part of the index
10 years later, i.e. Dec 96.
Churn in the Sensex peaked in the four years following the momentous reforms Sensex churn peaked in the four
launched by PV Narsimha Rao (as PM) and Manmohan Singh (as Finance Minister). A years following the 1991 reforms
whole host of businesses which had flourished behind the protectionist barriers
created by the License Raj were ejected from the Sensex. These industries include
(1) Textiles (Aditya Birla Nuvo, Bombay Dyeing, Century Textiles and Future
Polyester), (2) Automobiles (Hindustan Motors and Premier), (3) Steel (Mukand
Limited), (4) Paper (Ballarpur Industries), and (5) Heavy engineering (Bharat Forge,
Cummins India, Siemens and Voltas (although this final group of companies
subsequently adapted well in the post-License Raj).
After 1995, Sensex churn fell remarkably relative to the volatile era of the early
1990s. Sensex incumbents grew rapidly in size, which we attribute to the following
reasons: Post-1995, Sensex churn has fallen
remarkably relative to the volatile
Large business groups ramped up domestic capacities in a license-free era and era of early 1990s
followed them up by large acquisitions in the noughties (Reliance, Tata Steel and
Hindalco).

Strategy
Export-led companies like software (Infosys and TCS) and pharmaceuticals

expanded.
The noughties also saw the rise of infrastructure companies (L&T) and
banks/financial institutions which funded their expansion (ICICI Bank) and also
benefited (HDFC and HDFC Bank) due to the rise in overall GDP growth (from
3.9% in FY03 to 8% in FY04, 7.1% in FY05, 9.5% in FY05 and 9.6% in FY01).
Finally, towards the end of the noughties, the rise in rural-led consumption
benefited auto (Hero MotoCorp, Bajaj Auto, M&M and Maruti) and FMCG (HUL
and ITC) stocks.
Further, the likelihood of churn from new company listings was also limited, at least
in the first half of the noughties.
After remaining flat for a decade (3% CAGR from FY93 to FY03), the Sensexs New listings of meaningful size
recovery began meaningfully only after FY03 (55% CAGR from FY03 to FY06). This took place in second half of
recovery drove a slew of large IPOs, including Government disinvestment-driven ones noughties
(see exhibit below). These new IPOs resulted in new entrants into the Sensex such as
ONGC and NTPC from PSUs and TCS and Reliance Petroleum from the private
sector. However, in terms of numbers, the impact of these changes on Sensex churn
was much lower than those driven by the end of the License Raj regime. Only 8
replacements were made in the Sensex from 2005 to 2015 vs 20 from 1995 to 2005.
Exhibit 57: Three of four IPOs of more than US$1bn happened only after 2004
Year Rs bn
1 Coal India Oct 2010 150
2 Reliance Power Jan 2008 117
3 ONGC March 2004 95
4 DLF June 2007 92
5 Cairn India Dec 2006 58
6 TCS Aug 2004 54
7 NTPC Oct 2004 54
Source: Media reports, Ambit Capital research
We believe the next 10 years in India will be akin to the 1990s rather than the The next ten years in India appear
noughties. This is because the period spanning 1992-02 was defined by irrevocable akin to the 1990s in light of Modis
structural changes administered by the political leadership. The structural changes resets
akin to 1992-02 are the three resets by PM Modi to the Indian economy, namely:
Reset 1: Shifting Indias savings landscape away from gold and land towards the
formal financial system;
Reset 2: Disrupting crony capitalism in India by breaking the nexus between
politicians and certain large business houses; and
Reset 3: Re-defining Indias subsidy mechanism so that it becomes centred on Direct
Benefit Transfers (straight into the recipients bank account).
We have focused on this theme in detail in our report Sensex exits: The decadal story
dated 5 May 2015.
Thus, we expect Sensex churn to rise to 50% in the next decade from the historical
lows of 27% during the most-recent decadal bucket (2005 to 2015). This means
that 15 stocks will be replaced in the Sensex in the upcoming decade.
Owning Sensex exit candidates is a losing proposition
Stocks that eventually exit the Sensex do so after a long period of underperformance. A long period of underperformance
We present the price performance of the stocks during 1992-2002 and note their precedes the stocks exit from the
sharp underperformance to the Sensex during that decade. Sensex

Strategy
Exhibit 58: Exits from the Sensex over Dec91-Dec01

CAGR returns CAGR returns
CAGR returns Year of exit
Company name Sector (Dec'91-Dec'01, (Dec'91-date of
(Dec'91-Dec'01) from Sensex
rel. to Sensex) exit from Sensex)
Aditya Bir. Nuv. Textiles 0% -5% 1996 8%
Ballarpur Inds. Paper -16% -21% 1996 -20%
Bombay Dyeing Textiles -21% -26% 1996 -20%
CEAT Tyres -15% -20% 1996 -8%
Century Textiles Diversified -20% -25% 1996 -12%
Cummins India Capital Goods-Non Electrical Equipment 5% 0% 1996 21%
Futura Polyester Textiles -20% -25% 1996 -22%
GE Shipping Co Shipping -14% -19% 1998 -21%
GSFC Fertilisers -27% -32% 1996 -23%
Hind.Motors Automobile -12% -17% 1996 5%
Indian Hotels Hotels & Restaurants 10% 5% 2000 19%
Mukand Steel -28% -33% 1996 -12%
Philips El India Consumer Durables DNA DNA 1996 DNA
Premier Capital Goods-Non Electrical Equipment -22% -27% 1996 -2%
Siemens Capital Goods - Electrical Equipment -1% -6% 1996 25%
Tata Power Co. Power Generation & Distribution -7% -12% 2000 -15%
Voltas Diversified -10% -15% 1996 -23%
Zenith Birla Steel DNA DNA 1992 DNA
In the exhibit below, we show the share price performance for all the exits from the
Sensex in two ways over the next decade and until the time of exit from the Sensex.
Whilst on average these stocks underperformed the Sensex by ~6% on a CAGR basis
over the next decade, what is more interesting is their performance and Sensex exit stocks underperform
underperformance until the time of exit from the Sensex. On average, these stocks the index by ~20% (CAGR terms)
delivered -10% CAGR until exit. Further, relative to the Sensex, the underperformance until the time of exit
(until exit) is as high as -20% CAGR.
Exhibit 59: Sensex exit stocks - massive underperformance until the time of exit from the Sensex
Median Median
Median Median
underperformance underperformance
No. of exits performance performance of
Period rel. to Sensex of rel. to Sensex of
from Sensex of exiting stocks exiting stocks till
exiting stocks exiting stocks
over the decade exit from Sensex
over the decade till exit from Sensex
1991-01 18 -15% -20% -12% -23%
1992-02 19 -8% -11% -9% -17%
1993-03 20 -1% -6% -16% -14%
1994-04 20 -2% -7% -27% -18%
1995-05 20 5% -6% -24% -33%
1996-06 14 8% -7% -21% -25%
1997-07 13 10% -8% -22% -31%
1998-08 13 6% -6% -6% -18%
1999-09 14 9% -5% -9% -11%
2000-10 16 13% -5% -3% -16%
2001-11 16 13% -4% 7% -17%
2002-12 14 21% 2% 14% -19%
2003-13 9 6% -8% 0% -11%
2004-14 8 13% -2% -9% -25%
2005-15 8 9% -2% -4% -15%
Average 15 6% -6% -10% -20%

Strategy
Finally, in the exhibit below, we show the performance of companies that were part
of the Sensex in December 05 but exited by December 15. On a median basis,
these stocks delivered CAGR returns of ~9% over the 2005-15 decade (and -2%
CAGR returns relative to Sensex). However, what we also note from the exhibit below
is that these stocks massively underperformed the Sensex until the time of their exit,
having delivered -4% CAGR in absolute terms and -15% CAGR vs the Sensex (see the
penultimate row of the table above).
Exhibit 60: Exits from the Sensex over Dec05-Dec15
CAGR CAGR returns CAGR returns
Year of
returns (Dec'05- (Dec'05-
Company name Sector exit from
(Dec'05 Dec'15, date of exit
Sensex
-Dec'15) rel. to Sensex) from Sensex)
ACC Cement 10% -1% 2010 13%
Ambuja Cem. Cement 10% -1% 2008 1%
Grasim Inds Textiles 14% 3% 2010 14%
Hindalco Inds. Non Ferrous Metals -4% -15% 2015 -5%
Ranbaxy Labs. Pharmaceuticals 9% -2% 2009 -9%
Power Generation &
Reliance Infra. -1% -12% 2011 -4%
Distribution
Satyam Computer IT - Software DNA DNA 2009 -54%
Power Generation &
Tata Power Co. 5% -6% 2006 -5%
Distribution
Hence, given the stark underperformance of the exit stocks, it becomes critical for
investors to identify potential exiting candidates in advance. We now provide a
framework for identification.
A framework to identify Sensex exit candidates

We provide a four-step filter for identifying stocks that are most likely to exit the Our four step filter identifies exit
Sensex in the coming decade. To maintain consistency for a 10-year window we use candidates from the current Sensex
financial data for the past 10 years (FY07 to FY16). constituents
In the first two steps, we score companies using our Coffee Can Portfolio and
Greatness frameworks. From these scores, we select the bottom 20 companies and
shortlist them as the most likely Sensex exit candidates.
In the third step, we check if the shortlisted companies feature on the Ambit P-75 list
of politically connected companies. In the final step, we check if the shortlisted
companies are in a sector that is likely to lose market share (i.e. Consumer Staples,
Healthcare (albeit marginally) and IT + Telco) given the economic insights that we
have derived in the previous sections.
We describe our methodology in detail below:
Step 1: Coffee Can Portfolio filters in reverse
In November 2014, we unveiled our Indian Coffee Can Portfolio for identifying stocks We use Coffee Can portfolio filters
that investors can hold for a decade without churning the portfolio. Our back-testing in reverse
showed that a portfolio constructed on two filters, mentioned below, beats the Sensex
across five 10-year iterations. We now use the same filters but in reverse to
identify Sensex stocks that are on an exit path.
Sales growth of less than 10%: Indias nominal GDP growth rate has averaged
15% over the past 10 years. As very few listed companies (only 5 out of the We identify companies that have
~1,100 firms run under our screen) managed to achieve this over the past 10 failed to deliver 10% sales growth
years, we reduced this filter rate modestly to 10%. Therefore, for the purposes of in any year for the past ten years...
the Sensex exits exercise, we identify companies that failed to deliver 10% sales
growth in any year for the past ten years. Hence, the more years a company
delivers sales growth of less than 10%, the lower will be its score.
RoCE of less than 15%: We use 15% as a minimum because we believe that if a
company can deliver 15% RoCE over 10 consecutive years, it is a proxy for the
annual returns investors can expect from that stock. We also believe this is well

Strategy
justified theoretically by adding the average decadal risk-free rate (8.5% in India)
and an equity risk premium of 6.5%. This equity risk premium, in turn, is
calculated as 4% (the long-term US equity risk premium) plus 250bps to account
for Indias rating (BBB- rating as per S&P). Note further that over the past 20 ..and those that have failed to
years and 30 years, the Sensex has delivered returns of around 16% per annum, deliver 15% RoCE in any year for
thus validating our point of view that 15% is a sensible figure to use as a the past ten years
minimum RoCE criteria. Therefore, we identify companies that have failed to
deliver 15% RoCE in any year for the past 10 years. Hence, the more years a
company delivers RoCE of less than 15%, the lower will be its score.
For Banks and Financial Services (BFSI) stocks, we modify the filters on RoCE and
sales growth as follows:
RoEs of 15% for NBFCs and RoAs of 1.2% for banks: Whilst we have used For banks, we screen stocks that
RoEs (net profit to average equity) for NBFCs, we have used RoA (net profit to failed to deliver 1.2% RoA/15% RoE
average assets) for banks. Whilst the underlying profitability of operations reflects in any year for the past ten
in both RoE and RoA, RoE is also impacted by the leverage or capital position of years.
the bank. Historically, many banks (especially PSU banks) have delivered high
RoEs due to high leverage despite weak underlying profitability. Therefore, RoA is
a better metric to use for banks. and those that have failed to
For every year that a bank/NBFC fails to deliver 1.2% RoA/15% RoE, we allot a deliver 15% loan growth in any
lower score. Hence, the more years a bank/NBFC delivers RoA of less than 1.2% year for the past ten years
(or RoE of less than 15% in case of banks), the lower will be its score.
Loan growth of 15%: We believe loan growth of 15% is an indication of a
lenders ability to lend over business cycles. Strong lenders ride the downcycle
better as their competitive advantages surrounding their origination, appraisal
and collection process ensure that they continue their growth profitably either
through market share improvements or upping the ante in sectors which are
resilient during a downturn. Therefore, we identify banks/financial institutions
that have failed to deliver 15% loan growth in any year for the past 10 years.
Hence, the more years a bank/financial institution delivers loan growth of less
than 15%, the lower will be its score.
Once we have identified a list of such companies that fail to meet our filters for any
year in the past decade (FY07-16), we allot scores based on the number of years that
the company has failed to meet the filter. Our scoring is based on the parameters
mentioned in the exhibit below.
Exhibit 61: Scoring parameters - number of years (from FY07 to FY16) that a company
fails to meet our filters
From (years) To (years) Score
0 2 20
3 4 15
5 6 10
7 8 5
9 10 0
The thumb rule for the above exhibit is the more years a companys financial
services have been below our filters, the lower the score. For example, a
company that delivers less than 10% sales growth for any eight years (of the past 10
years from FY07 to FY16), gets five points. Similarly, a company that delivers RoCE of
less than 15% for all 10 years (of the past 10 years from FY07 to FY16) gets zero
points. The scoring structure is aimed at raising the penalty on companies that fail to
meet these filters more often in the past 10 years (FY07 to FY16).
Conversely, the more often a company delivers sales growth of more than 10%
and/or RoCE of more than 15%, the higher will be its score. Therefore, a company
that delivers RoCE for all 10 years (FY07 to FY16) will get the highest score of 20.

Strategy
Step 2: The Greatness Framework

We had unveiled our Greatness Framework on 19 January 2012 with the first
iteration of the Tomorrows ten baggers note (see exhibit below).
Exhibit 62: 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)
This framework has served us remarkably well over the years and has consistently
helped us generate outperformance with our five annual tenbagger portfolios (one
for each of the past five years). Now, to identify exit candidates, we reverse the
framework, i.e. the worse the performance of a company in the greatness framework,
the lower its decile as per the framework and the lower its score.
Exhibit 63: Scores as per our Greatness Framework
Greatness Decile Score
D1-D2 20
D3-D4 15
D5-D6 10
D7-D8 5
D9-D10 0
Whilst we do not have a greatness framework for NBFCs currently, in our 20 February
2013 note titled The Good Indian Banks (click here for more details), we had
unveiled the greatness framework for the banking space. Both these frameworks
study a firms structural strengths by focusing not on absolutes but rather on
improvements over a period of time and the consistency of those improvements.
Step 3: Ambits P-75 companies
In the next step, we check this shortlist of Sensex exit candidates to identify stocks that Companies that are already part of
are part of Ambits P-75 companies, i.e. companies whose core competitive Ambits P-75 companies are
advantage is politically connectivity. immediately deemed to be exit
We believe these companies are on a weaker footing given the impact of the Modi candidates
Resets. In our May 2014 strategy thematic, Can India Turn Back the Clock?
(click here for more details), we said that over the past decade, powerful cliques of
politicians and promoters have suppressed competition in a range of sectors and
drove Indias CPI inflation rate up from 4% to 11%. In that report, we posited that this
vicious spiral could be on the retreat with the changes taking place in New Delhi and
in the RBI. We further said that these changes could result in a redistribution of profits
away from the winning companies of the last decade towards the also-rans of the last
decade.
Over and above the distortionary effects that politically connected companies have
had on competition and inflation, these companies are likely to have received undue
access to capital (from PSU banks), land (from state governments) and public sector
contracts (like building of airports or roads). After peaking in the noughties, the

Strategy
strength of this under-the-table cooperation model between promoters and

politicians has been ebbing since November 2010 (the month in which the 2G
spectrum auction scam came to public attention thanks to the CAGs hard hitting
report).
Thus, any company in our shortlist that is part of Ambits P-75 companies
would qualify automatically to be a Sensex exit candidate.
Step 4: Belongs to a sector likely to lose market cap share in the Sensex
Finally, from our shortlist, we identify those companies that belong to a sector that is
likely to lose market cap share in the index over the next decade.
Exhibit 64: The Sensexs market cap share evolution
Sectors FY95 FY05 FY15 FY25 Reasons
Spending on discretionary items and financial services tends to rise
Consumer Discretionary +
15% 25% 41% 49% with rise in per capita income. That is the result emerging from our
Financial services
cross country analysis and that is what economic theory tells us.
Industrials, Materials, and Energy 58% 35% 20% 25% The share of investments in GDP rises with rising per capita income.
IT Services revenues arise from the Western world and with GDP
growth in the West seemingly stuck at structurally low levels, IT
Information Technology and
0% 21% 17% 10% Services is likely to lose market cap share. In Telecom, continued
Telecommunication Services
regulatory pressure (repeated spectrum auctions) and competitive
pressure will result in market cap share coming under pressure.
Spending on food items tend to fall as income levels rise. That is the
Consumer Staples 23% 12% 13% 8% result emerging from our cross country analysis and that is what
economic theory tells us.
Cross country evidence indicates that spending on healthcare tends
Healthcare 2% 5% 6% 5% to moderately decline/stagnate until US$10k per capita income is
attained, after which it rises
We assume that utilities sector will not show much change in its
Utilities 2% 2% 3% 3% weighting as political imperatives will mean that ROEs will never be
allowed to go north of the cost of capital in this sector
Total 100% 100% 100% 100%
Source: Capitaline, Ambit Capital research. The weights from 2006 onwards are based on free float market cap weights. Note: The weights from 2006 onwards
are based on free float market cap weights. Red indicates a decline in the sectors market cap weight whereas blue indicates an increase.
Sectors which will shed market cap share are: Consumer Staples, Healthcare, and IT
+ Telco. Please refer to Sections 1-4 for more details. Any company in our shortlist
that belongs to a sector that seems likely to shed market share is likely to be a Sensex
exit candidate.
We summarise our four-step process of identifying a Sensex exit candidate in the
checklist below.
Exhibit 65: Checklist for Sensex exit candidates
Step Criteria Parameters
Non BFSI: Highest number of years within FY07-16 where sales
growth was <10%
Non BFSI: Highest number of years within FY07-16 where RoCE was
<15%
Banks and financial services: Highest number of years within FY07-16
1 Coffee Can filters in reverse
where loan growth was <15%
Banks: Highest number of years within FY07-16 where RoA was
<1.2%
NBFCs: Highest number of years within FY07-16 where RoE was
<15%
2 Greatness Framework* Featuring in the lowest decile
3 Politically Connected Part of Ambit's P-75 Index
4 Losing sector Belongs to a sector that is likely to lose market cap share
Source: Ambit Capital research. *Note: As we do not have a greatness framework for NBFCs, we give an average
score to HDFC (the only NBFC in the Sensex) on this parameter. Greatness scores for non BFSI names are based
on FY10-15 financials and for BFSI names FY09-14 financials. Accounting scores are based on FY09-14
financials. Our accounting framework does not apply to BFSI names.

Strategy
Identifying the Sensex exit candidates

We present the results of our four-step screening of potential Sensex exit stocks over
the next 10 years.
Exhibit 66: Exit candidates from Sensex over the next decade
Mcap FF mkt cap 6M ADV
Name Ticker Exit hypothesis
(US$ bn) rank (US$ mn)
Uncertainty on profitability of large investments in retail and telecom;
Reliance Industries RIL IN 50.9 5 53
downstream margins likely to remain muted
Compromised pricing power and/or muted e-auction prices can
Coal India COAL IN 31.5 26 21 pressurise margins; capital misallocation risks exist given CILs plans to
invest in projects with limited visibility on expected RoI.
Falling subsidies unlikely to aid profitability; uncertainty on production
ONGC ONGC IN 30.3 17 17
growth makes earnings growth a challenge
Asset quality issues; weak profitability; rising capital requirements;
State Bank of India SBIN IN 29.2 13 81 competition from stronger private sector peers and introduction of new
players
High competitive intensity in a fragmented industry, no discernible
Larsen & Toubro LT IN 21.1 7 43 competitive advantages in most sectors; L&Ts large size will be a
constraint
Persistently high capex to support data growth; Reliance Jios entry;
Bharti Airtel BHARTI IN 19.7 23 18 technology disruptions eroding competitive advantages as cash rich
media companies find alternate delivery modes
Limited growth opportunities in power generation; tariff regulation likely
NTPC NTPC IN 19.7 29 10
to hit 2019 RoE; weakening competitive positioning
Weak portfolio mix and culture; continued underperformance of earnings
Wipro WPRO IN 18.1 34 15
growth relative to peers combined with deceasing RoCE
Utility vehicle business under threat from foreign car companies superior
M&M MM IN 13.3 15 23 offerings; automotive business (esp. 2W/trucks) has limited chances of
long-term success
Over-dependence on legacy models, uncertain indigenous technology,
Hero Motocorp HMCL IN 10.6 21 21
shift towards scooters and rising competition from Honda
High capital intensity and capital allocation issues within the company;
Adani Ports ADSEZ IN 8.1 44 19
delays in enabling infrastructure could affect volumes
Dr Reddy's Labs DRRD IN 7.8 31 21 Sub-par business mix and weak competitive positioning
Incremental investments in pipelines havent yielded results; artificially
GAIL (India) GAIL IN 7.3 48 9 suppressed tariffs by regulator; rising competition from GSPL and
emerging gas supply sources
High management attrition hurting growth prospects; no moated
Cipla CIPLA IN 6.9 38 17 revenues; average ranking on our IBAS framework due to weak brand
equity and lack of investment in innovation
Tata Steel TATA IN 5.4 43 41 Shrinking raw material advantage as well as margins
Source: Bloomberg, Ambit Capital research. Greatness scores for non BFSI names are based on FY10-15 financials and for BFSI names FY09-14 financials.
Accounting scores are based on FY09-14 financials. Our accounting framework does not apply to BFSI names.
We have chosen 15 exit candidates from this list on the following basis:
The top nine companies with scores of less than 45 qualify automatically for
exiting the Sensex, based on our framework detailed above. These nine
companies are Reliance Industries, Coal India, ONGC, Bharti Airtel, NTPC, M&M,
Hero Motocorp, GAIL (India), and Tata Steel. We do not include Bajaj Auto as an
exit candidate despite low greatness scores as our Auto sector lead, Ashvin
Shetty, is convinced regarding the long term prospects of this company.
The remaining six candidates have been chosen from companies based on our
sector leads views that these companies face an uncertain future. These six
companies are State Bank of India, L&T, Wipro, Cipla, Adani Ports, and Dr
Reddys.

Strategy
Appendix 1: Comparison with our Sensex

entry and exit predictions from last year
We published the Sensex Exits thematic on 5 May 2015 and the Sensex Entries
thematic on 22 June 2015. A year hence, we highlight that four of our exit
predictions Vedanta, BHEL, Hindalco, and Tata Power have already materialised.
We look at the changes made in our predictions from 2015 to 2016.
Exhibit 67: Predicted exit candidates (from the June 2015 note)
Name Ticker Part of current Sensex? Part of this years exit list
Reliance Industries RIL IN Yes Yes
ONGC ONGC IN Yes Yes
State Bk of India SBIN IN Yes Yes
No HDFC will own 42% of the combined entity HDFC Life (HDFC Life is our
HDFC HDFC IN Yes entrant candidate in the fresh listings space). HDFC Lifes success ensures HDFC
a place in the Sensex.
Bharti Airtel BHARTI IN Yes Yes
Larsen & Toubro LT IN Yes Yes
NTPC NTPC IN Yes Yes
M&M MM IN Yes Yes
Vedanta* SSLT IN No No already exited
B H E L* BHEL IN No No already exited
Bajaj Auto BJAUT IN Yes No long term export potential remains strong in spite of current struggles
Hero Motocorp HMCL IN Yes Yes
Tata Steel TATA IN Yes Yes
Hindalco Industries* HNDL IN No No already exited
Tata Power Co*. TPWR IN No No already exited
Source: Ambit Capital research. Note: * indicates that the stock has already exited the Sensex.
Our current exit candidate list comprises of the following names:

Exhibit 68: Exit candidates predicted in this report
Name Ticker
Reliance Inds. RIL IN
ONGC ONGC IN
St Bk of India SBIN IN
Coal India COAL IN
Larsen & Toubro LT IN
Bharti Airtel BHARTI IN
NTPC NTPC IN
Wipro WPRO IN
M&M MM IN
Hero Motocorp HMCL IN
Adani Ports ADSEZ IN
Dr Reddy's Labs DRRD IN
GAIL (India) GAIL IN
Cipla CIPLA IN
Tata Steel TATA IN
Source: Ambit Capital research. Note : bold indicates that the stock is a new exit candidate
The new exit candidates in comparison with the 2015 list are Coal India, Wipro,
Adani Ports, Dr Reddys Labs, Gail (India), and Cipla.
Bajaj Auto and HDFC are the two candidates which no longer figure in our list.

Strategy
Our Auto sector lead, Ashvin Shetty, believes that Bajaj Auto seems to be turning the
corner in the domestic motorcycle market thanks to strong responses to its new
launches like Avenger and V15. While export volumes are facing near-term
pressures, the long-term export potential for Indian 2Ws remain huge and Bajaj Auto
will be the prime beneficiary due to its first mover advantage across several export
markets. Hence, we no longer believe that Bajaj Auto is an exit candidate.
HDFC will own 42% of the combined entity HDFC Life and Max Life post-merger. We
do not envisage HDFC exiting the Sensex over the next decade given that HDFC Life
is an entrant candidate from the fresh listings space and is set to become the largest
private insurer.
Exhibit 69: Predicted entry candidates (from the June 2015 note)
Name Ticker Part of current Sensex? Part of this years entry list
HCL Technologies Ltd. HCLT IN No Yes
Kotak Mahindra Bank Ltd. KMB IN No Yes
Asian Paints Ltd. APNT IN Yes No already entered the Sensex
No- marginally fails to clear the greatness cut off and belongs to a
Nestle India Ltd NEST IN No
sector that will lose market share over the next decade
Eicher Motors Ltd. EIM IN No Yes
IndusInd Bank Ltd. IIB IN No Yes
Pidilite Industries Ltd. PIDI IN No Yes
Page Industries Ltd. PAG IN No Yes
Torrent Pharmaceuticals TRP IN No Yes
No our covering analyst does not have conviction that PI Industries
PI Industries PI IN No
will compound its FF market cap @ 34% to enter the Sensex*
Flipkart N/A No Yes
Paytm N/A No Yes
No - the merged entity HDFC Life and Max Life is our top choice as
I Pru Life N/A No
the largest private sector insurer
No- core coffee retailing franchise fundamentally challenged for
Caf Coffee Day N/A No
profitability
Hind. Aeronautics N/A No No- poor earnings quality and sub-par scale
Source: Ambit Capital research. Note: * indicates the minimum amount of FF market cap compounding required
for a stock to enter the Sensex assuming the smallest Sensex stock compounds @15% over the next decade.
Exhibit 70: Entry candidates predicted in this note
Name Ticker
Kotak Mahindra Bank Ltd. KMB IN
IndusInd Bank IIB IN
IOCL IOCL IN
HCL Tech HCLT IN
UltraTech Cement UTCEM IN
BPCL BPCL IN
Eicher Motors EIM IN
Ambuja Cement ACEM IN
Pidilite Industries PIDI IN
Page Industries PAG IN
Torrent Pharma TRP IN
Flipkart N/A
HDFC Life N/A
LIC N/A
Paytm N/A
Source: Ambit Capital research. Bold indicates that the stock is a new entry candidate versus 2015.
The new entry candidates compared with the 2015 are IOCL, Ultratech Cement,
BPCL, LIC, and HDFC Life.

Strategy
Nestle, Hindustan Aeronautics, IPru Life, and Caf Coffee Day no longer figure in our
list.
Nestle fails to clear the greatness cut-off, albeit marginally. We exclude Nestle as we
already have ITC and HUL in the Sensex representing the consumer staples sector.
Since we expect the consumer staples sector to lose market share over the next
decade, we exclude Nestle.
In the private insurance sector, we believe the recently created merged entity, HDFC
Life, is a better entry candidate than ICICI Prudential Life due to its position as the
largest private sector insurer post-merger. HDFC will hold around 42% in the merged
entity.
A year ago, we had included Caf Coffee Day (CCD) as a Sensex entrant. At that
time, CCD had not yet listed and we were basing our judgment purely on the DRHP.
In retrospect and having seen the now listed company perform for a year we
believe that its core coffee retailing franchise is not strong enough to make this
company a Sensex candidate.
Hindustan Aeronautics was not included due to the poor quality of earnings and sub-
par scale. Further, we believe it doesnt deserve the same premium as BEL due to
Indias poor aerospace capabilities versus other segments like electronics and auto.

Kotak Mahindra Bank
SELL
STRATEGY NOTE KMB IN EQUITY September 19, 2016
Proven mettle; set for future opportunities BFSI
Kotak Mahindra Bank (KMB) is a diversified financial services firm with SENSEX ENTRANT
one of the best-run banks in India and leading capital market Mcap (bn): `1,480/US$22.1
subsidiaries. Over the last six years, the bank has demonstrated strong
3M ADV (mn): `1,268/US$18.9
asset quality track record and business focus on margins (~4.4%). CASA
CMP: `807
ratio has increased to ~38% in FY16 (vs industry best of 40-45%). Having
TP (12 mths): `530
completed acquisition of ING Vysya Bank, it is now set to generate
synergies from distribution of products through the acquired network. Downside (%): 34
This will help KMB achieve growth higher than the industry average. We
build in long-term loan CAGR of ~25%. While we believe current Flags
valuations are expensive, in the long term earnings growth would be the Accounting: GREEN
key driver of share price return even as the valuation multiple (3.6x Predictability: GREEN
FY17BV) moderates closer to those of peers. Earnings Momentum: GREEN
Competitive position: MODERATE Changes to this position: POSITIVE Performance

Structural play on Indian financial services 130
120
KMB is a diversified financial services firm and one of the best-run banks in 110
India. The merger of ING Vyasa Bank last year allowed KMB to fill gaps in the 100
90
business. Over FY06-16, loan book expanded at 34% CAGR. The loan mix is 80
well diversified across corporate (32%), mortgage (19%), SME (14%), agri (14%) 70
Jul-16
Sep-15
Nov-15
Jan-16
Mar-16
May-16
and other retail (12%). KMB also increased its CASA ratio from 19% in FY06 to
~38% in FY16. The bank has generated average RoA of 1.5% and RoE of 13%,
along with strong asset quality (gross NPA of 2.5% and restructured loans of just
0.1%). While the bank accounts for 61% of total profit, other capital market KMB IN BANKEX
subsidiaries too have leading presence in their respective industries.

Conservative risk management; well capitalised to drive growth
KMBs strong franchises in car, commercial vehicles, tractor finance and business
banking support strong margins of ~4.4%. Conservative risk management has
allowed the bank to escape unscathed from asset quality downturn (net NPA of
1.2% and almost nil restructured loans). Low exposure to stressed sectors, such
as infra and metals, has led to strong asset quality performance and low credit
costs. Capital position has been strong with tier-1 of 17.9%.
Strong franchise + merger synergy = above-industry growth
Whilst we believe integration of the acquired ING Vysya Bank with KMB has its
challenges in a muted economic environment, it does fill some gaps in KMBs
geographic presence and business offering. Over the longer term, once the
integration is behind, we expect KMB will continue to grow its loan book at ~5
percentage points faster than the Indian banking system thanks to its high- Research Analysts
quality management team, strong profitability and currently small market share
(<1%). Whilst we expect RoAs to moderate from current levels, these will remain Pankaj Agarwal, CFA
comparable with the best in its peer-set (HDFCB and IIB). Tel: +91 22 3043 3206
pankaj.agarwal@ambit.co
We are SELLers due to the elevated multiple at which the bank trades
Ravi Singh
Our SOTP valuation of the bank is Rs530 (implied consolidated FY18E P/B of Tel: +91 22 3043 3181
2.5x and consolidated FY18E P/E of 19.8x). It is trading at 60% premium and ravi.singh@ambit.co
40% premium to peers on P/E and P/B respectively. Over the long term, we
expect earnings growth to be the key driver of share price return even as the Rahil Shah
valuation multiple moderates gradually closer to that of peers. Structural Tel: +91 22 3043 3217
increase in competition in retail segment is the key risk for the bank. rahil.shah@ambit.co
Kotak Mahindra Bank
Exhibit 1: Key financial parameters over the last decade

Rs mn FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
Net Interest Income 6,199 12,258 15,185 18,581 20,976 25,125 32,057 37,200 42,237 69,004
Operating Profits 3,258 6,699 5,958 12,970 13,248 16,550 21,566 25,772 29,975 40,411
Net profits 1,414 2,939 2,761 5,611 8,182 10,851 13,631 15,025 18,660 20,898
EPS (Rs) 2.2 4.3 4.0 8.1 11.1 14.6 18.3 19.5 24.2 11.4
RoA (%) 0.94% 1.22% 0.97% 1.70% 1.85% 1.86% 1.83% 1.75% 1.93% 1.14%
RoE (%) 11.4% 11.4% 7.5% 13.5% 14.5% 14.7% 15.7% 13.8% 14.1% 9.2%
Gross NPAs (%) 2.53% 2.79% 4.07% 3.62% 2.03% 1.56% 1.55% 1.98% 1.85% 2.36%
Net NPAs (%) 1.98% 1.78% 2.39% 1.73% 0.72% 0.61% 0.64% 1.08% 0.92% 1.06%
Provision Coverage Ratio (%) 22% 37% 42% 53% 65% 61% 59% 46% 51% 56%
Tier 1 capital ratio (%) 8.8% 14.5% 16.0% 15.2% 18.0% 15.7% 14.7% 17.9% 16.2% 15.3%
Exhibit 2: Loan book growth moderated due to focus on Exhibit 3: Merger expenses and low growth impacted
merger processes RoA/RoE of the bank
NIMs Loan Book growth YoY (RHS) RoEs RoAs (RHS)
6% 45% 20% 2.5%

40%
5% 16% 2.0%
35%
4% 30%
25% 12% 1.5%
3%
20%
8% 1.0%
2% 15%
10% 4% 0.5%
1%
5%
0% 0% 0% 0.0%
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
Source: Company, Ambit Capital research; Note: Adjusted for ING Vysya Source: Company, Ambit Capital research; Note: Adjusted for ING Vysya
acquisition acquisition
Exhibit 4: KMB is currently trading in line with its historical Exhibit 5: KMBs share price has outperformed BANKEX
P/B index
12 1,200
10 1,000
800
8
600
6
400
4 200
2 0
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
Mar-07
Dec-07
Sep-08
Mar-10
Dec-10
Sep-11
Mar-13
Dec-13
Sep-14
Mar-16
Jun-09
Jun-12
Jun-15
KMB IN BANKEX
PB Avg. PB
Source: Bloomberg, Ambit Capital research Source: Bloomberg, Ambit Capital research
Exhibit 6: Explanation for our flags

Segment Score Comments
We did not find anything unusual in the accounts of the bank and we believe that the reported numbers are a
Accounting GREEN true reflection of the profitability of the bank. The bank has made adequate disclosures of its ESOP accounting
and revenue recognition norms.
Predictability GREEN The bank has one of the best track records of long-term profitability.
After consolidating loan book growth due to ING Vysya acquisition, KMB is now accelerating loan book growth.
Earnings Momentum GREEN
The bank is likely to continue to grow at higher momentum in the near term and medium term.

Kotak Mahindra Bank
Balance sheet
Year to March (Rs mn) FY14 FY15 FY16 FY17E FY18E
Net worth 122,751 141,411 239,591 262,415 292,239
Deposits 590,723 748,603 1,386,430 1,705,309 2,097,530
Borrowings 128,956 121,497 209,753 239,552 273,671
Other Liabilities 33,424 48,610 86,824 95,503 105,050
Total Liabilities 875,853 1,060,121 1,922,598 2,302,780 2,768,490
Cash & Balances with RBI/Banks 59,799 62,624 108,797 143,108 149,144
Investments 254,845 286,591 512,602 622,411 756,453
Advances 530,276 661,607 1,186,653 1,443,724 1,758,345
Other Assets 30,933 49,299 114,546 93,537 104,548
Total Assets 875,853 1,060,121 1,922,598 2,302,780 2,768,490
Income statement
Interest Income 87,671 97,199 163,842 183,506 215,055
Interest Expense 50,471 54,961 94,838 101,488 117,018
Net Interest Income 37,200 42,237 69,004 82,018 98,037
Total Non-Interest Income 13,997 20,285 26,122 32,589 38,702
Total Income 51,198 62,522 95,126 114,606 136,740
Total Operating Expenses 25,426 32,547 54,715 63,452 73,783
Employees expenses 11,722 14,667 28,170 31,863 35,876
Other Operating Expenses 13,705 17,880 26,546 31,589 37,907
Pre Provisioning Profits 25,772 29,975 40,411 51,154 62,957
Provisions 3,047 1,645 9,174 6,800 8,312
PBT 22,725 28,330 31,237 44,353 54,645
Tax 7,699 9,670 10,339 14,193 17,486
PAT 15,025 18,660 20,898 30,160 37,159
Ratio analysis
Credit-Deposit (%) 89.8% 88.4% 85.6% 84.7% 83.8%
CASA ratio (%) 31.9% 36.4% 38.1% 38.3% 38.6%
Cost/Income ratio (%) 49.7% 52.1% 57.5% 55.4% 54.0%
Gross NPA (Rs mn) 10,594 12,372 28,381 28,318 31,640
Gross NPA (%) 1.98% 1.85% 2.36% 1.94% 1.78%
Net NPA (Rs mn) 5,736 6,091 12,620 11,893 13,289
Net NPA (%) 1.08% 0.92% 1.06% 0.82% 0.76%
Provision coverage (%) 45.9% 50.8% 55.5% 58.0% 58.0%
NIMs (%) 4.49% 4.55% 3.95% 4.08% 4.02%
Tier-1 capital ratio (%) 17.9% 16.2% 15.3% 13.4% 12.3%

Kotak Mahindra Bank
Du-pont analysis
NII / Assets (%) 4.3% 4.4% 3.8% 3.9% 3.9%
Other income / Assets (%) 1.6% 2.1% 1.4% 1.5% 1.5%
Total Income / Assets (%) 6.0% 6.5% 5.2% 5.4% 5.4%
Cost to Assets (%) 3.0% 3.4% 3.0% 3.0% 2.9%
PPP / Assets (%) 3.0% 3.1% 2.2% 2.4% 2.5%
Provisions / Assets (%) 0.4% 0.2% 0.5% 0.3% 0.3%
PBT / Assets (%) 2.7% 2.9% 1.7% 2.1% 2.2%
Tax Rate (%) 33.9% 34.1% 33.1% 32.0% 32.0%
ROA (%) 1.8% 1.9% 1.1% 1.4% 1.5%
Leverage 7.9 7.3 8.1 8.4 9.1
ROE (%) 13.8% 14.1% 9.2% 12.0% 13.4%
Valuation parameters
Year to March FY14 FY15 FY16 FY17E FY18E
Consolidated EPS (Rs) 16.1 19.7 18.8 24.6 29.8
EPS growth (%) 10% 23% -4% 31% 21%
Consolidated ROE (%) 14% 15% 11% 13% 14%
Consolidated BVPS (Rs) 123.8 143.7 181.9 202.5 228.3
P/E (x) 50.2 40.9 42.8 32.7 27.1
P/BV (x) 6.5 5.6 4.4 4.0 3.5

Indian Oil Corporation
BUY
STRATEGY NOTE IOCL IN EQUITY September 19, 2016
All eyes on Paradip Oil and Gas
IOCL is the largest fuel retailer and second-largest refiner in India. IOCL SENSEX ENTRANT
should see improvement in ROEs over next 2-3 years as a) Paradip
Mcap (bn): `823/US$12.3
stabilization will drive GRMs and volume growth, and b) upgrades at
3M ADV (mn): `1,903/US$28.5
inland refineries will add to overall GRMs. Investment of improved FCFs
(due to lower subsidy burden) into petrochemicals, pipeline, and refinery CMP: `569
expansion should support healthy earnings growth over the next TP (12 mths): `618
decade. Growing share of businesses with steady profits such as Upside (%): 9
pipelines, marketing and petrochemicals (~70% of FY18E EPS) will
support multiple re-rating. Valuations of 1.4x/8.3x FY18E BV/EPS are Flags
undemanding given ROEs of ~19% by FY18 vs 15% in FY16. We dont Accounting: GREEN
foresee material challenges in compounding at 5% CAGR over next Predictability: AMBER
decade, which should secure it a place in the Sensex. Earnings Momentum: GREEN
Competitive position: STRONG Changes to this position: POSITIVE
Performance
Largest fuel retailer in the country
160
IOCL has ~45% share of retail outlets as well as retail volumes. It has ~35% of
140
Indias total refining capacity and 61% of crude and oil product pipeline
120
capacity. IOCL derives 47% of its profits from refining and marketing; pipeline 100
and petchem businesses contributed 26%/27% in FY16. IOCL has most volatile 80
refining margins amongst OMCs as most of its refineries are inland (holding 60
huge inventories). The Government holds ~59% stake in IOCL. Over the last
Nov-15
May-16
Jan-16
Jun-16
Jul-16
Dec-15
Aug-15
Sep-15
Oct-15
Feb-16
Mar-16
Apr-16
Aug-16
decade, IOCL has grown EBITDA/PAT by 10%/8% while capital employed has
posted a CAGR of 8%, indicating fairly good capital efficiency.
Indian Oil Corp. Sensex
Wide product distribution network provides competitive edge
IOCLs retail network and pan-India refineries give it distinct competitive Source: Bloomberg, Ambit Capital research
benefits. Besides, its wide network of depots and product pipelines (60% market
share) make it tough for private competition to take any major share away from IOCLs forensic score analysis
IOCL. Continued investments in petrochemicals (e.g. Paradip) should also
support earnings as most of it would be import substitution. Increased autonomy
in decision making should improve risk management; crude sourcing and supply
chain management would also improve operating efficiencies of the business.
IOCL just needs 5% compounding to be in Sensex over next decade
OMC earnings were depressed over the last decade due to huge subsidy burden
Source: Ambit HAWK, Ambit Capital research
put on them by the Government. However, recent fuel deregulation has taken
away most of those concerns. IOCLs reputation as a laggard to OMC peers
IOCLs greatness score analysis
should change with Paradip scale-up and rising share of EBITDA from stable
businesses such as marketing, petchem, and pipelines which should drive a
multiples re-rating. We expect ROCEs at 18-20% over next decade while
EPS/FCF growth should sustain ~12%.
Valuations a lot of juice left
IOCLs re-rating has lagged BPCL/HPCL after fuel deregulation as falling crude
prices led to huge inventory losses over the last two years. BPCL/HPCL one-year Source: Ambit HAWK, Ambit Capital research
forward multiples improved from 1.8x/0.8x in June 2014 to 2.4x/1.6x currently

driven by deregulation of auto fuel in Oct 2014. IOCLs valuations have
remained stagnant at 1.4x one-year forward P/B. IOCL should gradually narrow
valuation gap as refining profits normalize and full benefits of Paradip get
realized, driving 18% EPS CAGR over FY16-FY18. Sustained reforms on cooking
fuel pricing will also support re-rating for OMCs. IOCL falls in the fourth decile Research Analyst
of our accounting screen and 25% on our greatness framework given huge Ritesh Gupta, CFA
investments in Paradip in the last few years which will bear fruit only from FY18.
+91 22 3043 3242
ritesh.gupta@ambit.co

(Rs mn) FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
Revenues 2,161,481 2,307,448 3,046,261 2,660,663 3,280,923 3,984,766 4,470,964 4,732,101 4,375,242 3,506,031
Revenue growth (%) 4% 7% 32% -13% 23% 21% 12% 6% -8% -20%
Net profits 78,113 76,004 29,496 102,206 74,455 39,546 50,052 70,191 52,731 103,991
EPS 31.4 29.2 12.1 42.1 30.7 16.3 20.6 28.9 21.7 42.8
CFO 95,543 (17,563) 151,425 38,365 887 (113,624) 27,392 278,325 416,315 223,761
CFO-EBITDA 0.54 (0.48) 2.05 0.00 (0.12) -0.61 0.15 1.59 3.83 0.84
FCF 30,221 (106,095) 122,597 (93,355) (84,698) (90,294) (27,742) 71,253 273,140 87,421
Debt equity (x) 0.81 0.89 1.02 0.88 0.92 1.22 1.28 1.22 0.73 0.57
RoE (%) 24% 19% 7% 22% 14% 7% 8% 11% 8% 14.7%
ROCE (%) 13% 12% 4% 10% 8% 12% 6% 7% 4% 13%
Exhibit 2: Most of the cash flow generation has been from Exhibit 3: Cash has been used to build fixed assets
core operations
Debt Issue, Increase in Purchase
15% Cash, 1% of Fixed
Assets, 15%
Cash From
Operating
Equity
Activities,
Capital Dividend
40%
Sale of expenditure, Paid, 11%
Subsidy 50%
Bonds, 35% Interest
Dividend Paid, 23%
Income, 4%
Interest
received,
6%
Exhibit 4: IOCL Forward P/B Evolution Exhibit 5: IOCL share price performance vs. BSE Energy
1.6x 3.0
500
1.4x 2.5
400 1.2x 2.0
300 1.0x 1.5
1.0
200 0.7x
0.5
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
Sep-16
100
May-06
May-07
May-08
May-09
May-10
May-11
May-12
May-13
May-14
May-15
May-16
IOCL BSE Energy

Exhibit 6: Explanation for our flags on the cover page

In our forensic accounting model (see our December 2015 forensic thematic), IOCL has an accounting score that
Accounting GREEN
is in line with the sector average.
OMCs earnings are difficult to predict due to: (a) limited visibility of subsidy burden (as it is a function of macro
variables like crude price and INR/USD exchange rate) and (b) the Governments ad hoc subsidy sharing
Predictability AMBER
mechanism. However, in the long term, there is high visibility of the Government allowing OMCs to make
normalised RoEs of ~10-14% (or else the companies will not be able to meet their capex plans).
Bloomberg earnings momentum suggests an increase (8-9%) in FY17-FY18 earnings during the past 3 months
Earnings Momentum GREEN
due to increase in the marketing margins and weak crude environment.

Exhibit 7: Forensic score evolution Exhibit 8: Greatness score evolution
Source: Ambit HAWK, Ambit Capital research, Note: Using our accounting Source: Ambit HAWK, Ambit Capital research, Note: On our greatness
framework, we categorize the market into deciles on the basis of their framework, on a scale of 0 to 100, a small minority of outstanding companies
accounting quality with D1 indicating the best decile and D10 indicating tend to score above 67 whilst most companies tend to have scores below 50
the worst decile. Our analysis points towards a strong link between
accounting quality and share price performance.

IOCL Income Statement

(Rs mn) FY14 FY15 FY16E FY17E FY18E
Net Revenue 4,732,101 4,375,261 3,506,031 4,008,507 4,355,235
Total Expenditure 4,575,079 4,273,715 3,305,213 3,750,097 4,052,270
EBIDTA 157,022 101,546 200,818 258,410 302,965
EBITDA (%) 3.3 2.3 5.7 6.4 7.0
Depreciation 57,601 45,287 48,528 63,019 65,430
Depreciation charge (%) 5.1 3.7 3.2 3.8 3.7
EBIT 99,421 56,260 152,290 195,391 237,535
EBIT (%) 2.1 1.3 4.3 4.9 5.5
Interest 50,844 34,353 30,001 40,801 37,807
Other income 50,678 58,046 36,106 43,156 45,000
PBT 99,255 79,953 158,395 197,745 244,728
Tax 29,064 27,223 54,405 67,233 83,208
PAT 70,191 52,730 103,990 130,512 161,520
Consolidated PAT 70,191 52,730 103,990 130,512 161,520
PAT growth (%) 40.2 (24.9) 97.2 25.5 23.8
EPS (Rs/share) 28.9 21.7 42.8 53.8 66.5
IOCL Balance sheet Statement

Share capital 24,280 24,280 24,280 24,280 24,280
Reserves & surplus 635,641 655,420 715,208 800,302 905,613
Shareholders fund 659,921 679,700 739,487 824,581 929,892
Long term debt 316,836 327,313 249,432 249,432 187,074
Short term/ WC loans 489,155 169,793 175,427 175,427 175,427
Debt 805,991 497,106 424,859 424,859 362,501
Deferred Tax Liability 56,162 67,202 94,682 94,682 94,682
Capital employed 1,522,074 1,244,008 1,259,029 1,344,123 1,387,076
Gross Fixed Assets 1,126,090 1,216,435 1,538,390 1,658,390 1,768,390
Accumulated Depreciation 496,602 553,920 602,448 665,467 730,897
Net fixed assets (incl.WIP) 968,280 1,025,750 1,119,177 1,176,158 1,220,728
Investments 235,942 238,995 239,753 227,765 216,377
Current Assets without cash 1,336,784 1,007,132 901,994 933,488 1,014,233
Current Liabilities 1,045,018 1,028,988 1,007,043 1,043,310 1,133,554
Net working capital 291,766 -21,856 -105,048 -109,822 -119,322
Cash and bank balance 26,085 1,119 5,147 50,021 69,292
Capital deployed 1,522,074 1,244,008 1,259,029 1,344,123 1,387,076

IOCL Cash flow Statement

+ Depreciation 54,535 57,318 48,528 63,019 65,430
+ Deferred tax 1,035 11,040 27,480 - -
Cash profit 125,761 121,088 179,999 193,531 226,951
- Incr/(Decr) in WC (177,052) (313,622) (83,192) (4,774) (9,499)
Operating cash flow 302,813 434,711 263,191 198,304 236,450
- Capex 233,757 114,787 141,955 120,000 110,000
Free cash flow 69,056 319,924 121,236 78,304 126,450
- Dividend 24,488 18,396 39,430 45,418 56,209
+ Equity raised - - - - -
+ Debt raised 22,739 (308,886) (72,246) - (62,358)
- Investments 49,230 3,053 758 (11,988) (11,388)
Net cash flow 21,052 (24,966) 4,028 44,874 19,271
+ Opening cash 5,033 26,085 1,119 5,147 50,021
Closing cash 26,085 1,119 5,147 50,021 69,292
IOCL - Key ratios

Year-end Mar FY14 FY15 FY16E FY17E FY18E
BV (Rs) 272 280 305 340 383
Dividend yield (%) 1.4 1.0 2.2 2.6 3.2
P/E (x) 21.6 28.8 14.6 11.6 9.4
EV/EBITDA (x) 14.4 20.0 9.3 7.1 5.8
P/B (x) 2.3 2.2 2.1 1.8 1.6
EBITDA margin (%) 3.3 2.3 5.7 6.4 7.0
EBIT margin (%) 2.1 1.3 4.3 4.9 5.5
Net profit margin (%) 1.5 1.2 3.0 3.3 3.7
RoCE (%) 7.0 4.3 13.0 16.2 18.7
RoE (%) 11.0 7.9 14.7 16.7 18.4
Net Debt/Equity (%) 118.2 73.0 56.8 45.5 31.5
Interest cover (x) 2.0 1.6 5.1 4.8 6.3
Net debt/ EBITDA (x) 5.0 4.9 2.1 1.5 1.0

This page has been intentionally left blank

HCL Technologies
BUY
STRATEGY NOTE HCLT IN EQUITY September 19, 2016
IMS, Engineering to power growth Technology

HCLT missed out on the Y2K bug boom, but made up lost ground by
pioneering remote infrastructure management services (IMS) and a SENSEX ENTRANT
smart acquisition (Axon). It currently ranks among the top-3 India-listed Mcap (bn): `1098/US$16.4
IT vendors on our proprietary CAPOM framework (capital allocation, 3M ADV (mn): `1630/US$24.4
portfolio, operational excellence, management). It ranks within top-2 CMP: `779
globally in IMS and within top-5 in engineering services in terms of TP (12 mths): `870
capabilities. It has delivered revenue/EPS CAGR of 21%/25% over the Upside (%): 12
past 10 years, with average RoCE of 33%. Differentiated strengths in IMS
and engineering services (54% of revenue) will likely ensure 10%+ Flags
earnings CAGR with RoCE of >20% over the next 10 years, enabling
Accounting: GREEN
entry into the Sensex, replacing Wipro. Recent questionable acquisitions
Predictability: GREEN
(e.g. Geometric, software product from customer) and senior
Earnings Momentum: RED
management exits (about a dozen in past two years) are the only risks.
Competitive position: STRONG Changes to this position: STABLE Performance

Indias fourth-largest India-listed IT services company 170
150
HCLT, one of the oldest Indian IT vendors (started in 1976), missed out on the 130
Y2K bug boom because management thought it was temporary and low-end 110
work. This was a strategic mistake because it lost the opportunity to form 90
relationships with large Fortune 500 companies. However, since then, two large 70
Jun-16
Nov-15
bets paid off. It pioneered offshore delivery of infrastructure management
Sep-15
Feb-16
Jul-16
Sep-16
Dec-15
Mar-16
May-16
services in 2003-04 (now 35% of revenues, no. 2 globally after IBM) and
acquired Axon in 2009 (gave it relationships with CXOs in large organisations).
SENSEX HCLT
Over the past 10 years, revenues and profits have grown at 21% CAGR (USD)
and 25% CAGR (INR terms) respectively, and pre-tax RoCE has averaged 33%.
Strong portfolio, execution are its key strengths
HCLTs willingness to commit upfront to large savings for customers and then HCL Techs forensic score analysis
executing well in large deals (smooth transition from incumbent or in-house
vendor to offshore, automation) differentiate it from peers, especially in IMS and
engineering services (54% of FY16 revenue). These competitive strengths should
sustain as the company continues to invest in building its capabilities.
Sustained earnings growth should drive entry into the Sensex Source: Ambit HAWK, Ambit Capital research
Global IT services spend grew 3% CAGR over the past 10 years despite
HCL Techs greatness score analysis
deflationary trends such as outsourcing, offshoring and packaged software. In
the next 10 years, technology is gaining strategic importance across industries,
its heterogeneity (types of hardware, software, platforms) is growing, and pace
of change in both business and technology is increasing. So global spend could
grow at a similar pace over the next 10 years despite deflationary trends such as
automation and the cloud. HCLTs strengths in infrastructure management
services and engineering services as well as its intellectual property investments
should ensure leading position in Internet-of-Things/automation era. So we
expect revenue/earnings CAGR of 10%+ over the next 10 years with ROCE
above 20%, enabling an entry into the Sensex. Research Analysts
Valuations are reasonable Sagar Rastogi
+91 22 3043 3291
Stock currently trades at 13.5x one-year forward earnings vs 5-year average of
Sagar.rastogi@ambit.co
14x one-year forward earnings. We have been worried about questionable
acquisitions in the recent past (e.g. Geometric, a large software product from a Sudheer Guntupalli
customer) but we keep the faith given its long-term excellent capital allocation +91 22 3043 3203
track record. Senior management attrition (has seen about a dozen exits in past
Sudheer.guntupalli@ambit.co
two years and more appear likely) poses a key risk.
HCL Technologies

Revenues 56,945 70,609 96,926 121,521 151,068 194,114 247,088 314,726 357,905 409,126
Revenue growth 39% 24% 37% 25% 24% 28% 27% 27% 14% 14%
Net profits 10,049 13,732 9,787 12,156 14,361 21,014 36,313 57,138 73,209 73,365
EPS 15 13 7 9 10 15 26 40 52 52
CFO 9,941 15,282 21,272 11,811 14,584 18,493 27,096 63,481 55,422 71,067
CFO/EBITDA 0.8 1.1 1.0 0.5 0.6 0.5 0.5 0.8 0.6 0.8
FCF 6,312 8,786 17,507 6,864 7,353 10,021 22,490 57,527 44,110 61,310
Debt equity(x) (0.44) (0.43) (0.42) (0.35) (0.27) 0.02 (0.28) (0.45) (0.44) (0.42)
ROE(%) 24% 26% 18% 21% 19% 22% 29% 35% 35% 29%
ROCE(%) 37% 26% 27% 20% 24% 31% 41% 46% 40% 38%
Source: Ambit Capital research, company
Exhibit 2: Sources of cash FY07-16 Exhibit 3: Utilization of cash FY07-16

Sources of cash FY07-16 Utilization of cash FY07-16
4%
7%
16%
33%
60%
80%
CFO Asset sale Cash Flow from Financing Dividend Capex Acquisitions
Exhibit 4: Forward P/E evolution Exhibit 5: Forward EV/EBITDA evolution

18 1 year forward P/E 16 1 year forward EV/EBITDA
(consensus) (consensus)
16 14
14 12
12 10
10 8
01-Sep-11
01-Mar-12
01-Sep-12
01-Mar-13
01-Sep-13
01-Mar-14
01-Sep-14
01-Mar-15
01-Sep-15
01-Mar-16
01-Sep-16
6
Mar-12
Mar-13
Mar-14
Mar-15
Mar-16
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
Sep-16
P/E Avg EV/EBITDA Avg

Accounting GREEN Our proprietary forensic accounting tool Hawk places HCL Tech in Zone of safety in terms of accounting policies.
Predictability GREEN The management issues annual guidance; earnings surprises over the past eight quarters have averaged less than 5%.
Earnings momentum RED Bloomberg shows downgrades to consensus numbers in last 8 weeks.

HCL Technologies
Exhibit 7: HCL Tech fares well on forensic score Exhibit 8: as well as greatness score in Hawk
Source: Ambit Hawk, Ambit Capital research, Note: Using our accounting Source: Ambit Hawk, Ambit Capital research, Note: On our greatness
accounting quality with D1 indicating the best decile and D10 indicating the tend to score above 67 whilst most companies tend to have scores below 50
worst decile. Our analysis points towards a strong link between accounting
quality and share price performance.

HCL Technologies
Balance sheet
Balance sheet (Rs bn) FY15 FY16 FY17E FY18E FY19E
Net Worth 229.7 277.5 318.2 363.3 421.9
Other Liabilities 18.0 22.2 25.8 25.8 25.8
Capital Employed 247.7 299.6 344.1 389.1 447.7
Net Block 85.5 106.4 132.6 137.7 144.2
Other Non current Assets 29.6 40.0 40.0 40.0 40.0
Curr. Assets 215.1 247.4 278.5 329.6 397.6
Debtors 63.3 76.5 86.7 95.7 108.5
Unbilled revenues 29.5 29.7 34.4 38.0 43.1
Cash & Bank Balance 97.1 117.4 130.6 166.4 212.5
Other Current Assets 25.3 23.9 26.8 29.5 33.5
Current Liab. & Prov 82.5 94.2 107.1 118.2 134.1
Net Current Assets 132.6 153.3 171.4 211.4 263.5
Application of Funds 247.7 299.6 344.1 389.1 447.7
Income statement
Income statement (Rs bn) FY15 FY16 FY17E FY18E FY19E
Revenue (US$ mn) 5,822 6,235 6,941 7,665 8,694
Growth 12.4% 7.1% 11.3% 10.4% 13.4%
Revenue 357.9 409 465 514 582
Cost of goods sold 231.4 274.9 317.2 353.0 398.8
SG&A expanses 43.2 52.2 56.7 63.0 70.2
EBITDA 88.4 88 100 108 124
Depreciation 5.1 5.7 8.9 10.4 10.9
EBIT 83.4 82.1 91.4 97.6 113.5
EBIT Margin 23.3% 20.1% 19.6% 19.0% 19.5%
Other Income 8.5 10.1 10.4 10.5 11.7
PBT 91.9 92.2 101.8 108.1 125.2
Tax 18.7 18.8 21.7 23.2 26.9
Rate (%) 20.3% 20.4% 21.4% 21.5% 21.5%
Reported PAT 73.2 73.4 80.0 84.8 98.3
Diluted Adj EPS 51.9 52 57 60 70
Cash flow statement

Cash flow (Rs bn) FY15 FY16 FY17E FY18E FY19E
Net Income 73.2 73.4 80.0 84.8 98.3
Depreciation 5.1 5.7 8.1 9.3 9.8
CF from Operations 73.4 73.5 88.5 95.2 109.2
Cash for Working Capital (17.9) (2.4) (11.8) (4.3) (6.0)
Net Operating CF 55.4 71.1 76.7 90.9 103.1
Net Purchase of FA (11.3) (9.8) (21.4) (14.9) (16.9)
Others (17.2) (33.1) (2.8) (0.5) (0.5)
Net Cash from Invest. (28.5) (42.8) (24.2) (15.4) (17.4)
Proceeds from Equity & other 0.2 0.0 - - -
Dividend Payments (24.7) (33.7) (39.9) (39.7) (39.7)
Cash Flow from Fin. (28.8) (28.4) (41.7) (39.7) (39.7)
Free Cash Flow 44.1 61.3 55.3 76.0 86.3
Opening cash balance 85.9 103.6 119.9 130.6 166.4
Net Cash Flow (1.9) (0.1) 10.8 35.8 46.1

HCL Technologies
Ratio analysis
FY15 FY16 FY17E FY18E FY19E
Growth
Revenue growth (US$) 12.4% 7.1% 11.3% 10.4% 13.4%
EBIT growth (Rs) 13.9% -1.5% 11.3% 6.8% 16.3%
EPS growth (Rs) 28.3% 0.1% 9.1% 6.0% 15.9%
Valuation (x)
P/E 15.0 14.9 13.7 12.9 11.2
EV/EBITDA 11.3 11.4 10.0 9.3 8.0
EV/Sales 2.8 2.4 2.1 1.9 1.7
EV/NOPAT 12.0 12.2 11.0 10.3 8.8
Price/Book Value 4.8 3.9 3.4 3.0 2.6
Dividend Yield (%) 2.2% 2.8% 3.1% 3.1% 3.1%
Return Ratios (%)
RoE 35% 29% 27% 25% 25%
RoCE 29% 24% 22% 21% 20%
ROIC 48% 39% 36% 35% 38%
Turnover Ratios
Receivable days (Days) 95 95 95 95 95
Fixed Asset Turnover (x) 4.3 4.3 3.9 3.8 4.1

HCL Technologies

UltraTech
BUY
STRATEGY NOTE UTCEM IN EQUITY September 19, 2016
Taking lead to enter the Sensex Cement

UltraTech, after Jaypee acquisition, will fortify its scale leadership, with
SENSEX ENTRANT
22% of Indias capacity by FY18. Whilst the companys focus in the last
decade was to build scale leadership and a pan-India brand, it is now Mcap (bn): `1,061/US$15.9
focusing on enhancing operational efficiency and cost savings. Strong 3M ADV (mn): `966/US$14.5
balance sheet, cash generative traits, and access to large land parcels CMP: `3,941
and limestone reserves mean the company will sustain its leadership TP (12 mths): `4,172
and remain the proxy play to the inevitable Indian infra/housing Upside (%): 6
pickup. We expect the company to generate 16% CFO/FCF CAGR over
the next decade and represent the Materials sector in the Sensex. The Flags
stock trades at 14x FY18 EV/EBITDA 20% premium to its 5-year Accounting: GREEN
average and 10-30% premium to ACEM and ACC; rich multiples will Predictability: AMBER
sustain as the demand/pricing supercycle is yet to pick up. Capital Earnings Momentum: AMBER
allocation outside India remains the key risk to our thesis.
Competitive position: STRONG Changes to this position: POSITIVE Performance
140
Proxy play on the Indian cement/infra story
120
UltraTech is the proxy large-cap play on Indias capex/housing story given its
low leverage and high cash-generative traits unlike other infrastructure stories. 100
Its installed capacity will increase to 88mn tonnes in FY18 as against 31mn
80
tonnes in FY05. It posted 5.5% volume CAGR and 16% EBITDA CAGR over
Nov-15
Sep-15
Dec-15
Jan-16
Jul-16
Sep-16
Mar-16
May-16
Jun-16
FY05-16 and has steadily established scale and brand leadership across Indian
regions. Its RoCE declined to 11% in FY16 as against peak RoCE of 18-24%
over FY07-10 since the demand downcycle impacted recent performance. A SENSEX UTCEM
demand/pricing recovery over the next few years will drive EBITDA/tonne to
Rs1,718 (vs Rs956 in FY16) and RoCE to 15% by FY20. Source: Bloomberg, Ambit Capital research
The view from the top

UltraTechs forensic score analysis
With scale aspirations satiated, the company has begun focusing on cost
efficiencies, including: (a) power and fuel cost savings 17% decline in FY16
led by lower petcoke costs and higher petcoke adoption (70% in FY16 from
52% in FY15); (b) increased rural-retail mix (39% in FY16 vs 36 in FY15); and
(c) process efficiencies like centralized procurement and logistics management.
UltraTech has quadrupled its freehold land (to Rs32bn in FY16), holds ample
limestone reserves and balance sheet bandwidth to invest both
organically/inorganically to maintain its leadership over the next decade. Source: Ambit HAWK, Ambit Capital research
The prime contender to represent Materials in the Sensex UltraTechs greatness score analysis
We expect UltraTech to generate 16% CFO/FCF CAGR over the next decade as
it continues to outpace industry growth through consolidating capacities, which
should easily help it surpass the 9% annual compounding required to make it
to the Sensex. Whilst our assumptions imply it will re-invest in India for growth,
any major capital allocation outside India remains a key risk to the franchise.
Valuations the proxy premium
UltraTechs multiple has consistently re-rated in the last five years (14x FY18E
EV/EBITDA; 20% premium to five-year average) as it established its leadership
and now trades at 10-30% premium to ACEM and ACC. Whilst headline Research Analysts
valuation multiples appear rich, the demand and supercycle pricing will not
Nitin Bhasin
commence in FY18 and hence FY18 is not the correct representative of
earnings-based multiples. We expect double-digit industry volume growth over +91 22 3043 3201
FY19 and FY20, and UltraTech will be able to benefit from improving industry nitin.bhasin@ambit.co
volumes due to its scale and, thereby, post strong EBITDA growth. Over the
Achint Bhagat, CFA
next decade, UltraTech will maintain its valuation premium over peers as its
+91 22 3043 3178
utilisation ramps up and it sustains cost efficiency and capital discipline.
achint.bhagat@ambit.co
UltraTech

Revenues 107,530 124,123 143,195 117,236 133,553 183,864 201,749 202,798 229,362 241,074
Revenue growth (%) 48.4% 15.4% 15.4% -18.1% 13.9% 37.7% 9.7% 0.5% 13.1% 5.1%
Net profits 30,723 36,653 36,712 34,583 26,878 42,207 46,845 38,179 41,950 46,167
EPS 26,712 32,294 30,664 28,750 19,221 33,181 37,301 27,656 30,619 33,277
CFO 11,131 13,818 14,576 15,719 20,743 34,434 35,728 32,420 40,829 43,312
CFO-EBITDA 0.4 0.4 0.4 0.5 0.8 0.8 0.8 0.8 1.0 0.9
FCF 3,487 (4,113) 6,278 12,979 8,574 3,001 3,052 10,233 15,151 22,954
Debt equity (x) 0.9 0.6 0.6 0.4 0.4 0.3 0.4 0.3 0.4 0.4
RoE (%) NA NA NA NA 17.9 20.7 55.8 13.3 11.2 11.0
ROCE (%) NA NA NA NA 14.4 20.5 24.1 13.1 12.8 11.7
Exhibit 2: CFO accounted for majority of the cash inflows in Exhibit 3: Two-thirds of the overall cash inflows were spent
the last decade on capex
Investments
Int+div, , 0% Debt
2% repaid, 0% Others, 8%
Dividend,
6%
Interest,
11%
Inc in cash,
8%
CFO, 98% Capex, 67%
Exhibit 4: Post a recent re-rating UltraTech is trading at a Exhibit 5: UltraTech has materially outperformed the
significant premium to its five-year average EV/EBITDA Sensex
UltraTech EV/EBITDA 140
20
120
15
10 100
5
- 80
Sep-15
Oct-15
Apr-16
Nov-15
Feb-16
Mar-16
May-16
Jun-16
Aug-16
Sep-16
Dec-15
Jan-16
Jul-16
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
UltraTech EV/EBITDA 5-yr avg EV/EBITDA SENSEX UTCEM

The companys cash conversion cycle is top notch (100% CFO/EBITDA) and we do not see any instance of cash
Accounting GREEN
pilferage or window-dressing. This is a common trait in all Indian cement companies.
Predictability of UltraTech is better than Ambuja/ACC and has improved since management became more
transparent in recent years and improved the quality of non-financial disclosures.
Earnings momentum AMBER Consensus EBITDA estimates for FY18 have been increased by 10% as pricing improved.

UltraTech
Exhibit 7: Forensic score has improved over the years Exhibit 8: Greatness score has been impacted negatively
due to the demand downcycle and high capex investments

UltraTech
Balance sheet (standalone)

Year to March (` mn) FY14 FY15 FY16 FY17E FY18E
Shareholders' equity 2,742 2,744 2,744 2,742 2,742
Reserves & surpluses 168,233 185,833 204,617 234,304 272,984
Total networth 170,975 188,577 207,361 237,046 275,726
Minority Interest
Debt 51,993 74,142 76,607 73,607 68,607
Deferred tax liability 22,958 27,920 32,274 32,274 32,274
Total liabilities 245,927 290,639 316,241 342,926 376,606
Gross block 250,778 318,741 345,669 352,582 359,634
Net block 158,718 209,475 225,327 217,999 210,524
CWIP 20,416 20,737 14,156 14,156 14,156
Cash & Cash equivalents 2,775 2,139 22,352 33,687 73,143
Debtors 12,810 12,032 14,149 11,591 13,366
Inventory 23,684 27,514 24,261 30,909 35,643
Loans & advances 25,067 28,005 26,760 30,909 35,643
Total current assets 64,489 69,851 87,957 107,187 157,900
Current liabilities 41,884 48,481 51,013 50,227 57,919
Provisions 9,730 13,030 11,267 14,287 16,152
Total current liabilities 51,613 61,511 62,280 64,514 74,072
Net current assets 12,875 8,340 25,677 42,673 83,828
Total assets 245,927 290,639 316,241 342,926 376,606
Income statement (standalone)

Net Sales 202,798 229,362 241,074 282,044 325,239
% growth 1% 13% 5% 17% 15%
Operating expenditure 164,619 187,411 194,906 215,229 244,470
EBITDA 38,179 41,950 46,167 66,814 80,769
% growth -18% 10% 10% 45% 21%
Depreciation 10,523 11,331 12,890 14,241 14,526
EBIT 27,656 30,619 33,277 52,573 66,243
Interest expenditure 3,192 5,475 5,053 6,760 5,689
Non-operating income 3,290 3,718 2,352 4,673 5,226
Adjusted PBT 27,755 28,863 30,576 50,486 65,780
Tax 6,310 8,715 8,823 14,641 19,076
Adjusted PAT before minority interest 21,445 20,147 21,753 35,845 46,704
% growth -19% -6% 8% 65% 30%
Minority Interest
Adjusted PAT after minority interest
Reported PAT after minority interest 21,445 20,147 21,753 35,845 46,704

UltraTech
Cashflow statement (standalone)

Net Profit Before Tax 27,755 28,863 30,576 50,486 65,780
Depreciation 10,523 11,331 12,890 14,241 14,526
Others (3,154) (3,444) (2,047) (4,673) (5,226)
Tax (6,584) (1,486) (8,355) (14,641) (19,076)
(Incr) / decr in net working capital 689 91 5,195 (8,681) (3,564)
Cash flow from operations 32,420 40,829 43,312 46,513 59,994
Capex (net) (22,187) (25,679) (20,359) (6,913) (7,052)
(Incr) / decr in investments - - 2,268 (17,017) -
Interest received 506 582 - 4,673 5,226
Cash flow from investments (22,100) (18,797) (17,323) (19,258) (1,826)
Net borrowings (2,092) 22,162 2,465 (3,000) (5,000)
Issuance/buyback of equity 44 16 27 (2) (0)
Interest paid (4,046) (5,495) (5,388) (6,760) (5,689)
Dividend paid (2,879) (2,880) (2,926) (6,158) (8,023)
Cash flow from financing (8,973) (22,668) (5,822) (15,920) (18,712)
Net change in cash 1,347 (636) 20,167 11,335 39,456
Closing cash balance 2,775 2,139 20,830 33,687 73,143
Free cash flow 10,233 15,151 22,954 39,600 52,942
Ratio analysis (standalone)

Year to March (%) FY14 FY15 FY16 FY17E FY18E
EBITDA margin (%) 18.8 18.3 19.2 23.7 24.8
EBIT margin (%) 13.6 13.3 13.8 18.6 20.4
Net profit (bef min. int.) margin (%) 10.6 8.8 9.0 12.7 14.4
Dividend payout ratio (%) 12.0 15.0 15.0 15.0 15.0
Net debt: equity (x) 0.1 0.2 0.2 0.0 (0.2)
Working capital turnover (x) 24 28 51 46 33
Gross block turnover (x) 0.9 0.8 0.7 0.8 0.9
RoCE (post-tax) (%) 13.1 12.8 11.7 17.4 19.9
RoIC (%) 14.5 11.3 9.7 14.2 16.5
RoE (%) 13.3 11.2 11.0 16.1 18.2
Valuation parameters (standalone)

EPS after minority interest (`) 78.2 73.5 79.3 130.7 170.3
Diluted EPS (`) 78.2 73.4 79.3 130.7 170.3
Book value per share (`) 624 688 756 864 1,006
Dividend per share (`) 9.2 11.0 11.9 19.6 25.5
P/E (x) 52.3 55.6 51.5 31.3 24.0
P/BV (x) 6.6 5.9 5.4 4.7 4.1
EV/EBITDA (x) 29.6 27.5 24.3 16.8 13.9
EV/EBIT (x) 40.91 37.69 40.91 40.91 40.91

UltraTech

Bharat Petroleum
BUY
STRATEGY NOTE BPCL IN EQUITY September 19, 2016
Well oiled Oil and Gas
BPCL is the leading fuel retailer and refiner in India. Its core strength lies SENSEX ENTRANT
in superior capital allocation (upstream, investments in gas) and project
Mcap (bn): `823/US$12.3
execution. Whilst industry-best GRMs and throughput per outlet among
OMCs testify efficient operations, its de-centralised decision making 3M ADV (mn): `1,903/US$28.5
(legacy of erstwhile MNC parentage) is behind its superior execution CMP: `569
capabilities. We believe BPCL is on track to marry these capabilities with TP (12 mths): `675
geology knowledge to build a credible upstream business over the next Upside (%): 9
decade. This, together with building on its marketing franchise, would
drive required the compounding to get the stock into the Sensex. BPCL Flags
has re-rated to one-year fwd P/B of 2.2x from 1.6x in FY14 after fuel Accounting: GREEN
deregulation, which should sustain given RoEs of 20%+. Predictability: AMBER
Competitive position: STRONG Changes to this position: POSITIVE Earnings Momentum: GREEN
The most efficient fuel retailer
Performance
BPCL is the leading integrated fuel retailer in India with over 28% volume market
share. Unlike other PSUs, BPCL originated from nationalization of Shell Refinery 150
in India. It now has second-largest fuel retailing network in India (13,500 outlets)
100
and 12%/13% share in refining capacity/output. BPCL has also built a credible
position in upstream (stakes in Brazil and Mozambique) and gas (stake in PLNG, 50
IGL, CUGL, MNGL and Sabarmati Gas) businesses. Over last 10 years,
EBITDA/PAT grew by 34%/50% with capital employed CAGR of 9%. 0
Dec-15
Aug-15
Nov-15
Feb-16
Mar-16
Apr-16
Jun-16
Sep-15
Oct-15
Jan-16
May-16
Jul-16
Aug-16
De-centralised decision making drives capital efficiencies
BPCL has evolved a culture that promotes quick decision making and focuses on Bharat Petroleum Corp Sensex
nurturing talent. This has helped it build an efficient refining business (highest
GRMs alongside less volatility amongst three OMCs) and a marketing business Source: Bloomberg, Ambit Capital research
too (best throughput per outlet amongst OMCs). Foray into upstream and gas
businesses has also been successful. BPCL occupies prime retailing space across BPCLs forensic score analysis
India along with depots and pipelines, a retail network that is difficult to
replicate. Resultantly, efficient operation and prudent capital allocation make it
the leader in the energy/PSU space with ROEs of ~24%+.
Compounding of 10% will get BPCL into the Sensex

BPCL has been gradually de-risking its core refining business via better supply
chain, effective crude sourcing and risk management. On the marketing side,
BPCLs greatness score analysis
fuel deregulation and non-fuel retailing initiatives will improve productivity of
marketing business. Strong project execution and evolving expertise in geology
will help BPCL build a credible E&P franchise. Investments in petchem and gas
business too will generate shareholder value given track record of project
execution and capital allocation. We believe BPCL can compound at ~10% CAGR
hereon, which would guarantee it a place in the Sensex. We expect BPCL to Source: Ambit HAWK, Ambit Capital research
sustain ROE of ~20% while CFO should grow at ~12% over the next decade.
Valuation premium to sustain
BPCL has historically traded at 0.8x-1x one-year forward P/B. However, since the
Government de-regulated auto fuels and then cooking fuels, BPCLs RoEs
improved and drove valuation re-rating to ~2.5x one-year forward book. We
believe BPCLs historical valuations are not relevant given high subsidy burden
under fuel price regulation mechanism. Current multiples will sustain given
Research Analyst
significant improvement in profitability after the fuel deregulation. BPCL scores
79% on our greatness parameter and appears in the fourth decile on accounting. Ritesh Gupta, CFA
Key risks: Rollback of fuel deregulation and sharp rise in crude prices. +91 22 3043 3242
ritesh.gupta@ambit.co
Bharat Petroleum

Revenues 975,602 1,105,468 1,352,377 1,222,760 1,516,395 2,119,730 2,401,158 2,600,750 2,380,869 1,893,033
Revenue growth (%) 35% 13% 22% -10% 24% 40% 13% 8% -8% -20%
Net profits 18,055 15,809 7,359 15,376 15,467 13,113 26,429 40,609 50,844 74,319
EPS 25.0 21.9 10.2 21.3 21.4 18.1 36.6 56.2 70.3 102.8
CFO 40,530 (907) 33,757 (23,295) 65,763 (28,028) 35,031 62,778 184,984 190,774
CFO-EBITDA 1.47 0.31 1.33 (0.63) 2.09 (0.58) 0.80 1.01 2.51 2.02
FCF 25,976 (26,738) 23,267 (59,147) 43,220 (50,384) 11,566 26,334 101,727 97,872
Debt equity (x) 1.05 1.29 1.75 1.70 1.17 1.43 1.42 1.03 0.52 0.50
RoE (%) 19% 14% 6% 12% 11% 9% 17% 23% 24% 30%
ROCE (%) 13% 8% 6% 3% 6% 6% 11% 15% 16% 24%
Exhibit 2: Sources of cash over last ten years Exhibit 3: Uses of cash over last ten years
Decrease in Purchase Income tax

Debt Issue,
Cash, 11% of Investment on dividend
5%
, 4% paid, 2%
Proceeds
from Issue of
Equity Share Interest
Capital, 1% Paid, 18%
Cash From
Interest Operating
received and Activities, Purchase of
Equity
Other 78% Fixed Assets,
Dividend Paid,
Investments, 66%
9%
5%
Exhibit 4: BPCL multiples have seen a sharp re-rating Exhibit 5: BPCL has significantly outperformed BSE Index
1,200 6.5
2.4x 5.5
1,000
2.2x
4.5
800 1.8x
1.6x 3.5
600
2.5
400 1.0x 1.5
200 0.5
Sep-06
Nov-07
Jun-08
Jan-09
Aug-09
Sep-13
Oct-10
Nov-14
Jun-15
Jan-16
Aug-16
Jul-12
Feb-13
Apr-07
Mar-10
May-11
Dec-11
Apr-14
0
Aug-06
Aug-07
Aug-08
Aug-09
Aug-10
Aug-11
Aug-12
Aug-13
Aug-14
Aug-15
Aug-16
BPCL BSE Energy

Accounting GREEN In our forensic accounting, BPCL has an accounting score above the sector average.
OMCs earnings are difficult to predict due to: (a) volatility in refining GRMs due to crude sourcing, fuel losses,
distillate mix (b) volatility in marketing margins due to frequent pricing changes
Earnings Momentum GREEN Bloomberg earnings momentum suggests gradual upgrades in FY17/FY18 earnings during last 6-9 months

Bharat Petroleum

Bharat Petroleum
Exhibit 10: Balance sheet (in Rs mn)

FY14 FY15 FY16 FY17E FY18E
Shareholders fund 194,588 224,675 273,571 326,095 382,956
Secured debt 118,084 117,370 136,857 129,330 135,796
Unsecured debt 81,837 403 240 216 194
Debt 199,921 117,773 137,097 129,545 135,990
Minority Interest 0 0 0 0 0
Capital employed 408,117 359,530 427,750 472,723 536,029
Gross Fixed Assets 381,638 418,096 518,096 618,096 718,096
Net fixed assets (Incl. WIP) 221,046 279,807 365,097 444,398 519,900
Investments 118,469 123,911 129,737 116,763 105,087
Current Assets without cash 379,720 279,968 146,842 258,841 272,486
Current Liabilities 313,156 337,759 327,967 361,028 376,690
Net working capital 66,565 -57,791 -181,125 -102,188 -104,204
Capital deployed 408,117 359,530 427,750 472,723 536,029
Income statement (in Rs mn)

Net Revenue 2,600,750 2,380,869 1,893,033 2,136,956 2,309,160
Total Expenditure 2,519,743 2,297,722 1,782,471 2,004,217 2,160,415
EBIDTA 81,007 83,147 110,563 132,739 148,745
EBITDA (%) 3 3 6 6 6
Depreciation 22,468 25,160 18,543 24,724 28,724
EBIT 58,539 57,987 92,020 108,015 120,022
EBIT (%) 2 2 5 5 5
Interest 13,591 5,831 5,629 7,025 7,375
Other income 14,542 22,000 20,122 18,163 16,347
PBT 59,490 74,155 106,512 119,153 128,994
Tax 18,881 23,310 32,193 39,321 42,568
Effective tax (%) 35 32 31 30 33
PAT 40,609 50,845 74,319 79,833 86,426
PAT growth (%) 53.7 25.2 46.2 7.4 8.3
EPS (Rs/share) 56.2 70.3 102.8 110.4 119.5

Bharat Petroleum
Cash flow statement (in Rs mn)

+ Depreciation 22,468 25,160 18,543 24,724 28,724
Cash profit 60,129 79,479 92,862 104,556 115,150
- Incr/(Decr) in WC (16,581) (124,355) (123,335) 78,938 (2,016)
- Capex 52,373 82,464 103,833 104,024 104,226
Free cash flow 24,337 121,369 112,364 (78,406) 12,940
- Dividend 13,736 17,198 25,138 27,003 29,233
+ Others (1,614) (1,543) (284) 14,065 388
+ Debt raised (35,747) (82,148) 19,324 (7,551) 6,445
- Investments (2,561) 5,443 5,826 (12,974) (11,676)
Net cash flow (21,251) 11,564 100,439 (85,922) 2,215
+ Opening cash 23,289 2,038 13,602 114,041 28,119
Closing cash 2,038 13,602 114,041 28,119 30,335
Ratio Analysis
EBITDA margin (%) 3.1 3.5 5.8 6.2 6.4
EBIT margin (%) 2.3 2.4 4.9 5.1 5.2
Net Debt/Equity (%) 102 46 8 31 28
RoCE (%) 14.7 15.7 24.4 24.9 24.6
RoE (%) 22.5 24.3 29.8 26.6 24.4
Net Debt/Equity 102 46 8 31 28
Net debt/ EBITDA (x) 2.4 1.3 0.2 0.8 0.7
Valuation
FY14 FY15 FY16E FY17E FY18E
Diluted Shares (mn) 723 723 723 723 723
EPS (Rs) 56.2 70.3 102.8 110.4 119.5
Cash EPS (Rs) 87.2 105.1 128.4 144.6 159.2
BV (Rs) 269 311 378 451 530
Dividend yield (%) 4.7 5.9 8.6 9.3 10.0
P/E (x) 18.0 14.4 9.8 9.2 8.5
EV/EBITDA (x) 10.8 9.2 6.5 6.0 5.4
P/B (x) 3.8 3.3 2.7 2.2 1.9
DPS (Rs/ share) 16.8 21.1 30.8 33.1 35.9
Dividend payout (%) 30.0 30.0 30.0 30.0 30.0

Bharat Petroleum

IndusInd Bank
BUY
STRATEGY NOTE IIB IN EQUITY September 19, 2016
Improving franchise with superior earnings BFSI
IndusInd Bank (IIB) is the best-in-class vehicle financier with unmatched SENSEX ENTRANT
reach and a proven record of superior yields with asset quality control.
Mcap (bn): `697/US$10.4
Further, since the new management took charge in FY08, the bank has
3M ADV (mn): `1,440/US$21.5
been filling gaps in its liability franchise and product suites in other
CMP: `1,170
retail segments. Asset quality has been strong with low exposure to
stressed assets. While valuation, at 3.7x FY17BV, has limited room to TP (12 mths): `1,265
expand, strong earnings CAGR of 25% (over FY16-18E) will drive share Upside (%): 8
price return. Over the longer term, strong capital, healthy profitability, a
stable, well-knit top management team, and lack of any asset quality Flags
overhang will sustain earnings growth levels superior to the industry. Accounting: GREEN
Competitive position: MODERATE Changes to this position: UNCHANGED Earnings Momentum: GREEN
Premium CV financier; scaling-up other businesses as well
Performance
IIB is the best-in-class vehicle financier with unmatched reach (1,000 branches
145
and separate vehicle finance outlets) and a unique business model (long-term 135
relationships in SRTO segment). Further, it has been filling gaps in its liability 125
115
franchise and product suites in other segments (like loan against property, 105
tractor loans and credit cards). Stabilizing vehicle financing after a period of slow 95
85
growth, along with rising CASA ratio and fee income, should help IIB deliver 75
Sep-15
Nov-15
Jan-16
Mar-16
Jul-16
May-16
industry-leading earnings growth.
10-year loan book CAGR at 25%; RoAs have improved
In addition to IIBs competitive edge in CV finance business (with long-term IIB IN BANKEX
relationships/risk-history/sector expertise), a well-knit strong management team
with steady track-record of launching and scaling up new products is a key Source: Bloomberg, Ambit Capital research
strength of the bank. Since end-FY10, when IIB accelerated its network
expansion, the number of branches has more than tripled and CASA as a
percentage of total borrowed funds has risen from 20% (in FY10) to ~35%
currently. Since FY08, loan book has expanded at a CAGR of 27%, with RoA
expanding from 0.3% in FY08 to 1.8% in FY16.
Known for CV lending, now strengthening other businesses
IIB has been diversifying its presence in other retail products and wholesale
banking. The bank has scaled-up its LAP, credit card and home loan distribution
in recent years. The recent acquisition of RBS's diamond & Jewellery financing
business is an example of a targeted scale-up in wholesale banking. We expect
the bank to continue delivering a loan book growth 5-10 percentage points
higher than banking system growth over the next 5-10 years, with stable
RoA/RoE of 1.9%/17-18%. The bank would continue to seek selective market
Research Analysts
share gain (it still accounts for <1% credit market share).
Ravi Singh
Superior earnings growth justify the valuations Tel: +91 22 3043 3181
Our target price of Rs1,265 values the bank at 20x P/E and 3.25x P/B (1-year ravi.singh@ambit.co
forward). At 18.6x FY17E EPS, the current valuation reflects the earnings growth
Pankaj Agarwal, CFA
potential. We expect earnings CAGR of 29% along with stable valuation multiple
to drive share price return over next 5-10 years. While the stock trades at 10- Tel: +91 22 3043 3206
15% discount to peers (HDFC Bank and Kotak Bank), it is likely to deliver better pankaj.agarwal@ambit.co
earnings growth (29% EPS CAGR in FY16-18E) than peers. Succession planning
Rahil Shah
(after current CEO) and pricing pressure in high yielding retail segments are key
Tel: +91 22 3043 3217
risks.
rahil.shah@ambit.co
IndusInd Bank

Net profits 682 750 1,483 3,503 5,773 8,026 10,612 14,080 17,937 22,864
EPS (Rs) 2.1 2.3 4.2 8.5 12.4 17.2 20.3 26.8 33.9 38.4
RoA (%) 0.35% 0.34% 0.59% 1.12% 1.43% 1.56% 1.63% 1.76% 1.81% 1.82%
RoE (%) 7.1% 6.9% 11.7% 19.5% 19.3% 19.3% 17.8% 17.6% 19.0% 17.3%
Gross NPAs (%) 3.07% 3.04% 1.61% 1.23% 1.01% 0.98% 1.03% 1.12% 0.81% 0.87%
Net NPAs (%) 2.47% 2.27% 1.14% 0.50% 0.28% 0.27% 0.31% 0.33% 0.31% 0.36%
Exhibit 2: Loan book CAGR of 25% (FY06-16) Exhibit 3: RoAs have expanded over the years
4% 40% 20% 2.0%

35%
16%
3% 30% 1.5%
25% 12%
2% 20% 1.0%
15% 8%
1% 10% 0.5%
4%
5%
0% 0% 0% 0.0%
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
Exhibit 4: IIB is trading at premium to its average P/B Exhibit 5: IIB outperformed benchmark index by 24% in last
ten years
4 3,000
2,500
3
2,000
2 1,500
1,000
1
500
0 0
Mar-05
Sep-06
Mar-08
Jun-07
Sep-09
Mar-11
Jun-10
Sep-12
Mar-14
Jun-13
Sep-15
Jun-16
Dec-05
Dec-08
Dec-11
Dec-14
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
PB Avg. PB IIB IN BANKEX


Overall, we believe that the reported numbers are a true reflection of the profitability of the bank. The bank makes
adequate disclosures of its accounting policies. Compared with some of its peers, IIBs books fee income for
guarantees (excluding deferred payment guarantees) and LC (letter of credit) as on transaction date/when due
rather than amortising the income over the life of the product. However, the short tenor (~6 months) of such
Accounting GREEN instruments implies that the impact on the reported annual numbers is unlikely to be significant.
The bank had outstanding ESOP at 2.2% of outstanding shares as at end-FY16. Similar to all other Indian private
sector banks, IIB uses intrinsic value of stock option to account ESOP expense. However, IIB disclosed that if Black
Scholes model based fair valuation was used, net profit would be adjusted lower by 2% in FY14, 3% in FY15 and
2% in FY16.
Low exposure to stressed segment on the corporate book and long-term track record in the retail CV book lend
Predictability GREEN
predictability to earnings in the current environment
We expect earnings momentum to sustain for IIB in the future with an uptick in the CV cycle and decrease in
Earnings momentum GREEN
interest rates; we expect 29% EPS CAGR in FY16-18E.

IndusInd Bank
Balance sheet
Net worth 86,347 102,395 173,014 198,283 230,544
Deposits 605,023 741,344 930,003 1,181,104 1,488,192
Borrowings 147,620 206,181 221,559 270,253 338,172
Total Liabilities 866,287 1,113,964 1,396,762 1,739,838 2,169,620
Cash & Balances with RBI/Banks 67,694 107,791 101,119 123,144 150,175
Investments 215,630 228,783 312,143 384,481 476,686
Advances 551,018 687,882 884,193 1,112,303 1,397,219
Other Assets 31,944 89,507 99,307 119,910 145,540
Total Assets 866,287 1,113,964 1,396,762 1,739,838 2,169,620
Income statement
Interest Income 82,535 96,920 115,807 141,804 171,967
Total Income 47,812 59,683 78,135 98,516 121,754
Provisions 4,676 3,891 6,722 7,169 7,838
PBT 21,283 27,092 34,693 45,229 57,745
Tax 7,203 9,155 11,828 15,420 19,688
PAT 14,080 17,937 22,864 29,808 38,058
Ratio analysis
Credit-Deposit (%) 91.1% 92.8% 95.1% 94.2% 93.9%
CASA ratio (%) 32.5% 34.1% 35.2% 35.8% 36.8%
Gross NPA (Rs mn) 6,208 5,629 7,768 11,453 14,976
Gross NPA (%) 1.12% 0.81% 0.87% 1.02% 1.06%
Net NPA (Rs mn) 1,841 2,105 3,218 4,352 5,092
Net NPA (%) 0.33% 0.31% 0.36% 0.39% 0.36%
NIMs (%) 3.75% 3.68% 3.89% 4.04% 4.00%

IndusInd Bank
Du-pont analysis
NII / Assets (%) 3.6% 3.5% 3.6% 3.8% 3.7%
Cost to Assets (%) 2.7% 2.9% 2.9% 2.9% 2.9%
PPP / Assets (%) 3.3% 3.1% 3.3% 3.3% 3.4%
PBT / Assets (%) 2.7% 2.7% 2.8% 2.9% 3.0%
Tax Rate (%) 33.8% 33.8% 34.1% 34.1% 34.1%
ROA (%) 1.8% 1.8% 1.8% 1.9% 1.9%
Leverage 10.0 10.5 9.5 8.4 9.1
ROE (%) 17.6% 19.0% 17.3% 16.1% 17.7%
EPS (Rs) 26.8 33.9 38.4 50.1 64.0
EPS growth (%) 32% 26% 13% 30% 28%
BVPS (Rs) 164.3 193.4 290.8 333.3 387.5
P/E (x) 43.7 34.5 30.4 23.3 18.3
P/BV (x) 7.12 6.05 4.02 3.51 3.02

Eicher Motors
SELL
STRATEGY NOTE EIM IN EQUITY September 19, 2016
Strong earnings momentum Auto & Auto ancillaries

We expect Royal Enfields healthy sales momentum to continue (22%
over FY16-20) driven by relatively low competition, product/distribution SENSEX ENTRANT
expansion and strong brand pull. We expect Eicher Motors net earnings Mcap (bn): `623/US$9.4
to witness 20% CAGR over FY16-26 while maintaining the current RoCE 3M ADV (mn): `870/US$13.1
levels, which makes a strong case for its entry into Sensex possibly at the CMP: `22,295
expense of peers like Hero MotoCorp (7% net earnings growth over TP (12 mths): `17,575
FY16-26). While our current SELL stance on the stock is driven by Downside (%): 23
expensive valuations (we value Royal Enfield at 12% discount to current
levels; but 75% premium to domestic 2W peers); any success in the Flags
export markets presents key risks to our estimates/stance. Accounting: GREEN
Competitive position: MODERATE Changes to this position: POSITIVE Predictability: AMBER
A dominant player in the Indian leisure bikes Earnings Momentum: AMBER
Eicher Motors has built a dominant presence in the niche leisure bike segment
(through Royal Enfield/RE) with ~98% market share in 250-500cc segment. Performance
Through its JV (54.4% stake) with Volvo, it is also the third-largest player (11% 130
market share) in domestic Medium and Heavy Commercial Vehicles (MHCV) 120
trucks. Over the last five years (FY11-FY16), the companys net earnings have 110
compounded annually at 37% CAGR. 100
90
Strong demand pull for Royal Enfield, a million units franchise by FY20
80
RE bike sales have witnessed 57% CAGR over CY10-FY16 led by a strong social
Feb-16
Mar-16
Jun-16
Oct-15
Nov-15
Sep-15
Dec-15
Jan-16
May-16
Jul-16
Aug-16
Apr-16
following, significant product improvement, successful response to new models
(Classic 350), expanding user base (customers aged 18-35 years now at 79% vs Eicher Motors Sensex index
68% in 2011) and increased category awareness from entry of expensive global
brands like Harley Davidson and Triumph. With no credible competition in sight Source: Bloomberg, Ambit Capital research
and product/distribution expansion, we expect REs annual domestic sales to
continue and witness 22% volume CAGR over FY16-20 vs 10% for domestic 2W Eichers forensic score analysis
industry.
A strong case to debut in Sensex

We expect Eicher to deliver core net earnings growth of 20% over FY16-26 while
maintaining its current return ratios. This earnings performance is significantly Source: Ambit HAWK, Ambit Capital research
higher compared to the outlook for peers like Hero MotoCorp (7%). Any success
in exports market would be over and above this; we currently build in only 4% Eichers greatness score analysis
share from exports by FY2020. Eichers share price would need to compound at
13% over the next decade to make an entry in Sensex; we believe its strong net
earnings growth (but limited further re-rating in P/E) makes a strong case for the
same possibly at the expense of Hero MotoCorp.
Expensive valuation drives our SELL stance Source: Ambit HAWK, Ambit Capital research
Eicher scores relatively well on both our accounting (D3) and greatness (75%
score) frameworks. The earnings multiple of the company has witnessed
significant re-rating over the last five years driven by much improved
performance of RE. However, we believe the current valuation (30x FY18) more
Research Analysts
than captures REs unique positioning (affordable premium) amongst
leisure/utility users, much strong volume/earnings and limited competitive risks, Ashvin Shetty, CFA
unlike for Hero/Bajaj. We value RE at 26x (12% discount to current levels but ashvin.shetty@ambit.co
Tel: +91 22 3043 3285
75% premium to our implied valuation for Hero/Bajaj/TVS). Any success in
export markets present key risks to our estimates/SELL stance. Gaurav Khandelwal, CFA
gaurav.khandelwal@ambit.co
Tel: +91 22 3043 3132
Ritu Modi
ritu.modi@ambit.co
Tel: +91 22 3043 3292
Eicher Motors

(Rs mn) FY07 FY08 9M Dec08 CY09 CY10 CY11 CY12 CY13 CY14 15M Mar6
Revenues 19,821 22,625 17,180 29,386 43,971 56,775 63,899 68,098 87,383 156,887
Revenue growth (%) 19% 14% -24% 71% 50% 29% 13% 7% 28% 44%
Net profits 527 548 625 834 1,889 3,088 3,243 3,939 6,154 12,779
EPS 19 20 9 30 71 114 120 146 227 471
CFO 1,337 848 (890) 3,685 3,360 4,035 4,825 7,174 10,502 22,843
CFO-EBITDA 1.20 0.73 (185.42) 2.55 0.94 0.73 0.88 1.01 0.94 0.93
FCF 982 169 (1,522) 2,984 2,045 (138) (2,995) 120 820 12,221
Debt equity (x) 0.88 0.88 (0.12) (0.10) (0.01) 0.20 0.54 0.66 0.81 0.80
RoE (%) 12.7% 13.2% 3.8% 11.6% 26.7% 36.5% 29.2% 27.6% 30.7% 38.8%
ROCE (%) 18.0% 17.7% -7.6% 20.0% 85.1% 86.6% 41.3% 34.0% 40.2% 60.8%
Exhibit 2: Funds generated over the last 10 years Exhibit 3: have largely been utilized for capex and
(Rs74bn) paying dividend
Finance Investments
charges made
Int. & 1% 15%
Issue of Dividend Dividends
shares rcd. 16%
14% 8%
Change in
net debt
10%
CFO
78%
Capex
58%
Exhibit 4: Eicher has re-rated in the last 6 years on back of Exhibit 5: Eicher has marginally underperformed BSE Auto
strong volumes index in last one -year
140
40.0
130
35.0
30.0 120
25.0 110
20.0
100
15.0
90
10.0
5.0 80
Jan-16
Oct-15
Nov-15
Aug-16
Sep-15
Dec-15
Feb-16
Mar-16
Jun-16
Jul-16
Apr-16
May-16
Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16
Eicher 1-yr fwd P/E Avg P/E

Eicher Motors BSE Auto index

Eichers key accounting ratios such as CFO to EBITDA stand out amongst its peers (for FY16, Eichers cash
conversion (CFO as a percentage of EBITDA) was much higher than other listed peers, namely Tata Motors and
Accounting GREEN
Ashok Leyland). On Ambits forensic accounting, Eicher is categorised in the 2nd decile of the Auto universe
(comprising eight companies).
Whilst the volumes are reported by the company on a monthly basis (in line with the industry practice), the margin
Predictability AMBER performance reported in the quarterly earnings tends to be unpredictable due to the high nature of fixed costs
involved in the business. However, this is an industry-wide phenomenon.
Earnings momentum AMBER Bloomberg shows no significant upgrades/downgrades to consensus numbers in recent weeks.
June 22, 2015 Ambit Capital Pvt. Ltd. Page 78

Eicher Motors
Exhibit 7: Eicher scores high in our forensic framework Exhibit 8: and greatness framework

Eicher Motors
Balance sheet (consolidated)

Year to December (` mn) CY13 CY14 15M Mar16 FY17E FY18E
Shareholders' equity 270 271 272 272 272
Total networth 20,554 25,159 34,643 48,505 65,695
Minority Interest 10,397 10,851 11,569 13,059 14,902
Debt 839 584 859 859 859
Gross block 22,993 31,609 41,909 51,042 56,891
Net block 16,561 23,199 29,131 34,954 36,595
CWIP 5,551 5,867 5,366 1,131 1,131
Debtors 5,125 5,622 8,336 9,026 10,948
Inventory 5,268 6,455 10,143 11,209 13,569
Loans & advances 5,709 7,380 8,710 9,347 11,329
Provisions 2,159 3,213 2,195 5,532 6,429
Total assets 33,595 38,986 50,452 65,854 84,888
Source: Company, Ambit Capital research; Note: The company has changed its accounting year-end from
December to March, and hence FY16 is for 15 months ended March 31, 2016
Income statement (consolidated)

Net Sales 68,098 87,383 156,887 171,655 207,709
% growth 7% 28% 44% 37% 51%
EBITDA 7,132 11,148 24,472 29,625 35,829
% growth 30% 56% 76% 51% 51%
Depreciation 1,300 2,198 4,517 3,550 4,208
EBIT 5,831 8,950 19,956 26,074 31,621
Interest expenditure 79 98 90 64 64
Non-operating income 545 666 66 1,502 2,243
Adjusted PBT 6,298 9,518 19,931 27,513 33,800
Tax 1,452 2,909 6,466 8,397 10,566
Adjusted PAT before minority
4,846 6,609 13,465 19,115 23,234
interest
% growth 2% 36% 63% 77% 52%
Minority Interest 1,314 864 1,741 2,124 2,524
Adjusted PAT after minority
3,531 5,746 11,725 16,991 20,709
interest

Eicher Motors
Cashflow statement (consolidated)

Depreciation 1,300 2,198 4,517 3,550 4,208
Others (819) (833) (881) (1,438) (2,179)
Tax (1,504) (2,810) (6,343) (8,348) (10,566)
(Incr) / decr in net working capital 1,491 2,020 4,565 1,716 1,832
Capex (net) (7,054) (9,682) (10,622) (5,138) (5,849)
(Incr) / decr in investments - - - (1,000) (1,000)
Other income (expenditure) 731 598 373 1,502 2,243
Net borrowings 610 (255) 275 - -
Issuance/buyback of equity 17 79 48 (0) (0)
Interest paid (80) (98) (90) (64) (64)
Dividend paid (1,020) (1,348) (5,862) (542) (3,791)
Cash flow from financing (474) (1,622) (5,629) (606) (3,855)
Net change in cash 377 (205) 6,965 17,752 18,633
Free cash flow 120 820 12,221 17,855 21,246
Ratio analysis (consolidated)

Year to December (%) CY13 CY14 15M Mar16 FY17E FY18E
EBITDA margin (%) 10.5% 12.8% 15.6% 17.3% 17.2%
EBIT margin (%) 8.6% 10.2% 12.7% 15.2% 15.2%
Net profit (bef min. int.) margin (%) 7.1% 7.6% 8.6% 11.1% 11.2%
Dividend payout ratio (%) 21% 22% 21% 16% 15%
Net debt: equity (x) (0.7) (0.6) (0.6) (0.8) (0.9)
Working capital turnover (x) (35) (26) (28) (21) (21)
RoCE (pre-tax) (%) 34% 40% 61% 96% 117%
RoIC (%) 27% 28% 42% 66% 80%
RoE (%) 28% 31% 39% 46% 41%
Valuation parameters (consolidated)

Year to December CY13 CY14 15M Mar16 FY17E FY18E
EPS after minority interest (`) 146 227 471 626 763
Diluted EPS (`) 145 226 469 624 760
Book value per share (`) 760 928 1,275 1,786 2,419
Dividend per share (`) 30 50 100 102 115
P/E (x) 156.9 100.6 60.6 36.5 29.9
P/BV (x) 29.9 24.5 17.8 12.7 9.4
EV/EBITDA (x) 85.5 54.7 31.2 20.6 17.0
EV/EBIT (x) 104.6 68.2 38.2 23.4 19.3

Eicher Motors

Holcim India
BUY
STRATEGY NOTE NA September 19, 2016
An inevitable merger Cement

Holcims Indian subsidiaries, ACC and Ambuja (both tier I brands), will
merge to create a large cement entity (~65mn tonnes, second-largest SENSEX ENTRANT
cement firm in India) in the next few years. Whilst both the companies Mcap (bn): `822/US$12.3
have refrained from expanding capacities, we believe the combined 3M ADV (mn): NA
entity has sufficient resources (land, limestone reserves) to re-invest over CMP: NA
the next decade as the global parents leverage/cash flow constraints TP (12 mths): NA
abate. Apart from maximizing plant level efficiencies, the combined Upside (%): NA
entity will enjoy synergistic savings (clinker swaps, logistics management
etc.) which should reduce overall costs. We expect the combined entity to Flags
generate 13% CFO CAGR over the next decade, making a strong case for
Accounting: GREEN
becoming a Sensex entrant. It trades at 11.7x CY17E EV/EBITDA, at a
Predictability: AMBER
15% discount to UltraTech; the valuation discount will narrow with
Earnings Momentum: GREEN
increased scale of the combined operations.

Two sleeping giants 160
140
Whilst ACC and Ambuja are strong pan-India brands, the companies have lost 120
market share on account of limited re-investments over the last few years since 100
the parent (Holcim) chose to hoard cash. The combined market share of the 80
companies fell to 17% in CY15 as against 22% in CY05 as they lost share to
Jun-16
Nov-15
Sep-15
Feb-16
Jul-16
Dec-15
Mar-16
Sep-16
May-16
smaller players that aggressively added capacities. A cyclical demand downturn
and volatile pricing meant that their RoCE dropped to 9% in CY15 as against
peak-RoCE of 23-25% over CY07-09 SENSEX HOLCIM
will combine to create a stronger franchise

ACC and Ambuja will merge to create the second-largest cement entity (~65mn
tonnes) in India over the next few years. Lafarge-Holcims FCF maximization
Ambujas forensic score analysis
mandate has meant that the focus in India is on cost optimization and adoption
of petcoke, alternative fuels and waste heat recovery plants. ACC-Ambuja have
maintained low cost re-investments, which means that their combined invested
capital/tonne is one of the lowest in the Industry (~Rs2,000/tonne) and, hence,
as and when demand recovers, these companies will post a sharp improvement
in RoCE (we expect 23% by FY20). As Lafarge-Holcims leverage concerns abate, Source: Ambit HAWK, Ambit Capital research
the re-investments for growth in India should pick up.
Ambujas greatness score analysis
Doesnt need to deliver much to enter the Sensex
Holcim India needs to deliver a share price CAGR of 9% over the next decade to
enter the Sensex. Whilst we assume 200bps lower than industry volume growth
rate over the next decade, we believe ramp-up in the Industrys utilisation rate
will render pricing stability, thereby supporting 8% unitary EBITDA and 13% CFO
CAGR over CY16-26. We assume that the company will start re-investing for Source: Ambit HAWK, Ambit Capital research
growth after the next 2-3 years as its free cash flows further improves. Our thesis
stands at risk if the parent decides against re-investing and extracts cash to
support the global operations or balance sheet.
Multiples will re-rate to reflect enhanced scale
Research Analysts
Holcim India trades at a 15% discount to UltraTech; premium valuations of the
latter are due to higher scale and surplus capacities to grow volumes in the Nitin Bhasin
demand upcycle. After merger, the scale and the valuation gap between the two +91 22 3043 3201
entities will marginally reduce. Both ACC and Ambuja are top-notch in our nitin.bhasin@ambit.co
accounting framework. Whilst their greatness scores have fallen in recent years
(due to the demand downturn), it will improve over the next few years as the Achint Bhagat, CFA
cement demand super-cycle commences. +91 22 3043 3178
achint.bhagat@ambit.co
Holcim India

Revenues 122,110 127,316 137,177 153,690 154,773 182,509 210,371 203,293 217,163 212,582
Revenue growth (%) NA 4.3% 7.7% 12.0% 0.7% 17.9% 15.3% -3.4% 6.8% -2.1%
Net profits 27,351 32,073 26,151 28,251 23,836 25,541 23,276 21,969 26,646 13,992
EPS 68 74 71 93 63 66 77 55 54 44
CFO 32,233 35,745 26,760 45,235 38,110 31,945 34,347 31,008 30,070 30,141
CFO-EBITDA 82.7% 87.5% 71.9% 98.1% 101.7% 81.8% 74.4% 96.7% 87.8% 98.7%
FCF 21,350 24,317 (3,417) 16,642 21,656 20,571 21,957 8,558 6,624 12,329
Debt equity (x) 0.25 0.07 0.07 0.06 0.04 0.04 0.01 0.02 0.00 0.00
RoE (%) 50.0% 41.5% 26.9% 24.5% 18.1% 17.6% 14.8% 13.2% 15.0% 7.5%
ROCE (%) 41.0% 37.0% 28.5% 30.4% 20.2% 18.5% 20.4% 12.0% 12.4% 9.0%
Exhibit 2: CFO accounted for most of the cash inflows Exhibit 3: Capex and dividend accounted for ~75% of
overall cash outflows
Receipts Net
from payment
Sale of
subsidiaries towards
Investments , 2% Debt, 5% Interest, 3%
, 1%
Others, 5% Increase in
Cash, 17%
Int+Divd, Dividend,
7% 29%
Capex, 47%
CY06-15
CFO, 85% CY06-15
Exhibit 4: Ambuja-ACC (Holcim) is trading at a 15% Exhibit 5: Holcim outperformed Sensex as pricing improved
premium to its five-year average in core markets
Holcim EV/EBITDA 160

20
140
15
120
10
100
5
- 80
Sep-15
Nov-15
Mar-16
May-16
Jun-16
Sep-16
Dec-15
Feb-16
Jul-16
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Holcim EV/EBITDA 5-yr avg EV/EBITDA SENSEX HOLCIM

ACC and Ambuja fall in the top quartile of cement companies in accounting practices, with strong CFO/EBITDA
Accounting GREEN
and no instance of cash pilferage through accounting shenanigans.
Earnings of cement companies are highly dependent on pricing in their core markets. Given that prices are
determined by discipline, it is susceptible to volatility which impacts predictability.
Earnings momentum GREEN Consensus EBITDA estimates have been increased by 8-10% in the last 3 months.

Holcim India
Exhibit 7: Ambujas Forensic Evolution Exhibit 8: Ambuja Greatness Evolution
Exhibit 9: ACC Forensic Evolution Exhibit 10: ACC Greatness Evolution

Holcim India
Balance sheet (combined ACC and Ambuja)

Year to March (` mn) CY13 CY14 CY15 CY16E CY17E
Total networth 171,301 183,389 187,499 204,514 225,192
Debt 3,005 292 682 - -
Gross block 219,128 223,798 233,651 278,348 292,827
Net block 122,296 118,255 113,770 146,804 148,249
CWIP 16,949 26,048 27,851 4,141 4,141
Debtors 5,375 6,387 7,707 5,507 6,331
Inventory 20,661 21,440 20,841 21,848 25,048
Loans & advances 16,466 21,411 24,802 19,288 22,244
Total assets 185,150 194,928 198,524 214,839 235,517
Income statement (combined ACC and Ambuja)

Net Sales 203,293 217,163 212,582 225,977 259,207
% growth NA 6.8% -2.1% 6.3% 14.7%
EBITDA 32,062 34,260 30,553 41,788 53,759
% growth NA 6.9% -10.8% 36.8% 28.6%
Depreciation 10,547 10,671 12,777 11,663 13,034
EBIT 21,515 23,589 17,775 30,125 40,724
Interest expenditure 1,053 1,472 1,591 17 -
Adjusted PBT 26,885 29,186 19,562 33,628 45,678
Tax 4,916 2,540 5,571 10,256 13,932
Adjusted PAT 19,313 21,701 15,945 24,810 33,185
Reported PAT 21,969 26,646 13,992 23,371 31,746

Holcim India
Cashflow statement (combined ACC and Ambuja)

Depreciation 10,547 10,671 14,309 11,663 13,034
Interest income (4,388) (4,854) (6,295) (8,427) (9,993)
Tax (7,792) (5,243) (2,711) (10,274) (13,932)
(Incr) / decr in net working capital 6,586 565 807 2,654 540
Capex (net) (22,450) (23,446) (17,811) (20,988) (14,479)
(Incr) / decr in investments 782 (105) - - -
Other income (expenditure) 3,604 3,706 5,340 4,958 6,392
Net borrowings 947 (113) - (682) -
Issuance/buyback of equity 368 - 256 0 0
Interest paid (672) (809) (804) (17) -
Dividend paid (12,874) (14,755) (15,691) (6,357) (11,068)
Net change in cash 848 (4,590) 4,051 9,644 19,773
Free cash flow 8,558 6,624 12,329 11,741 24,449
Ratio analysis (combined ACC and Ambuja)

Year to March (%) CY13 CY14 CY15 CY16E CY17E
EBITDA margin (%) 15.8% 15.8% 14.4% 18.5% 20.7%
EBIT margin (%) 10.6% 10.9% 8.4% 13.3% 15.7%
Dividend payout ratio (%) 59.2% 55.1% 35.0% 30.9% 38.3%
Net debt: equity (x) (0.4) (0.3) (0.3) (0.4) (0.4)
Working capital turnover (x) (8.3) (10.5) (17.7) (19.7) (18.3)
RoCE (pre-tax) (%) 12.0% 12.4% 9.0% 14.6% 18.1%
RoIC (%) 23.1% 23.3% 17.1% 25.1% 30.2%
RoE (%) 13.2% 15.0% 7.5% 11.9% 14.8%
Valuation parameters (combined ACC and Ambuja)

Year to March CY13 CY14 CY15 CY16E CY17E
EPS after minority interest (`) NA NA NA NA NA
Diluted EPS (`) NA NA NA NA NA
Book value per share (`) NA NA NA NA NA
Dividend per share (`) NA NA NA NA NA
P/E (x) 36.7 32.7 44.5 28.6 21.4
P/BV (x) 4.1 3.9 3.8 3.5 3.2
EV/EBITDA (x) 19.7 18.8 20.6 15.1 11.7
EV/EBIT (x) 29.3 27.3 35.5 20.9 15.5

Holcim India

Pidilite Industries
BUY
STRATEGY NOTE PIDI IN EQUITY September 19, 2016
A stronger bond Building Materials

Six decades of innovation in category/brand creation with prudent
capital allocation (FCF in 18 of past 20 years) make Pidilite an SENSEX ENTRANT
unassailable franchise (17% CAGR; 25% RoE). Misplaced investor concern Mcap (bn): `360/US$5.4
on rising competition does not credit formidable competitive moats 3M ADV (mn): `386.3/US$5.8
brand, relationships with influencers, and unmatched reach (better than CMP: `708
FMCG majors). Induction of senior professionals from iconic consumer TP (12 mths): `835
franchises provides bandwidth to grow legacy adhesive segment/ Upside (%): 18
extensions and incubate new ones like construction chemicals (an
opportunity bigger than Fevicol). Demand recovery and product Flags
launches should keep sales/earnings CAGR at 18%/21% over FY16-20, Accounting: AMBER
similar to last two decades. Rich valuation (40x FY17E EPS) is justified Predictability: GREEN
given earnings/FCF longevity rivaling branded consumer names helped
by under-penetration and innovation-led applications.
Franchise built on bonds with customers and through ambassadors 140
130
Pidilites leading adhesive brands (Fevicol, Fevikwik, M-Seal and Fevistik) are 120
110
built via (a) innovation in branding (witty messaging, double run times and 100
consumer feedback); (b) innovation in packaging which helped in brand flanking 90
and expanding end-user base (B2B-B2I-B2C); (c) converting intermediaries into 80
Jun-16
Nov-15
Sep-15
Jan-16
Jul-16
Dec-15
Mar-16
Sep-16
May-16
ambassadors; and (d) chasing shelf space at every shop in India. In three high-
growth and high-potential segments, Pidilites brands enjoy near-monopoly
recall. The strength of this champion franchise is clearly visible in its stellar SENSEX PIDI
financial performance over the last two decades 24% CFO CAGR and 20%+
RoE each year alongside maintaining a strong balance sheet. Source: Bloomberg, Ambit Capital research
Pre-empted and prepared for todays competition

Pidilites forensic score analysis
After building a wide product portfolio, reach across multiple
channels/intermediaries, the company started investing in management
bandwidth from 2007. Previously, the franchise was family-run and Fevicol (and
extensions) dominant. Entry into construction chemicals and to further scale up
consumer/intermediary connect, the promoters brought Bharat Puri on Board
and doubled employee base by first hiring experienced talent (from Castrol, Source: Ambit HAWK, Ambit Capital research
Asian Paints) and then young talent from top B-Schools. Simultaneously, Pidilite
strengthened distribution/HR processes, adopted Kaizen, and now supply-chain Pidilites greatness score analysis
management.
Well-crafted platform for creating more Fevicols
Pidilites history, truly sustainable competitive advantages, product portfolio and
present talent pool (at par with Asian Paints) drive its right-to-win as awareness
and acceptance of adhesives/chemicals rise across end-uses, especially
construction/packaging/industrial/personal-care. Pidilites focus on new products Source: Ambit HAWK, Ambit Capital research
(some Moonshots) poses upside risks to near-term estimates as these could

become Fevicol-esque (~Rs16bn brand); Dr Fixit, is the highly probable one. The
company will generate 16%/18% CFO/FCF CAGR over the next decade, thereby
making a cut in the Sensex.
Research Analysts
40x for 60 years of reputation for excellence
Nitin Bhasin
Over the next decade, Pidilite could close the gap with Asian Paints and emulate +91 22 3043 3201
3M given (a) presence in multiple low-capital-intensity segments and
nitin.bhasin@ambit.co
geographies (finally turning around); (b) a strong supply of resources (cash,
people, brands) and (c) culture of innovation. We value the company at 40x Achint Bhagat, CFA
FY18 EPS (using fading growth in DCF) well knowing the fact that near-term +91 22 3043 3178
multiples can be misleading; Asian Paints and 3M are prime examples. Our achint.bhagat@ambit.co
target price implies 40x FY18 EPS, similar to trading multiples of other champion
franchises such as Asian Paints.
Pidilite Industries

Revenues 12,482 17,082 19,863 21,941 26,439 32,849 38,979 42,832 48,441 53,694
Revenue growth (%) 36.1% 36.9% 16.3% 10.5% 20.5% 24.2% 18.7% 9.9% 13.1% 10.8%
Net profits 1,116 1,726 1,105 2,769 3,100 4,828 6,438 4,499 5,126 7,556
EPS 2.2 3.4 2.2 5.4 6.0 9.4 12.6 8.8 10.0 14.7
CFO 769 1,102 2,370 3,916 3,218 3,671 5,175 3,939 5,520 8,645
CFO-EBITDA 0.5 0.5 1.1 1.0 0.7 0.6 0.6 0.6 0.7 0.7
FCF (310) (1,756) 359 3,136 1,930 2,117 3,716 2,046 1,429 6,648
Debt equity (x) 0.5 1.1 1.1 0.8 0.6 0.5 0.3 0.2 0.2 0.2
RoE (%) 24.9% 31.2% 16.9% 34.5% 31.5% 40.0% 43.1% 25.1% 24.3% 29.9%
ROCE (%) 20.4% 20.2% 11.2% 21.9% 23.4% 32.1% 37.5% 24.0% 23.6% 28.5%
Exhibit 2: CFO accounted for most of the cash inflows Exhibit 3: Capex and dividend accounted for ~75% of
overall cash outflows
Debt
Int+Dividend Repayment(
, 2% Investments net), 1%
Proceeds Others, 0%
, 14%
from Share
Capital, 1%
Capex, 48%
Dividend,
29%
CFO, 97% Interest, 5% Inc in cash,

3%
Exhibit 4: Pidilite is trading at a 35% premium to its 5-year Exhibit 5: Pidilite outperformed Sensex as it posted strong
average P/E earnings growth led by margin expansion
One-yr Forward P/E 140
50 130
40 120
30 110
20 100
10 90
0 80
May-12
Oct-12
Mar-13
Aug-13
Jun-14
Nov-14
Apr-10
Dec-11
Sep-10
Feb-11
Apr-15
Jul-11
Jan-14
Sep-15
Feb-16
Jul-16
Oct-15
Nov-15
Mar-16
May-16
Jun-16
Aug-16
Dec-15
Sep-15
Jan-16
Feb-16
Apr-16
Jul-16
Sep-16
Pidilite Forward P/E 6 yr avg P/E SENSEX PIDI


Pidilite falls is the fourth decile of our accounting model. Whilst its CFO/EBITDA is ~100%, it gets a low score
Accounting AMBER
due to high contingent liabilities, high CWIP as a % of GB (due to elastomer) and mediocre cash yield.
Whilst the business has several moving parts, the management has been fair in giving guidance and does not
Predictability GREEN
have a reputation of being over-optimistic.
Earnings momentum GREEN Consensus EPS estimates have been increased by 5% in the last 3 months

Pidilite Industries
Exhibit 7: Top-notch forensic score Exhibit 8: Been in the zone of greatness consistently; FY15
is a temporary blip

Pidilite Industries

Total networth 19,526 22,706 27,829 32,508 38,567
Minority Interest
Debt 459 584 848 843 843
Deferred tax liability 537 566 670 670 670
Gross block 14,212 17,867 20,646 22,646 24,896
Net block 7,062 9,569 11,073 11,558 12,144
CWIP 4,580 4,618 4,001 4,001 4,001
Cash & Cash equivalents 1,772 860 1,319 7,910 13,253
Debtors 5,244 5,861 7,294 8,319 9,485
Inventory 5,997 6,410 6,290 7,154 8,300
Loans & advances 1,612 1,885 1,777 1,664 1,976
Provisions 2,209 2,308 858 3,404 4,117
Total assets 20,565 23,907 29,774 34,448 40,507

Net Sales 42,832 48,441 53,694 60,729 72,127
% growth 10% 13% 11% 13% 19%
EBITDA 6,715 7,708 11,739 11,871 14,599
% growth -18% 15% 52% 1% 23%
Depreciation 812 1,178 1,331 1,515 1,664
EBIT 6,352 6,985 10,918 11,196 14,259
Non-operating income 449 455 510 841 1,323
Adjusted PBT 6,189 6,828 10,785 11,079 14,158
Tax 1,653 1,694 3,221 3,545 4,530
Adjusted PAT before minority interest 4,519 5,122 7,564 7,534 9,627
% growth -29% 13% 48% 0% 28%
Adjusted PAT after minority interest

Pidilite Industries

Depreciation 812 1,178 1,331 1,515 1,664
Interest paid 163 156 133 117 101
Tax (1,669) (1,749) (3,140) (3,545) (4,530)
(Incr) / decr in net working capital (1,514) (593) (375) (145) (844)
Capex (net) (1,894) (4,091) (1,997) (2,000) (2,250)
(Incr) / decr in investments 488 (807) (2,565) - -
Other income (expenditure) 145 111 43 841 1,323
Cash flow from investments (987) (4,359) (4,530) (1,159) (927)
Net borrowings - 5 94 (5) -
Issuance/buyback of equity - - 339 - -
Interest paid (203) (157) (133) (117) (101)
Dividend paid (1,559) (1,619) (4,032) (309) (2,855)
Cash flow from financing (2,415) (1,651) (3,563) (431) (2,956)
Net change in cash 538 (490) 551 6,591 5,343
Closing cash balance 1,182 692 1,243 7,910 13,253
Free cash flow 5,833 9,611 10,642 10,180 11,475

EBITDA margin (%) 16 16 22 20 20
EBIT margin (%) 15 14 20 18 20
Net profit (bef min. int.) margin (%) 11 11 14 12 13
Net debt: equity (x) (8) (5) (6) (25) (35)
Working capital turnover (x) 11.8 10.3 9.2 11.1 16.7
RoCE (pre-tax) (%) 32.8% 31.4% 40.7% 34.9% 38.0%
RoIC (%) 43.4% 38.0% 43.9% 41.9% 55.1%
RoE (%) 24.6% 24.3% 30.1% 24.9% 27.0%

Diluted EPS (`) 8.8 10.0 14.7 14.8 18.9
Book value per share (`) 38 44 54 63 75
P/E (x) 82.0 71.5 48.5 48.4 37.9
P/BV (x) 18.9 16.1 13.2 11.3 9.5
EV/EBITDA (x) 54.4 47.2 30.7 29.8 23.9
EV/EBIT (x) 57.1 52.1 33.0 31.6 24.5

Pidilite Industries

Torrent Pharma
NOT RATED
STRATEGY NOTE TRP IN EQUITY September 19, 2016
Moving closer to large-cap peers Healthcare

Torrents focus on building brands in the domestic/emerging market
provides sustainability to its business. We expect longer-term revenue SENSEX ENTRANT
growth of >15% to be driven by investments in EMs and broad-basing Mcap (bn): `280/US$4.2
US presence. Larger scale alongside no material capital needs should 3M ADV (mn): `310/US$4.6
stabilise base RoCEs (18-20%) and provide balance sheet capacity to CMP: `1,656
invest in innovation. Successful partnership for biosimilars development TP (12 mths): NA
and investment on NCEs and NDDS projects bode well for longer-term Downside (%): NA
sustenance and would drive earnings growth over next 10 years. Torrent
trading at a 10% discount to the large-cap average one-year forward Flags
P/E multiple is unjustified given high quality management, history of
Accounting: GREEN
rational capital allocation and robust business model. For Torrent to
enter Sensex, its market-cap needs to compound at 29%, which it should
Earnings Momentum: AMBER
from biosimilar and innovation revenues over the next 10 years.
COMPETITIVE POSITION: STRONG CHANGE to this position: STABLE Performance

120
RoCEs on an upward trajectory post management turnaround
110
Over the past decade (FY07-16), Torrents revenues have expanded at 20%
CAGR led by improving domestic sales, brand establishment in emerging 100
markets and key product launches in US generics. Post the management 90
turnaround in FY11, profitability and ROCEs have shown a steady upward trend 80
focus on creating bigger brands and low new product launches, change in
Aug-15
Nov-15
Mar-16
Jun-16
Sep-15
Dec-15
Jan-16
Jul-16
May-16
incentive program for Medical Representatives (MRs) led to RoCEs improving
from 20% in FY11 to ~25% in FY16 (ex one-off revenue from Abilify). Sensex Torrent Pharma
Investments in innovation A foot forward

Torrent has built quality brands and enjoys a diversified portfolio in India, thus Source: Bloomberg, Ambit Capital research
providing confidence on its capability of scaling up its branded businesses.
Whilst its investments in Brazil, India, US and other Asian markets have paid off Torrent forensic score analysis
in the past, the more recent investments in Europe and Mexico/Russia are yet to
bear fruit. In the US market, though Torrent has limited ANDA filings (~35) vs
large-cap peers (100-150 ANDAs), early investment in biosimilars with partner
has potential for enhancing its innovative capability over the next 10 years. The
cost structure of the company is closer to the leader board and margins should
improve as MR productivity increases in the domestic market. Source: Ambit HAWK, Ambit Capital research
Outperformance to peers led by creation of moats around its business Torrent greatness score analysis
Revival of growth in the Brazil business led by new approvals (branded +
unbranded) is a key catalyst. The company has created moats around its
business in branded generic markets in India and EMs to support >15% revenue
growth over next 10 years. Furthermore, with its entry in the US markets with
key products like Cymbalta and Abilify, the company has further de-risked its
revenue portfolio. Adding to its longer-term visibility through investment in
innovation, Torrent is working on New Chemical Entities and on biosimilars with
its partner Reliance Life Sciences. Therefore, we believe market-cap
compounding of 29% over next 10 years to enter the Sensex will not be a
challenge. We expect its excellent capital allocation track record (refer exhibit 8)
to be replicated in other EMs and innovative pursuits.
Deserves a re-rating led by improvement in return profile and growth
The stock is trading at a 10% discount to the large-cap average FY18E P/E
despite above average competitive positioning and higher RoCE. Whilst strong Research Analyst
earnings growth would sustain current valuations, key triggers for a re-rating are
Paresh Dave, CFA
realisation of improvement in execution in domestic business, scale-up of the
value chain in the US and sales ramp-up in RoW/Brazil. Key risks: Delay in +91 22 3043 3212
approval in Brazil and USFDA cGMP issues. Paresh.dave@ambit.co
Torrent Pharma

Revenues 12,988 13,548 16,307 19,160 21,978 26,959 32,111 41,847 46,535 66,764
Revenue growth (%) 34.9% 3.9% 20.9% 15.5% 15.4% 22.7% 17.7% 32.2% 13.6% 43.5%
Net profits 935 1,347 1,844 2,312 2,702 2,840 4,328 6,639 7,509 17,224
EPS 11.1 15.9 21.8 27.3 31.9 33.6 51.1 39.2 44.4 101.8
CFO 718 2,417 2,579 2,870 3,950 4,991 1,535 5,994 8,102 27,132
CFO-EBITDA 59.2% 131.6% 109.9% 83.9% 123.5% 118.2% 41.3% 90.5% 85.1% 123.7%
FCF -281 1,133 1,952 1,369 1,300 3,378 -1,394 1,993 5,676 21,092
Debt equity (x) 0.7 0.7 0.7 0.6 0.6 0.5 0.5 0.6 1.1 0.7
RoE (%) 45.0% 50.4% 52.6% 47.4% 29.2% 31.7% 36.1% 39.9% 34.2% 58.6%
ROCE (%) 28.0% 31.7% 32.3% 29.3% 20.4% 22.8% 25.5% 27.5% 21.5% 46.4%
Increase in
cash and
Interest cash
Debt received, equivalent,
raised, 2.2% 22.0%
25.6% Net Capex,
40.4%
Interest
CFO, Dividend paid,
70.6% received, 10.5% Dividend
0.1% paid,
27.1%
Exhibit 4: Forward P/E evolution Exhibit 5: Torrents share price performance vs CNX
Pharma
25 1 year forward P/E 1800
1600
22 1400
1200
19
1000
16 800
600
13 400
200
10 0
Mar-11
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
Sep-14
Mar-15
Sep-15
Mar-16
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
P/E Avg Torrent CNX Pharma

In our forensic analysis of 360 companies, Torrent scores higher than the pharma industry average (comprising 26
companies). Torrent scores high on ratios of: (a) gross block conversion; (b) change in depreciation rates; (c) audit
Accounting GREEN
fees; and (d) non-operating expenses. However, Torrent has weaker scores on: (a) cash yield; and (b) volatility in
sales and distribution costs.
Overall, the management has made timely announcements in its earnings calls, meetings and interviews
Predictability AMBER regarding product filings, acquisitions and business outlook. However, the unpredictability of emerging markets
and innovative projects makes us assign an AMBER flag on predictability.
Earnings momentum AMBER Consensus FY17 and FY18 EBITDA and EPS have been downgraded by 2-3% over the past three months.

Torrent Pharma
Source: Ambit HAWK, Ambit Capital research, Note: Using our accounting Source: Ambit HAWK, Ambit Capital research
framework, we categorize the market into deciles on the basis of their
accounting quality with D1 indicating the best decile and D10 indicating

Torrent Pharma

Year to Mar (Rs In Mn) FY12 FY13 FY14 FY15 FY16
Total Assets 30,479 37,528 50,042 78,269 93,415
Fixed Assets 9,156 11,051 14,095 35,110 39,190
Current Assets (incl Cash) 19,620 25,633 33,483 39,680 46,622
Cash 6,270 7,694 5,674 6,471
Investments 1,703 844 2,464 3,479 7,603
Total Liabilities 30,479 37,528 50,042 78,269 93,415
Total networth 11,938 14,219 19,025 24,906 33,890
Total debt 5,825 7,030 11,418 27,479 23,653
Deferred tax liability/(asset) 514 258 -182 1,047 221

Year to March ( Rs In Mn) FY12 FY13 FY14 FY15 FY16
Net revenues 26,959 32,111 41,847 46,535 66,764
Material Cost 8,631 9,258 12,435 14,148 15,343
General Expenses 7,775 9,650 11,644 13,766 15,705
Employee cost 5,337 6,233 7,411 8,418 8,559
Core EBITDA 5,216 6,970 10,357 10,202 27,157
Depreciation 817 827 870 1,907 2,461
Interest expense 395 338 586 1,752 1,859
Adjusted PBT 4,240 6,191 8,440 9,398 23,638
Tax 723 1,467 1,801 1,888 6,414
Reported net profit 3,517 4,724 6,639 7,510 17,224

Year to March (In Rs. mn) FY12 FY13 FY14 FY15 FY16
PBT 3,586 5,816 8,440 9,398 23,638
Depreciation 817 827 870 1,907 2,461
Tax (827) (1,325) (2,617) (582) (6,471)
Net Working Capital 1,518 (4,218) (1,197) (4,094) 5,225
CFO 5,073 1,535 5,994 8,102 27,132
Capital Expenditure (1,691) (2,844) (3,982) (21,964) (5,801)
Investment 232 427 424 341 (1,777)
Other investments - - - - -
CFI (1,459) (2,417) (3,558) (21,623) (7,014)
Issuance of Equity - - - - -
Inc/Dec in Borrowings (254) 1,340 4,141 16,062 (3,837)
Net Dividends (1,367) (831) (2,667) (1,991) (8,397)
Other Financing activities (299) (312) (610) (1,949) (2,118)
CFF (1,920) 197 864 12,123 (14,352)
Net change in cash 1,694 (685) 3,300 (1,399) 5,767
FCF 3,382 (1,310) 2,012 (13,862) 21,331

Torrent Pharma
Ratio analysis (consolidated

Revenue growth 22.7 17.7 32.2 13.6 43.5
Core EBITDA growth 34.5 33.6 48.6 (1.5) 166.2
APAT growth 5.1 52.4 53.4 13.1 129.4
EPS growth 5.1 52.4 53.4 13.1 129.4
Core EBITDA margin 19.3 21.7 24.8 21.9 40.7
PBT margin 15.7 19.3 20.2 20.2 35.4
Net profit margin 13.0 14.7 15.9 16.1 25.8
ROCE (%) 22.8 25.5 27.5 21.5 46.4
Reported RoE (%) 31.7 36.1 39.9 34.2 58.6
Net Debt Equity ratio (X) (0.1) 0.1 0.2 0.9 0.7
CFO/EBITDA (x) 1.0 0.2 0.6 0.8 0.8
Gross Block turnover (x) 2.4 2.5 3.0 1.9 2.1
Working Capital Turnover (x) 37.2 9.3 6.7 5.0 8.7
Current Ratio 1.6 1.6 1.7 1.6 1.8

EPS 16.8 25.6 39.2 44.4 101.8
Book Value ( per share) 141.1 168.0 112.4 147.2 200.3
P/E (x) 91.2 59.8 39.0 34.5 15.7
P/BV (x) 10.8 9.1 13.6 10.4 8.0
EV/EBITDA(x) 49.5 37.3 25.4 27.5 12.1
EV/Sales (x) 9.9 8.4 6.4 5.6 4.1
EV/EBIT (x) 55.6 39.4 28.5 22.9 12.1

Torrent Pharma

Page Industries
BUY
STRATEGY NOTE PAG IN EQUITY September 19, 2016
Jockeying towards the Sensex Consumer Discretionary

With laser-like focus on innerwear and associated categories, the
Genomals have leveraged their experience in the Philippines to fortify SENSEX ENTRANT
Pages moats around: a) product differentiation given in-house Mcap (bn): `169/US$2.5
manufacturing; b) aspirational brand recall; and c) tight control on the 3M ADV (mn): `138/US$2.1
distribution channel. Hence, new entrants offering either international CMP: `14,438
brand recall, or affordable price, struggle to break Jockeys customer TP (12 mths): `15,800
loyalty which is built on a combination of quality, affordability & brand. Upside (%): 10%
Pages unique genesis should help sustain 27% earnings growth over
FY16-26 and hence qualify for entry into Sensex. We expect 34% EPS Flags
CAGR over FY16-21 with average ROE of 57% and a dividend payout of
Accounting: GREEN
>55%. Our DCF-based fair value of Rs15,800 implies 43x FY18E P/E.
Competitive position: STRONG Changes to this position: NONE
Page has delivered 33% revenue CAGR over FY06-16
Performance
Pages revenue/earnings CAGR of 33%/35% over FY06-16 with an average
ROCE of 37% has been driven by a combination of: a) 17-18% CAGR in the 120
organized mid-premium innerwear market; b) Jockeys market share gain from 100
incumbent brands like Liberty, Libertina, Tantex, Rupa and VIP; and c) successful
expansion in associated categories like leisurewear, where Page has led a shift 80
from unorganized/regional players towards Jockey branded leisurewear. 60
Benefitting from the Governments TUFS scheme (technology upgradation
Mar 16
Jul 16
Sep 15
Nov 15
Jan 16
Sep 16
May 16
funding) for the textile sector, Page has maintained a debt/equity of 0.5x-1.0x.
Pages competitive moats will help gain further market share Page Sensex
Pages competitive advantages are centred on: a) in-house manufacturing to
deliver product differentiation in a labour-intensive industry; b) maintaining Source: Bloomberg, Ambit Capital research
aspirational brand recall; and c) an entrenched distribution channel through
distributors. Over the next decade, threats to Pages leadership are low given: a) Pages forensic score analysis
incumbents like Rupa/Maxwell sell through the wholesale channel with
outsourced manufacturing and hence lack control on both product development
and hosiery stores distribution; b) given lack of scale and in-house
manufacturing, new entrants like FCUK, USPA, CK or regional players cant offer
affordability with good product quality.
Why we expect it to enter Sensex
Pages unique genesis should help sustain 27% earnings growth over FY16-26 Pages greatness score analysis
and hence qualify for entry into Sensex. This includes: a) 60-year association
with two strong international brands (Jockey and Speedo) which allows know-
how on branding, product development and technological R&D; b) focus on
capital allocation and maintaining ROCE above 20%, with Page not willing to
shift focus to other brands or product categories in the foreseeable future; c)
incentivisation/empowerment of professionals to achieve scale with operating
efficiencies. We expect category CAGR of 14%, 19% and >20% for mens
innerwear (mid-premium), womens innerwear (mid-premium) and leisurewear
respectively over the next decade given low penetration of organized segment.
Page deserves one of the highest P/E multiples in the consumer space
Longevity of Pages growth is led by: (a) only ~50% penetration of mid-premium
innerwear in SEC A/B households even in 2020; (b) sustainability of competitive Research Analysts
advantages driving market share gains in mid-to-premium innerwear to 44% Rakshit Ranjan, CFA
overall by FY30 vs ~20% in FY16 ; (c) unexplored sub-segments in kidswear and rakshit.ranjan@ambit.co
loungewear. Resultant exemplary financials (33% EPS CAGR over FY16-21E and Tel: +91 22 3043 3201
~57% RoCE) support valuation premium to most consumer names. Key risk: Dhiraj Mistry, CFA
Inability to manage growth given labour intensive manufacturing and wide dhiraj.mistry @ambit.co
range of SKUs in its distribution network. Tel: +91 22 3043 3264
Page Industries
Exhibit 1: Pages key financial parameters over the last decade

Revenues 1,375 1,945 2,584 3,441 4,977 6,966 8,758 11,876 15,430 17,834
Revenue growth (%) 35% 42% 33% 33% 45% 40% 26% 36% 30% 16%
Net profits 170 238 316 396 585 900 1,125 1,537 1,960 2,327
EPS 15 21 28 36 52 81 101 138 176 209
CFO 91 112 315 298 (2) 1,226 871 740 1,670 2,165
CFO (pre-tax)/EBITDA (%) 63% 58% 84% 70% 31% 113% 79% 59% 83% 85%
FCF (45) (90) 43 62 (275) 959 430 280 1,139 1,902
Debt equity (x) 0.4 0.5 0.5 0.6 0.9 0.5 0.5 0.6 0.3 0.1
RoE (%) 42% 33% 39% 43% 53% 62% 59% 61% 58% 52%
Pre-tax ROCE (%) 47% 36% 42% 44% 48% 60% 64% 65% 62% 63%
Exhibit 2: Sources of funds over FY07-16 Exhibit 3: Application of funds over FY07-16
Interest Increase in Debt
received, cash and repayment,
1% cash 5%
equivalents,
Debt raised,
14%
24%
Proceeds Dividend
from shares, Cash flow Net Capex, paid, 45%
4% from 30%
operations,
71%
Interest
paid, 7%
Exhibit 4: Band chart of Pages one-year forward P/E Exhibit 5: Pages share price performance vs Sensex
80 4,000
70 3,500
3,000
60
2,500
50 2,000
40 1,500
1,000
30
500
20 -
Sep-11
May-12
Sep-12
May-13
Sep-13
May-14
Sep-14
May-15
Sep-15
May-16
Sep-16
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Mar 11
Oct 11
May 12
Dec 12
Sep 07
Apr 08
Nov 08
Jun 09
Jan 10
Aug 10
Jul 13
Feb 14
Sep 14
Apr 15
Nov 15
Jun 16
Page 1 year fwd P/E Average of 5yr P/E Page Sensex
Source: Company, Ambit Capital research Source: Company, Ambit Capital research; Note: price are rebased to 100

Page Industries' cash conversion has remained healthy and this has resulted in cumulative CFO (pre-
Accounting GREEN tax)/EBITDA of above 70% in FY07-16. Page has maintained effective control on the working capital cycle, and
hence despite high sales growth, WC days have increased marginally from 63 days in FY09 to 71 days in FY16.
Since FY16, Page Industries has twice beaten or missed consensus revenue estimates by more than 4%. The
company has twice missed consensus net profit estimates by more than 4% and beaten once by more than 4%.
Earnings momentum GREEN In the last six months, consensus earnings forecasts for Page have been upgraded by ~3.5% for FY17 and FY18

Page Industries
Exhibit 7: Pages forensic score has remained in zone of Exhibit 8: Pages greatness score has improved from 40 in
safety over 2011-15 2011 to 95 in 2015

Page Industries
Balance sheet
Total net worth 2,890 3,868 5,052 6,426 8,088
Loan funds 1,632 1,344 734 734 484
Gross block 2,404 3,059 3,251 3,941 4,672
Net block 1,728 2,173 2,132 2,555 2,968
CWIP 36 1 4 4 4
Investments 0 0 0 0 0
Inventories 3,626 4,435 5,393 5,026 6,290
Debtors 727 884 1,034 1,211 1,572
Cash and cash equivalents 35 44 86 1,198 1,412
Loans & Advances 328 509 705 606 786
Other current assets 217 189 93 402 494
Creditors 608 821 941 1,090 1,415
Deposits from Dealers 466 556 735 884 1,148
Other current liabilities 764 1,028 1,234 1,393 1,808
Provisions 241 504 640 363 472
Total assets 4,617 5,326 5,897 7,271 8,683
Income statement
Net Sales 11,876 15,430 17,834 22,101 28,696
% growth 35.6% 29.9% 15.6% 23.9% 29.8%
Raw materials Cost 5,659 7,121 8,133 10,387 13,631
Employees cost 1,881 2,585 3,130 3,377 4,312
Royalty expenses 584 846 994 1,231 1,599
Advertisement expenses 335 714 670 918 1,004
Other Admin, S&D expenses 906 974 1,137 1,450 1,779
Total operating expenses 9,365 12,240 14,063 17,365 22,325
EBITDA 2,511 3,190 3,771 4,736 6,371
% growth 42.3% 27.0% 18.2% 25.6% 34.5%
Depreciation 139 176 238 266 318
EBIT 2,372 3,014 3,533 4,470 6,052
Non operating Income 66 86 62 77 100
PBT 2,334 2,933 3,443 4,490 6,108
Tax expenses 797 973 1,116 1,437 1,955
Adjusted PAT 1,537 1,960 2,327 3,053 4,154
% growth 36.6% 27.5% 18.7% 31.2% 36.0%
Extraordinary items - - - - -
Reported PAT / Net profit 1,537 1,960 2,327 3,053 4,154

Page Industries
Cash flow statement

PBT 2,335 2,933 3,443 4,490 6,108
Depreciation 139 176 238 266 318
Others 67 96 102 (20) (56)
Tax (750) (966) (1,046) (1,437) (1,955)
(Increase)/Decrease in working capital (1,051) (569) (572) 161 (785)
Cash flow from operating activities 740 1,670 2,165 3,460 3,631
Capex (473) (534) (263) (689) (731)
(Increase)/Decrease in investments 19 - 1 - -
Interest income 13 3 4 - -
Others - 3 - 77 100
Cash flow from investing activities (441) (531) (258) (612) (630)
Net borrowings (59) (59) (624) - (250)
Interest paid (97) (171) (152) (57) (44)
Dividend paid (756) (899) (1,087) (1,679) (2,492)
Cash flow from financing activities (912) (1,129) (1,864) (1,737) (2,786)
Net change in cash -613 10 43 1,111 214
Closing cash balance 79 43 86 1,198 1,412
Free cash flow 280 1,139 1,902 2,848 3,000
Ratio analysis
Gross margin (%) 52.3 53.8 54.4 53.0 52.5
EBITDA margin (%) 21.1 20.7 21.1 21.4 22.2
EBIT margin (%) 20.0 19.5 19.8 20.2 21.1
Dividend payout ratio (%) 51 49 49 55 60
Net debt/equity (x) 0.6 0.3 0.1 (0.1) (0.1)
Asset turnover excluding cash (x) 3.1 3.2 3.2 3.4 3.7
Post-tax RoCE (%) 41.9 42.6 44.2 47.8 53.2
ROE (%) 61.2 58.0 52.2 53.2 57.2
EPS (Rs) 137.8 175.7 208.6 273.8 372.4
Book value per share (Rs) 259 347 453 576 725
Dividend per share (Rs) 60.0 72.0 85.0 128.7 191.0
P/E (x) 105.6 82.8 69.8 53.1 39.1
P/BV (x) 56.2 42.0 32.1 25.3 20.1
EV/EBITDA (x) 65.3 51.3 43.2 34.2 25.3
Price/Sales (x) 13.7 10.5 9.1 7.3 5.7
Dividend yield (%) 0.4 0.5 0.6 0.9 1.3

Page Industries

Reliance Industries
NOT RATED
STRATEGY NOTE RIL IN EQUITY September 19, 2016
Oil & Gas

Capital misallocation challenges
SENSEX EXIT
RIL is a large Indian conglomerate operating across refining, telecom,
Mcap (bn): `3,487/US$52
petrochemicals, oil & gas E&P, media and retail. While RIL has
competitive strengths in refining and petrochemicals, we believe 6M ADV (mn): `3,621.3/US$54
constant forays into unrelated businesses have hampered its ability to CMP: `1076
deliver even cost of capital returns. RIL has underperformed the Sensex
by 6% over the last five years due to heavy investments in telecom (new Flags
foray; unlikely to create value) and core petchem/refining segments. We Accounting: RED
expect these investments to give subpar results, putting further pressure Predictability: AMBER
on already low ROE of 10-11%. In such a scenario, RIL will find it difficult Earning Momentum: RED
to sustain 1.3x P/B valuation, leading to a potential Sensex exit.
Competitive position: STRONG Changes to this position: NEGATIVE Performance
Indias largest oil & gas exploration and production company 130
Reliance Industries (RIL) is one of India's largest private sector enterprises. 120
Businesses span exploration and production (E&P) of oil & gas, petroleum 110
refining and marketing, petrochemicals, textiles, retail, telecom and special 100
economic zones (SEZ). RIL has 6.3% weightage in the Sensex. Over the last 5 90
years, its shares have compounded at 6% p.a. vs 12% for the Sensex. RILs CFO 80
grew at 9% CAGR over FY06-16 but capex of Rs4.3tn vs OCF of Rs2.85tn led to
Aug-15
Sep-15
Oct-15
Nov-15
Nov-15
Dec-15
Feb-16
Mar-16
Mar-16
Apr-16
Jan-16
Jan-16
sharp increase in net debt. Most of the capex for telecom, E&P and retail have
been unproductive, leading to ROE moderation to 12% in FY16 vs 33% in FY06. Reliance Ind Sensex
Investments in non-core eating into fruits of core segments

RIL makes good returns in the core refining and petchem segment due to strong
operational and project execution capabilities and favorable fiscal policy actions.
RILs forensic score analysis
However, post-2007 forays into ventures like E&P, retail and telecom havent
generated much value for shareholders. On a much broader level, eagerness to
consistently reinvest cash profits from the core refining and petchem businesses
into unrelated business have kept ROEs muted at 10-11% despite strengths of
core business. From a net cash company in FY05 Reliance now has net debt of
~US$23bn (3x EBITDA). Its net-debt:equity stands at 0.75x.
Return ratios to remain muted Source: Ambit HAWK, Ambit Capital research
Management pursuit of empire building has led it to foray into unrelated areas
like Retail, E&P, Media and Telecom in the past decade. These non-core RILs greatness score analysis
investments have consumed most operating cash flows over the last decade and
also led to a significant ballooning of debt (Rs1tn+ in FY16 vs Rs0.2tn in FY12).
This could continue over the next decade too. We note both E&P and retail make
minuscule profits despite US$17bn-18bn capital allocation over the past decade.
Even on recent core capex, we dont expect more than 15-16% returns with
economics hit by the sustained crude price decline and execution delays. Cost of
capital returns even in RJio will be elusive in the near term given hyper-
competitive segment and Reliances relative inexperience with large B2C
business (as seen in Retail). RJio is likely to make cash losses for the next 3
years, which would need funding over and above capex. We believe the
company will take almost 4-5 years to repay debt taken for these projects.
Discount to historical valuations justified
The stock is trading at one-year forward consensus P/E of 12x (10-year average
of 14.6x) and FY16 consensus P/B of 1.3x (10-year average of 1.6x). The
discount to historical average is justified given RoE deterioration and EPS growth Research Analyst
moderation. We believe multiples may see further pressure if RJio investments
Ritesh Gupta, CFA
fail to make cost of capital returns. RIL is in sixth decile on our forensic
accounting (zone of pain) and score 25% (zone of mediocrity) on our greatness +91 22 3043 3242
parameters. ritesh.gupta@ambit.co
Reliance Industries

Revenues 1,137,701 1,371,467 1,512,240 2,037,397 2,658,110 3,585,010 3,970,620 4,344,600 3,754,350 2,765,440
Revenue growth (%) 37% 21% 10% 35% 30% 35% 11% 9% -14% -26%
Net profits 120,748 195,214 149,687 245,031 192,940 197,240 208,790 224,930 235,660 276,300
EPS 43.3 67.2 54.4 82.3 64.7 66.2 71.1 76.5 80 93.7
CFO 167,490 162,331 162,875 204,943 333,380 244,830 369,180 432,610 343,740 398,110
CFO-EBITDA 0.71 0.57 0.57 0.54 0.75 0.56 1.03 1.22 0.87 0.79
FCF -105,238 -50,035 -109,664 92,080 11,880 114,150 108,450 -142,250 -263,340 -19,030
Debt equity (x) 0.52 0.61 0.7 0.49 0.57 0.56 0.59 0.7 0.74 0.75
RoE (%) 22.45 27.77 15.83 13.37 14.78 12.97 12.29 11.69 11 12.02
ROCE (%) 20.12 23.36 13.21 11.89 13.63 12.77 12.15 11.52 10.6 11.54
Exhibit 2: Sources of funds over the last ten years (FY06-16) Exhibit 3: Utilisation of funds over last ten years (FY06-16)
Proceeds Other
from Issue of Investment
Equity Share Activities, 2% Increase in
Capital, 3% Cash, 2%
Debt Issue, Purchase
27% of Investme
nt, 8%
Interest
Cash From Paid, 10%
Other
Operating
Financial Purchase
Activities, Equity
Activities, of Fixed
62% Dividend
1% Assets, 73%
Paid, 6%
Interest
received, 6%
Exhibit 4: one-year forward P/E band Exhibit 5: Share price performance vs BSE Energy index
18x 3.3
1,600 15x
1,400 2.8
12x
1,200 2.3
1,000 10x
800 1.8
600 6x
1.3
400
200 0.8
Aug-09
Aug-16
Sep-06
Nov-07
Jun-08
Jan-09
Apr-07
Mar-10
Oct-10
May-11
Dec-11
Jul-12
Feb-13
Sep-13
Jun-15
Jan-16
Apr-14
Nov-14
0
Aug-06
Aug-07
Aug-08
Aug-09
Aug-10
Aug-11
Aug-12
Aug-13
Aug-14
Aug-15
Aug-16
RIL BSE Energy
Source: Company, Bloomberg, Ambit Capital research Source: Company, Bloomberg, Ambit Capital research

In our forensic accounting model, RIL has a sub-par score (5.9 as compared to the oil & gas sector average of 6.9).
The key reasons of this sub-par score are: (a) CFO/EBITDA (b) frequent changes in depreciation rates; (c)
Accounting RED
cumulative FCF to median revenues (d) volatility in non-operating income; (e) change in reserves (excluding
Securities premium)/(PAT ex dividend); (f) cash yield and (g) fixed assets turnover.
RILs E&P business earnings are difficult to predict given that its reserves have been downgraded in the past and
Predictability AMBER there is limited clarity on production trends over the next couple of years. Furthermore, the uncertainty surrounding
cost recovery makes it even harder to predict the earnings from RILs E&P business.
Earning Momentum RED Earnings have seen downgrades over last 6-9 months

Reliance Industries

Reliance Industries
Income statement (` mn)

Y/E Mar (` mn) FY11 FY12 FY13 FY14 FY15 FY16
Net Revenue 2,658,110 3,585,010 3,970,620 4,344,600 3,754,350 2,765,440
EBIDTA 377,360 345,080 329,880 347,990 373,640 437,070
Depreciation 141,210 124,010 112,320 112,010 115,470 129,160
Interest 24,110 28,930 34,630 38,360 33,160 36,080
Other income 28,510 61,940 79,240 90,010 86,130 87960
Consolidated PAT 192,940 197,240 208,790 224,930 235,660 276,300
EPS (Rs/share) 64.7 66.2 71.1 76.5 80 93.7
Balance sheet (` mn)

Total Assets 3,075,190 3,271,910 3,623,570 4,288,430 5,044,860 6,062,140
Net Fixed Assets + CWIP 1,862,740 1,641,770 1,834,390 2,329,110 3,229,200 4,249,730
Current Assets inlcuding cash 1,074,940 1,448,490 1,559,140 1,510,690 1,365,770 1,265,870
Other Assets 137,510 181,650 230,040 448,630 449,890 546,540
Total Liabilities 3,075,190 3,271,910 3,623,570 4,288,430 5,044,860 6,062,140
Networth 1,541,020 1,694,450 1,820,550 1,986,870 2,184,990 2,436,510
Dept 662,360 653,520 709,600 1,010,160 1,207,770 1,420,000
Current Liabilities 750,940 796,070 962,740 1,151,560 1,385,530 1,858,700
Deferred Tax 110,710 115,670 115,880 119,280 203,620 271,310
Cash flow statement (` mn)

PBT 240,550 254,080 262,170 287,630 311,140 359,790
+ Depreciation 168,200 148,270 133,130 122,840 115,750 129,160
- Incr/(Decr) in WC (10,390) (67,480) 73,720 110,300 18,150 71,280
Cash from operations 333,380 244,830 369,180 432,610 343,740 398,110
- Capex (338,650) (163,810) (307,260) (600,870) (633,640) (496,620)
Free cash flow (5,270) 81,020 61,920 (168,260) (289,900) (98,510)
Cash from investing (320,440) (63,010) (276,500) (730,700) (648,980) (383,380)
- Dividend (24,310) (27,720) (29,490) (31,230) (32,680) (72,590)
+ Debt raised 207,020 (10,480) 106,540 223,170 175,040 133,450
Cash from financing 149,500 (75,900) 4,080 137,130 84,440 (27,590)
Net cash flow 162,440 105,920 96,760 (160,960) (220,800) (12,860)
Ratios and valuation parameters

Y/E Mar FY11 FY12 FY13 FY14 FY15 FY16
EBITDA margin (%) 14.2% 9.6% 8.3% 8.0% 10% 15.8%
PAT margin (%) 7.3% 5.5% 5.3% 5.2% 6.2% 10%
Return on Equity (%) 13.1% 12.2% 11.9% 11.8% 10.8% 11.3%
DPS (Rs) 8.00 8.50 9.00 9.50 10 10.5
BVPS (Rs) 496.5 556.2 614.3 672.8 739.5 823.6
P/E (x) 16.26 15.89 14.80 13.75 13.15 11.23
P/B (x) 2.12 1.89 1.71 1.56 1.42 1.28

Coal India
BUY
STRATEGY NOTE COAL IN EQUITY September 19, 2016
Keep eye on pricing, cash utilisation Metals & Mining

Our BUY stance is based on CILs dominant position in Indias power
sector, improving volume trajectory (9% CAGR over FY16-20E vs 3% over SENSEX EXIT
FY10-15), and gradual adoption of inflation-linked escalation pricing for Mcap (bn): `2,050/US$30.6
new contracts. We expect CIL to achieve 10%/12% revenue/EPS CAGR 3M ADV (mn): `1,113/US$16.6
over FY16-20E and find valuations (11.3x FY18 P/E vs historical average CMP: `325
of 12.7x) inexpensive. However, we believe there is potential risk of CILs TP (12 mths): `375
pricing power getting compromised and cash getting mis-utilised; in Upside (%): 16
which case, CIL will find difficult to expand EPS beyond 10% CAGR
leading to a multiples de-rating. For CIL to stay in the Sensex, its market- Flags
cap needs to compound at 9%, for which not only volumes but pricing
Accounting: AMBER
and demand for coal have to sustain.
Competitive position: STRONG Changes to this position: STABLE Earnings Momentum: AMBER
Coal India: Backbone of Indias power sector
The world's largest coal producer, CIL accounts for ~80% of India's coal Performance
production. CILs coal reserve base of ~18.9bt is one of the largest amongst 120
global peers, with a reserve life of 35-40 years. CIL sells >80% of its volumes at 110
notified prices and the remaining 10-20% through e-auctions. Indias rising 100
90
demand for coal has helped CIL achieve 5% offtake volume CAGR and 10% 80
revenue CAGR over FY06-16, with cumulative CFO/EBITDA of ~70%. 70
Sep-15
Oct-15
Nov-15
Jan-16
Feb-16
Apr-16
May-16
Jul-16
Dec-15
Mar-16
Jun-16
But pricing and penchant for fossil fuel have to sustain
Under the Coal Nationalisation Drive in 1970s, the Government took over the
ownership of all coal assets in India and CIL was made a deemed lessee of the COAL IN SENSEX
mines that it explores and operates. We see limited risks to CILs dominant
position and expect share of coal-based power to remain ~73%; but we see
risks to CILs ability to maintain margins as its pricing power is a function of
whether it can take regular price hikes to offset cost escalation. Given CIL is at
the mercy of the Government for price hikes, pricing power could be Coal Indias forensic score analysis
compromised to meet the Governments broader agenda to reduce cost of
power (CILs margins declined from 28% in FY13 to 23% in FY16).
Sensex exit if pricing power is compromised or cash is mis-utilised
Although we expect CIL to achieve volume CAGR of 9-10% over FY16-20, we
expect the following factors to pressure margins: (a) risks to pricing power for
FSA segment (over 80% of total volumes); and (b) muted e-auction prices given
Coal Indias greatness score analysis
global oversupply and subdued prices. Hence, market-cap compounding beyond
9-10% could be at risk if CILs pricing power is compromised and/or e-auction
prices do not recover (for CILs to stay in the Sensex, its market-cap needs to
compound at 9% at least assuming smallest stock compounds at 15%).
Moreover, risks of capital misallocation (given CILs high cash balance of
Rs400bn) loom large CIL plans to invest in railway lines, wagons, power Source: Ambit HAWK, Ambit Capital research
plants etc. with limited visibility on expected RoI.
Valuations inexpensive but upside nominal
Our BUY stance on CIL is based on our expectation of improving volume
trajectory of 9% CAGR over FY16-20E (vs 3% over FY10-15) due to sustained
share of coal-based power, import replacement and gradual adoption of
inflation-linked escalation pricing for new contracts. We expect CIL to achieve
10%/12% revenue/EPS CAGR over FY16-20E and find valuations (11.3x FY18
P/E vs historical average of 12.7x) inexpensive. However, we do not expect Research Analyst
multiples to re-rate and, hence, our TP of Rs375 offers only 16% upside.
Parita Ashar, CFA
However, multiples could de-rate if CILs pricing power is compromised or if
cash is mis-utilised. CILs score on our forensic accounting framework as well as +91 22 3043 3223
our greatness framework has been mediocre (refer exhibits 7 and 8). parita.ashar@ambit.co
Coal India

Revenues 315,427 346,084 408,108 479,139 514,482 637,915 697,718 705,076 741,201 780,101
Revenue growth (%) 2.6% 9.7% 17.9% 17.4% 7.4% 24.0% 9.4% 1.1% 5.1% 5.2%
Net profits 57,087 52,433 20,787 96,224 108,674 147,882 173,564 151,117 137,266 142,743
EPS 9.04 8.30 3.29 15.23 17.21 23.41 27.48 23.92 21.73 22.60
CFO 59,933 88,690 117,194 133,026 87,045 198,879 91,094 145,247 132,261 49,876
CFO-EBITDA 88% 147% 476% 116% 59% 117% 47% 82% 76% 27%
FCF 44,591 70,340 98,447 113,222 61,363 164,784 66,554 104,083 87,321 (4,594)
Debt equity (x) (0.85) (0.99) (1.44) (1.43) (1.33) (1.40) (1.26) (1.23) (1.31) (1.10)
RoE (%) 37.5 29.5 10.8 42.8 36.8 40.1 39.0 33.3 33.2 38.4
ROCE (%) 49.5 43.4 27.8 57.3 52.8 55.4 54.5 49.6 51.7 56.8
Exhibit 2: CFO and income on investments are key sources Exhibit 3: most of which has been returned as dividend
of cash over last ten years given low capex needs
Others
1% Capex
Incr. in
21%
cash
Interest / balance
Dividend 17% Others
income 2%
22%
CFO Interest /
77% dividend
paid
60%
Exhibit 4: CIL trades in line with historical one-year Exhibit 5: CIL has outperformed BSE Metal index since
forward P/E listing due to its utility characteristics
18 140
120
16
100
14 80
12 60
40
10 20
8 0
Nov-10
May-11
Nov-11
May-12
Nov-12
May-13
Nov-13
May-14
Nov-14
May-15
Nov-15
May-16
Dec-10
Apr-11
Aug-11
Dec-11
Apr-12
Aug-12
Dec-12
Apr-13
Aug-13
Dec-13
Apr-14
Aug-14
Dec-14
Apr-15
Aug-15
Dec-15
Apr-16
Aug-16
1-yr fwd P/E Average Coal India BSEMETL index

In our forensic accounting model (see our December 2015 forensic thematic for details), CIL has a relatively
moderate score (11.2 vs the metals and mining sector average of 10). The key parameters on which CIL has
Accounting AMBER
weak scores are: (a) contingent liabilities to net worth; (b) audit fees CAGR vs CAGR in consolidated revenues;
(c) change in depreciation rates; and (d) volatility in non-operating income.
Target and actual volumes are disclosed periodically. However, CIL has a poor track record of achieving targets
Predictability AMBER and a lack of clear rationale/methodology for determining the quantum/timing of price hikes making its
earnings unpredictable.
Over the past three months, consensus EBITDA and EPS estimates have been downgraded by 4%-8% for FY17
Earnings momentum AMBER
and FY18 due to weaker e-auction realisation and lack of visibility on non-power linkage auctions.

Coal India
Exhibit 7: Mediocre Forensic score evolution Exhibit 8: Deterioration in greatness score

Coal India

Year to March FY14 FY15E FY16E FY17E FY18E
Net Worth 424,045 403,531 338,976 653,442 770,542
Total Debt 1,778 4,019 11,920 11,068 11,068
Total Liabilities & Provisions 372,316 415,639 446,053 132,641 132,641
Net Block 145,949 167,691 197,497 233,375 268,985
Add: Capital Work In Progress 43,158 43,158 43,158 43,158 43,158
Add: Surveyed Off Assets 1,895 1,895 1,895 1,895 1,895
Total Fixed Assets 191,002 212,744 242,549 278,428 314,038
Investments 37,749 28,134 29,019 29,019 29,019
Current Assets
Inventories 55,681 61,838 75,953 71,292 80,407
Sundry Debtors 82,410 85,219 114,637 86,874 85,154
Loans & Advances 65,957 88,268 82,789 82,789 82,789
Total Current Assets 252,497 287,602 322,522 290,098 297,493
Current Liabilities & Provisions 244,285 282,225 305,247 302,627 315,664
Net current Assets 8,212 5,377 17,275 -12,529 -18,171
Cash & Bank Balances 523,895 530,925 383,128 374,178 461,310
Net current Assets (incl. Cash) 532,107 536,302 400,402 361,649 443,139
Total Assets 798,138 823,189 796,949 797,151 914,251
Profit & loss (` mn)

Sales 705,076 741,201 780,101 856,214 965,682
Raw material consumed 71,147 67,260 56,383 72,793 81,673
Employee Remuneration & Benefits 277,694 298,741 296,598 329,679 340,549
Power & Fuel 22,822 23,473 25,035 27,638 31,010
Social Overhead 7,348 2,981 10,821 1,425 1,646
Repairs 9,852 11,227 12,423 15,940 19,112
Contractual Expenses 68,275 85,126 111,292 140,566 179,362
Miscellaneous Expenses 26,919 30,834 39,338 41,621 48,072
Overburden Removal Adjustment 32,866 38,267 28,114 0 0
Provision/Write Off 11,545 9,938 17,033 17,124 19,314
Total Expenses 528,468 567,847 597,038 646,787 720,739
EBITDA 176,608 173,354 183,063 209,427 244,942
EBITDA margin (%) 25.0% 23.4% 23.5% 24.5% 25.4%
Total D&A 19,964 23,198 24,664 27,121 30,540
EBIT 156,644 150,156 158,398 182,306 214,402
Total Finance charges 580 73 207 207 207
Other Income 72,718 65,706 57,285 55,544 60,235
PBT 228,782 215,789 215,476 237,643 274,431
Taxes 77,679 78,573 73,148 80,673 93,161
PAT 151,117 137,266 142,743 156,970 181,269

Coal India

PBT 228,796 215,789 215,476 237,643 274,431
D&A 19,959 23,198 24,664 27,121 30,540
Others (17,686) (26,987) (29,995) (55,338) (60,028)
CFO per WC changes 231,069 212,000 210,146 209,427 244,942
Changes in WC 2,442 (1,166) (87,123) 29,804 5,642
CFO post WC changes 233,511 210,834 123,024 239,231 250,585
Taxes paid (88,264) (78,573) (73,148) (184,099) (93,161)
Net CFO 145,247 132,261 49,876 55,132 157,423
Capex (41,164) (44,940) (54,470) (63,000) (66,150)
FCFF 104,083 87,321 (4,594) (7,868) 91,273
Interest and others 50,955 75,321 56,400 55,544 60,235
CFI 9,791 30,381 1,930 (7,456) (5,915)
Dividends (242,430) (154,283) (204,221) (55,568) (64,169)
Others (11,072) (1,329) 4,617 (1,058) (207)
CFF (253,503) (155,612) (199,604) (56,626) (64,376)
Net change in C&CE (98,465) 7,030 (147,798) (8,950) 87,133
Opening cash 622,360 523,895 530,925 383,128 374,178
Closing cash 523,895 530,925 383,127 374,178 461,310

Margins / Ratios
EBITDA margin % 25.0% 23.4% 23.5% 24.5% 25.4%
Adjusted net profit margin % 21.4% 18.5% 18.3% 18.3% 18.8%
RoE (%) 33.3% 33.2% 38.4% 31.6% 25.5%
Return on Assets %
( (EBIT * (1-t) )/ Debt + long term 18.5% 16.9% 17.6% 19.7% 21.3%
liabilities & OBR + net worth )
Per share (`)
EPS Fully Diluted 23.9 21.7 22.6 24.9 28.7
CEPS 34.1 33.0 33.7 31.9 36.6
Net Dividend Per Share 29.0 20.7 27.4 7.5 8.6
Operating FCF per share 16.5 13.8 -0.7 -1.2 14.5
Net Cash (debt) per share
82.7 83.4 58.8 57.5 71.3
(Excl. long term liabilities and OBR)
Net Cash (debt) per share 23.7 17.6 -11.8 36.5 50.3
Book Value Per Share 67.1 63.9 53.7 103.5 122.0
Valuation Parameters
P/E (x) 13.6 15.0 14.4 13.1 11.3
P/B (x) 4.8 5.1 6.1 3.1 2.7
Dividend yield (%) 8.9% 6.4% 8.4% 2.3% 2.6%
EV/ EBITDA (x) 8.7 8.8 8.3 7.3 6.2

Coal India

ONGC
NOT RATED
STRATEGY NOTE ONGC IN EQUITY September 19, 2016
Challenged on capital allocation Oil & Gas

ONGC is an upstream player established by the Government to secure
Indias energy needs. It contributes ~75% of Indias crude output and SENSEX EXIT
has significant presence outside India through investments in oil fields Mcap (bn): `2141/US$31.9
across the globe. Over the years, ONGCs domestic production has 6M ADV (mn): `1094.4/US$16.3
plateaued due to absence of any large discovery alongside investments CMP: `250
of ~US$25bn in overseas assets which havent yielded required returns.
These have led to sharp ROCE moderation to 10% (pre-tax!). Limited Flags
capabilities in exploration and production and weaker track record in Accounting: RED
capital allocation will lead to consistent erosion in ROCEs, driving further Predictability: RED
P/E de-rating alongside muted EPS growth. Growing share of volumes Earnings Momentum: GREEN
from mature fields poses further risk to current profitability.
Competitive position: MODERATE Changes to this position: NEGATIVE
Indias largest oil & gas exploration and production company Performance (%)
120
ONGC is the largest oil & gas exploration and production company in India. It ONGC IN Equity SENSEX index
110
has expanded its presence outside India through 100%-owned subsidiary ONGC 100
Videsh Ltd (OVL) which contributes ~18% of ONGCs crude production. ONGC 90
also has a crude refining subsidiary MRPL (15 MMT) though its track record in 80
profit generation has been weak. ONGCs crude/natural gas production was 70
31.44MMT/25.94BCM in FY16, which has declined from 34.06MMT/27.3BCM in 60
Aug-15
Sep-15
Oct-15
Nov-15
Dec-15
Jan-16
Feb-16
Mar-16
Apr-16
Jul-16
May-16
Jun-16
Aug-16
FY09 despite a capex of over US$50bn during this period. OVL produced
5.82MMT/3.3BCM crude/gas in FY16 post cumulative investment of US$25bn so
far. Consequently, ROCEs have declined from 36% in FY07 to 10% in FY16 due
to increased subsidy burden on Indian operations, significant jump in
capex/opex requirements for oil & gas fields, and expensive acquisitions.
ONGCs forensic score analysis
ONGC limited competitive advantages
ONGC historically benefited from being a quasi-government arm to explore and
develop Indias E&P assets on a nomination basis. However, ONGC failed to
ramp-up domestic crude and gas production given lack of any major success in
E&P despite consistent investments. ONGC hasnt been able to build credible Source: Ambit HAWK, Ambit Capital research
competitive advantages around technical capabilities for assessing and choosing
right exploration and production block. It has also not emerged as a preferred ONGCs greatness score analysis
partner for financial investments in overseas blocks unlike its younger peer BPRL.
ONGC will not be in the Sensex a decade from now

Limited capabilities in exploration and production, weaker track record in
generating value from Government-mandated capital allocation (e.g. overseas Source: Ambit HAWK, Ambit Capital research
E&P assets), and uncertain policies on taxation and subsidy sharing significantly
undermine ONGCs capability to generate cost of capital returns. High
uncertainty on subsidy sharing mechanism and muted volume growth
underpinned ONGCs underperformance relative to the Sensex. ONGC has
seen very few discoveries reaching production while capex/opex spends have
gone up to sustain production at mature fields.
Valuation discount justified given deterioration in return ratios
ONGC is trading at one-year forward consensus P/E of 11x (last 10-year
average of 9.4x) and consensus P/B of 1.2x (last 10-year average of 2.2x). Over
the last 10 years, its shares have compounded at 3% annually vs 9% for the Research Analyst
Sensex. Going forward, we dont expect ONGC to compound at more than 5%,
Ritesh Gupta, CFA
which would mean it should exit from the Sensex. ONGC scores a fairly low 25%
+91 22 3043 3242
on our greatness framework while being at the bottom (ninth decile) in our
accounting framework. Key risks: Sharp uptick in crude prices and any major ritesh.gupta@ambit.co
domestic discovery.
ONGC

Revenues 822,615 967,821 1,045,883 1,017,545 1,201,338 1,472,849 1,624,025 1,744,771 1,612,117 1,314,978
Revenue growth (%) 16% 18% 8% -3% 18% 23% 10% 7% -8% -18%
Net profits 177,695 198,722 197,953 194,035 224,559 281,436 242,196 265,065 183,335 141,238
EPS 20.77 23.23 23.14 22.68 26.25 32.9 28.3 31.0 21.43 16.51
CFO 277,901 290,288 289,976 287,829 490,846 461,294 398,742 532,704 339,504 527,757
Pre Tax CFO-EBITDA 1.47 1.34 1.45 1.73 2.87 1.25 1.22 1.34 1.04 1.49
FCF 165,923 198,930 192,081 146,584 212,285 154,218 121,170 324,985 71,650 338,097
Debt equity (x) 0.25 0.18 0.26 0.24 0.06 0.12 0.14 0.29 0.30 0.30
RoE (%) 29.20 28.16 23.86 20.53 21.20 22.72 16.72 16.51 10.06 7.85
ROCE (%) 36.13 35.62 30.41 25.83 28.28 31.68 23.00 20.39 13.31 10.49
Exhibit 2: Sources of funds over the last ten years Exhibit 3: Utilisation of funds over last ten years (FY07-16)
(FY07-16)
Loan Funds, Increase In
10% Cash, 6%
Interest Purchase
received, of Fixed
6% Assets, 30%
Other
Dividend Investment
Income, 1% Activities,
43%
Cash From Income
Operating tax and
Activities, Loans & Equity
83% advances Dividend
given to Paid, 19%
subsidiaries
partnership Interest
firms etc., Paid, 1%
1%
Exhibit 4: 1-yr forward P/E band rerating on the back of Exhibit 5: ONGC has significantly underperformed BSE
a decline in under-recoveries offset by fall in crude prices Energy Index
2.6
14x 2.4
500
12x 2.2
450 10x 2.0
400 1.8
9x
350 1.6
7x
1.4
300
1.2
250
1.0
200 0.8
Sep-06
Nov-07
Jan-09
Aug-09
Sep-13
Oct-10
Nov-14
Jan-16
Aug-16
Jun-08
Apr-07
Mar-10
Jul-12
Feb-13
Jun-15
May-11
Dec-11
Apr-14
150
100
Aug-06
Aug-07
Aug-08
Aug-09
Aug-10
Aug-11
Aug-12
Aug-13
Aug-14
Aug-15
Aug-16
ONGC BSE Energy

Accounting RED ONGC is in ninth decile in our forensic framework indicating fairly low accounting quality
Predictability RED Lack of visibility over net crude realisations and subsidy sharing mechanism make earnings volatile.
Earnings Momentum GREEN Consensus earnings have seen some upgrades over last 6 months

ONGC
the worst decile. Our analysis points towards a strong link between accounting

ONGC
Income statement (` mn)

Y/E Mar (` mn) FY12 FY13 FY14 FY15 FY16
Net Revenue 1,472,849 1,624,025 1,744,771 1,612,117 1,314,978
EBIDTA 483,938 432,384 491,208 420,665 411,445
Depreciation 131,865 117,633 165,809 180,329 180,086
Interest 4,349 4,838 6,243 28,637 21,573
Other income 48,906 57,509 72,186 62,005 79,287
EPS (Rs/share) 32.9 28.3 31.0 21.43 16.51

Total Assets 2,654,186 2,887,377 3,536,146 3,580,439 3,810,498
Net Fixed Assets + CWIP 1,490,405 1,730,286 2,279,571 2,433,263 2,541,723
Current Assets inlcuding cash 622,671 565,405 644,442 584,985 600,093
Other Assets 531,990 581,643 604,748 562,191 668,682
Total Liabilities 2,654,186 2,887,377 3,536,146 3,580,439 3,810,498
Networth 1,364,391 1,525,276 1,721,515 1,804,544 1,847,443
Dept 52,086 88,427 316,809 475,754 462,719
Current Liabilities 515,056 495,861 685,283 565,320 651,116.61
Deferred Tax 121,846 142,251 178,635 181,759 203,552

PBT 428,035 367,422 394,134 273,703 227,179
+ Depreciation 131,865 120,942 165,809 180,329 180,086
- Incr/(Decr) in WC (70,506) (60,066) 42,031 (116,349) 128,243
Cash from operations 461,294 398,742 532,704 339,504 527,757
- Capex (191,430) (179,608) (149,385) (169,059) (113,242)
Free cash flow 154,218 121,170 324,985 71,650 338,097
Cash from investing (383,751) (412,199) (636,326) (303,196) (379,770)
- Dividend (73,657) (94,960) (83,453) (79,203) (49,190)
+ Debt raised 91,523 45,678 247,223 19,643 16,904
Cash from financing 1,015 (69,270) 152,246 (106,407) (62,225)
Net cash flow 78,559 (82,727) 48,624 (70,100) 85,761

Y/E Mar FY12 FY13 FY14 FY15 FY16
EBITDA margin (%) 130% -11% 14% -14% -2%
PAT margin (%) 19.1% 14.9% 15% 10.6% 10%
Return on Equity (%) 22.6% 16.6% 16.4% 10.06% 7.8%
DPS (Rs) 9.75 9.50 9.50 9.50 8.50
BVPS (Rs) 158.4 177.1 200.4 210.27 215.38
P/E (x) 7.53 8.76 8.00 11.57 15.01
P/B (x) 1.56 1.40 1.24 1.18 1.15

State Bank of India
SELL
STRATEGY NOTE SBIN IN EQUITY September 19, 2016
A long road to profitability recovery BFSI
The largest bank in India has been underperforming the new SENSEX EXIT
generation private sector banks. Despite its large network and strong
Mcap (bn): `1,974/US$29.5
liability, the bank is struggling with asset quality issues due to the large
3M ADV (mn): `5,411/US$803.7
exposure to stressed segments. With weak profitability, rising capital
requirements, competition from stronger private sector peers and entry CMP: `254
of new players, SBI seems highly likely to continue underperforming its TP (12 mths): `180
private sector peers on earnings growth. Low provision (34%) on Downside (%): 29
stressed assets of 9.4% would keep credit costs high and RoAs low. With
steady-state RoA at less than 1% and capped leverage of 12-13x, the Flags
bank will struggle to deliver steady state RoEs above 10-12% any time Accounting: GREEN
soon. We are SELLers with TP of Rs180. Predictability: AMBER
The largest Bank in India Performance
State Bank of India (SBI) is Indias largest bank and, along with its associate 130
120
banks, has a loan market share of ~24%. The bank has a strong liability 110
franchise (CASA at 43%), but exposure to stressed segments and poor 100
90
productivity have led to RoA languishing at 0.5%. Gross NPAs stand at 7% with 80
provision coverage of 44%. Even as it is regarded the best-run state-owned 70
60
bank, state ownership remains a key millstone around SBIs neck, preventing it
Nov-15
Jan-16
Sep-15
Mar-16
Jul-16
May-16
from being able to better compete with nimble-footed private banks.
SBI has struggled to generate RoAs of more than 1%
SBIN IN BANKEX
Since FY99, SBI has generated RoA of over 1% in only two years. Despite
enjoying arguably the best liability franchise (CASA at 43%) and branch network Source: Bloomberg, Ambit Capital research
in India, profitability suffered due to weak income productivity (sub-par cross-
sell) and volatile asset quality trends. SBI and other PSU banks have structurally
weakened over the years due to the role of Government as promoter. High
exposure to risky sectors (e.g. metals and infra) at inadequate risk pricing and
low employee and branch productivities are reflections of these weaknesses.
SBI has underperformed the new-gen private sector banks
Whilst SBI has retained its market share vs other PSU banks that have lost
market share, it has underperformed its private sector peers in profitability (RoA
less than third of private peers). Moreover, the Governments efforts to improve
corporate governance at PSU banks, including SBI, have been underwhelming.
With a large size, weak profitability, rising capital requirements, competition
from stronger private sector peers, and introduction of new players, SBI seems
highly likely to underperform its private sector peers on earnings growth. We
expect loan CAGR of 12-14% in the next three years vs 18-20% for private sector Research Analysts
peers. RoE will not cross 10-12% anytime soon due to high credit costs. Ravi Singh
Overvalued given the weak profitability Tel: +91 22 3043 3181
With steady-state RoA of ~1% and capped leverage of 12-13x, SBI will struggle ravi.singh@ambit.co
to deliver steady state RoEs above 12-13%. We value the standalone bank at Pankaj Agarwal, CFA
Rs140, implying 0.75x June17 BV. The sum-of-the-parts method for the banks
Tel: +91 22 3043 3206
banking and non-banking subsidiaries leads to a target price of Rs180
pankaj.agarwal@ambit.co
(June17). Current valuation of ~1.15x 1-year fwd P/B is at a significant
premium to peers BOB (0.97x) and PNB (0.72x). The only way it can remain in Rahil Shah
the Sensex is if it were given greater autonomy by the Government in HR policies Tel: +91 22 3043 3217
and external vigilance. rahil.shah@ambit.co
State Bank of India

Net profits 45,412 67,291 91,212 91,661 82,645 117,073 141,050 108,912 131,016 99,506
EPS (Rs) 8.6 10.7 14.4 14.4 13.0 17.4 20.6 14.6 17.5 12.8
RoA (%) 0.86% 1.04% 1.08% 0.91% 0.73% 0.91% 0.97% 0.65% 0.68% 0.46%
RoE (%) 15.4% 16.8% 17.1% 14.8% 12.6% 15.7% 15.4% 10.0% 10.6% 7.3%
Gross NPAs (%) 2.92% 3.04% 2.86% 3.05% 3.29% 4.45% 4.76% 4.97% 4.27% 6.52%
Net NPAs (%) 1.56% 1.78% 1.78% 1.72% 1.63% 1.82% 2.10% 2.57% 2.12% 3.81%
Exhibit 2: NIMs are declining so is loan book growth Exhibit 3: RoAs and RoEs has been subdued
4% 30% 20% 1.2%

25% 16% 1.0%
3%
20% 0.8%
12%
2% 15% 0.6%
8%
10% 0.4%
1%
5% 4% 0.2%
0% 0% 0% 0.0%
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
Exhibit 4: SBI is trading at a discount to its historical P/B Exhibit 5: SBIN has underperformed BANKEX by 400bps in
but at a premium to other PSU banks the past decade
4 500
3 400
300
2
200
1
100
0 0
Mar-05
Mar-08
Mar-11
Mar-14
Jun-07
Jun-10
Jun-13
Jun-16
Sep-06
Nov-07
Jun-08
Jan-09
Aug-09
Mar-10
Feb-13
Sep-13
Jun-15
Jan-16
Oct-10
Dec-11
Jul-12
Nov-14
Aug-16
Dec-05
Dec-08
Dec-11
Dec-14
Sep-06
Sep-09
Sep-12
Sep-15
Apr-07
May-11
Apr-14
PB Avg. PB SBIN IN BANKEX

We do not find anything unusual in SBIs financial statements and we believe that the reported numbers are a
Accounting GREEN
true reflection of the profitability of the bank.
Predictability AMBER The volatility in asset quality trends lead to weak predictability of financial performance.
Earnings were down 27% YoY in FY16. Weak balance sheet CAGR of 13% (FY16-18E) would dampen earnings
Earnings Momentum AMBER
growth even as RoA begins to improve gradually.

State Bank of India
Balance sheet
Networth 1,182,822 1,284,382 1,442,744 1,533,893 1,651,574
Deposits 13,944,085 15,767,932 17,307,224 19,557,164 22,295,166
Borrowings 1,831,309 2,051,503 2,241,906 2,555,171 2,907,927
Other Liabilities 969,267 1,376,980 1,598,756 1,822,582 2,077,743
Total Liabilities 17,927,483 20,480,798 22,590,630 25,468,809 28,932,410
Cash & Balances with RBI/Banks 1,325,496 1,547,558 1,674,677 1,868,719 2,103,055
Investments 3,987,996 4,817,587 4,770,973 5,239,650 5,691,392
Advances 12,098,287 13,000,264 14,637,004 16,470,241 18,772,656
Other Assets 515,704 1,115,389 1,507,977 1,890,198 2,365,307
Total Assets 17,927,483 20,480,798 22,590,630 25,468,809 28,932,410
Income statement
Interest Income 1,363,508 1,523,971 1,636,853 1,724,533 1,861,799
Interest Expense 870,686 973,818 1,068,035 1,113,941 1,186,172
Total Income 678,351 775,911 850,402 901,912 990,088
Provisions 159,354 202,233 294,838 275,767 264,734
PBT 161,739 193,140 137,741 171,616 221,572
Tax 52,827 62,124 38,234 54,917 70,903
PAT 108,912 131,016 99,506 116,699 150,669
Ratio analysis
Credit-Deposit (%) 86.8% 82.4% 84.6% 84.2% 84.2%
CASA ratio (%) 45.8% 43.8% 45.1% 44.8% 44.2%
Gross NPA (Rs mn) 616,054 567,253 981,728 960,443 896,055
Gross NPA (%) 4.97% 4.27% 6.52% 5.69% 4.67%
Net NPA (Rs mn) 310,961 275,906 558,070 537,848 492,830
Net NPA (%) 2.57% 2.12% 3.81% 3.27% 2.63%
NIMs (%) 3.03% 2.99% 2.81% 2.73% 2.69%

State Bank of India
Du-pont analysis
NII / Assets (%) 2.9% 2.9% 2.6% 2.5% 2.5%
Cost to Assets (%) 2.1% 2.0% 1.9% 1.9% 1.9%
PPP / Assets (%) 1.9% 2.1% 2.0% 1.9% 1.8%
PBT / Assets (%) 1.0% 1.0% 0.6% 0.7% 0.8%
Tax Rate (%) 32.7% 32.2% 27.8% 32.0% 32.0%
ROA (%) 0.6% 0.7% 0.5% 0.5% 0.6%
Leverage 15.5 15.6 15.8 16.1 17.1
ROE (%) 10.0% 10.6% 7.3% 7.8% 9.5%
EPS (Rs) 13.4 16.0 12.2 14.0 19.4
EPS growth (%) -22% 20% -24% 14% 39%
BVPS (Rs) 141.6 152.9 171.2 180.3 193.3
P/E (x) 12.7 10.7 14.0 12.2 8.8
P/BV (x) 1.20 1.12 1.00 0.95 0.88

Larsen & Toubro
SELL
STRATEGY NOTE LT IN EQUITY September 19, 2016
One eyed king in the land of the blind Engineering & Construction
L&Ts industry leadership (in contracting) is meaningless in the context of
potential Sensex survivors given the industry itself has never sustainably SENSEX EXIT
created shareholder value. As transient competitive advantages of scale Mcap (bn): `1,364/US$20.5
and balance sheet strength fade (new segment-specific peers and 3M ADV (mn): `2,692/US$40.4
potential entry of globals), the construction business (now dominant) will CMP: `1,467
face challenges to grow profitably. There are also risks of the TP (12 mths): `1,250
conglomerate splitting into multiple smaller entities and becoming akin Downside (%): 15
to a holdco. In this scenario, only the construction business may stand a
chance of remaining a Sensex company due to its scale; recent capital Flags
allocation decisions have yielded barely par-for-the-course franchises,
Accounting: AMBER
unlikely to fetch premium valuations.
Competitive position: STRONG Changes to this position: STABLE Earnings Momentum: AMBER
Largest contractor in the country; now a conglomerate
L&T is the largest EPC company in the country (and sizably so! 6x revenues than Performance
its closest listed competitor). Over the last five years, the company has invested 120
its surplus funds into IT, financial services and infrastructure businesses and now
resembles a conglomerate with more than 50% capital employed in new forays. 100
An impressive 15% consolidated revenue CAGR over FY11-16 was accompanied
80
by a paltry profit growth of 3% CAGR. RoEs declined from 17% in FY11 to 11% in
FY16 due to investments in infra assets and declining standalone profitability. 60
Jun-16
Sep-15
Jan-16
Jul-16
Mar-16
Sep-16
Nov-15
Dec-15
May-16
Competitive advantages will erode further
Contracting business has few competitive edges and perceived advantages of
scale and technical know-how are fleeting or misleading (or both!). L&Ts SENSEX L&T
competitive advantages in EPC through the 2000s stemmed from limited

competition with an equally large balance sheet and pre-qualifications that gave Source: Bloomberg, Ambit Capital research
it a virtual monopoly over large projects. Growth of segment specialists like
those in roads, urban infra (ports) and power has impacted its win rates and also L&Ts forensic score analysis
reduced its pricing/profitability from these segments. Potential entry of global
contractors as projects become larger is a threat looming large.
Can it be the biggest casualty of the current Sensex crop?
With Mr. AM Naiks retirement on the horizon (Oct-17), the company is likely to
witness its first major managerial transition in recent years. L&Ts increasingly Source: Ambit HAWK, Ambit Capital research
conglomerate-like structure could result in splintering of the group into smaller
listed units (like L&T Infotech). Most of these units are unlikely to be large L&Ts greatness score analysis
enough to be Sensex stocks barring possibly the construction business (~58% of
our current SOTP value). Even in this business, the company faces headwinds
from a more democratic competitive environment, a track-record of order
inflow focused approach that may keep profitability volatile, and an increasing
global footprint necessitated by its need to grow.
Valuations to recede as TINA wears off

L&Ts leadership in its industry has limited meaning given that the industry itself
has not lent itself well to value creation. Its current valuation of 20x FY18E EPS
for the core business are unlikely to sustain as the halo effect of Indias largest
construction company fades in the light of increasing competition. Moreover,
Research Analysts
valuation premium driven by lack of viable investable alternatives (the TINA
effect) will wear off. We do not expect valuations to persist at such punchy levels Nitin Bhasin
for a company that ranks a mere D9 on our accounting framework (Zone of +91 22 3043 3241
Darkness) and in the Zone of mediocrity in our greatness framework. The key Nitin.bhasin@ambit.co
risk remains pragmatism and rationality in capital allocation and order
collection. Utsav Mehta, CFA
+91 22 3043 3209
Utsav.mehta@ambit.co
Larsen & Toubro

(Rs bn) FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
Revenues 205 295 405 440 520 643 745 851 920 1,026
Revenue growth (%) 24% 44% 38% 9% 18% 24% 16% 14% 8% 12%
Net profits 18 22 29 33 40 46 48 42 40 47
EPS (Rs) 62.2 37.6 49.3 54.9 65.5 76.1 76.1 45.5 43 54.7
CFO 23 -12 20 65 46 7 21 -7 63 70
CFO-EBITDA 89% -34% 41% 101% 60% 8% 22% -6% 56% 57%
FCF -3 -49 -33 21 -23 -64 -53 -74 -5 19
Debt equity (x) 0.9 1.1 1.3 1.1 1.3 1.6 1.8 2.1 2.2 2.6
RoE (%) 30% 25% 23% 19% 17% 17% 15% 12% 10% 11%
RoCE (%) 15% 11% 10% 9% 8% 7% 6% 5% 5% 7%
Exhibit 2: Despite cyclical downturn, the company did not Exhibit 3: High investments highlights the capital allocation
need to rely too much on debt funding issues of the last five years
Inflow of funds Net Outflow of funds
(FY07-16: Rs500bn) Other, 3% Investment, (FY07-16: Rs500bn)
0% Capex, 25%
Investment
Debt, 19% in
subsidiaries,
40%
Inc in cash,
Equity, 10% CFO, 51%
4%
Int+Divd, Interest, 13%

17%
Dividend,
19%
Exhibit 4: Forward P/E evolution Exhibit 5: L&Ts share price performance vs BSE Sensex
(x)
L&T P/E 120
35
30
100
25
20 80
15
10 60
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Dec-15
Sep-15
Nov-15
Mar-16
May-16
Jun-16
Sep-16
Jan-16
Jul-16
L&T P/E 5-yr avg P/E SENSEX L&T

L&T appears in the bottom-half of the conglomerate universe in our proprietary accounting framework. The reasons
Accounting AMBER for the companys poor performance are (1) poor cash conversion, (2) volatile depreciation rate and (3) high
receivable days
Although the company provides timely guidance on revenue growth, margins and order inflows, the companys
results have surprised quite often (4%/ 20% surprise on revenue/ EPS in the last eight quarters)
Consensus consolidated EPS estimates for FY17E and FY18E has not shown any revisions in the last 6 months.
Expected Consolidated EPS growth CAGR is 13% over FY16-FY18E as against 10% over FY14-16.

Larsen & Toubro

Larsen & Toubro

Year to March (` bn) FY14 FY15 FY16 FY17E FY18E
Reserves & surpluses 332 366 403 434 473
Total networth 337 371 407 438 477
Minority Interest
Debt 115 129 136 126 116
Total liabilities 455 504 545 566 595
Gross block 117 123 130 138 146
Net block 77 75 72 69 66
CWIP 6 5 5 5 5
Cash & Cash equivalents 18 16 17 (13) (7)
Debtors 215 231 263 263 278
Inventory 20 22 19 20 23
Loans & advances 101 105 132 136 144
Total current assets 509 559 648 637 687
Current liabilities 304 337 395 368 394
Provisions 24 29 31 34 39
Total current liabilities 328 365 425 402 433
Net current assets 181 193 223 235 254
Total assets 455 504 545 566 595

Year to March (` bn) FY14 FY15 FY16 FY17E FY18E
Net Sales 566 570 598 640 724
% growth 9.7% 1% 5% 7% 13%
Operating expenditure 499 505 536 570 640
EBITDA 67 65 62 70 84
% growth 22.0% -2.8% -4.8% 14.1% 18.9%
Depreciation 8 10 10 11 11
EBIT 59 55 52 60 72
Non-operating income 14 17 19 18 19
Adjusted PBT 67 63 60 70 85
Tax 18 16 14 18 21
50 48 48 52 64
interest
% growth 25.4% -5.3% 0.7% 9.3% 21.5%
Minority Interest
interest
Reported PAT after minority interest 55 51 53 53 64

Larsen & Toubro

Year to March (` bn) FY14 FY15 FY16E FY17E FY18E
Net Profit Before Tax 67 63 67 71 86
Depreciation 8 10 10 11 11
Others (2) (3) (7) (8) (10)
Tax (20) (17) (16) (18) (21)
(Incr) / decr in net working capital (42) (21) (31) (45) (19)
Cash flow from operations 10 31 24 11 47
Capex (net) (10) (9) (7) (8) (9)
(Incr) / decr in investments (50) (17) (22) (12) (12)
Interest received 5 6 5 6 6
Cash flow from investments (12) (19) (2) 2 2
Net borrowings 42 51 7 (10) (10)
Others (26) (54) (16) (18) (21)
Interest paid (10) (12) (13) (13) (12)
Dividend paid (12) (14) (16) (18) (21)
Cash flow from financing 5 (14) (23) (42) (43)
Net change in cash 3 (2) (1) (29) 5
Closing cash balance 18 16 15 (13) (7)
Free cash flow 1 22 17 3 38

EBITDA margin (%) 11.8% 11.4% 10.3% 11.0% 11.6%
EBIT margin (%) 10.4% 9.6% 8.7% 9.3% 10.0%
Net debt: equity (x) 0.2 0.2 0.2 0.1 0.1
RoCE (pre-tax) (%) 18.6% 15.8% 15.1% 16.3% 18.8%
RoIC (%) 23.6% 19.5% 18.9% 19.9% 22.5%
RoE (%) 18.7% 15.8% 14.3% 14.6% 16.8%

Adjusted EPS diluted (`) 54.0 51.0 51.3 56.1 68.2
Core EPS Diluted (`) 42.4 24.4 28.4 63.0 79.0
P/E (x) 27.1 28.7 28.5 26.1 21.5
P/BV (x) 4.0 3.7 3.3 3.1 2.9
EV/EBITDA (x) 21.9 22.8 24.1 21.4 17.8
EV/EBIT (x) 24.9 27.0 28.7 25.2 20.6

Larsen & Toubro

Bharti Airtel
NOT RATED
STRATEGY NOTE BHARTI IN EQUITY September 19, 2016
Technology risk, commoditization Telecom

Bharti Airtels dominance in the Indian telecom space is challenged by
(1) persistently high capex (for spectrum and infra) to support data SENSEX EXIT
growth, (2) Reliance Jios entry, (3) technology disruptions eroding Mcap (bn): `1,271/US$19.1
competitive advantages as cash-rich media companies find alternate 3M ADV (mn): `1,336/US$20.0
content delivery modes. It trades at 5.9x/5.3x FY17E/FY18E Bloomberg CMP: `318
consensus EV/EBITDA, in-line with global peers. However, consensus is TP (12 mths): NR
yet to digest Reliance Jios big-bang market entry, as FY18E EBITDA saw Downside (%): NA
just 2% downgrade over the last month. RJios lofty telecom aspirations
backed by deep pocket set the stage of a protracted pricing battle and Flags
capex race. Bharti Airtels poor capital allocation places it in Ambit
Accounting: GREEN
Hawks Zone of Mediocrity as the company delivered sub-par -10%/-
Predictability: RED
1%/-3%/4% 1yr/3yr/5yr/10yr stock price CAGR. It is unlikely to cross 9%
hurdle rate of share price CAGR to remain in the SENSEX.
Competitive position: MODERATE Changes to this position: NEGATIVE Performance
Largest Indian telco with global presence 120
Airtel is Indias largest telco, with 33% revenue market share (1QFY17). The 110
company also has telecom presence in Africa (present in 16 countries and is the 100
number 2 operator), Bangladesh and Sri Lanka. In India, Bharti also provides
90
fixed line telecom and Digital TV and IPTV services to homes and enterprises.
80
The company also owns tower infrastructure pertaining to telecom operations Sep-15 Dec-15 Mar-16 Jun-16
through its subsidiary (Bharti Infratel) and joint venture (Indus Towers). The
Sensex Bharti Airtel
company has dominated the Indian telecom market by investing aggressively to
maintain its first mover advantage.
Competitive advantage blunted by industry structure
Despite being indispensable to entertainment, financial services and Bhartis forensic score analysis
communication, telecom operators return ratios remain utility-like. Sectors
seductive operating cash flows (a third of revenue) due to strong operating
margins with scale persistently attract competition and regulators ire, which
looks to capture value through usurious spectrum auctions. Further, despite
being B2C providers, telcos are unable to capture the cream of consumer
spends, which accrue to dominant OTT media companies (Facebook, Google),
smartphone vendors (Apple) and content providers (Disney, Netflix). Source: Ambit HAWK, Ambit Capital research
Not a steep ask but stock price CAGR will weigh under RoCE decline
Bhartis greatness score analysis
Bhartis capital allocation strategy of redeploying gargantuan India cash flows
into international markets with uncertain growth trajectory has destroyed
shareholder wealth leading to negative share price CAGR over 1/3/5 years.
Now, as the company looks to make amends for its disastrous international
expansion (by opportunistically exiting African markets), competition has spiraled
in the Indian market. RJios entry results in pricing pressure, challenging revenue
growth and spiraling capex needs. This will keep return ratios depressed and
substantially below cost of capital (FY16 RoCE was 3%), implying that decadal
share price CAGR of 9% remains a tall task.
Valuations to moderate
Bharti Airtel has consistently de-rated from 8x 1-year forward EV/EBITDA to 5.3x
now. Valuations remain aggressive as analyst forecasts are yet to incorporate
competition-led pricing pressures and persistently high capex. Whilst the
company ranks highly in our Greatness framework owing to high pre-tax CFO to
Research Analyst
EBITDA (common across telcos owing to prepaid business nature), the same isnt
an important enough factor to sustain current multiples. Key risk to our stance is Vivekanand Subbaraman, CFA
success in monetisation of international assets and focus on India business +91 22 3043 3261
backed by strong content investments, potentially resulting in improved RoCE. Vivekanand.s@ambit.co
Bharti Airtel

(Rs mn; year-end March) FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
Revenue 185,195 270,251 369,615 396,150 596,018 715,058 769,470 858,635 921,351 966,192
Revenue growth (%) 59 46 37 7 42 20 8 12 7 5
Net profit 42,570 67,006 84,701 91,974 60,468 42,593 22,756 27,726 51,835 54,842
EPS (Rs) 11.2 17.7 22.3 24.2 15.9 11.2 6.0 7.0 13.0 13.6
CFO 70,549 102,484 127,597 154,924 188,513 225,438 227,699 262,326 276,018 283,205
Pre-tax CFO/EBITDA (X) 1.0 1.0 0.9 1.1 1.0 1.1 1.1 1.1 1.0 1.0
FCF (4,249) (25,969) (18,781) 52,628 (89,364) 74,081 96,233 83,307 63,637 8,440
Debt equity (x) 0.3 0.1 0.1 (0.1) 1.2 1.3 1.2 1.0 1.1 1.2
RoE (%) 37.4 38.0 32.5 25.6 13.3 8.6 4.5 5.0 9.2 7.4
RoCE (%) 16.5 17.4 15.7 14.7 5.6 3.5 1.8 2.0 3.7 2.9
Source: Company, Ambit Capital research; * accounting standard changed to IFRS from US GAAP; also, Bharti acquired Zain's Africa operations; FCF defined as
CFO minus capex (excluding acquisitions)
Exhibit 2: Sources of cash (FY07-16) Exhibit 3: Uses of cash (FY07-16)
Dividend,
Debt (net), 2% Others, 2%
17% Interest, 9%
Equity raise,
Acquisitions
6%
, 20%
Tangible
assets
capex, 52%
CFO, 77%
Intangible
assets
capex, 16%
Exhibit 4: Bharti Airtel EV/EBITDA band chart Exhibit 5: Share price performance vs BSE SENSEX
300
20
260
16
220
12
180
8 140
4 100
Aug-07
May-08
Nov-09
Aug-10
May-11
Nov-12
Oct-15
Mar-06
Dec-06
Feb-09
Feb-12
Apr-14
Jul-13
Jan-15
Jul-16
60
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
Bharti 1-yr fwd EV/EBITDA

3-yr avg EV/EBITDA
Sensex Bharti Airtel
Avg EV/EBITDA

Airtel is in the 3rd decile among BSE 500 companies as it stands out in key accounting ratios such as CFO to EBITDA
(decadal pre-tax CFO to EBITDA stood at 103%) and low miscellaneous expenses (0.1% of revenue over the past
Accounting GREEN
decade).
The company was already disclosing financials as per IFRS and hence had a very smooth transition to IND-AS.
Due to competitive pressures (Reliance Jios recent entry), pricing environment is uncertain in India, resulting in low
earnings predictability. Other factors clouding predictability include the companys significant presence in Africa
Predictability RED
(~24% of FY16 revenue), which faces persistent currency devaluation pressures, uncertain regulations and inflation
shocks.
RJios entry has sparked fears of heightened competition leading to ~10% downgrade of FY18E consensus EPS over
Earnings momentum RED
the last month. Downgrades could continue as RJio launches full-fledged operations in Jan17.

Bharti Airtel

Bharti Airtel
Consolidated Balance sheet

Year to March (Rs mn) FY12 FY13 FY14 FY15 FY16
Reserves & Surplus 487,125 484,229 577,573 599,578 637,842
Total Networth 506,113 503,217 597,560 619,565 657,829
Debt 690,232 667,363 758,958 663,672 609,006
Deferred spectrum liability - - 1,026 143,167 341,424
Other liabilities 50,781 58,466 73,115 59,844 87,773
Total liabilities 1,274,821 1,269,932 1,472,761 1,534,773 1,748,016
Tangible Assets 674,932 638,277 596,429 579,157 654,813
Intangible Assets 660,889 648,386 809,716 922,283 1,162,450
Other non-current assets 86,711 108,685 201,770 228,923 208,633
Cash and cash equivalents 38,432 81,624 112,073 104,559 67,146
Trade receivables 63,735 67,824 62,441 67,252 73,106
Other current assets 45,917 47,457 49,343 50,199 81,485
Trade payables 232,650 259,902 283,981 339,670 387,456
Other current liabilities 63,145 62,419 75,030 77,931 112,161
Net Current Assets (147,710) (125,416) (135,154) (195,591) (277,880)
Total Assets 1,274,821 1,269,932 1,472,761 1,534,773 1,748,016
Consolidated income statement

Net sales 715,058 769,470 858,635 921,351 966,192
Growth (%) 20 8 12 7 5
Operating expense 477,935 536,891 580,865 607,468 625,259
EBITDA 237,123 232,579 277,770 313,883 340,933
Growth (%) 16 (2) 19 13 9
Depreciation 133,681 148,148 156,496 155,311 174,498
EBIT 103,442 84,431 121,274 158,572 166,435
PBT 65,256 44,346 72,893 108,439 96,546
Tax 22,602 25,184 48,449 54,047 59,368
PAT 42,654 19,162 24,444 54,392 37,178
Growth (%) (33) (55) 28 123 (32)
Minority interest (13) (88) 2,467 1,248 6,495
Extraordinary gains - - 538 (8,532) 14,505
Income from associates (74) 3,506 5,211 7,223 9,654
PAT after Minority interest 42,593 22,756 27,726 51,835 54,842
Growth (%) (30) (47) 22 87 6
EPS (Rs/share) 11.2 6.0 7.0 13.0 13.6
APAT 42,593 22,756 27,520 56,063 47,471
Growth (%) (33) (47) 21 104 (15)

Bharti Airtel
Cash flow statement

Net profit before tax 65,256 44,346 72,893 108,439 96,546
Depreciation 133,681 148,148 156,496 155,311 174,498
Others 61,788 66,499 67,976 58,379 58,997
Tax paid (29,453) (31,294) (35,039) (46,111) (46,836)
Tangible assets capex (144,436) (125,722) (114,159) (146,411) (193,313)
Intangible assets capex (6,921) (5,744) (64,860) (65,970) (81,452)
Others (179,917) (55,295) (70,714) (8,100) 128,729
Cash flow from investing (331,274) (186,761) (249,733) (220,481) (146,036)
Equity issuance - 32,303 67,956 40,412 984
Net borrowings (3,187) (39,207) 1,847 (81,696) (72,251)
Interest paid (32,352) (34,339) (37,620) (33,887) (32,890)
Dividend paid (4,568) (4,412) (4,439) (21,399) (15,304)
Cash flow from financing (40,107) (45,655) 27,744 (96,570) (119,461)
Change in cash (140,109) (4,717) 40,337 (41,033) 17,708
Free cash flow to firm 79,915 96,233 83,307 63,637 8,440
Free cash flow to equity* 47,563 61,894 45,687 29,750 (24,450)
Source: Company, Ambit Capital research; * prior to debt issuance
Ratios
Year end March FY12 FY13 FY14 FY15 FY16
EBITDA margin (%) 33.2 30.2 32.4 34.1 35.3
EBIT margin (%) 14.5 11.0 14.1 17.2 17.2
Adj. net profit margin (%) 6.0 3.0 3.2 6.1 4.9
Tax rate (%) 34.6 56.8 66.5 49.8 61.5
Net debt/equity (x) 1.3 1.2 1.0 1.1 1.2
Net debt/EBITDA (x) 2.7 2.5 2.2 2.1 2.2
Pre-tax RoCE (%) 5.3 3.5 5.3 7.2 5.9
RoCE (%) 3.5 1.8 2.0 3.7 2.9
RoE (%) 8.6 4.5 5.0 9.2 7.4
Year end March FY12 FY13 FY14 FY15 FY16
EPS (Rs/share) 11.2 6.0 7.0 13.0 13.6
Adj. EPS (Rs/share) 11.2 6.0 6.9 14.0 11.9
Book value per share (Rs) 133 133 149 155 165
Dividend per share (Rs) 1.0 1.0 1.8 3.9 1.4
Adj. P/E (x) 28 53 45 25 23
P/BV (x) 2.2 2.2 1.9 1.9 1.8
EV/EBITDA (x) 8.1 8.0 6.8 6.2 6.0
EV/EBIT (x) 18.6 22.0 15.5 12.2 12.2

Bharti Airtel

NTPC
SELL
STRATEGY NOTE NTPC IN EQUITY September 14, 2016
Strong visibility of weak RoEs Utilities
NTPC with 16% share in generation capacity is Indias largest utility. SENSEX EXIT
Over the past decade, NTPC served as governments vehicle to expand Mcap (bn): `1,275/US$19.0
power capacities and hence enjoyed nominated assured-RoE PPAs,
3M ADV (mn): `678/US$10.2
driving EPS CAGR of 6.3%/RoIC of 11.1%. However, NPTC could exit
CMP: `156
from the Sensex in the next decade given: (a) limited growth
TP (12 mths): `126
opportunities (surplus power situation); (b) likely cut in assured RoE
from April19; (c) weakening competitive positioning with expensive Downside (%): 19
power from new plants and challenges in signing new PPAs; and (d)
RoE-dilutive diversification into renewables. Stock trades at 1.3x FY18E Flags
P/B despite RoE of 11% being lower than CoE of 14%. With EPS growth Accounting: AMBER
of merely 4.6% and RoIC <10% over FY16-26, re-rating is unlikely and Predictability: GREEN
share price growth would at best replicate net worth CAGR of 6.2%. Earnings Momentum: AMBER
Competitive position: STRONG Changes to this position: NEGATIVE
Indias largest utility and one of the most efficient Performance
270
NTPC is Indias largest utility with ~16% share in installed capacity. With plant 240
availability factor (PAF) of >90% over the past decade, it is among the most- 210
efficient utilities. Over the past decade, NTPCs installed capacity/PAT/CFO 180
150
grew by 6%/11%/10% led by 6% growth in Indias power demand; however 120
NTPCs share price has compounded by just 2.2% vs 9.5% for the Sensex due 90
to decline in NTPCs RoIC from 15.2% in FY07 to 9.7% in FY16.
Aug-14
Oct-14
Nov-14
Jan-15
Jun-14
Jul-14
Sep-14
Dec-14
Feb-15
Mar-15
Apr-15
May-15
Weakening competitive advantage
NTPCs competitive advantage came from: (a) nominated PPAs with assured Sensex Eicher Motors
RoE; (b) lower generation cost given proximity to mines; (c) cheap financing
due to strong credit rating. Two of these factors are weakening as: (a) power
surplus in 18 states casts shadow on converting MoUs (for capex up to FY30)
into PPAs; (b) power from new plants is expensive (Rs4-4.5/unit vs Rs2.5-3/unit
NTPCs forensic score analysis
for older plants) as they are far from mines. Hence, NTPC may face offtake
challenges (lower incentive income) and see under-recoveries at new plants.
NTPC to exit Sensex as generation sector loses its flavor
NTPC may exit from Sensex as power capacity addition would significantly
decelerate with India not needing fresh capacities; coal-based capacity was Source: Ambit HAWK, Ambit Capital research
185GW (plus 118GW gas/hydro/renewables) vs peak demand of 153GW in
FY16. Under-construction coal-based capacity of 87GW is more than sufficient NTPCs greatness score analysis
to meet single-digit demand CAGR over FY16-22E. So, NTPCs new capacity
addition is likely to slow down. There is also the risk of assured RoE of 15.5%
being cut in 2019 tariff regulation given: (a) G-Sec yields have declined from
9.1% in March14 to 6.8% in Sept16; (b) Governments focus on reduction in
power tariff; (c) disincentive for further capacity expansion. Lastly, NTPCs
incremental capital allocation strategy will be RoE-dilutive. NTPCs capex plans Source: Ambit HAWK, Ambit Capital research
are shifting toward renewables, which will earn non-assured ROE of 12-14%
vs assured RoE of 15.5% (plus 50-100bps incentives) in thermal.
Valuations: De-rating candidate

NTPC trades at 1.3x FY18E P/B, a 29% discount to 10-year average, given
decline in RoE from 14% over FY06-16 to 11% over FY17-18. Premium to Research Analysts
book is unjustified given RoE is lower than CoE of 14%. NTPC would see a de-
rating led by: (a) cut in assured RoE; and (b) cut in capex target over FY16-30. Bhargav Buddhadev
In our residual income based TP of Rs126, our implied target multiple for +91 22 3043 3252
NTPCs (a) regulated equity of Rs410bn is 1.5x; (b) equity invested in CWIP is bhargav.buddhadev@ambit.co
1.5x (present value is 1.2x); and (c) cash + liquid investments is 1x. NTPC is in
Deepesh Agarwal, CFA
the Zone of Mediocrity/Safety in our Greatness/forensic frameworks (refer
Ambits Hawk model). +91 22 3043 3275
deepesh.agarwal@ambit.co
NTPC

Revenues 325,952 370,501 419,238 463,226 550,627 620,522 656,739 717,357 729,737 705,068
Revenue growth (%) 25% 14% 13% 10% 19% 13% 6% 9% 2% -3%
Net profits 68,647 74,148 82,013 86,603 91,026 92,237 126,194 106,915 100,185 125,955
EPS 10.8 12.4 11.4 13.1 14.6 14.9 13.3 13.0 12.2 15.3
CFO 80,653 101,711 96,881 105,942 110,850 138,666 154,952 157,322 142,347 145,035
CFO-EBITDA 106% 107% 116% 108% 117% 114% 108% 105% 104% 79%
FCF 14,026 23,883 8,824 11,008 12,211 21,799 21,158 8,832 (16,482) (59,372)
Debt equity (x) 0.2 0.2 0.3 0.4 0.3 0.4 0.5 0.5 0.8 0.9
RoE (%) 14.1 14.6 14.9 14.5 14.0 13.1 12.0 12.9 12.0 14.8
ROCE (%) 8.4 8.9 8.3 8.1 6.9 7.2 8.2 7.4 6.7 9.2
Exhibit 2: CFO/debt accounted for 57%/31% of cash Exhibit 3: and capex accounted for 61% of cash used over
generation over FY07-16 FY07-16
Others, Interest,
Rs0.1tn, 4% Rs0.4tn,
17%
Investments
, Rs0.2tn,
8%
CFO,
Rs1.2tn, Dividends,
57% Rs0.5tn, Capex,
22% Rs1.3tn,
Debt,
Rs0.7tn, 61%
31%
Exhibit 4: One-year forward P/B evolution Exhibit 5: NTPC has outperformed BSE Power by 10ppt
(cumulative) over the past decade
300
250 250
2.0x
200 200
1.7x
150
150 1.4x
1.1x 100
100 50
0.8x
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
Sep-16
50
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
Sep-16
BSE Power NTPC
Exhibit 6: NTPC explanation for forensic accounting scores on the cover page
Field Score Comments
NTPC's overall scores D4 in utilities space in our accounting framework. Whilst the company enjoys strong
Accounting AMBER
CFO/EBITDA and cash yields, it scores poorly on CWIP/gross block and volatility in non-operating income.
The company has always given a detailed description and has made timely disclosures regarding its future
Predictability GREEN strategy, expansion plans, expected business momentum and expected earnings performance, in its annual
reports and conference calls. Further, regulated equity model renders high predictability to earnings.
Over past three months, there has been no change in the consensus FY18 earnings estimate for NTPC.
Consensus has marginally cut FY18 EPS estimate by 2%/4% over past 6/12 months

NTPC

NTPC

Cash 153,114 128,788 44,064 30,916 72,000
Debtors 52,201 76,044 78,440 93,479 108,226
Inventory 53,734 74,530 71,925 65,216 78,549
Loans & advances 158,933 179,355 285,290 285,290 285,290
Investments 97,579 90,321 82,932 82,932 82,932
Fixed assets (incl. CWIP) 1,169,995 1,353,426 1,580,635 1,714,323 1,803,418
Other current assets 109,987 68,384 96,748 96,748 96,748
Total assets 1,795,542 1,970,847 2,240,034 2,368,905 2,527,164
Current liabilities & provisions 286,716 345,218 457,398 460,437 522,937
Debt 624,058 785,323 883,294 965,027 1,005,753
Other liabilities 26,615 23,732 11,522 11,522 11,522
Total liabilities 937,389 1,154,274 1,352,214 1,436,986 1,540,212
Total net worth 858,153 816,574 887,820 931,919 986,953
Net working capital 241,252 181,882 119,070 111,213 117,878
Net debt (cash) 470,944 656,535 839,230 934,110 933,753

Operating income 717,357 729,737 705,068 775,453 918,666
% growth 9% 2% -3% 10% 18%
EBITDA 174,941 154,794 199,276 201,883 243,222
% growth 2% -12% 29% 1% 20%
Depreciation 41,422 49,117 54,253 62,985 72,134
EBIT 133,519 105,678 145,023 138,898 171,087
Other Income 26,889 21,163 11,893 15,686 20,527
Exceptional item / Prior Period items 128 (3,338) - - -
PBT 136,214 102,743 124,113 117,598 146,756
Tax 29,299 2,558 (1,842) 29,400 36,689
PAT 106,915 100,185 125,955 88,199 110,067
% growth 16% -6% 26% -30% 25%
APAT 106,786 103,524 125,955 88,199 110,067
% growth 41% -3% 22% -30% 25%

NTPC

PBT 139,047 105,467 100,587 117,598 146,756
Depreciation 41,422 49,117 54,253 62,985 72,134
Interest 24,066 27,025 32,304 36,986 44,858
(Incr) / decr in net working capital (2,919) (7,665) (28,769) (5,291) 34,419
Tax (25,563) (19,199) (13,357) (29,400) (36,689)
Others
Cash flow from operating activities 176,053 154,744 145,017 182,878 261,479
(Incr) / decr in capital expenditure (167,220) (171,226) (204,390) (196,673) (161,230)
(Incr) / decr in investments 11,199 16,123 11,672 - -
Others - - - - -
Cash flow from investing activities (156,022) (155,103) (192,718) (196,673) (161,230)
Incr / (decr) in borrowings 73,732 186,092 53,880 81,733 40,726
Dividend paid (57,881) (123,682) (33,246) (44,099) (55,033)
Interest (48,941) (56,905) (66,250) (36,986) (44,858)
Others - - - - -
Cash flow from financing activities (33,090) 5,505 (45,616) 648 (59,165)
Net change in cash (13,059) 5,146 (93,316) (13,147) 41,084
Free Cash Flow 8,832 (16,482) (59,372) (13,795) 100,249

EBITDA margin 24% 21% 28% 26% 26%
EBIT margin 19% 14% 21% 18% 19%
Net profit margin 15% 14% 18% 11% 12%
Return on capital employed 7.4% 6.7% 9.2% 5.7% 6.6%
Return on invested capital 14.2% 12.9% 17.3% 9.9% 10.7%
Return on equity 12.9% 12.0% 14.8% 9.7% 11.5%
Net Debt: Equity 0.55 0.80 0.95 1.00 0.95

EPS (Rs) 12.97 12.15 15.28 10.70 13.35
Book value per share (Rs) 104.1 99.0 107.7 113.0 119.7
P/E (x) 12.0 12.8 10.2 14.6 11.7
P/BV (x) 1.5 1.6 1.4 1.4 1.3
EV/EBITDA (x) 9.4 10.7 8.3 8.2 6.8
EV/Sales (x) 2.3 2.3 2.3 2.1 1.8
CFO/EBITDA 115% 112% 79% 105% 123%
DPS 6.7 0.9 7.6 5.3 6.7

NTPC

Wipro
SELL
STRATEGY NOTE WPRO IN EQUITY September 19, 2016
Culture, portfolio are drags Technology

Wipros weak portfolio mix (higher exposure to project-based work) and
silo-led culture have led to a long period of underperformance vs peers SENSEX EXIT
(FY06-16 EPS CAGR of 10% vs 25% for HCLT). Frequent churn in sales Mcap (bn): `1163/US$17.4
staff as well as senior management (four leadership changes in the past 3M ADV (mn): `1054/US$16
10 years) has not helped. The new CEO, a TCS veteran, is taking the CMP: `478
right steps to improve culture, but we fear that desperation for near- TP (12 mths): `480
term growth could result in value-destructive acquisition and sacrifice of Upside (%): 0%
margins. In this context, current valuations of 16.1x one-year forward
earnings (vs last five-year average of 14.2x) appear expensive.
Flags
Continued underperformance in earnings growth (4% CAGR over FY16-
Accounting: AMBER
26E) and decreasing RoCE (to sub-20%) could lead to exit from Sensex.
Competitive position: WEAK Changes to this position: POSITIVE Earnings Momentum: RED
Third-largest India-listed IT services company

Performance
Wipro was one of the pioneers of offshored IT services (in 1980) and grew 120
rapidly when labour arbitrage was the key value proposition. However, over the
110
past 10 years, customers require their vendors to act like strategic partners, i.e.
100
establish trusted relationships and build vertical-specific domain expertise.
90
Wipro has lagged in this aspect compared to many of its larger peers, partly
80
due to constant senior management churn. Over the past 10 years, profits grew
Nov-15
Jan-16
Sep-15
Dec-15
Mar-16
Jun-16
Jul-16
May-16
Sep-16
only 10% CAGR (INR terms) vs 25% for HCL Tech.
Weak portfolio and poor culture leading nowhere
SENSEX Wipro
Wipro has higher exposure to project-based work (revenue bucket needs to
constantly re-filled), troubled industry segments such as energy and telecom,
and low-margin markets like India and the Middle East. Wipro has seen
significant churn in sales staff (both internal and external) hurting customer
trust. Its top-10 clients contribute revenue of US$136mn on average vs Wipros forensic score analysis
US$220mn for Infosys. A silo-led organisation culture (until recently sales and
delivery organisations were barely integrated) means that it lacks the DNA of
selling based on vertical-specific domain expertise.
Continued underperformance vs peers could lead to Sensex exit
Wipro has often been early to enter segments with the most opportunity but for
the reasons described above failed to execute effectively (e.g. it was early to Wipros greatness score analysis
enter IMS, but TCS and even HCLT have now overtaken it in terms of absolute
revenue). The new CEO (Abidali Neemuchwala, a veteran of TCS) recently
changed the organisation structure and given incentives to change the culture,
but this will likely take a long time to take effect.
Valuations are expensive given the weak franchise Source: Ambit HAWK, Ambit Capital research
Stock is currently trading at 16.1x one-year forward EPS estimates ahead of its
5-year average of 14.2x. Wipro has had four leadership changes in the last 10
years so the CEO needs to prove himself quickly. This desperation for near-term
revenue growth could lead to more value-destructive acquisitions (Wipro has
had a poor track record so far), expansion into low-margin businesses and/or
pricing cuts. We build in 8% revenue CAGR and 500bps margin decline over the Research Analysts
next 10 years, yielding earnings CAGR of just 4%. RoCE will likely drop from
23% to 18% over this period. Sagar Rastogi
+91 22 3043 3291
Sagar.rastogi@ambit.co
Sudheer Guntupalli
+91 22 3043 3203
Sudheer.guntupalli@ambit.co
Wipro

Revenues 149,431 197,428 255,339 271,242 310,986 375,248 433,606 437,628 473,182 516,307
Revenue growth 41% 32% 29% 6% 15% 21% 16% 1% 8% 9%
Net profits 29,170 32,238 38,579 45,935 52,957 55,731 70,294 77,944 86,525 89,010
EPS 13 13 16 19 22 23 29 32 35 36
CFO 41,489 33,188 43,441 34,462 46,522 41,707 74,378 65,296 41,953 49,693
CFO/EBITDA 1.2 0.8 0.8 0.6 0.7 0.6 0.8 0.7 0.4 0.4
FCF 21,492 (22,733) 6,462 22,107 28,581 8,797 88,958 41,575 14,398 (24,928)
Debt equity(x) (0.40) (0.08) (0.06) (0.17) (0.24) (0.21) (0.32) (0.37) (0.34) (0.23)
ROE(%) 32% 28% 28% 27% 24% 21% 25% 25% 23% 20%
ROCE(%) 39% 29% 27% 26% 25% 24% 24% 29% 27% 23%
Exhibit 2: Sources of cash FY07-16 Exhibit 3: Utilization of cash FY07-16
Sources of cash FY07-16 Utilization of cash FY07-16
27% 26%
40%
73%
34%
CFO Cash from Financing Dividend Capex Acquisition
Exhibit 4: One-year forward PE evolution Exhibit 5: Stock price performance vs Sensex

18 180
16 160
14 140
120
12
100
10
80
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
Sep-14
Mar-15
Sep-15
Mar-16
Sep-16
Nov-15
Mar-16
May-16
Jun-16
Dec-15
Sep-15
Jan-16
Jul-16
Sep-16
P/E Avg SENSEX Wipro


Accounting AMBER Wipro ranks in the 5th decile on our forensic accounting framework.
Predictability GREEN Management gives quarterly guidance; and the earnings surprise has averaged less than 5% over past eight quarters.
Earnings
RED Bloomberg shows downgrades to consensus numbers in last 8 weeks.
momentum

Wipro
Exhibit 7: Wipro scores well on our forensic accounting Exhibit 8: Wipro scores highly on our greatness framework
framework
Source: Ambit HAWK, Ambit Capital research, Note: Using our accounting
framework, we categorize the market into deciles on the basis of their Source: Ambit HAWK, Ambit Capital research, Note: On our greatness
accounting quality with D1 indicating the best decile and D10 indicating the framework, on a scale of 0 to 100, a small minority of outstanding companies
worst decile. Our analysis points towards a strong link between accounting tend to score above 67 whilst most companies tend to have scores below 50

Wipro
Income statement
Income statement (Rs bn) FY16 FY17E FY18E FY19E
Rev-IT Serv (US$mn) 7,346 7,752 8,057 8,745
Revenue 516.3 543.9 562.0 608.1
Cost of goods sold 357.0 383.3 396.8 426.2
SG&A expanses 62.6 71.5 71.8 77.4
EBITDA 112.1 107.4 112.4 125.2
Depreciation 15.0 18.5 19.1 20.7
EBIT 97.1 88.9 93.3 104.5
EBIT margin 18.8% 16.3% 16.6% 17.2%
Other Income 17.7 19.0 20.9 23.0
PBT 114.8 107.9 114.2 127.5
Tax 25.3 24.8 26.3 29.3
Rate (%) 22.0 23.0 23.0 23.0
Reported PAT 89.0 82.8 87.6 97.9
PAT margin 17.2% 15.2% 15.6% 16.1%
Diluted Adj EPS 36.2 33.6 35.6 39.7
DPS 6.0 14.0 15.0 15.0
Balance sheet
Balance sheet (Rs bn) FY16 FY17E FY18E FY19E
Net Worth 466.1 511.3 555.8 610.6
Other Liabilities 148.1 149.4 149.7 150.0
Capital Employed 614.2 660.7 705.5 760.5
Net Block 65.0 64.5 62.2 59.7
Cash & Bank Balance 232.0 346.7 390.3 439.8
Other Current Assets 122.9 54.4 56.4 61.0
Current Liab. & Prov 110.7 117.5 121.7 131.6
Net Current Assets 394.9 440.0 487.1 544.5
Application of Funds 614.2 660.7 705.5 760.5
Source: Company, Ambit Capital research;
Cash flow statement

Cash flow (Rs bn) FY16 FY17E FY18E FY19E
Net profit 89.0 82.8 87.6 97.9
Depreciation 15.0 18.5 19.1 20.7
CF from Operations 86.8 82.6 86.2 95.9
Cash for Working Capital (37.1) 69.6 (3.5) (7.9)
Net Operating CF 49.7 152.3 82.7 88.0
Net Purchase of FA (25.7) (18.0) (16.9) (18.2)
Other (48.9) (1.9) - -
Net Cash from Invest. (56.9) (0.9) 4.0 4.7
Proceeds from Equity & other - - - -
Dividend Payments (17.2) (40.3) (43.2) (43.2)
Cash Flow from Fin. 22.5 (36.6) (43.2) (43.2)
Free Cash Flow 24.0 134.2 65.8 69.7
Opening cash flow 216.7 232.0 346.7 390.3
Net Cash Flow 15.3 114.8 43.5 49.5
Closing Cash Balance 232.0 346.7 390.3 439.8

Wipro
Ratio analysis
FY16 FY17E FY18E FY19E
Rev growth (US$ IT Serv) 3.7% 5.5% 3.9% 8.5%
EBIT growth 1.8% -8.4% 5.0% 12.0%
EPS growth 3.1% -7.0% 5.8% 11.7%
P/E 15.2 16.3 15.4 13.8
EV/EBITDA 10.5 10.9 10.4 9.4
RoE 20% 17% 16% 17%
RoCE 16% 13% 13% 13%
Turnover Ratios
Receivable days (Days) 107 105 105 105
Fixed Asset Turnover (x) 8.7 8.4 8.9 10.0
Source: Company, Ambit Capital research;

Wipro

Mahindra & Mahindra
SELL
STRATEGY NOTE MM IN EQUITY September 19, 2016
UV fortress under siege Auto & Auto ancillaries
While M&Ms dominance in domestic tractors looks intact, its leadership SENSEX EXIT
in domestic UVs is seriously undermined by rising competition from Mcap (bn): `915/US$13.8
global players with better styled products. Driven by market share losses 3M ADV (mn): `1,597/US$24.0
in domestic UVs (from 38% in FY16 to 32% in FY20), we expect M&Ms CMP: `1,472
core businesses to deliver a muted 7% net earnings CAGR and 600bps
TP (12 mths): `1,300
fall in RoCE (to 14%) over FY16-26, making a case for its exit from
Downside (%): 12
Sensex. This, together with capital allocation concerns (core business
cash flows used consistently to fund other automotive/non-automotive
forays, some of which are heavily loss-making) would continue to weigh Flags
on the valuation multiples (35% discount to Maruti). Divestment of loss- Accounting: AMBER
making entities is a key risk to our SELL stance. Predictability: AMBER
Competitive position: STRONG Changes to this position: NEGATIVE
M&M - a federation of diverse businesses Performance
M&M is the leader in the domestic UV and tractor segments. The company has 130
over the years entered into different businesses and now has presence in more 120
than 20 business segments (at FY16-end, nearly 57% of groups capital 110
employed is deployed in businesses outside of the core tractor/UV business) 100
including 2Ws, aerospace, information technology and realty. Over FY11-16, 90
the companys core business has delivered revenue, EBITDA and net earnings 80
Feb-16
Mar-16
Jun-16
Sep-15
Oct-15
Nov-15
Dec-15
Jan-16
May-16
Jul-16
Aug-16
Apr-16
CAGR of 11%, 7% and 5% respectively.
Rising competition in domestic UVs
M&M Sensex index
M&Ms leadership in tractors (41% market share in FY16) will likely sustain on
the back of strong competitive advantages surrounding brand (reliability, high Source: Bloomberg, Ambit Capital research
resale value) and distribution. On the other hand, its domestic UV leadership
built around first mover advantage, lack of competition and rural reach is now M&Ms forensic score analysis
witnessing significant competitive headwinds. MNCs (with strong product
development) and large car makers (Maruti, Hyundai with distribution
advantages) are targeting the UV segment aggressively and successfully.
Consequently, we expect M&Ms market share losses in the recent years (from
53.1% in FY12 to 37.9%) to continue and further decline to 32% by FY20.
Weak outlook for core business, capital allocation a further concern
Driven by market share losses in domestic UVs, we expect M&Ms core M&Ms greatness score analysis
businesses to deliver a muted 7% net earnings CAGR over FY16-18; RoCE
should decline from 20% in FY16 to 14% in FY26. Furthermore, M&Ms policy of
allocating core businesses cash flows to fund the group businesses across
several spheres of mobility and unrelated non-mobility businesses is a concern
particularly given that more recent investments like two wheelers and heavy
commercial vehicles are incurring huge losses. We believe the muted earnings Source: Ambit HAWK, Ambit Capital research
performance, decline in RoCE and lower valuation multiples (explained in below

paragraph) combine to make a strong case for M&Ms exit from Sensex.
Weak earnings and poor capital allocation force lower multiples Research Analysts
While the company gets relatively average score on our accounting framework,
Ashvin Shetty, CFA
it scores poorly on the greatness framework across most parameters. At 8.1x ashvin.shetty@ambit.co
FY18 EBITDA, the stock justifiably trades at 35% discount to Marutis FY18 Tel: +91 22 3043 3285
EV/EBITDA given market share concerns in UVs, lower return ratios and weak
Gaurav Khandelwal, CFA
capital allocation. We do not expect the valuation multiples to re-rate with key
gaurav.khandelwal@ambit.co
risk to our call being the divestment of loss-making entities. Tel: +91 22 3043 3132
Ritu Modi
ritu.modi@ambit.co
Tel: +91 22 3043 3292
Mahindra & Mahindra

(Fig in Rs mn) FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
Revenues 99,257 115,413 130,937 186,021 235,641 313,703 383,566 388,171 374,683 388,566
Revenue growth (%) 22% 16% 13% 42% 27% 33% 22% 1% -3% 4%
Net profits 17,024 9,306 8,265 19,970 25,696 28,888 35,438 38,523 30,876 32,420
EPS 25.7 18.9 14.8 34.5 41.9 51.4 63 68.3 54.2 56.8
CFO 3,905 11,035 16,313 23,365 23,172 38,125 42,099 39,936 37,281 57,154
CFO-EBITDA -11% 60% 149% 79% 64% 92% 79% 76% 81% 111%
FCF -14,784 1,087 -2,067 8,446 -21,224 7,158 12,232 24,926 199 17,338
Debt equity (x) 0 0.3 0.3 0 0.2 0.2 0.1 0 0 0
RoE (%) 39% 24% 17% 30.50% 28.30% 25.60% 26.00% 24% 17% 15%
ROCE (%) 63% 50% 31% 78% 62% 51% 57% 45% 31% 32%
Exhibit 2: Core business generated funds (Rs350bn) largely Exhibit 3: of which a significant amount (Rs95bn) has
through internal accruals over FY07-16 been invested in subsidiaries and associates
Change in Investments Repayent of
net debt made capital
7% 27% 0%
Int. & div. Finance

recd charges
12% 6%
Dividends
18%
CFO
81% Capex
49%
Exhibit 4: Trading 15% above its historical five-year Exhibit 5: M&Ms has marginally underperformed in last
average 1-year forward EV/EBITDA one year
13 140
12 130
11
120
10
9 110
8 100
7
90
6
80
5
Sep-15
Oct-15
Nov-15
Dec-15
Jan-16
Feb-16
Mar-16
Jun-16
Jul-16
Aug-16
Apr-16
May-16
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
Sep-14
Mar-15
Sep-15
Mar-16
M&M 1-yr fwd EV/EBITDA M&M BSE Auto index

Avg 1 year forward EV/EBITDA
Source: Company, Ambit Capital research. Fair value of investments Source: Company, Ambit Capital research
(Rs395/share) reduced from current market price while calculating EV/EBITDA

M&Ms accounting score (using Ambit framework) is in-line with the sector average accounting score. Compared to peers
in the automobile sector, it scores poorly on higher contingent liability (as % of net worth); higher miscellaneous
Accounting AMBER expenditure (as a % of revenues) and weaker CFO to EBITDA conversion. On the positive side, its cash yield on
investments and fixed asset turnover ratio are higher than peers with average depreciation rate fairly consistent over the
past 5 years.
Given that automobile companies publish their volume numbers on a monthly basis, generally no positive/ negative
Predictability AMBER surprises are seen in results. However, the margins tend to be less predictable and are generally the source for actual
results coming in above/below consensus expectations.
Earnings
RED There have been significant downgrades to consensus numbers in recent weeks.
momentum

Mahindra & Mahindra
Exhibit 7: M&M scores average in our forensic Exhibit 8: ..but has consistently witnessed poor scores in our
framework greatness framework

Mahindra & Mahindra
Balance sheet (M&M+MVML)

Year to December (` mn) FY14 FY15 FY16 FY17E FY18E
Share capital 2,952 2,957 2,963 2,963 2,963
Reserves and surplus 170,272 195,812 220,880 248,719 280,537
Total Networth 173,224 198,769 223,843 251,682 283,500
Debt 49,041 44,490 39,524 39,524 39,524
Deferred tax liability (net) 10,512 11,509 14,216 14,216 14,216
Gross Block 131,096 141,067 167,951 192,951 217,951
Net block 73,283 72,005 86,405 96,825 105,225
Capital work-in-progress 17,272 28,802 28,802 28,802 28,802
Investments (non-current) 88,283 104,133 117,066 125,066 132,066
Cash and bank balances 47,775 38,708 48,065 38,056 52,453
Sundry debtors 24,017 24,241 23,497 30,015 33,875
Inventories 31,733 28,152 33,260 33,617 37,940
Loans and advances 51,103 54,428 52,738 63,658 71,844
Total Current Assets 154,628 145,528 157,561 165,346 196,112
Provisions 21,355 21,369 20,909 23,682 26,851
Current liabilities and provisions 100,689 95,700 112,251 110,617 124,966
Total Assets 232,777 254,768 277,583 305,421 337,239
Source: Company, Ambit Capital research. Note: MVML = Mahindra Vehicle Manufacturers Limited
Income statement (M&M+MVML)

Revenue 388,171 374,683 388,566 438,221 494,578
yoy growth 1% -3% 4% 13% 13%
Total expenses 335,690 328,651 337,279 380,003 427,709
EBITDA 52,481 46,033 51,288 58,218 66,869
yoy growth -2% -12% 11% 14% 15%
Depreciation 9,760 10,980 12,484 14,580 16,600
EBIT 42,721 35,053 38,804 43,638 50,269
Interest expenses 3,611 3,039 2,329 2,191 2,191
Other income 6,648 8,201 7,910 8,430 8,928
Adj PBT 45,758 40,215 44,384 49,877 57,006
Provision for taxation 7,235 9,339 11,964 13,445 15,366
Adj PAT 38,523 30,876 32,420 36,433 41,640

Mahindra & Mahindra
Cashflow statement (M&M+MVML)

PBT 45,758 40,215 44,384 49,877 57,006
Depreciation 9,760 10,980 12,484 14,580 16,600
Interest paid 3,611 3,039 2,329 2,191 2,191
Change in working capital (8,792) (3,767) 14,565 (20,242) (3,249)
Direct taxes paid (4,281) (8,342) (9,257) (13,445) (15,366)
Others (6,121) (4,844) (7,352) (8,430) (8,928)
CFO 39,936 37,281 57,154 24,531 48,253
Net capex (22,847) (21,232) (26,884) (25,000) (25,000)
Net investments 7,838 (15,850) (12,933) (8,000) (7,000)
Others 6,648 8,201 7,910 8,430 8,928
CFI (8,361) (28,881) (31,907) (24,570) (23,072)
Proceeds from borrowings 4,397 (4,552) (4,966) - -
Change in share capital (6,721) (219) (126) (0) -
Interest & finance charges paid (3,611) (3,039) (2,329) (2,191) (2,191)
Dividends paid (8,912) (9,658) (8,469) (7,779) (8,594)
CFF (14,846) (17,467) (15,890) (9,970) (10,785)
Net increase in cash 16,728 (9,068) 9,358 (10,009) 14,396
FCF 24,926 199 17,338 (8,469) 16,253
Ratio analysis (M&M+MVML)

Year to December (%) FY14 FY15 FY16 FY17E FY18E
Revenue growth 1% -3% 4% 13% 13%
EPS norm (dil) growth 8% -21% 5% 12% 14%
EBITDA margin 13.5% 12.3% 13.2% 13.3% 13.5%
Net margin 9.9% 8.2% 8.3% 8.3% 8.4%
Net debt/Equity (x) 0.0 0.0 (0.0) 0.0 (0.0)
Working capital days (x) 11 17 12 13 20
RoCE % 45% 31% 32% 32% 32%
RoIC % 38% 24% 24% 24% 23%
RoE 24% 17% 15% 15% 16%
Valuation parameters (M&M+MVML)

Year to December FY14 FY15 FY16 FY17E FY18E
EPS (Rs) 68.3 54.2 56.8 63.9 73.0
BPS (Rs) 307 349 392 441 497
DPS (Rs) 15.3 13.1 12.0 13.3 15.2
P/E (x) 15.7 20.9 19.9 17.5 15.1
P/B(x) 4.6 4.0 3.6 3.2 2.8
EV/EBITDA(x) 10.3 11.7 10.5 9.3 8.1
EV/EBIT(x) 12.6 15.4 13.9 12.4 10.7
Debt/Equity(x) 0.3 0.2 0.2 0.2 0.1
Source: Company, Ambit Capital research. Note: MVML = Mahindra Vehicle Manufacturers Limited; Fair value
of investments (Rs395/share) reduced from current market price while calculating EV/EBITDA, EV/EBIT and P/E

Mahindra & Mahindra

Hero MotoCorp
SELL
STRATEGY NOTE HMCL IN EQUITY September 19, 2016
Challenges to dominance Auto & Auto ancillaries
We see Heros market share dominance in Indian 2Ws facing serious SENSEX EXIT
challenges from rising competition from its erstwhile partner Honda Mcap (bn): `723/US$10.9
(aggressive distribution/product rollout) but more importantly from 3M ADV (mn): `1,298/US$19.5
shifting customer preference towards its weak areas of premium bikes CMP: `3,621
and scooters. We expect the company to record a market share loss of
TP (12 mths): `2,880
~500bps over FY16-20; deliver a muted net earnings CAGR of 7% over
Downside (%): 20
FY16-26 and see a decline in its RoCE to 22% by FY2026 (from 33% in
FY16). The current premium valuation (18.8x FY18, 20% premium to
historical average) should de-rate as recent weak commodity-driven Flags
benefits dissipate and net earnings growth moderate. Accounting: GREEN
Competitive position: STRONG Changes to this position: NEGATIVE Earnings Momentum: GREEN
A Market-leading franchise in domestic motorcycles
Performance
Hero MotoCorp, the largest 2W player in India by volumes, started as a JV
160
between the Hero Group and Honda Motors (Japan) (which exited in 2011).
Over the past five years, the company has witnessed a net earnings CAGR of 140
10% (10 years: 12%) led by revenue CAGR of 8% and EBITDA margin expansion 120
of ~200bps. Post traditional focus on motorcycles and bicycles, Hero group is 100
now geeing into new business areas like defense, energy etc.
80
Dec-15
Nov-15
Feb-16
Mar-16
Apr-16
Sep-15
Oct-15
Jan-16
May-16
Jun-16
Jul-16
Aug-16
Facing structural risks around competition and changing customer
Heros dominance in the Indian 2W market over the last twenty years evolved
Hero MotoCorp Sensex index
through Hondas technological strength, rapid network expansion in rural India
and shifting customer preference towards commuter bikes (Heros core
portfolio). However, we see risks emerging to Heros market Source: Bloomberg, Ambit Capital research
dominance/competitive advantages because: (i) since the separation from Hero,

Honda has upped the ante in Indian 2W space through aggressive Heros forensic score analysis
product/distribution rollout; (ii) market shift in favour of scooters (impacting
commuter bike growth) and premium bikes where Hero has a relatively weak
brand; and (iii) uncertainty surrounding Heros indigenous technological
capability. We expect Heros market share in domestic 2Ws to decline from
40.8% in FY16 to 36.1% by FY20. Source: Ambit HAWK, Ambit Capital research
Tough road ahead, should get replaced from Sensex

Heros greatness score analysis
Given the likely market share loss, we believe Heros volume growth over FY16-
26 at 4% to lag our industry growth estimate of 8%. Further, margin expansion
would halt as low hanging benefits of weak commodity prices dissipate and
competitive intensity remains high. Consequently, we expect Hero to witness
muted 7% net earnings CAGR over FY16-26 (vs 12% over FY06-16) with RoIC Source: Ambit HAWK, Ambit Capital research
declining from 33% in FY16 to 22% by FY26. We also see succession risks
surrounding Hero MotoCorp (for details see our note Succession planning by
family owned businesses in India)
Premium valuation ignores weak earnings outlook Research Analysts

The company scores relatively weak under Ambits Greatness framework across Ashvin Shetty, CFA
most parameters. Over the last five years, the earnings multiple has witnessed ashvin.shetty@ambit.co
Tel: +91 22 3043 3285
significant volatility with strong de-rating during two years following Honda split
but an uptrend in the last 12 months on the back of favourable Gaurav Khandelwal, CFA
commodity/margin environment/expectation of a strong rural recovery. The gaurav.khandelwal@ambit.co
stock currently trades at 18.8x FY18 net earnings, a 20% premium to historical Tel: +91 22 3043 3132
average. We expect this multiple to de-rate as net earnings growth moderate Ritu Modi
(we currently value Hero at historical average of 15x). ritu.modi@ambit.co
Tel: +91 22 3043 3292
Hero MotoCorp

Revenues 99,368 103,632 123,823 158,605 193,979 235,790 237,681 252,755 275,853 285,993
Revenue growth (%) 14% 4% 19% 28% 22% 22% 1% 6% 9% 4%
Net profits 8,579 9,679 13,071 22,291 20,077 23,781 21,182 21,091 25,407 31,324
EPS -12% 13% 35% 71% -10% 18% -11% 0% 20% 23%
CFO 6,251 12,118 13,590 26,887 22,881 23,603 18,904 29,634 22,500 42,225
CFO-EBITDA 51.7% 87.8% 76.7% 97.3% 87.6% 65.2% 57.6% 83.7% 63.5% 95.0%
FCF 1,099 8,379 10,455 24,787 19,271 10,402 5,424 13,453 8,097 31,454
Debt equity (x) (0.7) (0.9) (0.9) (1.7) (1.8) (0.1) (0.1) (0.8) (0.5) (0.8)
RoE (%) 38% 35% 39% 61% 63% 66% 46% 40% 42% 43%
ROCE (%) 126% 114% 168% 399% 514% 253% 101% 88% 90% 105%
Exhibit 2: Cash generated over the years Exhibit 3: largely used for paying dividends and Capex
Int. & div. Investments

recd 2%
Dividends
5%
53%
CFO Capex
95% 37%
Change in
net debt
8%
Exhibit 4: Trading 20% above its historical five-year Exhibit 5: Hero MotoCorp has outperformed BSE Auto index
average 1-year forward P/E in last one year
20 160
19 150
18 140
17 130
16 120
15 110
14 100
13 90
12 80
Sep-11
Jun-12
Mar-13
Dec-13
Aug-14
Feb-16
May-15
Sep-15
Jun-16
Oct-15
Nov-15
Dec-15
Jan-16
Feb-16
Mar-16
Aug-16
Jul-16
Apr-16
May-16
HMCL 1-yr fwd P/E Avg P/E Hero MotoCorp BSE Auto index

Accounting GREEN We did not come across any significant concerns surrounding Heros accounts
Since the volume numbers are published on a monthly basis by automobile companies, there are generally no
Predictability AMBER positive/negative surprises on revenues. However, the margins tend to be less predictable and are generally the source for
actual results coming in above/below expectations.
Earnings
GREEN There have been upgrades to consensus numbers in recent weeks.
momentum

Hero MotoCorp
Exhibit 7: Hero has consistently scored well in our forensic Exhibit 8: but has seen sharp deterioration in our
framework greatness framework

Hero MotoCorp
Balance sheet (Standalone)

Total net worth 55,999 65,413 79,447 94,288 55,999
Deferred tax liability (1,060) (735) 2,278 2,278 (1,060)
Gross block (inc. royalty to Honda) 69,089 81,140 62,955 72,614 69,089
Net block (inc. unamortised royalty
22,433 29,127 35,485 40,128 22,433
to Honda)
CWIP 10,040 8,937 8,937 8,937 10,040
Cash & cash equivalents 42,063 33,134 61,040 74,916 42,063
Debtors 9,206 13,896 12,828 13,976 9,206
Inventory 6,696 8,155 6,730 7,332 6,696
Loans & advances 9,477 11,234 15,450 16,833 9,477
Provisions 15,943 7,997 25,895 29,766 15,943
Total assets 54,939 64,678 81,725 96,566 54,939
Income statement (Standalone)

Revenue (inc. other op income) 252,755 275,853 285,993 311,587 346,472
% growth 6% 9% 4% 9% 11%
EBITDA (before royalty to
35,401 35,422 44,470 49,895 55,481
Honda)
% growth 8% 0% 26% 12% 11%
Depreciation & amortisation (inc
11,074 5,400 4,414 5,016 5,617
royalty to Honda)
EBIT 24,327 30,022 40,056 44,879 49,864
Adjusted PBT 28,673 34,839 43,946 49,082 54,489
Tax 7,582 9,432 12,622 14,097 16,347
Adjusted PAT/ Net profit 21,091 25,407 31,324 34,984 38,142
% growth 0% 20% 23% 12% 9%

Hero MotoCorp
Cashflow statement (Standalone)

Depreciation 11,074 5,400 4,414 5,016 5,617
Others (4,163) (2,831) (3,890) (4,203) (4,625)
Tax (6,495) (9,998) (9,609) (14,097) (16,347)
(Incr) / decr in net working capital 545 (3,359) 7,364 597 814
Capex (net) (9,328) (11,530) (10,772) (9,659) (6,583)
Payment to deferred credits to
(6,854) (2,873) - - -
Honda
(Incr) / decrease in investments (1,460) 13,188 (11,123) - -
Other income (expenditure) 1,448 1,336 3,911 4,224 4,647
Cash flow from investments (16,193) 121 (17,983) (5,435) (1,936)
Interest paid (118) (111) (22) (22) (22)
Dividend paid (14,031) (22,194) (7,210) (17,063) (20,143)
Net change in cash (708) 316 17,011 13,876 17,847
Free cash flow 13,453 8,097 31,454 26,736 33,366

Year to December (%) FY14 FY15 FY16 FY17E FY18E
EBITDA margin (%) 14.0% 12.8% 15.5% 16.0% 16.0%
EBIT margin (%) 9.6% 10.9% 14.0% 14.4% 14.4%
Net profit margin (%) 8.3% 9.2% 11.0% 11.2% 11.0%
Net debt: equity (x) (0.8) (0.5) (0.8) (0.8) (0.8)
RoCE (pre-tax) (%) 88% 90% 105% 113% 119%
RoIC (%) 65% 64% 75% 80% 83%
RoE (%) 40% 42% 43% 40% 37%
Valuation parameters (Standalone)

Year to December FY14 FY15 FY16 FY17E FY18E
EPS (`) 106 127 157 175 191
Diluted EPS (`) 106 127 157 175 191
Dividend per share (`) 65 60 72 85 95
P/E (x) 34.3 28.5 23.1 20.7 19.0
P/BV (x) 12.9 11.1 9.1 7.7 6.6
EV/EBITDA (x) 19.5 19.5 15.5 13.8 12.4
EV/EBIT (x) 28.4 23.0 17.2 15.4 13.8

Hero MotoCorp

Adani Ports
NOT RATED
STRATEGY NOTE ADSEZ IN EQUITY September 19, 2016
Capital allocation concerns to the fore Infrastructure

Adani Ports is a strong player in the ports space driven by its location
advantage, hinterland connectivity and high bulk volumes with take-or- SENSEX EXIT
pay arrangements. However, we believe its position as a Sensex Mcap (bn): `551/US$8.2
company could be under threat due to the high ask in terms of share 3M ADV (mn): `1,317/US$19.7
price CAGR (16%) dependent on high capital intensity and capital CMP: `266
allocation issues with the company the group has shown a penchant for TP (12 mths): NA
picking growth over balance sheet discipline and the company provides Downside (%): NA
loans to its group companies (Rs40bn as of FY16, 30% of net worth); we
note it has promised to reduce its related-party loans by end of the year. Flags
That aside, as with concerns over any transportation asset, i.e., delays in
Accounting: RED
enabling infrastructure, could affect volumes though successful
operationalisation of DFCC and Sagarmala may prove us wrong.
Competitive position: STRONG Changes to this position: POSITIVE
Performance
Amongst the largest port operators in the country
120
Adani Ports is amongst the leading port owners and developers in the country 110
100
with a capacity of 332MMTPA (Jan-16). It handled 15% of Indias and 33% of the 90
private sector cargo in FY15. Over FY10-16, the companys revenue and 80
70
earnings increased at 30%/ 27% CAGR driven by capacity growth of 25% over 60
the same period. RoEs have remained flat over the last five years. A large part of 50
Jun-16
Nov-15
Sep-15
Jan-16
Jul-16
Dec-15
Mar-16
Sep-16
May-16
this growth was from the exemplary Mundra Ports with locational benefits
An integrated service provider with a location advantage SENSEX ADSEZ

Adani has built strong competitive advantages through its multi-asset, multi-
services portfolio. A strong ports location combined with its dependence on
multiple products and high bulk volumes with take-or-pay arrangements have
led to an EBITDA CAGR of 22% over the last five years. Starting from one port at
Adani Ports forensic score analysis
Mundra, the company has gone out to build multiple assets across locations in
India. Relationships with clients, credible JV Partners and a good project team
complement its location advantage.
A steep ask to remain a Sensex participant
By our estimates, the companys share price will need to compound by 16% Source: Ambit HAWK, Ambit Capital research
CAGR to remain a Sensex company 10 years hence. The companys expansion
plans will be highly dependent on creation of enabling infrastructure in the Adani Ports greatness score analysis
country such as connectivity, an aspect that has been a repeated stumbling block
in the country. Moreover, the companys capital allocation policies may restrict
valuation upsides. As of Mar-16, the company had provided Rs40bn of loans to
its group entities, 30% of its net worth. Moreover, akin to the rest of the group,
Mundra could continue expanding its efforts to become larger, and effective Source: Ambit HAWK, Ambit Capital research
utilisation of cash will remain an issue.
Capital allocation decisions will impact valuations
The company currently trades at 3.0x FY18E P/B (consensus) and 18x P/E
(consensus) vs its five year average of 4.9x and 18x respectively. Valuations will
be impacted by the companys desire to keep growing which may lead to costly
allocation errors. Moreover, inter-group loans and advances and the companys Research Analysts
D9 ranking (zone of darkness) in our accounting framework remain concerns. Nitin Bhasin
The poor ranking on accounting is because of poor cash conversion, poor free
+91 22 3043 3241
cash flows and high CWIP. Better connectivity due to DFCC and Sagarmala
projects may boost volumes and could prove us wrong. More pertinently, if the Nitin.bhasin@ambit.co
company delivers on its promise of unwinding its related-party loans, valuations Utsav Mehta, CFA
could get a leg-up. +91 22 3043 3209
Utsav.mehta@ambit.co
Adani Ports

(Fig in Rs mn) FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
Revenues 5,812 8,170 11,949 14,955 20,001 26,973 35,766 48,296 61,520 72,557
Revenue growth (%) NA 41% 46% 25% 34% 35% 33% 35% 27% 18%
Net profits 1,872 2,104 4,325 6,760 9,181 11,021 16,232 17,396 23,143 28,674
EPS 1.0 1.1 2.2 3.4 4.6 5.5 8.1 8.4 11.2 13.9
CFO 4,490 5,227 7,467 10,487 12,093 11,997 13,791 11,319 30,571 25,786
CFO-EBITDA 144% 98% 102% 111% 93% 69% 58% 39% 78% 55%
FCF (1,226) (8,375) (7,671) (8,284) (6,165) (33,475) (24,523) 297 12,731 664
Debt equity (x) 2.7 1.0 1.2 1.3 0.9 3.7 1.8 1.5 1.7 1.7
RoE (%) NA 13% 16% 21% 24% 24% 29% 23% 24% 24%
ROCE (%) NA 11% 10% 11% 14% 9% 10% 11% 12% 11%
Exhibit 2: Debt has been the primary source of funds which Exhibit 3: Most cash has been deployed in capex and also
is expected in infra businesses in an expansion phase investments
Investment
Outflow of funds in
Inflow of funds (FY07-16: Rs462bn)subsidiaries, Others, 2%
(FY07-16: Rs462bn) 1%
CFO, 29% Investments

, 31% Capex, 45%
Debt, 61%
Proceeds
from Share Interest,
Capital, 6% Dividend, 11%
4%
Int+Dividend
Inc in cash,
, 4%
6%
Exhibit 4: Forward P/E evolution Exhibit 5: Adani Portss share price performance vs BSE
Sensex
Adani Ports P/E 120

35
110
30
100
25 90
20 80
70
15
60
10 50
Jun-10
Nov-10
Sep-11
May-13
Oct-13
Mar-14
Aug-14
Jun-15
Nov-15
Sep-16
Apr-11
Jan-10
Feb-12
Dec-12
Apr-16
Jul-12
Jan-15
Sep-15
Oct-15
Nov-15
Mar-16
May-16
Jun-16
Aug-16
Sep-16
Dec-15
Apr-16
Jan-16
Feb-16
Jul-16
Adani Ports P/E 5-yr avg P/E SENSEX ADSEZ

Accounting RED On Ambits forensic accounting, Adani Ports is categorised in the 9 th decile.
Predictability AMBER In the last 4 quarters, Adani Ports has exceeded consensus estimates of EPS by an average of 26%.
Earnings momentum AMBER Bloomberg shows no significant upgrades/downgrades to consensus numbers in last 6 months for Adani Ports.

Adani Ports

Adani Ports

Year to March (` mn) FY12 FY13 FY14 FY15 FY16
Total networth 48,153 63,963 87,681 107,679 132,236
Debt 175,964 116,172 129,340 177,313 228,328
Gross block 200,410 133,746 158,820 247,500 264,230
Net block 184,279 113,825 131,630 205,269 210,515
CWIP 33,992 29,091 19,529 12,665 23,497
Debtors 3,022 7,200 9,233 12,878 19,437
Inventory 691 980 1,694 2,592 2,137
Loans & advances 14,881 29,575 68,128 66,380 99,778
Provisions 3,970 4,043 6,959 7,727 1,730
Total assets 240,644 186,844 225,201 295,171 372,658

Net Sales 26,973 35,766 48,296 61,520 72,557
% growth NA 32.6% 35.0% 27.4% 17.9%
EBITDA 17,466 23,760 29,192 39,023 46,505
% growth NA 36.0% 22.9% 33.7% 19.2%
Depreciation 3,159 4,220 6,495 9,117 10,794
EBIT 14,307 19,540 22,697 29,906 35,711
Non-operating income 515 2,644 6,848 6,856 6,848
Adjusted PBT 12,007 16,766 19,777 25,012 31,569
Tax 896 883 2,367 1,767 3,269
11,112 15,884 17,410 23,245 28,299
interest
% growth NA 42.9% 9.6% 33.5% 21.7%
Minority Interest 94 (156) (14) (102) 421
11,205 15,727 17,396 23,143 28,720
interest

Adani Ports

Depreciation 4,630 7,564 6,495 9,117 10,794
Others 3,507 (1,023) 2,987 5,321 5,194
Tax (2,524) (3,735) (5,200) (4,868) (7,452)
(Incr) / decr in net working capital (5,439) (6,285) (12,740) (4,011) (14,319)
Capex (net) (45,472) (38,314) (11,022) (17,839) (25,123)
(Incr) / decr in investments (3,126) (1,519) 13,985 (1,968) (542)
Other income (expenditure) (90,162) (7,066) (28,064) (5,045) (20,892)
Net borrowings 135,934 49,440 12,249 12,779 44,852
Issuance/buyback of equity 10,159
Interest paid (5,235) (6,373) (6,360) (12,002) (12,136)
Dividend paid (1,499) (1,402) (2,070) (2,069) (4,551)
Cash flow from financing 129,763 42,111 7,725 (2,365) 24,472
Net change in cash 3,000 9,004 (6,056) 3,353 3,702
Free cash flow (33,475) (24,523) 297 12,731 664

Year to March (%) FY12 FY13 FY14 FY15 FY16
EBITDA margin (%) 64.8% 66.4% 60.4% 63.4% 64.1%
EBIT margin (%) 53.0% 54.6% 47.0% 48.6% 49.2%
Net debt: equity (x) 3.42 1.66 1.42 1.57 1.62
RoCE (pre-tax) (%) 5.9% 9.1% 11.0% 11.5% 10.7%
RoIC (%) 6.9% 12.6% 11.1% 10.7% 10.3%
RoE (%) 24.7% 28.4% 23.1% 24.0% 23.7%

Year to March FY12 FY13 FY14 FY15 FY16
Diluted EPS (`) 5.5 8.1 8.4 11.2 13.9
Book value per share (`) 23.3 30.9 42.3 52.0 63.9
P/E (x) 49.3 33.5 32.3 24.2 19.6
P/BV (x) 11.7 8.8 6.4 5.2 4.2
EV/EBITDA (x) 44.4 32.6 26.6 19.9 16.7
EV/EBIT (x) 54.2 39.7 34.2 25.9 21.7

Adani Ports

Dr. Reddys Labs
SELL
STRATEGY NOTE DRRD IN EQUITY September 19, 2016
Realizing long-term revenue streams? Healthcare

Fruits of decade-long investment in innovative R&D for developed
markets (vs peers generics focus) will remain elusive, given a) expensive SENSEX EXIT
clinical trials, b) high risk of failure, and c) lack of track record Mcap (bn): `520/US$7.8
(Balaglitazone failure). Sub-par business mix and weak competitive 3M ADV (mn): `1498/US$22.5
positioning due to a) slow growing acute heavy portfolio in India; b) CMP: `3,138
currency and demand volatility in Ems; and c) revenue concentration risk TP (12 mths): `2,793
in the US with no commensurate product approval due to quality issues Downside (%): 11
would lead to lower revenue and profitability growth vs peers in longer
term. For Dr. Reddy to remain in the Sensex, its market-cap needs to Flags
compound at 10%, for which creation of moated revenues will be critical,
Accounting: AMBER
else earnings multiples could contract over the long term.
Competitive position: MODERATE Changes to this position: STABLE Earnings Momentum: RED
Fractured revenue streams
Dr. Reddy has been a beneficiary of unfolding of US generics market and Performance
reported 16% revenue CAGR over FY11-16. However, margins have remained 110
flat over FY11-16 at ~25% due to investment in R&D as also currency and 100
demand challenges in some of the emerging markets (Russia), partially offset by 90
one-off revenues. The vision of an innovation-led company still lies at the heart 80
of the organisation. The company has made significant investments in innovative
70
products like biosimilars and novel molecules with little benefits being realized.
Aug-15
Sep-15
Nov-15
Jan-16
Feb-16
Jun-16
Aug-16
Apr-16
Average ranking on IBAS framework
As highlighted in our initiation note (click here 4th July), Dr. Reddy scores
Sensex Dr. Reddy's
average on IBAS framework due to weak brand equity in India and EMs. The
company has presence in acute therapy in India and, hence, we expect lower
than market growth. In the EM business, Dr. Reddy has presence in volatile Source: Bloomberg, Ambit Capital research
economies like Russia where demand and currency volatility have hampered
growth profile. Whilst the company has best-in-class innovation profile as it Dr. Reddys forensic score analysis
leads the pack in biosimilars evolution, no material success has been derived
yet. Quality observations raised by US FDA at three of its facilities are serious in
nature and strongly worded. Issues around systemic corporate quality and
recurrent and longstanding failures could lead to long period of remediation and
hurt incremental US revenues.
Weak franchise would lead to lower than peer-average growth
We complement management on its ability to realize the potential of innovative Dr. Reddys greatness score analysis
pursuits and start investing in R&D early (since 2003). Early entry could provide a
tactical first mover advantage. However, success from innovative pursuits has
remained elusive with instances of R&D investment write-offs due to project
failures (Balaglitazone). Though no material success has been achieved, Dr.
Reddy could be a beneficiary of early entry into biosimilars in the regulated Source: Ambit HAWK, Ambit Capital research
market but lacks visibility. Weak India business, demand concerns in EMs,
systemic quality issues at its manufacturing facility and failures in innovation
R&D could lead to lower than peer-average growth; hence, market cap
compounding at 10% for it to remain in the Sensex is a challenge.
Muted expectations until longer-term growth verticals are realized
Our medium-term (FY19-28E) FCFF CAGR is 13.5%. RoCEs will remain
depressed, at ~14%, over the medium term until innovation investments are
monetized. Margins would remain under pressure (decline ~450bps to 21.2% by
FY19E) due to high R&D cost (22% CAGR over FY16-19E) and US base business Research Analyst
erosion. On our greatness and accounting frameworks the company scores 92% Paresh Dave, CFA
and D4 (decile four) respectively, implying excellent capital allocation skills and +91 22 3043 3212
better than average accounting. Upside risk: Early resolution of warning letter
Paresh.dave@ambit.co
and early tailwind from innovation pipe.
Dr. Reddys Labs

Revenues 65,096 50,006 69,441 70,277 74,692 96,737 116,266 132,171 148,189 154,708
Revenue growth (%) 168% -23% 39% 1% 6% 30% 20% 14% 12% 4%
Net profits 10,338 3,846 -5,168 1,068 11,040 14,261 16,779 21,515 22,179 20,013
EPS 61.3 22.8 -30.6 6.3 64.9 83.7 98.3 126.1 130.0 117.3
CFO 12,589 5,128 5,991 18,510 7,554 16,126 13,319 19,463 25,033 40,915
CFO-EBITDA 110.1% 125.6% 58.5% 144.5% 62.8% 84.4% 68.9% 81.3% 86.9% 119.6%
FCF 8,083 95 -345 8,905 -3,637 7,498 6,713 9,467 15,866 27,120
Debt equity (x) 0.6 0.4 0.5 0.3 0.5 0.6 0.5 0.5 0.4 0.3
RoE (%) 31.9% 8.6% -11.6% 2.5% 24.8% 27.6% 25.7% 26.3% 21.9% 16.7%
ROCE (%) 18.0% 4.7% -5.7% 1.8% 17.6% 17.7% 16.4% 17.2% 14.3% 13.8%
Proceeds Interest
from paid, 5.0%
shares, Dividend
5.0% Interest paid,
Debt 13.3%
received,
raised,
3.4%
10.5% Net Capex,
CFO, 43.2%
Purchase
81.0% Decrease
of
in cash
investment
and cash
, 38.6%
equivalent,
0.2%
Exhibit 4: Forward P/E evolution Exhibit 5: Dr. Reddys share price performance vs CNX
Pharma
30 1000
1 year forward P/E
27 800
24 600
21 400
18 200
15 0
Mar-11
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
Sep-14
Mar-15
Sep-15
Mar-16
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
P/E Avg Dr. Reddy CNX Pharma

In our forensic analysis of 360 companies, Dr.Reddys scores below the pharma industry average (comprising 26
companies). Dr.Reddys scores high on ratios of: (a) CFO/EBITDA; (b) related party advances; (c) volatility in other
Accounting AMBER income and (d) provision for doubtful debts as a percentage of debtors. However, DR.REDDY has weaker scores on:
(a) change in depreciation rates; (b) miscellaneous expenses as a percentage of sales; (c) other loans and advances
as a percentage of net worth; and (c) audit fee CAGR to revenue CAGR.
Overall, the management has made timely announcements in its earnings calls, meetings and interviews regarding
Predictability AMBER product filings, acquisitions and business outlook. However, the unpredictability of unknown large filings in the US,
emerging markets and innovative projects makes us assign an AMBER flag on predictability.
Consensus FY17E and FY18E EBITDA and EPS estimates have been downgraded by 3-5% over the past three
months led by lack visibility of clearance of warning letter issued to three of its facilities

Dr. Reddys Labs

Dr. Reddys Labs

Year to Mar (Rs mn) FY15 FY16 FY17E FY18E FY19E
Total Assets 194,762 207,650 211,379 236,231 259,864
Fixed Assets 48,090 53,961 56,090 54,951 53,155
Current Assets 119,838 119,688 124,757 154,217 183,116
Investments 1,033 1,309 1,309 1,309 1,309
Other Assets 25,801 32,692 29,223 25,754 22,285
Total networth 111,302 128,336 142,276 164,502 186,798
Total debt 43,126 33,513 33,513 33,513 33,513
Deferred tax liability 1,779 767 767 767 767

Year to March (Rs mn) FY15 FY16 FY17E FY18E FY19E
Net revenues 148,189 154,708 154,806 177,352 193,378
EBITDA 35,016 40,156 30,916 40,922 42,280
Depreciation 8,730 10,537 11,340 12,108 12,765
Finance Costs (724) 2,708 (2,308) (3,107) (4,156)
Adjusted PBT 28,163 27,140 22,113 32,150 33,900
Tax 5,984 7,127 4,865 7,073 7,458
Net profit 22,179 20,013 17,248 25,077 26,442

Year to Mar (Rs mn) FY15 FY16 FY17E FY18E FY19E
PBT 28,163 27,140 22,113 32,150 33,900
Depreciation 8,729 9,860 11,340 12,108 12,765
Tax (5,396) (7,099) (4,865) (7,073) (7,458)
Net Working Capital (15,040) (175) (3,210) (6,948) (5,468)
CFO 25,033 40,915 24,137 28,372 30,866
Investment (13,461) (5,626) 2,223 2,846 3,855
CFI (22,904) (19,421) (7,777) (4,654) (3,645)
Issuance of Equity 206 1 - - -
Inc/Dec in Borrowings 352 (11,987) - - -
Net Dividends (3,587) (4,106) (3,308) (2,851) (4,146)
Interest paid (1,090) (917) (982) (982) (982)
CFF (4,119) (17,009) (4,290) (3,833) (5,127)
Net change in cash (1,990) 4,485 12,070 19,885 22,094
FCFF 4,537 18,842 11,928 18,290 20,985

Dr. Reddys Labs

Year to March (In Rs. mn) FY15 FY16 FY17E FY18E FY19E
Revenue growth 12.1 4.4 0.1 14.6 9.0
EBITDA growth 7.3 14.7 -23.0 32.4 3.3
APAT growth 7.4 -11.1 -14.5 45.4 5.4
EPS growth 3.1 -9.8 -13.8 45.4 5.4
EBITDA margin 23.6 26.0 20.0 23.1 21.9
EBIT margin 17.7 19.1 12.6 16.2 15.3
ROCE (%) 13.7 13.6 8.7 11.4 10.4
Reported RoE (%) 21.9 16.7 12.7 16.3 15.1
Debt Equity ratio (X) 0.4 0.3 0.2 0.2 0.2
Current Ratio 3.4 2.9 3.9 4.5 5.1
CFO/EBITDA (x) 0.7 1.0 0.8 0.7 0.7

Year to March (In Rs. mn) FY15 FY16 FY17E FY18E FY19E
EPS 132.9 118.2 101.0 146.9 154.9
Book Value (per share) 652.1 751.8 833.5 963.7 1094.3
P/E (x) 22.8 25.7 30.0 20.7 19.6
P/BV (x) 15.8 13.5 17.2 12.5 11.6
EV/EBITDA(x) 15.8 13.5 17.2 12.5 11.6
EV/Sales (x) 3.7 3.5 3.4 2.9 2.5
EV/EBIT (x) 21.0 18.4 27.2 17.8 16.6

Dr. Reddys Labs

GAIL
SELL
STRATEGY NOTE GAIL IN EQUITY September 19, 2016
Regulatory pains Oil & Gas
GAIL is the leading gas pipeline operator and marketer in India. It has SENSEX EXIT
over the years diversified into petrochemicals, LPG production, E&P and
Mcap (bn): `493/US$7.4
LNG terminals. Over the last decade, GAILs RoCEs sharply declined to
6M ADV (mn): `663.2/US$9.9
6% (vs regulated 12% IRR) as incremental investments in pipelines did
CMP: `388
not yield fruit. GAIL remains a GoI vehicle to build pipeline
infrastructure; hence, IRRs will remain muted given artificially TP (12 mths): `365
suppressed tariffs by the regulator and under-utilisation. Rising Downside (%): 6
competition from GSPL (cross-country pipeline) and emerging new
sources of gas supplies (LNG terminals) imply operating leverage Flags
benefits will be limited. We estimate that RoCE/ RoE will remain muted at Accounting: RED
10-12% and CFO generation register an 8-9% CAGR over the next Predictability: RED
decade and hence expect GAIL to be replaced by efficient OMCs. Earnings Momentum: RED
Competitive position: WEAK Changes to this position: NEGATIVE
Performance (%)
GAIL the largest gas pipeline operator
150
GAIL transmits 75% and trades 50% of natural gas in India. Its integrated
120
business model spans natural gas processing, transmission and distribution.
90
Apart from natural gas, GAIL has business interests in manufacturing of petchem
60
products, operating LNG terminals, and production and transmission of LPG.
Over last decade, GAILs PAT has been flat while capital employed has grown at 30
~12% CAGR, leading to dip in ROCE to ~5% vs 19% in FY06. This has primarily 0
Aug-15
Feb-16
Jun-16
Sep-15
Oct-15
Nov-15
Dec-15
Jan-16
Jul-16
Aug-16
Mar-16
Apr-16
May-16
been due to consistent investments to build pipelines and petchem capacities
despite weaker profit generation, resulting in declining ROEs.
GAIL (India) Sensex
Government sponsored competitive advantages unlikely to sustain
GAIL has enjoyed monopoly in gas distribution since inception. Its trading
business also benefited from the distribution monopoly. As the share of LNG
increases and new terminals like Ennore, Dhamra and Mundra come on-stream, GAILs forensic score analysis
the supply centre for gas will shift and strengthen non-GAIL pipeline volumes.
Historically, GAILs LPG and petchem businesses benefited from allocation of
cheap domestic gas until a gradual decline in domestic gas production and
increase in domestic gas prices impacted profitability. GAILs marketing arm
benefited due to long-term LNG from RasGas which was cheaper than existing
spot LNG. Some of these advantages are unlikely to play out in the next decade. Source: Ambit HAWK, Ambit Capital research
Why we expect it to exit Sensex

GAILs greatness score analysis
GAILs RoCE is likely to remain muted at 8-10% over next 5 years vs ~16% over
FY06-14 given: (a) weaker competitive advantages in petchem in the absence of
cheaper gas at a time of considerable capacity expansion; (b) under-utilisation
of new pipeline assets in the absence of domestic gas amidst capped pricing by
PNGRB. Future capital allocation to upstream/petchem poses further risks given
weaker capital allocation record. We do not see a case for GAIL to trade at Source: Ambit HAWK, Ambit Capital research
historical valuations (2-3x forward P/B) unless new catalysts (easing of gas tariffs
by PNGRB, sharp jump in gas volumes) emerge and improve ROCE.
Valuations not much upside given structurally lower ROCEs
Structurally, GAIL does not deserve to trade at historical valuations (2-3x) given:
(a) much lesser visibility on incremental domestic gas volumes for transmission
business (65% of capital employed), leading to unutilized pipelines (asset base of
which increased sharply over FY11-15 in anticipation of domestic gas); and (b) Research Analyst
declining attractiveness of petchem business (25% of capital employed) due to
higher-priced feedstock. These issues are reflected in RoCE decline from 38% in Ritesh Gupta, CFA
FY06 to 6% in FY16. Key risks: Sharp uptick in gas volumes driven by policy +91 22 3043 3242
triggers and favorable tariff revisions by PNGRB. ritesh.gupta@ambit.co
GAIL

Revenues 160,472 180,082 237,760 249,964 325,365 404,408 475,227 575,079 567,420 519,142
Revenue growth (%) 11% 12% 32% 5% 30% 24% 18% 21% -1% -9%
Net profits 23,867 26,015 28,037 31,398 35,611 36,538 40,222 43,753 30,392 22,989
EPS 28.2 30.8 22.1 24.75 28.07 28.80 31.7 34.49 23.96 18.12
CFO 20,117 21,841 23,310 26,549 33,484 32,969 41,146 42,747 43,556 30,184
Pre Tax CFO-EBITDA 0.78 1.13 1.01 1.34 0.82 1.06 1.01 1.01 0.70 1.30
FCF 4,927 24,875 26,038 29,782 42,755 33,049 58,428 38,793 -58,010 16,281
Debt equity (x) 0.12 0.10 0.08 0.09 0.10 0.24 0.37 0.38 0.33 0.27
RoE (%) 20.0 21.2 20.2 19.9 19.8 17.9 17.5 16.2 10.7 7.7
ROCE (%) 19.6 24.9 23.2 24.0 24.8 20.0 18.3 15.6 9.8 7.9
Exhibit 2: Sources of cash over last 10 years Exhibit 3: Uses of cash over last 10 years
Decrease in
Cash, 5% Interest
Debt issue, Paid, 7%
11% Equity
Dividend
Interest Paid, 22%
received,
5% Loans &
advances
Dividend given to Purchase
Income, 5% subsidiaries / of Fixed
partnership Assets, 66%
firms etc., 1%
Cash From Purchase
Operating of Investmen
Activities, t, 5%
74%
Exhibit 4: Forward P/B trends Exhibit 5: Share price performance vs BSE Energy index
800 3.0x
2.5x 3.5
700
3.0
600 2.0x 2.5
2.0
500
1.5
1.5x
400 1.0
0.5
300
Sep-06
May-07
Sep-08
May-09
Sep-10
May-11
Sep-12
May-13
Sep-14
May-15
Sep-16
Jan-08
Jan-10
Jan-12
Jan-14
Jan-16
200
100 GAIL BSE Energy

Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16

In our forensic accounting model, GAIL has a relatively low score (6.0 vs sector average of 6.9). The key drivers
Accounting RED of the sub-par score are: (a) contingent liabilities as a percentage of net worth; (b) CWIP to gross block; (c) non-
operating expenses as a percentage of total revenues; (d) CWIP to net worth; and (e) fixed assets turnover.
GAILs earnings are difficult to predict because: (a) its transmission volume is contingent on domestic gas output
Predictability RED and acceptance of LNG as fuel substitute whilst tariff is subject to PNGRBs approval, and (b) margins in the LPG
and petchem businesses are dependent on the global demand-supply balance.
Bloomberg consensus earnings forecasts for FY17/FY18 have seen downward revision over the last few quarters
Earnings Momentum RED
due to weakness in petchem business and subdued transmission volumes.

GAIL

GAIL
Balance sheet (Rs mn)

Year end March FY14 FY15 FY16E FY17E FY18E
Share capital 12,685 12,685 12,685 12,685 12,685
Reserves and Surplus 258,039 278,510 293,164 325,468 372,584
Share Holders fund 270,723 291,195 305,849 338,153 385,269
Long term Loans 102,973 93,221 57,813 57,813 46,250
Short term Loans - 2,338 - - -
Total Debt 102,973 95,559 57,813 57,813 46,250
Capital Employed 399,360 419,841 404,132 436,436 471,990
Gross Fixed Assets 340,563 413,893 427,318 441,418 470,518
Net Fixed Assets 214,766 277,597 277,892 276,945 290,928
Capital WIP 97,279 43,600 43,601 39,241 35,317
Net Assets 312,045 321,197 321,493 316,186 326,245
Investments 41,030 43,224 45,467 46,376 47,304
Current Assets without cash 118,529 153,095 145,044 201,651 220,216
Net working capital 19,775 44,004 19,234 57,961 63,297
Capital Deployed 399,360 419,841 404,132 436,436 471,990
Income statement (Rs mn)

Net Revenue 575,079 567,420 519,142 745,904 814,649
Total Expenditure 508,067 520,458 476,459 680,608 727,860
EBIDTA 67,012 46,962 42,682 65,295 86,789
EBITDA (%) 11.7 8.3 8.2 8.8 10.7
Depreciation 11,762 9,743 13,131 15,046 15,118
EBIT 55,250 37,219 29,551 50,249 71,672
EBIT (%) 9.5 6.5 4.6 6.7 8.7
Interest 3,662 3,613 6,400 5,734 5,174
Other income 8,985 8,609 8,577 8,610 8,610
PBT 64,023 42,844 31,728 53,753 75,107
Current Tax 17,607 4,578 8,739 17,201 24,235
Deferred Tax 2,663 7,874 - - -
Effective tax (%) 32 29 28 32 32
PAT 43,753 30,392 22,989 36,552 51,499
Recurring PAT 41,458 29,949 22,989 36,125 51,073
PAT growth (%) 3.1 (27.8) (23.2) 68.2 41.4
Recurring EPS (Rs) 32.7 23.6 18.1 28.5 40.3

GAIL
Cash flow statement (Rs mn)

+ Depreciation 11,762 9,743 13,131 15,046 15,118
+ Deferred Tax Liability 2,663 7,874 - - -
Cash profit 58,177 48,008 36,120 53,286 68,170
- Increase in Current Assets 19,309 34,566 (8,051) 56,607 18,564
+ Increase in Current Liabilities 7,686 10,337 16,720 17,880 13,228
- Increase in Capex 36,574 19,651 13,427 9,740 25,176
Free cash flow 9,981 4,127 47,464 4,819 37,658
- Dividend 15,430 4,452 5,936 5,936 5,936
+ Debt raised 12,477 (7,413) (37,746) - (11,563)
- Investments 3,840 2,194 2,243 909 928
Net cash flow 2,930 (15,093) 6,522 (2,026) 19,232
+ Opening Cash 23,579 26,510 11,416 17,939 15,913
Closing Cash 26,510 11,416 17,939 15,913 35,145
Ratio analysis / Valuation parameters

Year end Mar FY14 FY15 FY16E FY17E FY18E
Dividend yield (%) 2.7 0.8 1.1 1.1 1.1
P/E (x) 11.6 16.1 21.0 12.7 9.2
EV/EBITDA (x) 8.3 12.1 12.2 8.0 5.7
P/B (x) 1.8 1.7 1.6 1.4 1.3
EBITDA margin (%) 11.7 8.3 8.2 8.8 10.7
EBIT margin (%) 9.6 6.6 23.5 6.8 8.8
Dividend payout ratio (%) 31.8 12.7 22.1 13.4 9.6
Net Debt/Equity (%) 28.2 28.9 13.0 12.4 2.9
Total debt/operating cashflow (x) 1.8 2.0 1.6 1.1 0.7
Interest coverage ratio (x) 15.1 10.3 4.6 14.5 23.0
RoCE post tax (%) 10.4 6.9 5.4 9.0 11.8
RoE (%) 17.1 10.8 7.7 11.9 14.7

GAIL

Cipla
NOT RATED
STRATEGY NOTE CIPLA IN EQUITY September 19, 2016
Tale of Three Kings Company in Brokenness Healthcare

Ciplas decade-long effort on inhaler development may finally bear fruit
over the next five years. However, based on management attrition SENSEX EXIT
(twice) and uncertainties in the inhalers space, we remain skeptical of Mcap (bn): `458/US$6.9
the magnitude of success. Cipla has been late in developing complex 3M ADV (mn): `974/US$14.6
generics and in establishing a front-end in the export markets. With no CMP: `570
moated revenues, no investment in longer-term revenue stream
TP (12 mths): NA
(innovation) and average ranking on competitive framework, we expect
Downside (%): NA
Cipla to report revenue and profitability growth lower than its peers. The
stock is trading at 22x FY18E EPS, at an unwarranted ~13% premium to
large-cap peers as Cipla has a sub-par business model. For Cipla to stay Flags
in the Sensex, its market-cap needs to compound at 13%, for which Accounting: AMBER
investments in innovation are crucial. Predictability: AMBER
Competitive position: WEAK Changes to this position: STABLE
Management churn hurts growth prospects Performance
Cipla has reported subdued revenue CAGR of 17% over FY11-16 led by 110
management churn - twice. Whilst it continues to be top three pharma company 100
in India, growth has been at market rate. In Europe and UK, it continues to 90
80
struggle for approval of much awaited MDI inhaler (US$800mn market size) and
70
is at a nascent stage in the US market (10% of overall revenues). Margins have 60
declined from 22% in FY11 to 18% in FY16 due to increased investment in R&D
Sep-15
Aug-15
Nov-15
Feb-16
Apr-16
Jun-16
Jan-16
Aug-16
(5.5% of sales). Cipla had RoCE of 13% in FY16 (vs 16% in FY11) burdened by
distributor acquisitions made in the RoW markets at expensive valuations. Sensex Cipla
Average ranking on IBAS framework
As highlighted in our note (click here 4th July), Cipla scores average on our IBAS Source: Bloomberg, Ambit Capital research
framework due to weak brand equity and lack of investment in innovation. Since
the company has presence in acute therapy in India, we expect lower than Ciplas forensic score analysis
market growth (<15%). The company continues to lose market share in the
inhaler franchise in India which raises concerns on ability to retain consumers. In
the export market, apart from inhalers, the company has made no material
investment in innovative projects. Whilst new management has renewed its focus
on innovation, we believe it is too late to obtain benefits of limited competition
as innovative pursuits typically take 5-7 years to commercialize. In the export
generics market, concentrated bets in inhalers havent materialized yet and the
company runs a risk of no moated revenues. Ciplas greatness score analysis
Reaping the fruits of a decade-long development but late in the game

Management churn over past five years has hurt investments in business growth
for Cipla. Cipla has been late in developing complex generics and in
establishing a front-end in the export markets. Although the company will
marginally benefit from these efforts in the next five years, we believe its RoCE
will remain below its peers. With lack of moated revenues (in the form of
differentiated product filing), challenges in receiving inhaler approval in
regulated markets and volatility in top management, we expect the company to
underperform its peers, making it a probable candidate to exit the Sensex.
Premium valuation to peers unjustified
Cipla trades at 22x FY18E EPS, an unwarranted 13% premium to large-cap
peers. Valuations do not account for the lower visibility on inhaler launches in
Europe and the US coupled with depressed RoCEs due to expensive acquisitions
of distributors in EMs. Cipla will underperform its peers that would benefit from Research Analyst
GDUFA. For Cipla to stay in the Sensex, its market-cap needs to compound at
Paresh Dave, CFA
13%, for which investments in innovation are crucial. Within the sector, the Cipla
+91 22 3043 3212
scores poorly on our proprietary screens of both accounting and greatness.
Risks: Earlier-than-expected inhaler launch in the US; Cipla may be acquired. Paresh.dave@ambit.co
Cipla

Revenues 35,620 42,158 52,343 56,057 63,145 69,598 82,163 101,004 113,454 136,783
Revenue growth (%) 19% 18% 24% 7% 13% 10% 18% 23% 12% 21%
Net profits 6,677 7,010 7,710 10,826 9,896 11,442 15,449 13,884 11,808 15,059
EPS 8.6 9.0 9.9 13.5 12.3 14.3 19.2 17.3 15.2 18.6
CFO 3,343 3,670 3,733 10,430 10,302 17,128 13,977 15,627 11,734 17,939
CFO-EBITDA 52.7% 63.6% 35.4% 93.0% 96.5% 127.9% 87.1% 87.7% 72.4% 92.0%
FCF -863 -1,958 -3,266 5,175 3,197 11,517 6,409 9,931 5,272 -27,939
Debt equity (x) 0.04 0.15 0.22 0.00 0.09 0.00 0.11 0.12 0.16 0.44
RoE (%) 25.6% 20.1% 19.0% 21.1% 15.7% 16.0% 18.5% 14.6% 11.3% 13.3%
ROCE (%) 20.1% 15.6% 19.2% 17.6% 13.5% 13.6% 15.0% 12.5% 10.6% 10.4%
Proceeds Purchase
of Dividend
from
investment, paid,
shares,
20.1% 11.4%
8.6% Debt
raised, Interest Interest
24.7% received, paid, 3.6%
0.8%
CFO, Net Capex, Increase in

64.3% 59.8% cash and
cash
equivalent,
5.2%
Exhibit 4: Forward P/E evolution Exhibit 5: Ciplas share price performance vs CNX Pharma
45 1 year forward P/E 700
40 600
35 500
30 400
25 300
20 200
15 100
10 0
Mar-11
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
Sep-14
Mar-15
Sep-15
Mar-16
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
P/E Avg Cipla CNX Pharma

In our forensic analysis of 360 companies, Cipla scores higher than the pharma industry average (comprising 26
companies). Cipla scores high on ratios of: (a) change in reserves; (b) contingent liability as percentage of networth;
Accounting AMBER
and (c) CFO to EBITDA. However, Cipla has weaker scores on: (a) debtor days; (b) growth in auditors remuneration vs
growth in revenues; (c) CWIP to gross block; and (d) miscellaneous expense as percentage of total revenues
Overall, the management has made timely announcements in its earnings calls, meetings and interviews regarding
Predictability AMBER product filings, acquisitions and business outlook. However, the unpredictability of emerging markets and innovative
projects makes us assign an AMBER flag on predictability.
Consensus FY17 EBITDA and EPS estimates have been downgraded by 3-6% and consensus FY18 EBITDA and EPS
estimates have been downgraded by 2-5% over the past three months.

Cipla

Cipla

Year to Mar (Rs In Mn) FY12 FY13 FY14 FY15 FY16
Total Assets 78,856 102,663 116,568 129,699 176,953
Fixed Assets 35,870 39,878 44,378 47,215 54,342
Current Assets (incl Cash) 44,945 51,376 57,535 76,201 89,761
Cash 1,430 1,752 5,643 8,714
Investments 12,688 25,324 7,086 6,398 7,569
Total networth 76,389 90,187 100,503 107,892 118,575
Total debt 135 9,671 12,479 17,033 52,019
Deferred tax liability/(asset) 2,332 2,805 3,090 2,846 3,664

Year to March ( Rs In Mn) FY12 FY13 FY14 FY15 FY16
Net revenues 69,598 82,163 101,004 113,454 136,783
Material Cost 26,953 29,306 38,020 40,621 48,962
General Expenses 19,775 22,311 27,714 31,677 40,044
Employee cost 6,891 9,197 13,940 19,539 22,767
Core EBITDA 15,980 21,348 21,330 21,617 25,011
Depreciation 3,122 3,305 3,726 5,047 5,417
Interest expense 383 339 1,457 1,683 1,613
Adjusted PBT 14,478 20,556 18,800 16,543 20,070
Tax 3,065 5,443 4,634 4,000 4,396
Reported net profit 11,442 15,449 13,884 11,808 15,059
Cash flow statement (consolidated)

PBT 14,478 20,954 18,800 16,543 20,070
Depreciation 3,122 3,305 3,726 5,047 5,417
Tax (3,315) (4,617) (3,083) (3,923) (5,077)
Net Working Capital 2,454 (5,198) (5,619) (7,186) (4,242)
CFO 17,128 13,977 15,627 11,734 17,939
Investment (3,518) (15,376) 18,134 (1,375) (39)
Other investments (523) 2,314 (24,937) (1,574) 121
CFI (9,651) (20,629) (12,499) (9,411) (45,795)
Issuance of Equity - - - 123 29
Inc/Dec in Borrowings (5,427) 9,376 433 5,078 34,418
Net Dividends (1,866) (1,866) (1,879) (1,879) (1,809)
Other Financing activities (238) (332) (1,211) (1,674) (1,611)
CFF (7,532) 7,178 (2,656) 1,648 31,027
Net change in cash (55) 525 472 3,971 3,171
Closing cash balance 905 1,430 1,752 5,643 8,714
FCF 11,517 6,409 9,931 5,272 (27,939)

Cipla

Revenue growth 12.6 17.8 20.4 11.4 23.3
Core EBITDA growth 19.2 33.6 (0.1) 1.3 15.7
APAT growth 15.6 35.0 (10.1) (15.0) 27.5
EPS growth 15.6 35.0 (10.1) (12.0) 22.1
Core EBITDA margin 23.0 26.0 21.1 19.1 18.3
PBT margin 20.8 25.0 18.6 14.6 14.7
ROCE (%) 15.3 15.4 13.5 11.1 9.9
Reported RoE (%) 16.0 18.5 14.6 11.3 13.3
Gross Debt Equity ratio (X) 0.0 0.1 0.1 0.2 0.4
Net Debt Equity ratio (X) 0.1 0.1 0.1 0.4
CFO/EBITDA (x) 1.1 0.7 0.7 0.5 0.7
Current Ratio 3.7 4.6 4.1 3.6 3.6

EPS 14.3 19.2 17.3 15.2 18.6
Book Value ( per share) 95.1 112.3 125.2 134.4 147.6
P/E (x) 42.9 31.8 35.3 40.1 32.9
P/BV (x) 6.4 5.4 4.9 4.5 4.1
EV/EBITDA(x) 30.7 23.4 23.5 23.2 21.4
EV/Sales (x) 7.0 6.1 5.0 4.4 3.9
EV/EBIT (x) 38.1 27.7 28.5 30.3 27.3

Cipla

Tata Steel
SELL
STRATEGY NOTE TATA IN EQUITY September 19, 2016
Risks to margins Metals & Mining

Tata Steels low-cost Indian operations are built on its raw material
advantage (integrated iron ore and coking coal). We see this advantage SENSEX EXIT
gradually receding and margins shrinking as (a) European operations Mcap (bn): `349/US$5.2
do not have raw material integration; (b) India operations would not get 3M ADV (mn): `2,824/US$42.1
any fresh mines and existing mines can be used only until 2030; and (c) CMP: `359
the value of iron ore and coking coal has declined sharply given global TP (12 mths): `250
oversupply. Premium valuations (6.8x FY18E EV/EBITDA vs global Downside (%): 30
average of 6.3x) are unjustified given risks to margins. We expect Tata
Steels EBITDA to compound at 8% over FY17-27E, driven by volume
Flags
growth in India. EBITDA CAGR beyond 8% would require margin
expansion, which seems optimistic and, hence, there is a risk that Tata Accounting: AMBER
Steel could exit the Sensex. Key risk to our thesis is a further increase in Predictability: AMBER
Government protection to the domestic steel industry for the long term. Earnings Momentum: GREEN

Performance
A tough decade: Volume growth fully negated by slide in unitary EBITDA
180
Tata Steel is one of Indias largest steel companies with ~13mt domestic 160
capacity (~15% market share) and raw material integration (100% for iron ore 140
and 30% for coking coal). Tata Steels 2007 Corus acquisition increased its scale 120
by 3x; however, profitability at Europe has been a challenge due to global 100
overcapacity and deteriorating demand; but Tata Steel responded by multiple 80
Sep-15
Jan-16
Feb-16
Oct-15
Nov-15
Dec-15
Mar-16
Jun-16
Jul-16
Apr-16
May-16
restructurings and reduction in European capacity to ~11mt from 21mt. India
margins have also declined sharply over the last 3-4 years as integrated players
(like Tata Steel) were disproportionately affected in the falling raw material price
TATA IN SENSEX
scenario. Over FY06-16, despite a 19% revenue CAGR and 8x increase in
capital employed, EBITDA CAGR was merely 2%.
Raw material cost advantage receding
Tata Steels key competitive advantage as one of the lowest cost producers (raw Tata Steels forensic score analysis
material integration) is gradually receding as (a) European operations are not
integrated; (b) the value of raw materials (iron ore, coking coal) has declined
given global oversupply. We see long-term risks to raw material integration of
the India operations post the MMDR Act, 2015 (requires all new mines to be
auctioned and existing mines would remain only until 2030). Hence, bids for
new mines could increase raw material costs and deteriorate margins.
Global overcapacity + falling raw material integration = Risk to margins Tata Steels greatness score analysis
Our outlook for global steel prices is bleak given the global oversupply of iron
ore/coking coal and low capacity utilisation of steel mills (~70%); hence, we do
not expect RoCE (sub-10% since FY13) to improve significantly hereon for even
the next decade or so albeit possibilities of a brief period of high profitability.
Further, long-term risks to raw material integration of the India operations Source: Ambit HAWK, Ambit Capital research
would also structurally deteriorate margin profile.
Premium valuations unjustified
Our TP of Rs250 implies an FY18E EV/EBITDA of 6.2x, a premium to historical
average of 5.3x, unjustified given risks to margins. Tata Steel is trading at an
FY18 EV/EBITDA of 6.8x, in line with JSW Steel (7.0x) and higher than global
sector average of 6.3x. We recommend investors to SELL the stock as the CMP
optimistically factors in a further 5% increase in domestic steel prices, which is
difficult given our muted outlook on global steel demand and raw material
Research Analyst
oversupply. Tata Steels score on our forensic accounting framework has been
deteriorating whereas its score on our greatness framework has always been Parita Ashar, CFA
sub-par (refer exhibits 7 and 8). Key risk to our thesis is a further increase in +91 22 3043 3223
Government protection to the domestic steel industry for a long time. parita.ashar@ambit.co
Tata Steel

Revenues 252,124 1,315,359 1,473,293 1,023,931 1,187,531 1,328,997 1,347,115 1,486,136 1,395,037 1,171,516
Revenue growth (%) 24.5% 421.7% 12.0% -30.5% 16.0% 11.9% 1.4% 10.3% -6.1% -16.0%
Net profits 43,303 62,255 90,454 (3,255) 66,725 20,279 3,323 36,225 (2,969) (18,827)
EPS 66.95 82.27 102.34 (4.04) 68.79 20.22 3.42 37.30 (3.06) (19.40)
CFO 55,030 134,202 156,299 104,710 55,125 112,838 133,239 131,459 85,241 119,632
CFO-EBITDA 74% 75% 86% 130% 34% 91% 108% 80% 70% 158%
FCF 25,712 54,267 72,691 35,212 (38,235) (6,749) (18,985) (29,796) 51,901 6,830
Debt equity (x) (0.1) 1.4 1.8 1.9 1.1 1.1 1.6 1.7 2.3 2.6
RoE (%) 33.8 24.8 28.4 (1.2) 21.6 4.8 0.8 8.8 (0.7) (5.6)
ROCE (%) 26.1 25.0 15.0 2.1 15.8 10.9 (1.3) 9.6 2.9 (4.7)
Exhibit 2: CFO and debt have been the key sources of cash Exhibit 3: ~73% of cash has been spent on
over the last ten years capex/acquisitions over the last ten years
Eq/Pref/Hyb
rid cap. Others Incr. in cash
Interest /
raised 2% balance
dividend
10% 1%
paid
26%
Loans CFO Investments

26% 59% 0%
Capex &
Acquisitions
73%
Interest /
Dividend
income
3%
Exhibit 4: Tata Steel trading at ~30% premium to historical Exhibit 5: Tata Steel has underperformed the BSE Metal
one-year fwd EV/EBITDA index by ~28% over last 10 years
9.0 300
8.0 250
7.0 200
6.0
150
5.0
100
4.0
3.0 50
2.0 -
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
Sep-16
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
Sep-16
1-yr fwd EV/EBITDA Average Tata Steel BSEMETL index

In our forensic accounting model (see our December 2015 forensic thematic for details), Tata Steel gets a medium
score (of 9.2 as compared to the metals and mining sector average of 10). The key drivers of this sub-par score are:
Accounting AMBER
(a) contingent liabilities as a percentage of net worth; (b) CAGR in auditors remuneration to CAGR in consolidated
revenues; (c) CWIP to net worth, (d) change in reserves to PAT ex dividend and (e) volatility in non-operating income.
Margins for the Indian as well as European operations have been volatile given the global overcapacity and sharp
decline in steel prices over the past few years
Earnings momentum GREEN Over the past three months, consensus EBITDA estimates for FY16 and FY17 have seen upgraded by ~3-5%.

Tata Steel
Exhibit 7: Forensic accounting score deteriorating sharply Exhibit 8: Capital allocation score has always been weak
given European adventure

Tata Steel
Balance sheet
Net worth 445,647 353,483 324,281 334,236 350,913
Borrowings 814,855 823,039 858,040 858,040 888,040
Other liabilities & provisions 79,945 92,114 90,064 90,064 90,064
Capital employed 1,366,404 1,297,481 1,301,215 1,311,170 1,357,847
Net Fixed Assets 859,806 833,709 824,174 852,762 902,762
Investments 50,935 34,551 67,965 67,965 67,965
Total assets 1,366,404 1,297,481 1,301,215 1,311,170 1,357,847
Income statement
Net revenue 1,486,136 1,395,037 1,171,516 1,108,069 1,218,302
Total operating costs 1,322,587 1,272,680 1,095,659 968,496 1,055,989
EBITDA 163,549 122,358 75,856 139,573 162,313
EBITDA margin % 11.0% 8.8% 6.5% 12.6% 13.3%
Depreciation 58,412 59,436 50,818 61,412 74,474
Other income 5,729 7,962 11,174 6,321 6,321
EBIT 110,866 70,883 36,212 84,483 94,159
Interest expense 43,368 48,478 41,286 43,058 41,906
Adjusted PBT 67,498 22,406 (5,075) 41,425 52,253
Total taxes 30,582 25,674 15,050 24,466 24,504
Adjusted Net profit 36,225 (2,969) (18,827) 16,959 27,750
Cash flow statement

Reported profit before taxes 67,221 (13,881) (16,740) 41,425 52,253
+ Dep & impairments 58,412 59,436 50,818 61,412 74,474
Changes in working capital (12,696) (1,864) 54,332 (16,990) (6,529)
Direct Taxes Paid (30,127) (22,379) (16,450) (24,466) (24,504)
CFO 131,459 85,241 119,632 98,118 131,280
Net capex (161,255) (33,340) (112,801) (90,000) (124,474)
CFI (164,511) 14,070 (104,242) (83,679) (118,153)
Net proceeds from borrowings 58,749 8,184 15,500 0 30,000
Interest paid (36,763) (48,478) (43,004) (43,058) (41,906)
CFF 10,138 (92,903) (39,284) (50,062) (22,978)
Net Increase in C&CE (22,914) 6,407 (23,894) (35,623) (9,852)
Ratio analysis/ Valuation parameters

Year to March FY14 FY15 FY16E FY17E FY18E
EBITDA margin (%) 11.0% 8.8% 6.5% 12.6% 13.3%
RoE (%) 8.8% -0.7% -5.6% 5.2% 8.1%
RoCE (%) 7.7% 4.1% 2.0% 5.5% 6.1%
Net Debt (Cash)/ Equity (x) 1.7 2.3 2.6 2.6 2.6
EV/ EBITDA (x) 6.8 9.1 14.6 8.0 6.8
P/E on adjusted basis (x) 9.6 (117.5) (18.5) 20.5 12.6
P/B (x) 0.8 1.0 1.1 1.0 1.0

Tata Steel
Institutional Equities Team

Saurabh Mukherjea, CFA CEO, Institutional Equities (022) 30433174 saurabh.mukherjea@ambit.co
Research Analysts
Name Industry Sectors Desk-Phone E-mail
Nitin Bhasin - Head of Research E&C / Infra / Cement / Industrials (022) 30433241 nitin.bhasin@ambit.co
Aadesh Mehta, CFA Banking / Financial Services (022) 30433239 aadesh.mehta@ambit.co
Abhishek Ranganathan, CFA Retail (022) 30433085 abhishek.r@ambit.co
Achint Bhagat, CFA Cement / Home Building (022) 30433178 achint.bhagat@ambit.co
Anuj Bansal Mid-caps (022) 30433122 anuj.bansal@ambit.co
Aditi Singh Strategy (022) 30433284 aditi.singh@ambit.co
Ashvin Shetty, CFA Automobile (022) 30433285 ashvin.shetty@ambit.co
Bhargav Buddhadev Power Utilities / Capital Goods (022) 30433252 bhargav.buddhadev@ambit.co
Deepesh Agarwal, CFA Power Utilities / Capital Goods (022) 30433275 deepesh.agarwal@ambit.co
Dhiraj Mistry, CFA Consumer (022) 30433264 dhiraj.mistry@ambit.co
Gaurav Khandelwal, CFA Automobile (022) 30433132 gaurav.khandelwal@ambit.co
Girisha Saraf Mid-caps / Small-caps (022) 30433211 girisha.saraf@ambit.co
Karan Khanna, CFA Strategy (022) 30433251 karan.khanna@ambit.co
Pankaj Agarwal, CFA Banking / Financial Services (022) 30433206 pankaj.agarwal@ambit.co
Paresh Dave, CFA Healthcare (022) 30433212 paresh.dave@ambit.co
Parita Ashar, CFA Metals & Mining / Aviation (022) 30433223 parita.ashar@ambit.co
Prashant Mittal, CFA Strategy / Derivatives (022) 30433218 prashant.mittal@ambit.co
Rahil Shah Banking / Financial Services (022) 30433217 rahil.shah@ambit.co
Rakshit Ranjan, CFA Consumer (022) 30433201 rakshit.ranjan@ambit.co
Ravi Singh Banking / Financial Services (022) 30433181 ravi.singh@ambit.co
Ritesh Gupta, CFA Oil & Gas / Chemicals / Agri Inputs (022) 30433242 ritesh.gupta@ambit.co
Ritesh Vaidya, CFA Consumer (022) 30433246 ritesh.vaidya@ambit.co
Ritika Mankar Mukherjee, CFA Economy / Strategy (022) 30433175 ritika.mankar@ambit.co
Ritu Modi Automobile (022) 30433292 ritu.modi@ambit.co
Sagar Rastogi Technology (022) 30433291 sagar.rastogi@ambit.co
Sudheer Guntupalli Technology (022) 30433203 sudheer.guntupalli@ambit.co
Sumit Shekhar Economy / Strategy (022) 30433229 sumit.shekhar@ambit.co
Utsav Mehta, CFA E&C / Industrials (022) 30433209 utsav.mehta@ambit.co
Vivekanand Subbaraman, CFA Media (022) 30433261 vivekanand.s@ambit.co
Sales
Name Regions Desk-Phone E-mail
Sarojini Ramachandran - Head of Sales UK +44 (0) 20 7886 2740 sarojini.r@ambit.co
Dharmen Shah India / Asia (022) 30433289 dharmen.shah@ambit.co
Dipti Mehta India / USA (022) 30433053 dipti.mehta@ambit.co
Hitakshi Mehra India (022) 30433204 hitakshi.mehra@ambit.co
Krishnan V India / Asia (022) 30433295 krishnanv@ambit.co
Nityam Shah, CFA USA / Europe (022) 30433259 nityam.shah@ambit.co
Parees Purohit, CFA UK / USA (022) 30433169 parees.purohit@ambit.co
Praveena Pattabiraman India / Asia (022) 30433268 praveena.pattabiraman@ambit.co
Shaleen Silori India (022) 30433256 shaleen.silori@ambit.co
Vishal Mehta India / Asia (022) 30433198 vishal.mehta@ambit.co
Singapore
Pramod Gubbi, CFA Director Singapore +65 8606 6476 pramodgubbi@ambitpte.com
Shashank Abhisheik Singapore +65 6536 1935 shashankabhisheik@ambitpte.com
USA / Canada
Ravilochan Pola - CEO Americas +1(646) 361 3107 ravipola@ambitpte.com
Production
Sajid Merchant Production (022) 30433247 sajid.merchant@ambit.co
Sharoz G Hussain Production (022) 30433183 sharoz.hussain@ambit.co
Jestin George Editor (022) 30433272 jestin.george@ambit.co
Nikhil Pillai Database (022) 30433265 nikhil.pillai@ambit.co

Tata Steel
Indian Oil Corp Ltd (IOCL IN, BUY) Kotak Mahindra Bank Ltd (KMB IN, SELL)
700 900
600 800
700
500 600
400 500
300 400
300
200
200
100 100
0 0
Aug-13
Nov-13
May-14
Aug-14
Nov-14
May-15
Aug-15
Nov-15
May-16
Aug-13
Nov-13
May-14
Aug-14
Nov-14
May-15
Aug-15
Nov-15
May-16
Feb-14
Feb-15
Feb-16
Feb-14
Feb-15
Feb-16
Indian Oil Corp Ltd Kotak Mahindra Bank Ltd
Bharat Petroleum Corp Ltd (BPCL IN, BUY) HCL Technologies Ltd (HCLT IN, BUY)
700 1,200
600 1,000
500
800
400
600
300
200 400
100 200
0 0
Aug-13
Nov-13
Feb-14
May-14
Aug-14
Nov-14
Feb-15
May-15
Aug-15
Nov-15
Feb-16
May-16
Aug-13
Nov-13
Feb-14
May-14
Aug-14
Nov-14
Feb-15
May-15
Aug-15
Nov-15
Feb-16
May-16
Bharat Petroleum Corp Ltd HCL Technologies Ltd
Ultratech Cement Ltd (UTCEM IN, BUY) Eicher Motors Ltd (EIM IN, SELL)
4,000 25,000
3,500
20,000
3,000
2,500 15,000
2,000
1,500 10,000
1,000
5,000
500
0 0
Aug-13
Aug-14
Aug-15
Aug-13
Aug-14
Aug-15
Nov-13
Feb-14
May-14
Nov-14
Feb-15
May-15
Nov-15
Feb-16
May-16
Nov-13
Feb-14
May-14
Nov-14
Feb-15
May-15
Nov-15
Feb-16
May-16
ULTRATECH CEMENT LTD Eicher Motors Ltd

Tata Steel
Ambuja Cements Ltd (ACEM IN, UNDER REVIEW) Pidilite Industries Ltd (PIDI IN, BUY)
300 800
250 700
600
200 500
150 400
300
100 200
50 100
0
0
May-14
May-15
May-16
Nov-13
Nov-14
Nov-15
Aug-13
Feb-14
Aug-14
Feb-15
Aug-15
Feb-16
Aug-13
Nov-13
May-14
Aug-14
Nov-14
May-15
Aug-15
Nov-15
May-16
Feb-14
Feb-15
AMBUJA CEMENTS LTD Feb-16 Pidilite Industries Ltd
Torrent Pharmaceuticals Ltd (TRP IN, NOT RATED) Page Industries Ltd (PAG IN, BUY)
1,800 18,000
1,600 16,000
1,400 14,000
1,200 12,000
1,000 10,000
800 8,000
600 6,000
400 4,000
200 2,000
0 0
Aug-13
Nov-13
Feb-14
May-14
Aug-14
Nov-14
Feb-15
May-15
Aug-15
Nov-15
Feb-16
May-16
Aug-13
Nov-13
Feb-14
May-14
Aug-14
Nov-14
Feb-15
May-15
Aug-15
Nov-15
Feb-16
May-16
Torrent Pharmaceuticals Ltd Page Industries Ltd
Coal India Ltd (COAL IN, BUY) State Bank Of India (SBIN IN, SELL)
500 350
400 300
250
300
200
200
150
100 100
0 50
Aug-13
Aug-14
Aug-15
Nov-13
Feb-14
May-14
Nov-14
Feb-15
May-15
Nov-15
Feb-16
May-16
Aug-13
Nov-13
May-14
Aug-14
Nov-14
May-15
Aug-15
Nov-15
May-16
Feb-14
Feb-15
Feb-16
Coal India Ltd State Bank of India

Tata Steel
Larsen & Toubro Ltd (LT IN, SELL) Bharti Airtel Ltd (BHARTI IN, NOT RATED)
2,000 500
400
1,500
300
1,000
200
500
100
0 0
Aug-13
Nov-13
May-14
Aug-14
Nov-14
May-15
Aug-15
Nov-15
May-16
Aug-13
Nov-13
May-14
Aug-14
Nov-14
May-15
Aug-15
Nov-15
May-16
Feb-14
Feb-15
Feb-16
Feb-14
Feb-15
Feb-16
LARSEN & TOUBRO LTD Bharti Airtel Ltd
NTPC Ltd (NTPC IN, SELL) Wipro Ltd (WPRO IN, SELL)
180 800
160 700
140 600
120 500
100
400
80
60 300
40 200
20 100
0 0
Aug-13
Nov-13
Feb-14
May-14
Aug-14
Nov-14
Feb-15
May-15
Aug-15
Nov-15
Feb-16
May-16
Aug-13
Nov-13
Feb-14
May-14
Aug-14
Nov-14
Feb-15
May-15
Aug-15
Nov-15
Feb-16
May-16
NTPC LTD Wipro Ltd
Mahindra & Mahindra Ltd (MM IN, SELL) Hero Motocorp (HMCL IN, SELL)
1,600 4,000
1,400 3,500
1,200 3,000
1,000 2,500
800 2,000
600 1,500
400 1,000
200 500
0 0
Aug-13
Aug-14
Aug-15
Nov-13
Feb-14
May-14
Nov-14
Feb-15
May-15
Nov-15
Feb-16
May-16
Aug-13
Nov-13
May-14
Aug-14
Nov-14
May-15
Aug-15
Nov-15
May-16
Feb-14
Feb-15
Feb-16
Mahindra & Mahindra Ltd Hero MotoCorp Ltd

Tata Steel
Dr. Reddy's laboratories (DRRD IN, SELL) GAIL India Ltd (GAIL IN, SELL)
5,000 600
4,000 500
400
3,000
300
2,000
200
1,000 100
0 0
Aug-13
Nov-13
May-14
Aug-14
Nov-14
May-15
Aug-15
Nov-15
May-16
Feb-14
Feb-15
Feb-16
Aug-13
Nov-13
May-14
Aug-14
Nov-14
May-15
Aug-15
Nov-15
May-16
Feb-14
Feb-15
Feb-16
Dr Reddy's Laboratories Ltd GAIL India Ltd
Cipla Ltd (CIPLA IN, NOT RATED) Tata Steel Ltd (TATA IN, SELL)
800 700
700 600
600 500
500
400
400
300
300
200 200
100 100
0 0
Aug-13
Nov-13
Feb-14
May-14
Aug-14
Nov-14
Feb-15
May-15
Aug-15
Nov-15
Feb-16
May-16
Aug-13
Nov-13
Feb-14
May-14
Aug-14
Nov-14
Feb-15
May-15
Aug-15
Nov-15
Feb-16
May-16
Cipla Ltd/India Tata Steel Ltd

Tata Steel
Explanation of Investment Rating

Investment Rating Expected return (over 12-month)
BUY >10%
SELL <10%
NO STANCE We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation
UNDER REVIEW We will revisit our recommendation, valuation and estimates on the stock following recent events
NOT RATED We do not have any forward looking estimates, valuation or recommendation for the stock
POSITIVE We have a positive view on the sector and most of stocks under our coverage in the sector are BUYs
NEGATIVE We have a negative view on the sector and most of stocks under our coverage in the sector are SELLs
Disclaimer
This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Ambit Capital. AMBIT Capital Research is disseminated and available primarily electronically,
and, in some cases, in printed form.
Additional information on recommended securities is available on request.
Disclaimer
1. AMBIT Capital Private Limited (AMBIT Capital) and its affiliates are a full service, integrated investment banking, investment advisory and brokerage group. AMBIT Capital is a Stock Broker, Portfolio
Manager and Depository Participant registered with Securities and Exchange Board of India Limited (SEBI) and is regulated by SEBI
2. AMBIT Capital makes best endeavours to ensure that the research analyst(s) use current, reliable, comprehensive information and obtain such information from sources which the analyst(s) believes
to be reliable. However, such information has not been independently verified by AMBIT Capital and/or the analyst(s) and no representation or warranty, express or implied, is made as to the
accuracy or completeness of any information obtained from third parties. The information, opinions, views expressed in this Research Report are those of the research analyst as at the date of this
Research Report which are subject to change and do not represent to be an authority on the subject. AMBIT Capital may or may not subscribe to any and/ or all the views expressed herein.
3. This Research Report should be read and relied upon at the sole discretion and risk of the recipient. If you are dissatisfied with the contents of this complimentary Research Report or with the terms of
this Disclaimer, your sole and exclusive remedy is to stop using this Research Report and AMBIT Capital or its affiliates shall not be responsible and/ or liable for any direct/consequential loss
howsoever directly or indirectly, from any use of this Research Report.
4. If this Research Report is received by any client of AMBIT Capital or its affiliate, the relationship of AMBIT Capital/its affiliate with such client will continue to be governed by the terms and conditions
in place between AMBIT Capital/ such affiliate and the client.
5. This Research Report is issued for information only and the 'Buy', 'Sell', or Other Recommendation made in this Research Report such should not be construed as an investment advice to any
recipient to acquire, subscribe, purchase, sell, dispose of, retain any securities and should not be intended or treated as a substitute for necessary review or validation or any professional advice.
Recipients should consider this Research Report as only a single factor in making any investment decisions. This Research Report is not an offer to sell or the solicitation of an offer to purchase or
subscribe for any investment or as an official endorsement of any investment.
6. This Research Report is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied in
whole or in part, for any purpose. Neither this Research Report nor any copy of it may be taken or transmitted or distributed, directly or indirectly within India or into any other country including
United States (to US Persons), Canada or Japan or to any resident thereof. The distribution of this Research Report in other jurisdictions may be strictly restricted and/ or prohibited by law or contract,
and persons into whose possession this Research Report comes should inform themselves about such restriction and/ or prohibition, and observe any such restrictions and/ or prohibition.
7. Ambit Capital Private Limited is registered as a Research Entity under the SEBI (Research Analysts) Regulations, 2014. SEBI Reg.No.- INH000000313.
Conflict of Interests
8. In the normal course of AMBIT Capitals business circumstances may arise that could result in the interests of AMBIT Capital conflicting with the interests of clients or one clients interests conflicting
with the interest of another client. AMBIT Capital makes best efforts to ensure that conflicts are identified and managed and that clients interests are protected. AMBIT Capital has policies and
procedures in place to control the flow and use of non-public, price sensitive information and employees personal account trading. Where appropriate and reasonably achievable, AMBIT Capital
segregates the activities of staff working in areas where conflicts of interest may arise. However, clients/potential clients of AMBIT Capital should be aware of these possible conflicts of interests and
should make informed decisions in relation to AMBIT Capitals services.
9. AMBIT Capital and/or its affiliates may from time to time have or solicit investment banking, investment advisory and other business relationships with companies covered in this Research Report and
may receive compensation for the same.
Additional Disclaimer for U.S. Persons

10. The research report is solely a product of AMBIT Capital
11. AMBIT Capital is the employer of the research analyst(s) who has prepared the research report
12. Any subsequent transactions in securities discussed in the research reports should be effected through Enclave Capital LLC. (Enclave).
13. Enclave does not accept or receive any compensation of any kind for the dissemination of the AMBIT Capital research reports.
14. The research analyst(s) preparing the email / Research Report/ attachment is resident outside the United States and is/are not associated persons of any U.S. regulated broker-dealer and that
therefore the analyst(s) is/are not subject to supervision by a U.S. broker-dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with
U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account.
15. This report is prepared, approved, published and distributed by the Ambit Capital located outside of the United States (a non-US Group Company). This report is distributed in the U.S.by Enclave
Capital LLC, a U.S. registered broker dealer, on behalf of Ambit Capital only to major U.S. institutional investors (as defined in Rule 15a-6 under the U.S. Securities Exchange Act of 1934 (the
Exchange Act)) pursuant to the exemption in Rule 15a-6 and any transaction effected by a U.S. customer in the securities described in this report must be effected through Enclave Capital LLC (19
West 44th Street, suite 1700, New York, NY 10036). In order to receive any additional information about or to effect a transaction in any security or financial instrument mentioned herein, please
contact a registered representative of Enclave Capital LLC., by phone at 646 361 3107.
16. As of the publication of this report Enclave Capital LLC, does not make a market in the subject securities.
17. This document does not constitute an offer of, or an invitation by or on behalf of Ambit Capital or its affiliates or any other company to any person, to buy or sell any security. The information
contained herein has been obtained from published information and other sources, which Ambit Capital or its Affiliates consider to be reliable. None of Ambit Capital accepts any liability or
responsibility whatsoever for the accuracy or completeness of any such information. All estimates, expressions of opinion and other subjective judgments contained herein are made as of the date of
this document. Emerging securities markets may be subject to risks significantly higher than more established markets. In particular, the political and economic environment, company practices and
market prices and volumes may be subject to significant variations. The ability to assess such risks may also be limited due to significantly lower information quantity and quality. By accepting this
document, you agree to be bound by all the foregoing provisions.
Additional Disclaimer for Canadian Persons

18. AMBIT Capital is not registered in the Province of Ontario and /or Province of Qubec to trade in securities and/or to provide advice with respect to securities.
19. AMBIT Capital's head office or principal place of business is located in India.
20. All or substantially all of AMBIT Capital's assets may be situated outside of Canada.
21. It may be difficult for enforcing legal rights against AMBIT Capital because of the above.
22. Name and address of AMBIT Capital's agent for service of process in the Province of Ontario is: Torys LLP, 79 Wellington St. W., 30th Floor, Box 270, TD South Tower, Toronto, Ontario M5K 1N2
Canada.
23. Name and address of AMBIT Capital's agent for service of process in the Province of Montral is Torys Law Firm LLP, 1 Place Ville Marie, Suite 1919 Montral, Qubec H3B 2C3 Canada.
Additional Disclaimer for Singapore Persons

24. This Report is prepared and distributed by Ambit Capital Private Limited and distributed as per the approved arrangement under Paragraph 9 of Third Schedule of Securities and Futures Act (CAP
289) and Paragraph 11 of the First Schedule to the Financial Advisors Act (CAP 110) provided to Ambit Singapore Pte. Limited by Monetary Authority of Singapore.
25. This Report is only available to persons in Singapore who are institutional investors (as defined in section 4A of the Securities and Futures Act (Cap. 289) of Singapore (the SFA). Accordingly, if a
Singapore Person is not or ceases to be such an institutional investor, such Singapore Person must immediately discontinue any use of this Report and inform Ambit Singapore Pte. Limited.

Tata Steel
Additional Disclaimer for UK Persons

26. All of the recommendations and views about the securities and companies in this report accurately reflect the personal views of the research analyst named on the cover. No part of this research
analysts compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst in this research report. This report may not be
reproduced, redistributed or copied in whole or in part for any purpose.
27. This report is a marketing communication and has been prepared by Ambit Capital Pvt Ltd of Mumbai, India (Ambit) and has been approved in the UK by Ambit Capital (UK) Limited (ACUK)
solely for the purposes of section 21 of the Financial Services and Markets Act 2000. Ambit is regulated by the Securities and Exchange Board of India and is registered as a Research Entity under the
SEBI (Research Analysts) Regulations, 2014. ACUK is regulated by the UK Financial Services Authority and has registered office at C/o Panmure Gordon & Co PL, One New Change, London,
EC4M9AF.
28. In the UK, this report is directed at and is for distribution only to persons who (i) fall within Article 19(1) (persons who have professional experience in matters relating to investments) or Article
49(2)(a) to (d) (high net worth companies, unincorporated associations etc) of the Financial Services and Markets Act 2000 (Financial Promotions) Order 2005 (as amended) or (ii) are professional
customers or eligible counterparties of ACUK (all such persons together being referred to as "relevant persons"). This report must not be acted on or relied upon by persons in the UK who are not
relevant persons.
29. Neither Ambit nor ACUK is a US registered broker-dealer. Transactions undertaken in the US in any security mentioned herein must be effected through a US-registered broker-dealer, in conformity
with SEC Rule 15a-6.
30. Neither this report nor any copy or part thereof may be distributed in any other jurisdictions where its distribution may be restricted by law and persons into whose possession this report comes
should inform themselves about, and observe, any such restrictions. Distribution of this report in any such other jurisdictions may constitute a violation of UK or US securities laws, or the law of any
such other jurisdictions.
31. This report does not constitute an offer or solicitation to buy or sell any securities referred to herein. It should not be so construed, nor should it or any part of it form the basis of, or be relied on in
connection with, any contract or commitment whatsoever. The information in this report, or on which this report is based, has been obtained from publicly available sources that Ambit believes to be
reliable and accurate. However, it has not been prepared in accordance with legal requirements designed to promote the independence of investment research. It has also not been independently
verified and no representation or warranty, express or implied, is made as to the accuracy or completeness of any information obtained from third parties.
32. The information or opinions are provided as at the date of this report and are subject to change without notice. The information and opinions provided in this report take no account of the investors
individual circumstances and should not be taken as specific advice on the merits of any investment decision. Investors should consider this report as only a single factor in making any investment
decisions. Further information is available upon request. No member or employee of Ambit or ACUK accepts any liability whatsoever for any direct or consequential loss howsoever arising, directly or
indirectly, from any use of this report or its contents.
33. The value of any investment made at your discretion based on this Report, or income therefrom, maybe affected by changes in economic, financial and/or political factors and may go down as well
as go up and you may not get back the original amount invested. Some securities and/or investments involve substantial risk and are not suitable for all investors.
34. Ambit and its affiliates and their respective officers directors and employees may hold positions in any securities mentioned in this Report (or in any related investment) and may from time to time add
to or dispose of any such securities (or investment). Ambit and ACUK may from time to time render advisory and other services to companies referred to in this Report and may receive compensation
for the same.
35. Ambit and its affiliates may act as a market maker or risk arbitrator or liquidity provider or may have assumed an underwriting commitment in the securities of companies discussed in this Report (or
in related investments) or may sell them or buy them from clients on a principal to principal basis or may be involved in proprietary trading and may also perform or seek to perform investment
banking or underwriting services for or relating to those companies.
36. Ambit and ACUK may sell or buy any securities or make any investment which may be contrary to or inconsistent with this Report and are not subject to any prohibition on dealing. By accepting this
report you agree to be bound by the foregoing limitations. In the normal course of Ambit and its affiliates business, circumstances may arise that could result in the interests of Ambit conflicting with
the interests of clients or one clients interests conflicting with the interest of another client. Ambit makes best efforts to ensure that conflicts are identified, managed and clients interests are
protected. However, clients/potential clients of Ambit should be aware of these possible conflicts of interests and should make informed decisions in relation to Ambit services.
Disclosures
37. The analyst (s) has/have not served as an officer, director or employee of the subject company.
38. There is no material disciplinary action that has been taken by any regulatory authority impacting equity research analysis activities.
39. All market data included in this report are dated as at the previous stock market closing day from the date of this report.
40. Ambit and/or its associates have financial interest/equity shareholding in Kotak Mahindra Bank, HCL Tech, Reliance Industries, Coal India, SBI, L&T, M&M, Hero Motocorp, GAIL, Cipla, Tata Steel,
Century Textiles, Indian Hotels, Tata Power & HDFC.
Analyst Certification
Each of the analysts identified in this report certifies, with respect to the companies or securities that the individual analyses, that (1) the views expressed in this report reflect his or her personal views
about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly dependent on the specific recommendations or views expressed in this
report.
Ambit Capital Pvt. Ltd.
Ambit House, 3rd Floor. 449, Senapati Bapat Marg,
Copyright 2015 AMBIT Capital Private Limited. All rights reserved. Lower Parel, Mumbai 400 013, India.
Phone: +91-22-3043 3000 | Fax: +91-22-3043 3100
CIN: U74140MH1997PTC107598
www.ambitcapital.com

Ambit Strategy Thematic Sensexentriesandexitsthedecadalstory 19sept2016

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Ambit Strategy Thematic Sensexentriesandexitsthedecadalstory 19sept2016

Uploaded by

Copyright:

Available Formats

STRATEGY

Sensex in 2016 Sensex in 2025

Sensex entries and exits - the decadal story

Nitin Bhasin Ashvin Shetty, CFA Parita Ashar, CFA

September 19, 2016 Ambit Capital Pvt. Ltd. Page 2

Sensex churn is set to rise Pidilite Industries PIDI IN M&M MM IN

Predicting the 15 entrants and exits Utilities 3% 3%

Exhibit 1: Sensex Entry Candidates (FY16-25)

September 19, 2016 Ambit Capital Pvt. Ltd. Page 4

Exhibit 2: Sensex Exit Candidates (FY16-25)

September 19, 2016 Ambit Capital Pvt. Ltd. Page 5

Section 1: Dissecting Indias GDP growth

September 19, 2016 Ambit Capital Pvt. Ltd. Page 6

In specific, each of the drivers of growth can be intuitively explained as follows:

Factor#1: Labours share in the growth process

September 19, 2016 Ambit Capital Pvt. Ltd. Page 7

September 19, 2016 Ambit Capital Pvt. Ltd. Page 8

70% Total Factor Productivity

September 19, 2016 Ambit Capital Pvt. Ltd. Page 9

Section 2: How have economies with

Identifying the true peer set for India

September 19, 2016 Ambit Capital Pvt. Ltd. Page 10

Starting Ending Name of variable used to measure consumption related data

Insight#1: Indias spending on automobiles is set to rise

Cross-country evidence, in fact, indicates that as countries prospered in terms of their

September 19, 2016 Ambit Capital Pvt. Ltd. Page 11

Exhibit 12: Non-food spending tends to rise as countries get richer

Per capita income(US$)

September 19, 2016 Ambit Capital Pvt. Ltd. Page 12

Insight#3: Indias spending on financial services is set to rise

Thailands share of spends on financial services increased from 3% in CY90 to 6% in

Healthcares share of spending

September 19, 2016 Ambit Capital Pvt. Ltd. Page 13

Insight#4: Indias spending on healthcare is likely to marginally

household consumption (in %)

September 19, 2016 Ambit Capital Pvt. Ltd. Page 14

Section 3: Market cap changes as per

Details regarding the data used

15% R = 0.292 40% R = 0.7

Consumer staples' market

September 19, 2016 Ambit Capital Pvt. Ltd. Page 15

September 19, 2016 Ambit Capital Pvt. Ltd. Page 16

40% R = 0.9303 30%

Financials' market cap

Insight#4: The market cap share of industrials shows no trend

Industrial's market cap

September 19, 2016 Ambit Capital Pvt. Ltd. Page 17

Industrial's market cap

September 19, 2016 Ambit Capital Pvt. Ltd. Page 18

Section 4: Predicting the sectoral

September 19, 2016 Ambit Capital Pvt. Ltd. Page 19

Exhibit 35: Sectoral composition of the Sensex in FY25

Will changes in the shape of the underlying economy necessarily translate

80 Indias market cap to GDP ratio is

September 19, 2016 Ambit Capital Pvt. Ltd. Page 20

Section 5: Entries into the Sensex by FY25

Entrants from IPOs and M&A

Our choices: Flipkart and Paytm

2. Sectors that will come into play via disinvestment:

180 Disinvestment receipts

Source: Department of Disinvestment, Ambit Capital research

September 19, 2016 Ambit Capital Pvt. Ltd. Page 22

3. Sectors where regulatory hurdles may potentially ease: