Gems Jewellery Sector - Insig

Primed and ready
India’s story through charts

Special report August 2017

India strategy
Mahesh Nandurkar Contents

Head of India Strategy
mahesh.nandurkar@clsa.com
+91 22 6650 5079 Executive summary .......................................................................... 3
Abhinav Sinha
+91 22 6650 5069
Macro chartbook ............................................................................... 5
Alok Srivastava
+91 22 6650 5037
Sector profiles
Autos ........................................ 39 Metals ....................................... 85
Banks ....................................... 45 Midcaps ..................................... 91
Capital goods ............................. 51 Oil & Gas ................................... 97
Cement ..................................... 57 Pharma ................................... 103
Consumer .................................. 65 Power and infra ........................ 109
IT services ................................. 73 Property .................................. 117
Two years ago we Media........................................ 79 Telecoms ................................. 123

highlighted measures
underway to revive
growth. Today, India
looks poised to take off. All prices quoted herein are as at close of business 24 August 2017, unless otherwise stated
We would like to thank Evalueserve for its help in preparing our research reports. Aniket Sethi (Cement, Oil & Gas); Bhavik Mehta (Autos &
IT); Dhruvesh Shah (Capital Goods, Utilities, Power) and Nikhil Gada (Midcaps) provide research support services to CLSA.
Tracking the changes
Find CLSA research on Bloomberg, Thomson Reuters, Factset and CapitalIQ - and profit from our evalu@tor proprietary database at clsa.com
For important disclosures please refer to page 132.
2 mahesh.nandurkar@clsa.com 29 August 2017

Executive summary India strategy
Primed and ready

Fuelled up and Nifty earnings growth could rise into double digits from the September-2017
ready for take-off quarter onwards, after stalling around a 2% Cagr for the past five years. The
macro environment seems favourable as the disruptive forces of
demonetisation, GST and NPL recognition fade, creating a low base from
which to launch healthy YoY earnings trends. Meanwhile, strong, sustainable
domestic equity inflows should continue to support rich valuations. We depict
this story through charts and our top picks are ICICI, IndusInd, housing
finance companies, metals, L&T, Jubilant, Ambuja and Godrej Properties.
Double digit earnings- We expect the earnings-growth recovery from FY18 to owe more to
growth from September- normalising corporate performance, after the disruptive forces of
2017 quarter
demonetisation, goods and services tax (GST) and the spike in NPL
recognition start to fade. With the government turning more favourable on
rural policies, we have already seen a small revival in rural wage growth,
which should help consumer, autos and housing names, among others.
Capex cycle should A meaningful and sustained earnings recovery will need a capex-cycle revival,
improve driven by the which would follow a resumption of growth in the housing segment. Best-in-
expected housing-
two-decades affordability and the Modi administration’s push (see our April-
construction boom
2017 Housing boom ahead report) will help revitalise housing-market activity,
which will also create more than two million jobs per year.
Strong domestic flows Strong inflows from domestic investors provide key market-valuation support.
should help sustain As against household savings of US$630bn per year, the current US$15-18bn
market valuations
annual equities inflow appears sustainable. This could underpin the market
multiple, even though it is at the top end of its historical band.
Top picks While the valuation multiple is high for the market, we like stocks where
current high multiples are based on low-cycle earnings. As the capex-cycle
recovery sets in, earnings growth can improve materially for corporate banks
(ICICI and SBI), giant E&C player L&T and cement (Ambuja). The expected
housing boom should augur well for housing-finance companies, building-
materials names (cement firms and Astral) and property developers (Godrej
Properties). We also like IndusInd, Jubilant Foodworks and metals players
(Vedanta and JSW Steel).
Valuations for preferred stock ideas

Stock Mkt cap PE (x) PB (x) ROE (%) Rec Target TSR
(US$bn) FY18 FY19 FY17 FY18 FY18 FY19 (Rs) (%)
Ambuja 8.6 29.3 24.9 2.7 2.6 9.0 10.0 BUY 325 19.4
Astral 1.2 44.3 33.4 10.0 8.3 20.5 22.3 BUY 785 19.9
Godrej Properties 1.7 59.6 36.3 5.6 5.2 9.1 13.6 BUY 636 23.0
ICICI 29.4 11.8 9.8 1.8¹ 1.5¹ 10.7² 11.9² BUY 380 28.4
IndusInd 15.4 27.7 22.1 4.3¹ 3.7¹ 16.3 17.6 BUY 1,870 12.7
JSW Steel 9.0 14.5 11.7 2.6 2.3 16.9 18.1 BUY 300.0 23.1
Jubilant Foodworks 1.4 77.7 49.1 10.8 9.7 13.1 18.3 BUY 1,900 36.9
L&T 24.6 24.8 20.9 3.4 3.2 13.3 14.6 BUY 1,400 25.5
SBI 37.8 14.2 10.6 1.6¹ 1.3¹ 6.3 7.8 BUY 350 25.9
Vedanta 17.4 11.1 9.0 1.8 1.7 16.0 18.4 BUY 340 18.9
¹ Adjusted for NPL coverage and investment in subsidiaries; ² Adjusted for investment in subsidiaries. Source: CLSA
29 August 2017 mahesh.nandurkar@clsa.com 3

4
Sensex PE movement 2007 peak & Now
25 (x)
Inflation (%)
Capex cycle begins
Pre GFC peak to decline Modi wins election Bank cleanup starts GST 2007: About 6%
2017: About 4%
20 Congress comes to power,
BJP loses
Interest-rate cycle
PE average
2007: Rising
15 2017: Falling
Capex cycle
10 2007: Strong/rising
mahesh.nandurkar@clsa.com
Executive summary
Demonetisation 2017: Weak/bottoming
Congress re-elected Fiscal deficit correction starts, Strong domestic flows, Property cycle
5 inflation starts falling US$1.5bn/month
India's capex cycle begins; 2007: Exuberant
10Y GSec 6.4% CPI 4.06%
2017: Best affordability
0 Flows
Mar 03 Mar 04 Mar 05 Mar 06 Mar 07 Mar 08 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 2007: FII-driven
Corporate profit as a % of GDP 2017: Sticky domestic-driven
8 (%)
Corporate earnings
7.1
2007: Strong momentum
7 6.8
2017: Cyclical low
Policy paralysis
5.6
6 5.6 Political stability
5.2
5.2 5.0
4.7 FY18 profit at 2007: Coalition/weak outlook
5 1.5x FY08
4.5 4.2 4.2 or - a 4% Cagr 2017: Stable outlook
3.5
4 Valuations
2.9 3.3
3.1 2007: Close to highs
3.0
2.9
3 2017: Close to highs on low-
cycle earnings
India strategy
2.0
2 1.7
29 August 2017
0
FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E
Source: Bloomberg, CMIE, ACE Equity, MOSPI, CLSA

Macro chartbook India strategy
India’s macro variables look good on global comparison

Figure 1
India’s fiscal deficit is Fiscal deficit vs Government primary net lending/borrowing

high by global standards
but the trend is improving 3
Philippines
2016
Brazil
2012 Philippines
2
Russia
2012 2012
Fiscal deficit 1
Mexico China
(as % of GDP) 2016 2012
0
Indonesia
Mexico
2012
(1)
2012
Indonesia
India 2016
2016 (2)
Brazil
2016
China Russia
2016 2016
(3)
India
2012 Net govt debt
(as % of GDP) (4)
(8) (7) (6) (5) (4) (3) (2) (1) 0
Note: Size of bubble indicates the size of GDP. Source: IMF
Figure 2
India has seen the most FDI vs Current-account deficit

significant reduction in 5.5 FDI (% of GDP)
the current-account Brazil
deficit as compared to 2016
other EMs 4.5
Brazil
2012
Philippines Russia China
3.5 2016 2016 2012
Mexico India
2016 2016
2.5 Russia
2012
Indonesia
2012 1.5
India Mexico Philippines
2012 2012 2012
Indonesia China
0.5 2016
2016
(0.5) CAD (% of GDP)

(5.5) (3.5) (1.5) 0.5 2.5
Note: Size of bubble indicates the size of forex reserves. Source: World Bank, IMF
Figure 3
India’s debt-to-GDP has Non-financial sector debt-to-GDP ratio

remained largely constant
300 (% of GDP)
250
200
150
100
50
0
2012
2013
2014
2015
2016
2012
2013
2014
2015
2016
2012
2013
2014
2015
2016
2012
2013
2014
2015
2016
2012
2013
2014
2015
2016
2012
2013
2014
2015
2016
China Brazil India Russia Mexico Indonesia

Source: BIS total credit statistics

Figure 4
India saw the highest Global Competitiveness Index

improvement in the
30 (Improvement in rank, 2014-17)
Competitiveness Index
among EMs over 2014-17 21 21
20
10
4
1 2
0
(3)
(10)
(20)
(25)
(30)
Rank - 81 Rank - 28 Rank - 41 Rank - 51 Rank - 57 Rank - 43 Rank - 39

(40)
Brazil China Indonesia Mexico Philippines Russia India
Source: World Economic Forum, CLSA
Figure 5
India’s real policy rates Real policy rates

are finally in the positive
10 (%) Policy rates Inflation Real rate
zone after a long time
6
4.9
4.6
4
2.4
1.9
2 1.1
0.3
0
(0.7)
(2)
Brazil China Indonesia Mexico Philippines Russia India
Note: inflation is the aggregate exit inflation forecast for 2017. Source: IMF, Bloomberg, CLSA
Figure 6
Low CAD and higher FDI India’s current-account deficit (CAD) vs net foreign direct investment (FDI)
has been a key source of 100 6
(US$bn) CAD Net FDI CAD (RHS) (% of GDP)
the favourable balance-
of-payment situation 5
80
4
Net FDI remains well
60 ahead of CAD 3
2
40
1
20 0
(1)
0
(2)
(20) (3)
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18F
Source: CMIE, CLSA

Figure 7
India’s forex reserves and import cover
Import cover 13 months 15 months 8 months 9 months
6.6% Cagr
Flat
Forex reserves (US$bn)
+38% Cagr
US$54bn US$310bn US$304bn US$392bn
FY02 FY08 FY14 FY18
Source: CMIE, RBI, CLSA
Figure 8
Quantum of external debt India’s non-rupee external debt vs forex reserves

has remained flat over the Non-rupee external debt (LHS)
400 (US$bn) (%) 180
past four years
Ratio of forex reserves to non-rupee external debt
350
Over and above stated 160
forex reserves, RBI has a 300
long forward position of 140
US$13.6bn; so effective 250
forex reserves are already
well over US$400bn 200 120
150
100
100
80
50
0 60
Mar 03
Mar 04
Mar 05
Mar 06
Mar 07
Mar 08
Mar 09
Mar 10
Mar 11
Mar 12
Mar 13
Mar 14
Mar 15
Mar 16
Mar 17
Source: CMIE, CLSA

Figure 9
CPI has moderated India’s CPI overall and CPI ex-food inflation
significantly and we
25 (% YoY) CPI Food CPI ex-food CPI inflation
expect it to be around 4%
by early 2018, at the
midpoint of the CPI band 20
of 2-6%
15
10
(5)
Jul 07
Jul 08
Jul 09
Jul 10
Jul 11
Jul 12
Jul 13
Jul 14
Jul 15
Jul 16
Jul 17
Jan 08
Jan 09
Jan 10
Jan 11
Jan 12
Jan 13
Jan 14
Jan 15
Jan 16
Jan 17
Source: MoSPI, CMIE
Figure 10
Expect fiscal deficit to General government (state + centre) fiscal deficit as % of GDP
decline at central and
10 (% of GDP) Centre State
state levels in FY18
9
8
7
6
5
4
3
2
1
0
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
Source: CLSA, CMIE, Govt of India, RBI

Lower inflation is policy driven . . .

Figure 11
Nearly half the weight of Components of CPI by weight contribution

the CPI basket is food
Education Others
items, where government
4% 9%
policies play a large role
Health
6%
Transport &
communication Food & beverage
9% 46%
Housing
10%
Clothing,
bedding &
Pan, tobacco &
footwear
Fuel & light intoxicants
7%
7% 2%
Source: MoSPI
Figure 12
Government has brought Paddy (rice) YoY increase given by government in minimum support price (MSP)
down MSP price hikes
25 (% YoY)
significantly BJP Congress BJP
20.8
20.2
20
15.7
15
11.4 11.1
8.8
10 8.0
5.4
4.8
4.1 3.9 3.8 3.8 4.3
5 3.7
1.8 1.8
0
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
Source: Ministry of Agriculture
Figure 13
Despite implementation Annual central-government procurement of wheat and rice

of the Food Security Act in
80 (mt) Wheat Rice
2013, food grains
procured have remained
70
stable to declining
60
50
40
30
20
10
0
FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
Source: Food Corporation of India, Ministry of Agriculture

. . . helping reduce interest costs, though real rates still high

Figure 14
RBI has cut the policy Repo rate

(Repo) rate by 200bps in
10 (%)
the current cycle; room
for more rate cuts exists
9
4
Jul 08
Jul 09
Jul 10
Jul 11
Jul 12
Jul 13
Jul 14
Jul 15
Jul 16
Jul 17
Jan 09
Jan 10
Jan 11
Jan 12
Jan 13
Jan 14
Jan 15
Jan 16
Jan 17
Source: RBI
Figure 15
Real repo rate is at a high Real repo rate (ie, policy rate minus CPI)
of 4%+, even assuming
6 (%)
RBI’s March-2018 CPI
projection of 4%, the real 4
policy rate of 2% is still 2
higher than RBI’s stated
band for real policy rates 0
(2)
(4)
(6)
(8)
(10)
(12)
(14)
Jul 06
Jul 07
Jul 08
Jul 09
Jul 10
Jul 11
Jul 12
Jul 13
Jul 14
Jul 15
Jul 16
Jul 17
Jan 07
Jan 08
Jan 09
Jan 10
Jan 11
Jan 12
Jan 13
Jan 14
Jan 15
Jan 16
Jan 17
Source: RBI, SBI, CLSA
Figure 16
Mortgage rates moving Mortgage rate

towards all-time rates
13 (%)
12
11
10
9
12Y lows
7
Jul 04
Jul 05
Jul 06
Jul 07
Jul 08
Jul 09
Jul 10
Jul 11
Jul 12
Jul 13
Jul 14
Jul 15
Jul 16
Jul 17
Source: HDFC, SBI, CLSA

Figure 17
Bank-lending-rate cuts SBI base rate

have also aggregated to 11.0 (%) SBI benchmark lending rate (adjusted)
about 200bps in the
current cycle, thus fully 10.5
transmitting RBI rate cuts 10.0
9.5
9.0
8.5
8.0
7.5
7.0
6.5
6.0
Jul 06
Jul 07
Jul 08
Jul 09
Jul 10
Jul 11
Jul 12
Jul 13
Jul 14
Jul 15
Jul 16
Jul 17
Jan 07
Jan 08
Jan 09
Jan 10
Jan 11
Jan 12
Jan 13
Jan 14
Jan 15
Jan 16
Jan 17
Source: SBI, CLSA
Figure 18
The reduction in bond Corporate AAA bond yields

yields, however, has been
12 (%) 10Y 1Y
much sharper . . .
11
10
6
May 13
May 14
May 15
May 16
May 17
Nov 12
Nov 13
Nov 14
Nov 15
Nov 16
Aug 12
Aug 13
Aug 14
Aug 15
Aug 16
Aug 17
Feb 13
Feb 14
Feb 15
Feb 16
Feb 17
Source: Bloomberg
Figure 19
. . . which has driven the Bank credit growth vs Total credit growth
market share away from
25 (% YoY) Bank credit Total credit
banks to bonds
20
15
10 8.8
6.0
5
0
Jun 11
Mar 12
Jun 12
Mar 13
Jun 13
Mar 14
Jun 14
Mar 15
Jun 15
Mar 16
Jun 16
Mar 17
Jun 17
Sep 11
Dec 11
Sep 12
Dec 12
Sep 13
Dec 13
Sep 14
Dec 14
Sep 15
Dec 15
Sep 16
Dec 16
Source: RBI, CMIE, CLSA

Capex has been weak . . .

Figure 20
A sharp 6ppt drop in GFCF Gross fixed capital formation (GFCF) or investments as a % of GDP
has brought investment in
the economy down close 40
to the 2004 level 35 34 34
35 32
33 34
33
33
30 31
30
29
30
27
26
25
20
15
10
0
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
Source: RBI, CMIE
Figure 21
Weak GFCF is responsible GFCF growth

for poor job creation in
20 (% YoY) GFCF (nominal) GFCF (real)
the economy and overall
weaker GDP growth
15
10
(5)
Jun 12
Mar 13
Jun 13
Mar 14
Jun 14
Mar 15
Jun 15
Mar 16
Jun 16
Mar 17
Sep 12
Dec 12
Sep 13
Dec 13
Sep 14
Dec 14
Sep 15
Dec 15
Sep 16
Dec 16
Source: CMIE, RBI
Figure 22
More than half of the drop Split of GFCF (current) over FY14-16 by institution
in GFCF is attributable to
the housing sector;
a housing sector revival is
key for a capex recovery
Private
Household corporate
40% 37%
FY14-16
GFCF:
US$1.7tn
Government
General owned
government companies
12% 11%
Source: CMIE, MOSPI

Figure 23
Government share in GFCF (current) composition

GFCF has continued
41 (% of GDP) GFCF % of GDP
to increase and that of
households (housing
construction) has 39
kept falling
Govt
37 21% Pvt
33% Govt
Pvt
21%
Household 35%
35 46%
Household
44% Govt
Pvt
23%
37% Govt
33 22% Pvt
Household 36%
40% Govt Pvt
Household 25% 38%
31 42%
Household
37%
29
FY11 FY12 FY13 FY14 FY15 FY16
Source: CMIE
Figure 24
By sector, the biggest Split of GFCF (current) over FY14-16 by industry

capex contributors to the
Other services Agriculture FY14-16
slowdown are mining;
5% 8% GCF:
real estate and
agriculture Mining US$1.7tn
Govt services 3%
and defence
9% Manufacturing
17%
Real estate Electricity, gas &

27% Water
Financial 8%
services
2% Construction
Transport, 5%
storage and Trade and Hotels
communication 9%
7%
Source: CMIE, MOSPI

. . . but there are signs of bottoming out . . .

Figure 25
Capacity utilisation Industry capacity utilisation in RBI OBICUS survey, trailing 12-month basis
bottomed 18 months ago
82 (%)
and the housing-growth
revival could quickly raise
80
capacity utilisation in
sectors like cement 78
and steel
76
74
72
70
68
Mar 09
Mar 10
Mar 11
Mar 12
Mar 13
Mar 14
Mar 15
Mar 16
Mar 17
Sep 09
Sep 10
Sep 11
Sep 12
Sep 13
Sep 14
Sep 15
Sep 16
Source: RBI, CLSA
Figure 26
Order backlog in the Sector order backlog

capital-goods segment CG - Power CG - Non Power
8,000 (Rsbn) (%) 35
has seen a revival in the
Construction Developers
past three years 7,000 30
YoY growth % (RHS)
6,000 25
5,000 20
4,000 15
3,000 10
2,000 5
1,000 0
0 (5)
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
Note: ABB, Alstom T&D, Bharat Electronics, BHEL, Crompton Greaves, HCC, IRB Infrastructure, ITNL,
Jkumar Infra Projects, Kalpatru, KEC, L&T Tech Construction, L&T Cons, NBCC, NCC, Punj Lloyd, Sadbhav
Engineering, Siemens, Simplex and Thermax. Source: Companies
Figure 27
JSW steel has already Steel capex

announced capacity
700 (Rsbn) Steel Nonferrous Mining
expansion; announcement 633 638 655
by Tata Steel is a 616
matter of time 600 574
504
500 472
421
400 365
378
304
300
200
100
0
FY10 FY11 FY12 FY13 FY14 FY15 FY16 17CL 18CL 19CL 20CL
Source: CLSA, CMA, Ministry of Steel

. . . and an expected housing boom should help

Figure 28
For middle/low income Housing affordability ratio

housing, affordability is at
60 (%) Mortgage payment to post-tax income ratio
the best level in the last
two decades
44
45 42
36 35
34 34 35 34 34
32 32 31
29 30
28 28
30 25 24
21
15
0
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
Note: Affordability refers to houses costing Rs3.0m. Source: CLSA, HDFC, SBI
Figure 29
Government is supporting Government budget for housing schemes

housing construction
350 (Rsbn) PMAY - Rural PMAY - Urban
through its budget
300
60
250
200
49
150
11 15 230
100
160
130
50 111 101
79
0
FY13 FY14 FY15 FY16 FY17RE FY18BE
Source: Govt of India
Figure 30
Scheme is already Rural progress seen

resulting in housing
4.5 (m) Houses completed under PMAY-Rural (erstwhile IAY)
construction doubling in
rural areas 4.0
3.5
3.0
2.5
2.0 4.0
3.2
1.5
1.0 1.8
1.2
0.5 1.0 1.1
0.0
FY13 FY14 FY15 FY16 FY17 FY19E
Source: Ministry of Housing and Urban Poverty Alleviation

Figure 31
Urban scheme is Urban progress under way

witnessing a relatively
2.0 (m) PMAY - Urban houses sanctioned (Rsbn) 350
slower rampup
1.8 Central assistance granted (RHS)
300
1.6
1.4 250
1.2 200
1.0
0.8 150
0.6 100
0.4
50
0.2
0.0 0
Mar 16
Mar 17
Nov 15
Jul 16
Dec 15
Nov 16
Oct 15
Jan 16
Oct 16
Feb 16
Apr 16
Jan 17
Feb 17
Apr 17
Source: Ministry of Housing and Urban Poverty Alleviation
Figure 32
Residential mix to shift towards volume

Houses constructed
Flat
(m)
10.9m
6.3m 6.4m
4.5m
7.9% of 8.1% of 4.6% of 5.5% of

Spend
GDP GDP GDP GDP
Housing expenditure
(Rstn)
Flat
Premium Rs16.8tn
pickup
Affordable
Social pickup
Rs7.0tn Rs7.0tn pickup
Rs2.0tn
FY03 FY12 FY17 FY24

FY18 FY19 FY20
Source: CLSA, Census of India, MOSPI, RBI, NHB

Figure 33
Opportunity pyramid
House price Market size Market size

range (Rstn) (Rstn)
Rs4.6tn
0.4m market
Premium
Rs3.3tn
>Rs5m 0.3m market
Rs 4.6tn
Affordable 1.0m market
Rs 1.6tn
Rs2-5m 0.5m market
Social
Rs2.1tn
<Rs2m 5.7m
market
Rs7.6tn
9.5m market
FY17 FY24
Number of Number of
houses houses
Source: CLSA, Census of India, MOSPI, RBI, NHB
Figure 34
India’s mortgage market Mortgage penetration

is underpenetrated
Denmark 114
UK 75
USA 68
Singapore 56
HK 45
Germany 42
Taiwan 40
S Korea 36
Malaysia 32
Thailand 20
China 18
(% of GDP)
India 9
0 20 40 60 80 100 120
Source: European Mortgage Federation, Asian Development Bank, HDFC

RERA - Near-term hiccup for housing

Figure 35
Status of RERA implementation and key clauses which have differences among states
Mumbai¹ Bengaluru Gurgaon Noida Chennai Hyderabad
Draft - Public Final - Under

RERA Draft released Draft rules –
rules status
Finalised commenting review post Finalised
in 2016 Not notified yet
period over new government
Temporary Temporary
RERA authority - authority
authority status
In-place Not established In-place Not established
Granting limited - Not granting
approvals approvals
NA
RERA Likely functional
website
Operational na (offline na na
in few weeks
approvals)
Source: Ministry of Housing and Urban Poverty Alleviation (Mumbai rules also apply to Pune as both are in Maharashtra state.)
Figure 36
Key regulatory changes under RERA
Key regulation Post RERA Current practice Impact on developer
70% of inflows to be kept in an Projects suffer cash crunch at

Protecting diversion of Lower new project additions /
escrow account and released as per completion stage as initial inflows
customer inflows lower new pace of launches
project completion rotated out
"Prelaunch" prior to significant

Presales banned until all major Higher capital requirements;
Starting presales approvals or even at land
approvals are in place tougher to launch multiple projects
acquisition stage
Carpet area defined and to be basis Correct comparative pricing /

Selling standards "Super-built-up" basis
for purchase boost to buyer confidence
Same rate of interest for both

Financial penalties developer and customer Developers pay much lesser rate Lowers incentive to delay projects
on account of delays
Change in Needs consent of two-third of Rigidity in process; need to upfront

Ad-hoc
development plans allottees with some exceptions declare project expansion scope
Project details, legal issues and past Clearing up track record;

Transparency Ad-hoc
projects to be made online settling old legal issues important
Penalties for 5-10% of project cost or

Cases drag in consumer courts Need to stick to agreement
developers imprisonment of developer
Source: Ministry of Housing and Urban Poverty Alleviation, RERA

Figure 37
Most states are fully RERA compliance timelines for ongoing/new projects
compliant under RERA
from the 1 August; some Before 1 May 1 May - 31 July Post 31 July
states have granted
partial exemptions
No marketing, Some¹ marketing Need RERA approval
Ongoing projects cashflow restrictions restrictions to market
No marketing, Need RERA approval Need RERA approval

New Projects cashflow restrictions to launch to launch
Source: (Practices differ across states with those with regulators established likely to allow marketing of
ongoing projects to continue.)

NPL problem has peaked

Figure 38
Gross NPL ratio is Consolidated gross NPL ratio

showing signs of
10 (%)
topping out
8.8 8.8 8.7
9 8.4
7.9 7.9
8 7.2
7
6 5.6
5
4
3
2
1
0
3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 FY18CL FY19CL
Source: CLSA, SBI
Figure 39
Fast tracking of the 12 Recoveries for larger NPLs

NPL cases could drive
6,000 (Rsbn)
down NPL ratios further
5,134
5,000
4,000
19% of FY19
3,000 net NPL & 9%
of adj net worth
2,000
1,270 508
254
1,000
508
0
Gross NPL Est. top-12 NPL Current Additional prov. Recoverable
(Mar 17) (@25%) provision value
Note: Based on CLSA coverage. Source: CLSA, Banks
Figure 40
Key issue is stress even Total stressed loans by banks as a % of total assets, Mar 17/Jun 17
outside current NPLs and
risk of those loans PNB 14 3 4 21
slipping into NPLs is BOI 13 3 3 19
still possible Canara 11 2 5 18

Union 13 1 3 17
BOB 11 3 2 16
PSU banks 11 2 3 16
SBI 10 2 2 14
Average 9 2 2 13
ICICI 9 2 11
Gross NPL
Axis 6 1 2 9
Restructured Loans
Pvt banks 4 1 6
Kotak 3 3
Others/ overlap
Yes 1 1 2
IndusInd 1 2
HDFCB 1 1 (% gross loans)
0 5 10 15 20 25
Note: Based on June 2017 CLSA coverage. Source: CLSA, Banks

Figure 41
Provisioning costs have Annual credit costs

zoomed but likely peaked
1,400 (Rsbn) Loan provisions (% avg loans) 2.5
out as well
% avg loans (RHS)
1,200
2.0
1,000
800 1.5
600 1.0
400
0.5
200
0 0.0
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
FY19CL
Figure 42
Slippages have reduced Annual loan slippages

but still remain large . . .
3,000 (Rsbn) Slippages (LHS) (%) 7
% past-year loans
2,500 6
5
2,000
4
1,500
3
1,000
2
500 1
0 0
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
FY19CL
Figure 43
. . . but partially offset by Loan upgrades and recoveries

a reasonable pickup in
1,200 (Rsbn) Upgrades and recoveries (%) 1.8
upgrades and recoveries
% past-year loans (RHS) 1.6
1,000
1.4
800 1.2
1.0
600
0.8
400 0.6
0.4
200
0.2
0 0.0
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
FY19CL

GST - Short-term pain for long-term gain

Figure 44
Of the four key macro Multiple benefits of GST

improvements, three have
happened: removal of 2%
interstate trade tax;
faster movement of goods
across states as interstate
check posts go; and
reduction of different
types of taxes paid
Other macro-positives of
better economic growth
and a tax collection boost
will be realised gradually
Source: CLSA
Figure 45
India still has high GST GST/VAT rates by region

but the bulk of
30 (%) Max Min 28
commodities/products
get taxed at 12-18%
25
20
15
10
5
0
0
Europe Latin Asia North & Oceania Asean India
America (ex Asean) Central
America
Source: World Bank, MoF

Political stability
Figure 46
BJP or its allied-state States ruled by BJP and allies

governments control two-
thirds of the country
BJP/BJP alliance ruled states
Jammu & Kashmir Other parties
Himachal BJP/ally-ruled states

Pradesh Share of GDP: 63%
Punjab Uttarakhand
Share of population: 71%
Haryana
Delhi Sikkim Arunachal Pradesh
Uttar Pradesh
Rajasthan
Assam
Nagaland
Bihar Meghalaya
Manipur
Jharkhand Tripura
Gujarat Madhya Pradesh West
Chhattisgarh Bengal Mizoram
Orissa
Maharashtra
Telangana
Andhra
Goa Pradesh
Andaman & Nicobar Islands

Karnataka
Lakshwadeep
Tamil Nadu
Kerala
Source: CLSA, Census of India, NITI Aayog
Figure 47
BJP dominates the lower Lok Sabha (Lower house of parliament) position
house and the passage of
any ordinary bill (50%+
needed) is not an issue;
even for a constitutional
amendment bill (needs a
two-thirds majority),
passage doesn’t
appear difficult All others
27%
Congress allies BJP

3% 52%
Congress
8%
BJP allies
10%
Note: Two vacancies currently. Source: Lok Sabha

Figure 48
BJP + allies still don’t Project of BJP¹ + Allies seats in Rajya Sabha (Upper house)
have a majority in the
upper house but by 2020, 123
Seats
they should be close 15
103
13 2
Recent developments 14
suggest AIADMK could 83
start supporting NDA
63 119
AIADMK could
So if the BJP were to win add 13 seats
the 2019 lower-house 43 88
elections, passing
ordinary bills in either 23
houses would become
quite easy 3
(17)
Current seats 2018 2019 2020 2020 Tally
¹ Nominated members added to tally as and when appointed by BJP. Source: CLSA, Rajya Sabha, Election
commission.
Figure 49
Key state elections due in State government election calendar until the next national elections in 2019
the next 12 months are in
State Election LS % LS RS % RS BJP's prospects /
Gujarat and Karnataka timeline Seats seats Seats seats Key points
Gujarat Dec 17 26 4.8 11 4.5 Modi's home state; Anti-

incumbency after 4 BJP terms
Himachal Pradesh Dec 17 4 0.7 3 1.2 Congress ruled; BJP may gain
Total pending in 2017 30 5.5 14 5.7
Meghalaya Mar 18 2 0.4 1 0.4 Congress rules; Limited

chance for BJP
Nagaland Mar 18 1 0.2 1 0.4 May become part of NDA with

local ally
Tripura Mar 18 2 0.4 1 0.4 Communist party rules;
Limited chances
Karnataka May 18 28 5.2 12 4.9 Congress rules; BJP stepping

up activity and win chances
exist
Chhatisgarh Dec 18 11 2.0 5 2.0 BJP ruled; 3 terms completing
Madhya Pradesh Dec 18 29 5.3 11 4.5 BJP ruled; 3 terms completing

Mizoram Dec 18 1 0.2 1 0.4 Congress rules; Limited
presence of BJP yet
Rajasthan Dec 18 25 4.6 10 4.1 BJP rules; History of
flipping power
Total in 2018 99 18.2 42 17.1
Source: CLSA, Election commission

Rural growth focus likely

Figure 50
Rural wage growth Rural wage growth

has shown a small 25 (% YoY)
uptrend recently
20
15
10
0
May 11
May 12
May 13
May 14
May 15
May 16
May 17
Nov 10
Nov 11
Nov 12
Nov 13
Nov 14
Nov 15
Nov 16
Aug 10
Aug 11
Aug 12
Aug 13
Aug 14
Aug 15
Aug 16
Feb 11
Feb 12
Feb 13
Feb 14
Feb 15
Feb 16
Feb 17
Source: CMIE, Ministry of Labour
Figure 51
Government has stepped Government spending on MGNREGA

up expenditure on the
600 (Rsbn) Expenditure on rural employment guarantee scheme
rural employment
guarantee scheme
475 480
500
37% YoY increase
400 358 347

330 325
292 300
300
200
100
0
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18BE
Source: Government of India
Figure 52
PMGSY - Pradhan Mantri Government expenditure on PMGSY

Gram Sadak Yojana - of
250 (Rsbn)
the rural roads scheme 224
has seen increased
allocation 200 188 193 190 190
152
142
150
106
98 98
100 89
73
41
50 31
0
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17BE
FY18BE
Note: FY17 and FY18 is the Budget estimate. Source: Ministry of Rural Development

Figure 53
Farm loan waivers have Loan waiver in recent years

become politically popular
BJP/BJP alliance ruled states

US$15bn worth of Jammu & Kashmir Other parties
waivers announced
States with farm loan
Himachal waivers / protests
~Rs240bn waiver Pradesh
announced in
Jun 17 Punjab Uttarakhand
Haryana
Delhi Sikkim Arunachal Pradesh
Rajasthan Uttar Pradesh

Assam
Rs364bn in Nagaland
May 17 Bihar Meghalaya
Manipur
Jharkhand Tripura
Gujarat Madhya Pradesh West
Chhattisgarh Bengal Mizoram
Orissa
Maharashtra
Rs305bn waiver
announced in Telangana
Jun 17
Rs164bn in
May 14
Goa Andhra Rs240bn in

Pradesh May 14
Rs82bn in Andaman & Nicobar Islands
Jun 17 Karnataka
Lakshwadeep
Tamil Nadu Rs60bn in

Kerala May 16
Source: Ministry of Agriculture, RBI, IMD
Figure 54
FY17 saw a sharp Rural housing under PMAY

increase in houses
4.5 (m) Houses completed under PMAY-Rural (erstwhile IAY)
constructed under
PMAY rural
4.0
3.5
3.0
2.5
2.0 4.0
3.2
1.5
1.0 1.8
1.1 1.2
0.5 1.0
0.0
FY13 FY14 FY15 FY16 FY17 FY19E
Source: Govt of India

Job creation - The pressing need of the hour

Figure 55
As against the need for Jobs created and labour supply per year
rising job creation (due to
12 (m) Jobs created Labour supply
demographics), actual job
creation has slowed; 10 10
weaker investments 10
(GFCF) is the key culprit
8
6 6 6 6
6
6 5
5
5 5
4
4 4
4
0
FY78-83 FY83-88 FY88-94 FY94-00 FY00-12 FY12-16 FY16-20
Source: CLSA, World Bank
Figure 56
Over the past 10 years, IT IT services sector job creation

services created about
1,400 ('000s) Total IT sector jobs % YoY (RHS) (%) 30
100,000 new jobs/year;
the pace has now halved
to 50,000/year 1,200 25
1,000
20
800
15
600
10
400
200 5
0 0
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
Source:, Company reports (TCS, Infosys, Wipro, Tech Mahindra and HCL Technologies)
Figure 57
Organised sector job Organised sector job creation (BSE 500 listed companies)
creation has come off
5.0 (m) Number of employees % YoY (RHS) (%) 8
4.5 7
4.0
6
3.5
3.0 5
2.5 4
2.0 3
1.5
2
1.0
0.5 1
0.0 0
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
Note: For FY16/17 company base updated (employee numbers from growth). Source: CLSA, Capital Line

UID reaches application stage

Figure 58
Close to 1.2bn Indians UID enrolments

now have biometric
40 (m) Monthly UID enrolment (LHS) (m) 1,400
authentication
Cumulative UID enrolment
35 1,200
30
1,000
25
800
20
600
15
400
10
5 200
0 0
Jul 12
Jul 13
Jul 14
Jul 15
Jul 16
Jul 17
Oct 12
Jan 13
Apr 13
Oct 13
Jan 14
Apr 14
Oct 14
Jan 15
Apr 15
Oct 15
Jan 16
Apr 16
Oct 16
Jan 17
Apr 17
Source: UIDAI
Figure 59
Nearly all the adults now UID composition by age

have a UID 97
100 (%)
90 83
80
70
60
50 43
40
30
20
10
0
0 to 4 years 5 to 17 years 18 and above
Source: UIDAI
Figure 60
Government drive on No frills banks accounts and the bank balance

financial inclusion has led
350 (m) No. of Jan Dhan accounts opened (Rsbn) 800
to nearly 300m new bank
accounts opened in the Balance in PMJDY accounts (RHS)
300 700
past three years
Demonetisation 600
250
500
200
400
150
300
100
200
50 100
0 0
Jun 15
Jun 16
Jun 17
Dec 14
Dec 15
Dec 16
Aug 14
Aug 15
Aug 16
Oct 14
Oct 15
Oct 16
Feb 15
Apr 15
Feb 16
Apr 16
Feb 17
Apr 17
Source: UIDAI

Figure 61
40m-plus UID-based Monthly UID based banking transactions

transactions every month
100 (m) UID based transactions (Rsbn) 50
90 Transaction value (RHS) 45
80 40
70 BJP restarts DBT 35
60 30
50 UPA stops 25
40 20
30 15
20 10
10 5
0 0
Jun 13
Jun 14
Jun 15
Jun 16
Dec 13
Dec 14
Dec 15
Dec 16
Aug 13
Aug 14
Aug 15
Aug 16
Apr 13
Oct 13
Oct 16
Feb 14
Apr 14
Oct 14
Feb 15
Apr 15
Oct 15
Feb 16
Apr 16
Feb 17
Apr 17
Source UIDAI, NPCI
Figure 62
Several schemes now use Government schemes that use UID

UID/Aadhaar as the basis
(m) Total number of beneficiaries (LHS) (%)
for beneficiary 200 100
identification 180 Percentage of beneficiaries seeded with Aadhaar 90
160 80
140 70
Many new schemes are in 120 60
the process of being 100 50
added - important ones 80 40
would be food & fertiliser
60 30
subsidies
40 20
20 10
0 0
PAHAL MGNREGS NSAP (National Scholarships Others
(LPG subsidy) (Rural Social (College and
employment Assistance University
guarantee Program - students)
scheme) pensions and
family benefit)
Source: Government of India

Ecommerce/digital boom
Figure 63
Demonetisation gave a Digital payments

much needed fillip to
25,000 (Rsbn) Credit card POS Debit card POS
cashless transactions
Mobile banking Mobile wallet
20,000
15,000
10,000
5,000
0
FY13 FY14 FY15 FY16 FY17
Source: RBI
Figure 64
Nasscom estimates Size of ecommerce

ecommerce industry in
35 (US$bn) eTravel eTailing Others
India is worth US$35bn
30
25
20
15
10
0
FY13 FY14 FY15 FY16 FY16 FY17
(old series) (old series) (old series) (old series) (new series) (new series)
Source: Nasscom
Figure 65
Smartphone penetration Smartphone and data penetration

in India has more than
No. of smartphones Mobile subscribers
doubled in past
three years Smartphone penetration (RHS) Data penetration (RHS)
1,400 (m) (%) 40
1,200 35
1,000 30
25
800
20
600
15
400 10
200 5
0 0
Mar 13
Mar 14
Mar 15
Mar 16
Mar 13
Mar 14
Mar 15
Mar 16
Mar 17CL
Mar 17CL
Source: CLSA, TRAI

A few unresolved issues/risks

Figure 66
Premium end property Residential units pricing

market is still sluggish . . .
16 (% YoY) Average pricing change across top-7 cities
14
12
10
8
6
4
2
0
(2)
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
Note: Mumbai, Delhi, Gurgaon, Bengaluru, Pune, Chennai, Hyderabad. Source: CLSA, Cushman and
Wakefield
Figure 67
. . . evident in the price Residential units sold

and the volume trends
50 (% YoY) Residential units sold (Tr 12 months)
40
30
20
10
(10)
(20)
(30)
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
Note: Top cities - NCR, MMR, Bengaluru, Chennai, Hyderabad, Pune and Kolkata. Source: CLSA, JLL REIS
Figure 68
Despite the launch of State-owned power-distribution companies’ losses

UDAY, profitability of the
0
state-owned discoms
remains under pressure
(200)
(400)
(600)
(800)
Aggregate losses (subsidy received basis)
Aggregate losses (without subsidies)
(1,000)
(Rsbn)
(1,200)
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15
Source: PFC

Corporate profitability cycle at a low

Figure 69
Corporate profitability has Corporate profit as % of GDP

been impacted due to an
8 (% GDP)
investment-cycle
7.1
slowdown, lower revenue 7 6.8
growth leading to margin
compression . . . 6 5.6 5.6
5.2 5.2
5.0
5 4.5
4.7
4.2 4.2
4 3.5
3.0 3.1
2.9 2.9
3
0
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18E
Source: CMIE, ACE Equity
Figure 70
. . . and has lagged Nifty EPS growth

nominal GDP growth
35 (% YoY) Sensex / Nifty EPS
considerably 31.0
30
25
21.5
19.3
20 18.0
14.5
15
10.0
10 7.0 7.5
5 3.0 2.6
0
(5) (4.2)
(10) (9.2)
(15)
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
Source: Bloomberg
Figure 71
Earnings revisions not Earnings being revised

looking up as yet
700 (Nifty earnings) FY17 FY18 FY19
650
600
550
500
450
400
Apr 16 Jul 16 Oct 16 Jan 17 Apr 17 Jul 17
Source: Bloomberg

Figure 72
Revenue growth has Revenue growth for domestic companies

bottomed out and should
30 (%)
be improving
25
20
15
28
10 18
13 13
12 11
5
7
4
0
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
Note: Excluding IT, Pharma, Oil & Gas and Tata Motors. Source: CLSA
Figure 73
Margin reversion as the Change in Ebitda margins - domestic companies¹ covered

soft trend in input prices
has reversed; next leg of 250
214
margin expansion will
come from pricing power/ 200 185 184
operating leverage
150
97
100
62
50
0
(11)
(50)
(60)
(100) (79)
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18CL

¹ Excluding IT, Pharma, Oil & Gas, Tata Motors and Financials. Source: CLSA
Figure 74
Corporate ROEs Corporate ROE - CLSA universe

are at a low
30 (%) ROE (LHS) Ebit margins (%) 20
26 25
25 24 18
22
20 18 18 16
16
16 15
14 14
15 13
14
12
10 12
5 10
0 8
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
Source: CLSA, Companies

Valuation at the top end

Figure 75
Market PE is off the Nifty one-year forward PE

charts; but it is based on (x)
20 One-year forward PE Average +1sd -1sd
low-cycle earnings
18
16
14
12
10
8
Aug 08 Aug 09 Aug 10 Aug 11 Aug 12 Aug 13 Aug 14 Aug 15 Aug 16 Aug 17
Source: Bloomberg
Figure 76
But valuation is a global India performance vs EMs/AxJ

issue; India’s relative MSCI India premium to MSCI EM
70 (%)
valuation doesn’t
Average premium
look as bad 60 MSCI India premium to MSCI AxJ
50 Average premium
40
30
20
10
(10)
(20)
Aug 08 Aug 09 Aug 10 Aug 11 Aug 12 Aug 13 Aug 14 Aug 15 Aug 16 Aug 17
Source: Bloomberg
Figure 77
India in line with EM in India MSCI vs EMs/AxJ

the past six months (%)
1 MSCI India vs MSCI EM MSCI India vs MSCI AxJ
0.1 0.2 0.2
0
(1)
(1.5)
(2)
(2.0)
(2.3)
(3)
(4)
(5) (4.6)
(6) (5.6)
1m 3m 6m 12m
Source: Bloomberg

Figure 78
Several stocks at a Stock avg valuation vs current

premium to average
80 (% over 10Y average)
valuations but some at a
discount too 60
40
20
0
(20)
(40)
ITC
Power Grid
Wipro
Sun Pharma
Reliance Industries
Bajaj Auto
Infosys
Larsen & Toubro
UltraTech
Hindustan Unilever
Maruti Suzuki
Asian Paints
State Bank of India
Tata Consultancy
ICICI Bank
Bharti Infratel
Oil & Natural Gas
Dr Reddy's
Coal India
Mahindra
HDFC Bank
Note: Price to book for financials and price to earnings for others. Source: CLSA, Bloomberg
Figure 79
Banks, metals, real estate By sector: FY19CL price to earnings vs EPS Cagr
appear the most
60 FY19CL PE (x)
attractive on growth vs
valuation equation Consumer
PE/G = 1
50
40
Mid-Caps
30
Cement
Media
Pharma Real estate
20 Capital Goods
Infra Auto
Banks
Software
Metals & Minning
10 Power
Oil & Gas
FY17-19CL EPS Cagr (%)
0
0 10 20 30 40 50
Note: Telecom: US$46.8bn mkt cap, EPS (-)40% Cagr, 93% PE; bubble size denotes mkt cap. Source: CLSA
Figure 80
Staples, IT don’t appear By company: FY19CL price to earnings vs EPS Cagr

as attractive as yet
50 FY19CL PE (x)
45
HUL
40
35
Ultra Tech
30
ITC
25 TCS Maruti
HDFC Bank L&T
20 Infosys RIL
15 Lupin ICICI
Coal India Dr. Reddy's
10
ONGC
5
FY17-19CL EPS Cagr (%)
0
(6) (1) 4 9 14 19 24
Note: Bubble size denotes mkt cap of the stock. Source: CLSA

Domestic flows to stay strong

Figure 81
Incremental flow of India’s household-wealth split

US$15-18bn is only 3-4%
Equities Cash
of the annual incremental
3.8% 2.3% Provident and
household saving of
about US$400bn pension funds
4.5%
Insurance funds
5.5%
Bank
Property deposits
56.0% 16.1% Total assets :
US$7.5tn
Gold
11.7%
Source: AMFI, RBI, Bloomberg
Figure 82
Equities as a percentage Equity holdings as proportion of total household savings

of total assets away
5.0 (%)
from peak 4.6
4.5
3.9 4.0
3.8
4.0
3.5
3.5
3.0 2.6
2.7 2.8
2.4
2.5 2.2 2.2
2.0
1.5
1.0
0.5
0.0
Mar 07
Mar 08
Mar 09
Mar 10
Mar 11
Mar 12
Mar 13
Mar 14
Mar 15
Mar 16
Mar 17
Source: Bloomberg, AMFI
Figure 83
Consistent strong inflows Net inflows in MF Equity schemes vs monthly market returns
into domestic equity
3,000 (US$m) Net inflows in MF Equity schemes (% MoM) 15
funds - even during
months with negative 2,500 Sensex returns MoM (RHS)
12
market return
2,000 9
1,500
6
1,000
3
500
0
0
(500) (3)
(1,000) (6)
(1,500) (9)
Jun 14
Jun 15
Jun 16
Jun 17
Dec 14
Dec 15
Dec 16
Aug 14
Aug 15
Aug 16
Oct 15
Feb 14
Apr 14
Oct 14
Feb 15
Apr 15
Feb 16
Apr 16
Oct 16
Feb 17
Apr 17
Source: Bloomberg, AMFI

Figure 84
SIP industry is now Net inflows in mutual fund Systematic Investment Plan (SIP)
US$750m/month strong;
60 (Rsbn)
nearly 85% of the SIPs go
into equity funds 49.5
50 47.4
45.8
43.4 42.7
39.7 41.0 40.5
38.8
40 35.0
37.0
33.1 33.3 34.3
31.2 31.9
30
20
10
0
May 16
Jun 16
Mar 17
Jul 16
May 17
Jun 17
Sep 16
Nov 16
Jul 17
Dec 16
Aug 16
Apr 16
Oct 16
Jan 17
Feb 17
Apr 17
Note: SIP is systematic investment plan. Source: Bloomberg, AMFI;
Figure 85
Mutual funds owned only Shareholding of FIIs and mutual funds as on Dec 2016
a small 5% of the market
Other non-
as of December 2016,
institutions
which has now gone up
7%
Individuals
9%
Insurance
companies
5%
Promoters
51%
Financial
FIIs
institutions /
21%
Banks
2%
Mutual funds
5%
Note: FII includes ADRs/GDRs. Source: AMFI, Bloomberg
Figure 86
While we expect a near New equity issuance

doubling of equity
1,200 (Rsbn)
offerings will suck out
some liquidity, we believe
inflows still outweigh 1,000
equity offerings,
supporting market
valuations 800
600
400
200
0
Source: Bloomberg, CLSA

India strategy
Sector profiles
Autos ...............................................................................................39
Banks ..............................................................................................45
Capital goods ...................................................................................51
Cement ............................................................................................57
Consumer ........................................................................................65
IT services .......................................................................................73
Media ..............................................................................................79
Metals..............................................................................................85
Midcaps ...........................................................................................91
Oil & Gas .........................................................................................97
Pharma .......................................................................................... 103
Power and infra ............................................................................. 109
Property ........................................................................................ 117
Telecoms ....................................................................................... 123
All prices quoted herein are as at close of business 24 August 2017, unless otherwise stated

India strategy
Notes

Autos
Sector outlook - Neutral
Nitij Mangal Cruising ahead

nitij.mangal@clsa.com Maruti, Eicher and Ashok are top sector BUYs
+91 22 6650 5064
India’s auto industry is seeing healthy passenger-vehicle and two-
wheeler demand. Commercial vehicles have been weak but are improving
and should pick up further next year. Sector margins improved in the past
two years but could see pressure from rising commodity prices and
regulatory costs. The sector should deliver decent low-teen profit growth
over FY17-20, along with an ROE uptick. We like OEMs with strong and
improving franchises: Maruti, Eicher and Ashok are our top picks. With this
note I assume coverage of the sector.
29 August 2017
Healthy demand trends in PVs and 2Ws, CVs weak but improving
India  Indian passenger vehicle (PV) and two-wheeler (2W) demand has been improving
in the past one to two years, excluding the impact of demonetisation.
Autos  We expect PVs to post a healthy 11% Cagr in FY18-20. Two-wheelers should see
strong 13% growth in FY18, boosted by a low base due to demonetisation, but this
should moderate to an 8% Cagr in FY19-20 due to multiple regulatory cost pushes.
 Medium & heavy commercial vehicles (M&HCVs) weakened sharply in the last one
year and are likely to decline 5% in FY18. Growth should rise to 10% in FY19-20 on
a potential pickup in the investment cycle and a gradually improving economy.
 Overall, we expect sector revenue to post a healthy 14% Cagr in FY18-20.
Commodity prices and regulations could be margin headwinds

 The collapse of metal prices in 2015 boosted auto margins in FY16 but prices of key
commodities are now in an upswing, which is likely to put pressure on margins.
 Regulatory changes - new safety norms over 2018-19 and a shift from BS-IV to BS-
VI emissions standards in April 2020 - will also drive up vehicle costs.
 Companies that are seeing strong demand and enjoy solid franchises, such as
Maruti and Eicher, are better placed to pass on the cost pressures.
Sector profit growth to moderate but still remain decent

 Auto-sector profit enjoyed a strong 26% Cagr in FY16-17, boosted by margin
expansion and a change to IndAS accounting. We expect sector-earnings growth to
moderate but remain healthy at a 14% Cagr over the next three years.
 We forecast sector ROE to inch up from 17% in FY17 to 19% by FY20. Cash
generation should remain strong and we expect aggregate cash positions to
improve further.
Prefer companies with strong and improving franchise

 We like OEMs with strong and improving franchises due to their robust growth
outlook, better earnings visibility and potential to grow faster than the industry.
 Our top OEM BUY ideas are Maruti, Eicher and Ashok. We have SELL calls on Tata
Motors, Hero and TVS.
Autos sector valuations

Company Rec Target Mcap ADTO PE (x) PB (x) ROE (%)
(Rs) (US$bn) (US$m) 18CL 19CL 20CL 18CL 19CL 20CL 18CL 19CL 20CL
Ashok Leyland BUY 130.00 4.2 21.0 21.6 17.0 13.5 4.4 4.0 3.5 21.5 24.7 27.8
Bajaj Auto O-PF 3,130.00 12.3 12.5 20.0 17.4 15.7 4.2 3.7 3.3 22.1 22.6 22.1
Eicher Motors BUY 31,500.00 12.8 23.3 37.9 29.9 24.2 11.9 9.2 7.1 35.8 34.6 33.1
Hero Motocorp SELL 2,950.00 12.0 22.9 20.7 20.0 19.0 6.7 5.9 5.2 34.6 31.2 29.2
M&M O-PF 1,585.00 12.5 26.0 15.4 12.7 11.2 1.8 1.7 1.5 14.0 14.9 15.0
Maruti BUY 9,230.00 35.2 54.8 28.1 23.9 20.7 5.6 4.8 4.2 21.1 21.7 21.8
Tata Motors SELL 380.00 18.7 57.9 15.6 9.3 8.0 2.1 1.7 1.3 13.8 20.0 18.4
TVS Motor SELL 315.00 4.3 9.7 40.7 33.7 29.1 9.6 8.0 6.7 25.7 25.9 25.1
Source: Companies, CLSA
www.clsa.com

Autos India strategy
Figure 87
M&HCVs have been weak Healthy demand trends in passenger vehicles and two-wheelers
for the past year but are
(%)
improving and should pick 40
up further next year
30
20
10
(10)
(20) PV volume growth

M&HCV volume growth
(30)
2W volume growth
(40)
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
18CL
19CL
20CL
Source: SIAM, CLSA
Figure 88
Change in ownership PV demand has shown strong inverse correlation to growth in ownership cost
costs has been benign in
recent years YoY change in monthly cost of ownership
(%) (%)
Car industry growth rate (RHS)
10 32
8 24
6
16
4
2 8
0 0
(2) (8)
(4)
(16)
(6)
(8) (24)
(10) (32)
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
18CL
Source: SIAM, Govt of India, CLSA
Figure 89 Figure 90
PV demand is moving towards urban SUVs; share of 2W demand is shifting towards scooters and premium
small cars and large sedans/MPVs is coming down motorcycles
PV industry Entry small car Premium small car 2W volume <150cc mcycles 150cc & higher mcycles
volume split (%) Entry sedan Large sedan/MPV split (%) Scooters Moped
Urban SUV Non-urban SUV
100 100 6 6 5 5 4 5 4
8 9 9 9 8 7 6
90 2 3 8 9
90
6 8 15 19
11 21 24
80 13 80 28 31 32 34
17 13 15 13
11 12
70 12 70 14 12
12
12 16 17 60 13
60 18 14 14
15 14
28
50 28 50
27 26
40 24 27 25 40
30 30 61 61 59
54 51 48 48
20 40
35 20
29 29 27 27 28
10 10
0 0
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY12 FY13 FY14 FY15 FY16 FY17 YTD'18
Source: SIAM, CLSA Source: SIAM, CLSA
40 nitij.mangal@clsa.com 29 August 2017

Figure 91
Most multinational Maruti has been steadily gaining market share in PVs for the past six years
carmakers are getting
marginalised in the Indian PV market Maruti Hyundai M&M Tata Motors
PV space with low-single- share (%) Toyota Honda Others
digit market share 100
90
80 13 16 15 5
15 17 17 16 15 15 5 6
14 8 6
70 7
14 12 8 8
8
7 8 7 8 8 8 9
8 7 7 10
60 13 9 12 17
15 14 16 17 17
13 14 14 14 16 14 16
50 14
15
15
40
30
50 47 47 46 46 46 46 47 47 47 50
45 45 45
20 38 39 42
10
0
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
YTD18
Source: SIAM, CLSA
Figure 92
Hero’s market share is In 2Ws, Bajaj and Hero are coming under pressure while Honda is gaining share
coming under pressure Hero Honda Bajaj TVS
mainly due to an 2Ws market
unfavourable demand- share (%) Yamaha Suzuki Others
profile shift towards 100
scooters and premium 90 16 15 14
18 18 15 14 13 12 13
motorcycles 80 18 13 14 14
21
20 23 14 11 9
70 23
17 19 20 19 18 12 11
26 27
60 24
22 14 13 24 27
15 19 26 30
50 28 25 12 13 27
8 8 9
40 6
1 3
30
45 49 48 45 45
20 34 34 38 41 41 41 43 41 40 39 37 37
10
0
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
YTD18
Source: SIAM, CLSA
Figure 93
Ashok’s market-share In M&HCV trucks, Ashok is gaining share from Tata Motors at a rapid pace
gains have been driven by
Market share in Tata Motors Ashok Eicher Others
new products and
M&HCV trucks (%)
network expansion
100
6 6 6 8 8 7 9
90 8 10 10 11 14 13 11 10 11 11
80 26 25 24 21 24 26 21
25 20 23 20
70 23 23 27 31 33 34
60
50
40
66 67 67 67 65 65 63 66 66
30 62 62
57 58 57 55 51 50
20
10
0
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
YTD18
Source: SIAM, CLSA
29 August 2017 nitij.mangal@clsa.com 41

Figure 94
Auto-sector revenue We expect sector revenues to post a decent 14% Cagr in FY18-20
growth should improve
40 (%) Auto sector: Revenue growth
from a 10% Cagr over 35.9
FY14-17 to a 14% Cagr 35 31.3
over the next three years 29.8
30 25.7 25.6
25
18.4
20 16.1
13.9 14.2 13.6 13.4 12.9
15
10.1 9.5
10 7.0 7.5
4.2
5 2.2
0
(5)
(5.0)
(10)
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
18CL
19CL
20CL
Based on combined financials of Ashok Leyland, Bajaj Auto, Eicher Motors, Hero MotoCorp, M&M
(standalone), Maruti, Tata Motors (standalone) and TVS Motor. Source: Companies, CLSA
Figure 95
Discounts have come Discount levels in Indian car market should come down with improving demand
down from the peak but Maruti: Average discounts
(Rs '000/vehicle) (%)
we believe there is room
24 As % of ASP (RHS) 7
for further improvement 5.6
5.7 5.8 5.7
20 5.3 4.9 4.4 6
4.7 4.8 4.2 4.0
4.2 4.2
4.2 3.8 3.8 5
16 4.1 3.9 3.5
3.8
3.6
3.3 3.3 4
12 2.9
3
8
2
4 1
0 0
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
Source: Company, CLSA
Figure 96
Sector margins improved We factor in sector Ebitda margins remaining broadly stable at FY17 levels
in the past two years but
(%) Auto sector: Ebitda margin
could see pressure from 18
rising commodity prices
and regulatory cost push 16
14.2 14.2
13.3 13.6 13.2
14 12.4 12.7 12.3 12.6 12.6
12.4 12.0
11.7
12 10.4 10.7
10.1 10.3
9.9 9.8
10
8
6
4
2
0
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
18CL
19CL
20CL

Figure 97
We expect auto-sector- We forecast sector net profit to post a healthy 14% Cagr over the next three years
earnings growth over the
30 (%) Auto sector: Earnings growth excl Tata Motors
next 3Y to be slower than
that seen in FY16-17 26
25
25
Profit growth was
boosted by sharp margin 20
expansion in FY16 and a 17
change to IndAS 14
15 14
accounting in FY17 13
11
10
6
5
4
5
0
FY11 FY12 FY13 FY14 FY15 FY16 FY17 18CL 19CL 20CL
Figure 98
We expect sector ROE to inch up over the next three years

(%) Auto sector: RoE
30 28
29
28
26 25
24
25 23
20
20 18 18 19
17 18 17
17
16
15
15
11
10
10
0
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
18CL
19CL
20CL
Figure 99
Cash generation should Aggregate net cash position of the sector should also improve over next 3Y
remain strong and we
(%) Net debt/equity
expect aggregate cash 40
positions to improve 27
further 30 25
20
10 5
3
5
0
0
(3) (3) (2)
(10) (4)
(20) (17) (16)
(30) (25)
(28) (30)
(33) (31) (34)
(40)
(39)
(50)
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
17CL
18CL
19CL
20CL

Figure 100
While Maruti’s valuations Maruti’s PE has rerated in the past two years
appear rich, we believe
30 (x) Maruti: 1Y fwd PE
these should sustain
given its growing image Avg Jan 06 Apr 14
as a quality franchise and Avg since May 14
25
one of the best large-cap
plays on discretionary
consumption 20
15
10
5
Aug 06
Aug 07
Aug 08
Aug 09
Aug 10
Aug 11
Aug 12
Aug 13
Aug 14
Aug 15
Aug 16
Aug 17
Feb 07
Feb 08
Feb 09
Feb 10
Feb 11
Feb 12
Feb 13
Feb 14
Feb 15
Feb 16
Feb 17
Figure 101
Tata is trading at 16x Tata Motors has historically traded at an 8x one-year forward PE
FY18 and 9x FY19 PE on
our estimates 13 (x) Tata Motors: 1Y fwd PE
12 Average
11
10
9
8
7
6
5
4
3
May 12
May 13
May 14
May 15
May 16
May 17
Nov 11
Nov 12
Nov 13
Nov 14
Nov 15
Nov 16
Aug 11
Aug 12
Aug 13
Aug 14
Aug 15
Aug 16
Aug 17
Feb 12
Feb 13
Feb 14
Feb 15
Feb 16
Feb 17
Figure 102
Hero is trading at 20x Hero is trading above its historical average of 15x PE
FY19 PE on our estimates
(x) Hero: 1Y fwd PE Average
22
20
18
16
14
12
10
8
Aug 07
Aug 08
Aug 09
Aug 10
Aug 11
Aug 12
Aug 13
Aug 14
Aug 15
Aug 16
Aug 17
Feb 08
Feb 09
Feb 10
Feb 11
Feb 12
Feb 13
Feb 14
Feb 15
Feb 16
Feb 17

Banks
Sector outlook - Overweight
Aashish Agarwal Stay selective

Head of India Research ICICI Bank is our top pick
aashish.agarwal@clsa.com
+91 22 6650 5075 Moderating credit growth and rising stressed-loans/credit costs have put
earnings pressure on banks. A growth uptick and the resolution of certain
Prakhar Sharma large NPL cases should ease some concerns, even if near-term credit
+91 22 6650 5058 costs remain elevated. Banks’ recent cuts to savings-deposit rates should
Aditya Jain improve NIM or enhance competitive positions through lending-rate cuts.
+91 22 6650 5054 ICICI Bank is our top pick, given low valuations and scope for the
resolution of stressed loans. We also like small private banks as a
structural play and rate IndusInd and Yes Bank BUYs.
29 August 2017
Loan growth: Total vs bank-credit growth; expect an uptick
India  While credit growth for banks has slowed to 6% YoY, overall credit growth is better
at 9%, reflecting market-share gains by bond markets (up 20% YoY).
Financial services  Private banks are gaining market share, reflecting stronger deposit franchises that
enhance their competitive edge on lending rates; better capitalisation; and a higher
share of retail loans, where growth has been much better.
 While private banks have a 25% share in loans, their share in incremental lending
in FY17 was 60%, led by market-share gains.
 We expect bank credit growth to rise to 12-13% by FY20 as the economy recovers,
aiding demand for working capital (commodity prices up) and some uptick in capex.
 Banks may also leverage the recent cuts to savings deposits to lower lending rates.
Asset-quality pressure peaking; resolution key

 Stress recognition has peaked and banks’ asset quality will start normalising from
FY19; but credit costs may stay elevated as banks need to improve coverage.
 The government and RBI have initiated resolution measures, including insolvency
proceedings against the top-12 NPLs that form about 25% of NPLs.
 A resolution, even with an assumed 60% haircut, could reduce net NPLs by 19%
and lift adjusted net worth by 9% - although this will raise near-term credit costs.
 Additionally, deleveraging by select corporations (eg, JPA, Essar) could aid
repayment/upgrade of stressed loans.
Small is big
 Smaller private banks (IndusInd, Yes and Kotak) will be able to leverage Casa
rampup to grow loans and derisk lending to better-rated borrowers.
 They also have more headroom to cut savings-deposit rates while growing Casa, as
their average rate is higher than larger banks but their Casa base is smaller.
 Every 100bps cut in the savings-deposit rate could provide a margin cushion of
about 20bps and lift earnings by up to 7%.
Private banks deserve premium valuations

 Private banks trade at a >50% premium to PSUs, which is justified by their higher
profitability and growth rates.
 ICICI Bank is our top sector pick, given its low valuations and scope for resolution
of stressed loans. We also like small private banks as a structural play and rate
IndusInd and Yes Bank as BUYs.
Bank stock valuations

Rec Target Mkt cap ADTO PE (x) PB¹ (x) ROE (%)
(Rs) (US$bn) (US$m) FY18CL FY19CL FY18CL FY19CL FY18CL FY19CL
HDFC Bank BUY 2,000 71.0 34.7 26.3 21.9 4.7 4.0 18.7² 19.3²
ICICI BUY 380 29.4 93.7 11.8 9.8 1.8 1.5 10.7² 11.9²
IndusInd BUY 1,870 15.3 22.3 27.7 22.1 4.3 3.7 16.3 17.6
SBI BUY 360 37.8 70.8 14.2 10.6 1.6 1.3 6.3 7.8
Yes Bank BUY 2,070 12.3 68.9 18.8 15.2 3.3 2.8 17.5 18.6
¹ Adjusted for NPL coverage and investment in subsidiaries; ² Adjusted for investment in subsidiaries. Source: CLSA
www.clsa.com

Banks India strategy
Loan growth to pick up; private banks gaining share

Figure 103
Expect loan growth Loan growth and nominal GDP growth

to pick up from
demonetisation lows
30 (% YoY) Bank credit growth (LHS) (% YoY) 25
Nominal GDP growth
25
20
20
15
15
10
10
5
5
0 0
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 18CL 19CL 20CL
Source: RBI, CLSA
Figure 104 Figure 105
System credit growth is Growth in system credit and bank credit Segment-wise growth in loans
300bps higher than
bank credit (% YoY) Bank credit (% Cagr) FY08-12
Bank credit incl substitutes FY12-14
25 Total credit 25 FY14-17
Bond market 20
20 18 18
20 17
14 14 13
15 15 11
23 10 10
10 8
20 10
17 5
5 8 9 10 9 8 9 5
7 6
5
0 0
Mar 16 Mar 17 Jun 17 Retail Corp Agri Total
Source: RBI, Sebi, banks, CLSA Source: Banks, CLSA
Private banks to grow Loan market share of private banks Casa market share of private banks
faster via market-share
gains aided by stronger 30 (%) In stock of loans (LHS) (%) 70 30 (%) In stock of Casa (LHS) (%) 40
Casa franchises In incremental loans In incremental Casa
25 60 25
50 30
20 20
40
15 15 20
30
10 10
20 10
5 10 5
0 0 0 0
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
Source: RBI, CLSA Source: RBI, CLSA
46 aashish.agarwal@clsa.com 29 August 2017

Figure 108
Expect margins to Net interest margins

stabilise as corporate
banks see moderation in (%) Private banks
4.0
stress/leakage of income PSU banks
on NPL
Average
3.6
3.2
2.8
2.4
2.0
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
FY19CL
FY20CL
Source: Banks, CLSA
Figure 109
Banks have cut the Decline in key rates over the past three years
benchmark lending rate
by 185bps over the (bps)
past three years 300
240
250 230
220
200 200
200 185
150
100
50
0
Loan rate AAA - 5yr Repo Rate Gsec - 10 yr Term deposit 12m CD rate
(large banks) corp bond (1-3y)
Source: Bloomberg, RBI, Banks, CLSA
Banks may use cuts in Impact of 50bp savings-deposit-rate cut Bond yields vs bank lending rate
savings-deposit rates to
improve competitiveness BoI 75 10 (%) AA - 5Y corp bond
vs the bond market PNB 33 SBI lending rate
Union 30
Canara 26 9
Corp 25
PSU banks 24
SBI 20
BoB 20 8
Average 11
Kotak 7
Yes 7 7
Axis 7
ICICI 7
IndusInd 6 6
Pvt banks 6 (% of FY19CL PBT)
Sep 16
Oct 16
Nov 16
Dec 16
Jan 17
Mar 17
May 16
Feb 17
Apr 17
May 17
Jun 16
Aug 16
Jul 16
Jun 17
Jul 17
HDFCB 4
0 10 20 30 40 50
Note: 100bps for Yes, IndusInd, Kotak. Note: Based on 1Y MCLR.

Source: Banks, CLSA Source: SBI, Bloomberg, CLSA
29 August 2017 aashish.agarwal@clsa.com 47

Asset-quality pressure peaking

Figure 112
Stressed loans have risen Stressed loans of banks, Jun 17

to 16% of total for PSUs
PNB 14 3 4 21
BOI 13 3 3 19
Canara 11 2 5 18
Union 13 1 3 17
BOB 11 3 2 16
PSU banks 11 2 3 16
SBI 10 2 2 14
Average 9 2 2 13
ICICI 9 2 11
Gross NPL
Axis 6 1 2 9
Restructured Loans
Pvt banks 4 1 6
Kotak 3 3
Others/ overlap
Yes 1 1 2
IndusInd 1 2
HDFCB 1 1 (% gross loans)
0 5 10 15 20 25
Source: Banks, CLSA
Figure 113
Expect asset-quality Gross/net NPL ratio and credit costs

pressure to ease
10 (%) Gross NPL ratio (%) 2.5
from FY18
Net NPL ratio
Credit costs (RHS)
8 2.0
6 1.5
4 1.0
2 0.5
0 0.0
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
FY19CL
FY20CL
Source: Banks, CLSA
Figure 114
About 25% of gross NPLs Estimated recoveries from larger NPLs (covered banks)
are from the top 12 NPLs
6,000 (Rsbn)
Resolution of these cases 5,134
with 60% haircuts could 5,000
drive down FY19 net NPLs
by 19% and lift adjusted 4,000
net worth by 9%
19% of FY19
3,000 net NPL & 9%
of adj net worth
2,000
1,270 508
254
1,000
508
0
Gross NPL Est. top-12 NPL Current Additional prov. Recoverable
(Mar 17) (@25%) provision value
Note: Based on Mar 17. Source: News reports, CLSA

Small is BIG
Figure 115
Small private banks have Growth in banks’ Casa deposits over FY13-17
scaled-up Casa well
Yes 42
Kotak 31
IndusInd 31
HDFCB 22
ICICI 19
Axis 17
BOI 15
Canara 15
SBI 14
PNB 14
Corp 13
BOB 13
Union 12
OBC 12
(% Cagr)
0 5 10 15 20 25 30 35 40 45
Source: Banks, CLSA
Figure 116
Casa growth has led Five-year Cagr of Casa deposits vs price

price-performance (5Y Cagr - Price)
40
IndusInd
30 Yes
HDFCB
20 Kotak
Axis
10 ICICI
SBI
BoB
0
PNB
Corp
Canara/Union
(10)
OBC
(5Y Cagr - Casa deposits)
(20) BoI
0 10 20 30 40 50 60
Note: Casa growth for Kotak is over two years to Mar-17 (adjusted for merger with ING Vysya Bank).
Source: Banks, CLSA
Figure 117
Market share in Market share in incremental Casa

incremental Casa (%)
has ramped up 12 FY08-11 FY11-14 FY14-17
9.6
10
8
6.8 6.9
5.7
6
4.7 4.7
4
2.4
1.8
2
0.8
0.4
0
Axis HDFCB ICICI Yes IndusInd
Note: Kotak excluded due to merger with ING Vysya. Source: Banks, CLSA
29 August 2017 aashish.agarwal@clsa.com 49

Private banks command premium valuations

Figure 118
Private banks trade at One-year forward adjusted PB premium of private banks over PSUs
+50% premium to PSU
140 (%)
players . . .
120
100
80
60 56%
40
20
0
Aug 07 Apr 09 Dec 10 Aug 12 Apr 14 Dec 15 Aug 17
Source: Banks, CLSA
Figure 119
. . . as justified by their Valuation and profitability
higher ROEs
P/adj book (FY18CL) (x)
6
5 IndusInd
HDFCB
Kotak
4
Yes
Corp
Indiabulls
3 BoI Union
Axis
Canara
PNB LICHF
ICICI
2 SBI
SHTF
BoB IDFCB
REC
1 PFC
IDFC
ROE (FY18CL) (%)
0
0 5 10 15 20 25 30
Source: Banks, CLSA
Figure 120
ICICI trades at a discount Private banks' March-18CL adjusted PB

to peers and can rerate as
5 (x)
asset quality issues 4.7
are resolved 4.3
4.2
4
3.3
3
2.4
2 1.8
1.5
0
IDFCB ICICI Axis Yes Kotak IndusInd HDFCB
Source: Banks, Bloomberg, CLSA

Capital goods
Bharat Parekh Execution picking up

bharat.parekh@clsa.com Construction, defence drive orders to six-year high in FY17
+91 22 6650 5020
E&C firms have had a capex revival with 16% YoY backlog growth to
US$117bn in FY17. Ebitda margins have also recovered. Drivers remain
government-led construction and defence. Initiatives on opening new
funding lines have helped infuse much-needed liquidity (US$1.4bn) with
IRB Infra concluding an IPO and Larsen & Toubro likely to follow suit for
some subsidiaries. Leverage is precarious for some but consensus has not
cut credit ratings. BUY early-cycle plays (L&T); compelling asset owners
(IRB); and beneficiaries of urban infra capex (Sadbhav, Nagarjuna).
29 August 2017 Execution likely to pick up pace over next two years . . .
 Capital-goods posted an 8% revenue Cagr over FY10-17, mainly due to 4% order-
India inflow growth during the period and a high order backlog in the period before.
 A pickup in power-generation equipment, roads, urban infrastructure and defence
Capital goods will see order inflows rebound over FY17-19CL.
 Revenue growth of 8.6% in 4QFY17 was the highest in 13 quarters, showing initial
signs of a pickup, led by L&T. Bank-credit growth also increased.
 L&T’s revenue represents about 1.2% of India’s gross fixed-capital formation.
. . . and Ebitda margins to expand on operating leverage
 Capital-goods firms delivered a 1% compounded return during FY10-17, as higher
inflation went to margins. Ebitda margins shrank from 21% to 10% over the period.
 As they execute the recently-built order backlog, we expect utilisation to improve
and operating leverage to kick in, which will boost margins.
 Additionally, digitisation initiatives (L&T) and milestone achievements will help to
take margins to 12% by FY19.
Comfortable balance sheet, but working capital rising
 Capital-goods firms under our coverage have strong balance sheets and low debt.
BHEL and Voltas are cash rich. L&T’s leverage is high as a result of its consolidation
of L&T Finance.
 L&T’s recent focus on its balance sheet, rather than chasing just P&L growth, is
reflected in reduced working capital.
 Overall sector leverage remains low at 1x.
 BHEL’s working-capital cycle has deteriorated on higher debtor days (300 versus
200 in FY10).
Prefer L&T; SELL Voltas
 With domestic infra capex showing signs of revival, led by government spending,
we prefer early capex-cycle plays, especially L&T.
 We expect L&T’s consolidated ROE to rebound to 15% on double-digit topline
growth, margin expansion, listing subsidiaries to unlock value, divesting asset-
heavy business, turnaround in loss-making subs and improved working-capital.
 BUY L&T as we believe it is a good proxy for domestic capex, and the company has
a credible strategy to improve growth and ROE.
 SELL Voltas as its air-conditioning business is trading at 51x FY18CL, which is rich
and isn’t factoring in risks of technology shift to inverter ACs and rising competition.
Capital-goods stock valuations

Company Rec Target Market cap EPS Cagr PE (x) PB (x) ROAE (%)
price (Rs/sh) (US$m) 17-19 FY17 FY18 FY19 FY17 FY18 FY19 FY17 FY18 FY19
Cap goods
BHEL SELL 125 5,437 38 29.0 18.2 15.3 1.0 1.0 0.9 3.5 5.5 6.3
L& T BUY 1,400 25,892 22 21.6 17.1 14.4 3.5 3.3 3.0 11.1 13.3 14.6
Voltas SELL 366 2,789 9 34.9 33.1 29.3 5.4 4.9 4.4 16.6 15.4 15.7
Average 28.5 22.8 19.7 3.3 3.1 2.8 10.4 11.4 12.2
Construction
JKIL BUY 355 226 32 14 10 8 1.0 0.9 0.9 8 10 11.7
NJCC BUY 110 730 17 19 12 11 1.4 1.3 1.2 7 8 8.1
Sadbhav Eng BUY 360 705 15 15 11 9 2.8 2.5 2.2 12 12 12.8
Average 16 11 9 1.4 1.3 1.2 8 10 11.7
Source: CLSA
www.clsa.com

Capital goods India strategy
Green shoots visible: Backlog up 15%+ = Future topline

Figure 121
Backlog has improved Order backlog for 29 E&C companies

substantially on high
8,000 (Rsbn) CG - Power CG - Non Power (%) 35
growth in government-led
Construction Developers
construction
7,000 YoY growth % (RHS) 30
6,000 25
5,000 20
4,000 15
3,000 10
2,000 5
1,000 0
0 (5)
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
Note: ABB, Alstom T&D, Bharat Electronics, BHEL, Crompton Greaves, HCC, IRB Infrastructure, ITNL,
Jkumar Infra Projects, Kalpatru, KEC, KNR Construction, L&T Cons, NBCC, NCC, Punj Lloyd, Sadbhav
Engineering, Siemens, Simplex and Thermax. Source: CLSA, Companies
Figure 122
Ratio of order backlog to Capital goods CLSA universe: Order backlog and coverage ratio
sales (for our coverage)
4,000 (Rsbn) Total (LHS) Coverage 3.3
has been reducing after a
significant rise during
3,500 3.1
FY13-16 . . .
3,000
2.9
. . . which is led by a 2,500
pickup in execution, 2.7
backlog cleanup and delay 2,000
in receipt of large orders 2.5
1,500
2.3
1,000
500 2.1
0 1.9
Note: Coverage companies: BHEL, L&T and Voltas. Source: CLSA, Companies
Figure 123
BHEL has seen backlog BHEL order backlog & YoY growth
growth slow in past few
2,000 (Rsbn) Order backlog YoY growth (RHS) (%) 60
years led by government’s
myopic view of surplus 50
thermal power 1,500
40
1,000 30
20
500
10
0 0
(10)
(500)
(20)
(1,000) (30)
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17CL
FY18CL
FY19CL
Source: CLSA, Company
52 bharat.parekh@clsa.com 29 August 2017

Figure 124
L&T’s FY17 order L&T E&C order backlog growth

backlog/sales ratio was
50 (%)
3.7x for its E&C segment
45
40
35
30
25
20
15
10
5
0
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
FY19CL
Figure 125
Order inflows have Capital goods CLSA universe: Order inflows and YoY growth
flattened in the past two
2,500 (Rsbn) Total (LHS) YoY growth (%) 40
years led by BHEL . . .
2,000 30
. . . government
20
companies have led 1,500
capex in recent quarters
10
1,000
0
500
(10)
0
(20)
(500) (30)
(1,000) (40)
Figure 126
Over FY12-15 revenue Capital goods CLSA universe: Revenue and growth
saw 3% Cagr as economic
2,000 (Rsbn) Total (LHS) YoY growth (%) 25
activity stayed subdued
and execution weak 1,800
20
1,600
Backlog lead to faster 1,400
execution post FY15 15
to date . . . 1,200
1,000 10
. . . which we expect to
continue post FY17 800
5
600
400
0
200
0 (5)
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18CL FY19CL
Source: CLSA, coverage companies
29 August 2017 bharat.parekh@clsa.com 53

Ebitda to improve on operating leverage

Figure 127
Ebitda margins have Capital goods CLSA universe: Ebitda margins

weakened from FY11 as
higher inflation led to 17 (%)
reduced margins
16
15
14
However, as utilisation 13
improves as the high
order backlog is executed, 12
operating-leverage 11
benefits will help to
increase margins 10
9
8
7
Figure 128
BHEL’s material costs BHEL - Operating costs as percentage of revenue

have remained at (%)
80 Staff Others Material
57-61% post FY10
70
60
50
40
30
20
10
0
Figure 129
L&T’s staff costs have L&T - Operating costs as % of revenue

risen from 5% in FY10
to 13% in FY17 . . . 80 Material & Subcontracting Staff Others
70
60
50
40
30
20
10
0

ROE to rise on a low base on PAT growth & reallocation

Figure 130
Our capital-goods Capital goods CLSA universe: Gearing

coverage companies have
1,400 (Rsbn) Total debt (LHS) Net debt/equity (x) 1.2
strong balance sheets
1,200 1.0
Leverage has increased 1,000

(still below 1x) on 0.8
consolidation of L&T 800
finance’s debt . . . 0.6
600
0.4
400
200 0.2
0 0.0
Figure 131
. . . though ROE has fallen Capital goods CLSA universe: ROE

in years gone by
25 (%)
20
We expect returns to
increase on margin
expansion due to lower 15
commodity prices and
L&T asset-light strategy
and divestures of its 10
development-project
portfolio
5
0
Figure 132
L&T’s working capital is L&T parent-level: Core working capital

seeing a decline on
25 (% of net sales)
consistent management
efforts to keep working 23
capital under control even
at the expense of P&L 21
19
17
15
13
11
9
7
5
FY11 FY12 FY13 FY14 FY15 FY16 FY17
Source: CLSA

L&T trades below historical avg, while Voltas is expensive

Figure 133
BHEL’s stock is trading BHEL stock price and OB/sales

near its all-time
0.9 (x) EV/Orderbook Average
low EV/OB
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
Mar 10
Jun 10
Mar 11
Jun 11
Mar 12
Jun 12
Mar 13
Jun 13
Mar 14
Jun 14
Mar 15
Jun 15
Mar 16
Jun 16
Sep 10
Dec 10
Sep 11
Dec 11
Sep 12
Dec 12
Sep 13
Dec 13
Sep 14
Dec 14
Sep 15
Dec 15
Sep 16
Source: CLSA
Figure 134
Voltas is trading above its Voltas: One-year-forward PE

long-term average PE
(x)
of 19.4x . . . 40
35
30
+1sd26.78x
. . . its AC business is 25
grossly expensive, trading
20 avg19.38x
at 50x FY18CL EPS,
despite a technology shift
15
to inverter ACs, where
1sd11.99x
Voltas is not a leader (LG) 10
& competitive challenges
5
0
Mar 10 Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17
Source: CLSA, Bloomberg & Company
Figure 135
L&T is trading L&T’s 12-month forward PE

below its long-term
40 (x)
average PE of 26x, which
is attractive . . .
+1sd31.59x
30
avg25.94x
. . . given its bottom-cycle
earnings and credible
strategy to turn around 20 -1sd20.29x
loss-making businesses
or divest them
10
Mar 10 Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17
Source: CLSA

Cement
Vivek Maheshwari Strong growth foundation

vivek.maheshwari@clsa.com Steady recovery ahead with rising margins and ROE
+91 22 6650 5053
India’s cement industry is on course for a strong recovery after a decade
Bhavesh Pravin Shah of contraction. An expected demand pickup, led by a cyclical recovery and
+91 22 6650 5009 tapering of supply additions will drive up industry utilisation levels. This
should render pricing power to the industry and help margin expansion.
This will also strengthen the balance sheet and lead to a 25% earnings
Cagr over FY17-20CL, allowing above-average valuations to continue. Our
top picks are Ambuja and ACC.
Rise in utilisation to drive up prices
29 August 2017  We expect the cement industry to enjoy a sustained recovery in utilisation rates
over the next five years, with supply growth falling and a likely pickup in demand.
India  Utilisation has probably bottomed at 64% in FY17 and will rebound to more than
70% by FY20 and rising entry barriers (longer timelines to add capacity) will lift it
Materials to more than 75% over next five years.
 We project around a 7.5% industry-demand Cagr as a cyclical recovery is
underway, which would be well ahead of incremental capacity adds.
Margin expansion ahead; profit to rise
 Despite the rise in capital costs in the past decade, industry-unit profitability has
remained around the same level as it was 10 years ago.
 We believe this will change as expansion in utilisation rates render margin-accretive
cement-price hikes.
 We forecast a 6-7% cement-pricing Cagr, given a rise in utilisation levels.
 While the industry has benefited from lower energy prices in the past few years,
this has already turned and energy costs are on the rise; freight costs may,
however, see some benefits from better logistical movement post GST.
 Overall, we expect unit Ebitda for the industry to improve from around Rs850/t in
FY17 to Rs1,000-1,200/t over FY19-20CL.
Expansion in ROE and strong balance sheet
 We believe the rise in profitability, along with an improvement in asset turn, will
result in a steady expansion in return ratios over the next three years.
 Despite the poor macro backdrop, balance sheets for most companies have
remained strong with ACC, Ambuja and Shree having net cash balance sheets.
 The acquisition of JPA’s assets, along with negative FCF, have raised UltraTech’s net
gearing in FY18. But overall gearing remains comfortable and with a five-year
moratorium on debt repayment, it could turn debt free in the next three years.
 We forecast a 16% Cagr in operating cashflow over FY17-20 and expect rising FCF.
Top picks: Ambuja and ACC
 Notwithstanding the near-term volatility, we believe the cement sector is on course
for a strong recovery.
 Our top picks are Ambuja and ACC. We like UltraTech as well but there may be
quarter to quarter volatility following the integration of JPA assets.
 We are negative on Shree and Ramco on expensive valuations.
 A demand pickup delay, renewed aggression to add capacity, a rise in input prices
or government intervention on price hikes are key risks to our positive sector view.
Cement sector valuations

Stock Rec Target M cap ADTO PE (x) PB (x) RoE (%)
(Rs) (US$bn) (US$m) FY18 FY19 FY20 FY18 FY19 FY18 FY19 FY20
ACC ACC O-PF 2,050 5 12 42 30 24 4 4 9 12 14
Ambuja Cements Ambuja BUY 325 8 10 39 29 25 3 3 7 9 10
Shree Cement Shree U-PF 18,750 9 4 37 27 22 6 5 19 21 22
The Ramco Cements Ramco SELL 625 2 3 24 20 16 4 3 16 17 18
UltraTech UltraTech O-PF 4,700 17 16 42 28 20 4 4 10 14 17
Note: Calendar year-ends for ACC and Ambuja. FY18 refers to CY17 and so on. Source: CLSA
www.clsa.com

Cement India strategy
Demand has been sluggish for the past few years

Figure 136
Overall cement-demand Annual cement-demand growth

growth has trended below Annual domestic demand growth
20 (% YoY)
its long-term average
over the past five years Long term average
16
12
(4)
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
18CL
19CL
20CL
Source: CMA, Industry, CLSA
Figure 137
Long-term cement Long-term ratio of cement-demand growth over real GDP growth
demand to GDP multiplier
3.0 (x)
has declined from 1.2x
(few years back) to 1x
2.5
2.0
Average = 1x
1.5
1.0
0.5
0.0
(0.5)
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
Figure 138
Housing is the bedrock of Estimated sectoral mix for cement demand

cement demand, which
has been under pressure
due to weak consumer Commercial
sentiment 15%
Rural housing
Infrastructure 35%
20%
Urban housing:
Tier 2 & other Urban housing:
cities Tier 1 cities
20% 10%
Source: CEIC, CMIE, CemNet, CMA, CLSA
58 vivek.maheshwari@clsa.com 29 August 2017

Utilisation rates are set to improve

Figure 139
Unlike past decade, we Growth in industry demand and supply

expect supply additions to
20 (%) Demand Effective capacity
trail demand growth over
the next few years
15
10
(5)
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
18CL
19CL
20CL
Source: CLSA
Figure 140
We expect capacity Regional-wise capacity additions

growth to taper across all
8 (% Cagr) FY12-17 FY17-20CL
regions compared to the
past five years
7
0
North East South West Central All India
Source: CLSA
Figure 141
Industry utilisation rates Industry utilisation rate

are set to rise over the
100 Average adjusted capacity utilisation (%)
next few years
90
80
70
60
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
18CL
19CL
20CL
Source: CLSA, Company, CMA
29 August 2017 vivek.maheshwari@clsa.com 59

Energy prices have hardened - potential ahead in freight-cost saving

Figure 142
Freight forms over 30% Trend in pet-coke prices

of costs where there
could be savings due to
better truck turnaround
time under GST regime
Others Material
26% 22%
Power & Fuel

22%
Freight
30%
Source: CLSA
Petcoke is more than Fuel mix Freight mix

70% of fuel mix
Others Sea
5 3
Imported
10
Roads are 64% of Linkage

Rail
33
overall freight mix 12
Road
64
Petcoke
73
Source: CLSA Source: CLSA
Figure 145
Rise in petcoke prices Petcoke prices

have shown up in
recent results 120 (US$/t)
100
80
60
40
20
0
Jan 15 May 15 Oct 15 Mar 16 Aug 16 Jan 17 Jun 17
Source: CLSA

Pickup in cement prices to aid unit Ebitda

Figure 146
Cement prices to rise on Sector unit realisations

recovery in demand and (Rs/t) (%)
6,000 Realisations % YoY (RHS) 40
rising utilisations
35
5,000 30
25
4,000
20
15
3,000
10
5
2,000
0
1,000 (5)
(10)
0 (15)
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
18CL
19CL
20CL
Figure 147
After two years of decline, Sector unit costs

unit costs are likely to be (Rs/t) (%)
4,500 Unit cost % YoY (RHS) 20
on an uptrend
4,000
15
3,500
3,000 10
2,500
5
2,000
1,500 0
1,000
(5)
500
0 (10)
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
18CL
19CL
20CL
Figure 148
Overall unit Ebitda to rise Sector unit Ebitda

over the next three years
1,400 (Rs/t)
1,200
1,000
800
600
400
200
0
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
18CL
19CL
20CL

Healthy balance sheet with strong cashflows and improving ROE

Figure 149
Gearing for cement Trend in net gearing level for our coverage universe
industry remains
70 (%)
at low levels
60
50
40
30
With acquisition of JPA’s 20

assets, gearing for 10
UltraTech has increased,
impacting overall gearing 0
for our coverage universe
(10)
(20)
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
18CL
19CL
20CL
Figure 150
Overall cashflows are Trend in OP cashflow and free cashflow

strong for our
200 (Rsbn) OpCF FCF
coverage universe
150
100
Negative FCF in FY18 is 50

due to UltraTech’s
acquisition of JPA assets 0
(50)
(100)
(150)
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
18CL
19CL
20CL
Source: CLSA, Company; FY16 FCF cannot be accurately determined due to IndAS adjustments
Figure 151
ROE at decade low and Sector ROAE

set to rise from
60 (%)
current levels
50
40
30
20
10
0
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
18CL
19CL
20CL

Premium valuations to sustain

Figure 152
India’s cement industry Sector PE

PE is 1sd above
40 (x)
historical mean
35
+1sd30.97x
30
25
avg21.30x
20
15
-1sd11.63x
10
0
Figure 153
Even EV/Ebitda is 1sd Sector EV/Ebitda

above historical mean
22 (x)
20
18
16
+1sd15.35x
14
12
avg10.58x
10
8
6 -1sd5.82x
4
2
Figure 154
Asset valuation for Sector EV/t

cement companies is
300 (US$/ t) Industry Average
higher than the
long-term average
250
200
150
100
50
0
Aug 06 Aug 07 Aug 08 Aug 09 Aug 10 Aug 11 Aug 12 Aug 13 Aug 14 Aug 15 Aug 16 Aug 17

Notes

Consumer
Sector outlook - Underweight
Vivek Maheshwari Revival on the cards

vivek.maheshwari@clsa.com Growth to return; margins to remain rangebound
+91 22 6650 5053
The weak macro environment, subdued consumer sentiment and one-off
Bhavesh Pravin Shah issues (demonetisation and GST) have pushed FMCG growth to decade-
+91 22 6650 5009 low levels. We expect gradual improvement, coming off a low base with
better consumer sentiment. Already close to peaks, we expect margins to
remain rangebound, although there may be near-term risks in some
cases. Valuations are at a historical high and we stay selective.
Revenue growth to pick up
 Overall FMCG growth remains subdued and is trending at decade-low levels.
 Pressure is particularly high in the rural segment, where the wholesale channel has
29 August 2017
been significantly disrupted by demonetisation and the GST.
India  During FY16-FY17, staples revenue posted a 2-5% Cagr, the lowest in a decade.
 We expect growth to recover over FY18-20, led by improved consumer sentiment,
Consumer driven by a cyclical recovery; normal monsoons; normalcy in the wholesale
channel; and a supportive base.
Margins to remain rangebound
 Over the past few years, companies have seen strong gross-margin expansion,
which are close to all-time highs for our staple coverage.
 While the industry has ploughed money back via higher A&P spend, there has been
expansion in Ebitda margins as well.
 Over the next few years, we expect no material margin gains. Instead, we forecast
fairly rangebound margins led by modest cost inflation, explicit price hikes and
continued premiumisation.
High cash generation and best in class return ratios
 India’s consumer sector has strong balance sheets, as most companies in our
coverage are net cash, with debt only related to acquisitions.
 Working capital is also comfortable due to lower receivable and inventory days, and
elongated payable cycles with few companies in negative territory.
 The consumer industry has best-in-class return ratios, with sectorwide ROE of 30%
 We expect return ratios to trend up in the next few years with a pickup in growth.
Above average valuations - be selective
 Heightened investor focus on quality and cash-generating businesses, along with
fewer opportunities elsewhere, have led sharp multiple expansions in the sector.
Most companies are trading one standard deviation above 10-year averages.
 We like Hindustan Unilever (superior execution), Emami & Dabur (better earnings
visibility and reasonable valuations) and GSK (valuations).
 Within discretionary, we like Jubilant Foods (signs of turnaround), Nestle (growth
focus) and Titan.
 We would avoid ITC (tax woes), Godrej and Marico (international volatility and
expensive valuations) and United Spirits (regulatory headwinds).
Consumer stocks valuations
Stock Rec Target M cap ADTO PE (x) PB (x) RoE (%)
A/ Paints SELL 1,080 17 16 50 43 38 13 11 27 27 27
Colgate SELL 1,000 5 6 45 38 33 20 17 47 47 47
Dabur O-PF 350 8 7 38 33 28 9 8 26 26 26
Emami BUY 1,380 4 3 64 45 35 13 11 21 26 29
GSK BUY 6,450 4 1 33 28 25 7 6 21 22 23
Godrej SELL 940 9 13 43 35 30 10 9 26 27 27
HUL O-PF 1,250 41 25 51 43 37 36 34 73 81 88
ITC U-PF 285 54 78 31 28 25 7 6 23 23 23
Jubilant Foods BUY 1,900 1 20 77 49 34 10 8 13 18 22
Marico SELL 300 6 7 48 40 35 16 14 35 37 39
Nestle O-PF 7,550 10 5 53 43 36 19 17 38 42 45
Titan BUY 700 9 21 52 41 35 11 9 22 24 24
USL SELL 1,600 6 25 87 65 47 16 10 21 18 17
Varun BUY 650 2 1.3 48 34 25 5 4 10 13 16
Westlife BUY 300 1 0.2 960 139 55 8 7 1 5 13
Note: Calendar year-ends for Nestle and VBL. FY18 refers to CY17 and so on. Source: CLSA
www.clsa.com

Consumer India strategy
Growth at decade-low levels

Figure 155
Overall FMCG growth Overall FMCG growth in urban and rural India
rates remain subdued
14 (Index) Urban Rural
12
Pressure is much higher 10

in rural India
8
0
2012 2013 2014 2015 2016
Source: Hindustan Unilever, CLSA
Figure 156
Underlying volume Hindustan Unilever’s underlying volume growth and realisation/mix

growth for HUL has been
16 (% YoY) Volume Realisation/mix
weak recently
14
12
10
8
6
4
2
0
(2)
(4)
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 1Q18
Figure 157
We estimate gradual Revenue growth for our staples¹ universe

pickup in revenue growth
for our coverage universe 25 (% YoY)
20
15
10
0
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 18CL 19CL 20CL
¹ Includes HUL, Nestle, GSK, Dabur, Marico, GCPL, Emami and Colgate. Source: Company CLSA

Demonetisation & GST - Big channel disruption

Figure 158
About 35% of FMCG sales Revenue split for India FMCG sales
are channelled through
Canteen stores
the wholesale platform,
5%
which was severely
disrupted by
demonetisation and GST- Modern trade
related challenges 10%
Mom and pop

(direct)
Mom and pop 50%
(indirect)
35%
Figure 159
HUL has the best direct Distribution reach of key FMCG firms
distribution model in
8 (m) Direct Indirect
India within FMCG peers
0
HUL ITC Dabur Colgate GCPL Marico Nestle Emami GSK
Figure 160
Volumes for most Recent volume growth trend for key staple companies
companies has
(% YoY) 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18
significantly declined over
past few quarters owing HUL 6.0 7.0 6.0 4.0 4.0 (1.0) (4.0) 4.0 0.0
to demonetisation and
ITC - Cigarettes (15.0) (13.0) (4.0) 0.0 3.0 3.5 0.0 0.0 2.0
GST related challenges
Marico - India 6.0 5.5 10.5 8.4 8.0 3.4 (4.0) 10.0 (9.0)
GCPL - India 13.0 9.0 9.0 6.0 3.0 9.0 (3.0) 5.0 0.0
Dabur - India 8.1 5.0 (2.5) 7.0 4.1 4.5 (5.2) 2.4 (4.4)
Emami - India 15.4 13.5 9.3 18.0 18.0 11.0 0.2 (1.5) (18.0)
Colgate 3.0 3.0 1.0 6.0 6.0 4.0 (12.0) (3.0) (5.0)
GSK - HFD 0.0 (0.2) 0.0 0.0 0.0 (3.5) (17.0) (0.5) 0.0

Input-cost inflation has been fairly benign

Figure 161
After steep deflation in Prices for key raw materials

FY16, the overall raw (Indexed to 100)
150 Polypropylene LAB Palm oil
materials index
remains benign 140
130
120
110
100
90
80
70
60
50
Jul 12
Jul 13
Jul 14
Jul 15
Jul 16
Jul 17
Oct 12
Jan 13
Apr 13
Oct 13
Jan 14
Apr 14
Oct 14
Jan 15
Apr 15
Oct 15
Jan 16
Apr 16
Oct 16
Jan 17
Apr 17
Figure 162
Input basket of Asian Proportion of raw materials linked to crude price

Paints, HUL and GCPL (%)
50
have a high correlation to
crude prices . . . 45
40
35
. . . but low for
Nestle and GSK 30
25
20
15
10
APNT HUL GCPL CLGT Dabur MRCO NEST GSK
Source: CLSA
Figure 163
Benign input prices and Trend in gross margins for staples¹ universe
premiumisation have led
to decade-high 55 (% YoY)
gross margins
54
53
52
51
The FY16-20CL period is 50

not comparable to prior 49
years due to transition to
IndAS accounting, where 48
trade promotions are
directly netted-off from 47
revenue resulting in
46
optically low GMs
¹ Includes HUL, Nestle, GSK, Dabur, Marico, GCPL, Emami and Colgate. FY16 onwards financials are
based on IndAS accounting. Source: Company, CLSA

A&P levers to keep Ebitda margins range-bound

Figure 164
Firms cut A&P spend in Trend in A&P spends for staples¹ universe
FY17 as well as 1QFY18,
14 (%)
given uncertainties
around demonetisation
and GST 12
10
8
FY16-20CL not
comparable due to IndAS,
6
where trade promotions
are directly netted-off
from revenue resulting in 4
optically low A&P spend
2
0
¹ Includes HUL, Nestle, GSK, Dabur, Marico, GCPL, Emami and Colgate Source: FY16 onwards financials
are based on IndAS accounting. Source: Company, CLSA
Figure 165
We estimate overall Trend in Ebitda margins for staples¹ universe

Ebitda margins to remain
(%)
rangebound 25
20
FY16-20CL not 15
comparable due to IndAS,
are directly netted-off 10
from revenue, resulting in
optically high Ebitda
margins 5
0
¹ Includes HUL, Nestle, GSK, Dabur, Marico, GCPL, Emami and Colgate FY16 onwards financials are based
on IndAS accounting. Source: Company, CLSA
Figure 166
Margins are in the range Ebitda margins in FY18

of 18-20% for most firms
except Colgate and 35 (%)
Emami
30
25
20
15
10
0
Marico HUL Dabur Sector Nestle GCPL GSK Colgate Emami
Note: CY17 for Nestle India. Source: Company, CLSA

Strong balance sheet and return ratios to remain healthy

Figure 167
Overall balance sheet Trend in working capital for staples¹ universe

position as well as
working capital remains 10 (days)
strong
5
(5)
FY16-20CL not
comparable due to IndAS, (10)
(15)
are directly netted-off
from revenue resulting in
(20)
optically higher
working capital
(25)
(30)
¹ Includes HUL, Nestle, GSK, Dabur, Marico, GCPL, Emami and Colgate Source: Company, CLSA
Figure 168
We expect gradual Trend in ROAE for staples¹ universe

improvement in ROAEs
with a pickup in revenue (%)
100
growth and rangebound
margins 90
80
70
60
FY16-20CL not
comparable due to IndAS, 50
where dividends are not 40
accounted unless
approved by shareholders 30
resulting in higher 20
networth and optically
low return ratios 10
0
¹ Includes HUL, Nestle, GSK, Dabur, Marico, GCPL, Emami and Colgate Source: Company, CLSA
Figure 169
HUL has the highest ROAE ROAE for key staple companies for FY18
in our coverage universe 80 (%)
70
60
50
40
30
20
10
0
GSK GCPL Dabur Sector Marico Emami Nestle Colgate HUL
Note: CY17 for Nestle India. Source: Company, CLSA

High valuations
Figure 170
Valuation gap between HUL versus ITC PE

HUL and ITC has widened
recently due to high 60 (x) HUL ITC
cigarette taxes under GST
50
40
30
20
10
0
Source: CLSA
Figure 171
MNC staples are trading PE for MNC staples¹ universe

above 10-year
60 (x)
average valuations
55
50
+1sd46.18x
45
40
35 avg35.53x
30
25 -1sd24.87x
20
15
¹ Includes Nestle, GSK and Colgate Source: Company, CLSA
Figure 172
Domestic staples are PE for domestic staples¹ universe

trading 1sd above 10-year
(x)
average valuations 45
40
35 +1sd35.22x
30
avg27.96x
25
-1sd20.69x
20
15
10
¹ Includes Dabur, GCPL and Marico Source: Company, CLSA

Notes

IT services
Ankur Rudra On the back foot

ankur.rudra@clsa.com Softening growth, building for future, returning cash
+91 22 6650 5059
Growth at Indian IT firms is stabilising in mid-to-high single digits after
24 months of erosion. Visibility is clouded by spending delays in verticals
such as financial services and retail, particularly in North America. Under
pressure from Cloud, automation and the double-edged impact of digital,
firms are trying to futureproof businesses. This means a pause in growth,
higher retraining and a returning focus on capability building M&A. More
willingness to return cash (dividends and buybacks) and inexpensive
valuations keeps the sector attractive. HCL and TCS are our key BUYs.
29 August 2017
Crucial to improve growth visibility
India  Indian IT firms have seen constant currency (CC) YoY growth slow to 7-8% over
the past couple of years as large verticals (financial services, retail), geos (USA)
Technology and services (application development and maintenance) slow.
 Deal conversions and sizes have moderated further since late 2016, which have
impacted growth visibility.
 Much of the growth-recovery hope resides on an acceleration in September 2017
and a stronger-than-seasonal second half for Infosys, TCS and Wipro.
Indians need to rotate to Digital faster

 Digital services vary between 18% and 23% of revenue for the top-five Indian IT
firms versus 50% for Accenture, and are thus punching below their weight in an
important market.
 Part of this should change as clients move from consulting to implementation.
 Indian firms also need to up the ante on programmatic M&A.
Margins and per-employee economics are under pressure

 Rupee appreciation is the biggest source of margin pressure in FY18.
 Increased pricing pressure in legacy contracts is being countered by stronger
adoption of automation.
 A rising proportion of local hiring in the USA is also likely to pressure margins.
 Redundancies, increasing utilisation and lower wage hikes are being used to
overcome margin impact in FY18.
Capital returns and valuations underpin near-term attraction

 Indian IT has underperformed broader markets this year, led by Infosys/TechM
 An underappreciated recovery, buybacks and valuations have led outperformance
at Wipro and HCLT, which have outperformed the sector.
 Inexpensive valuations, stronger capital return and the growing confidence that the
worst of the slowdown is behind us, underpins our constructive view on the sector.
 HCLT is our top BUY given attractive valuations, consistent performance and
stronger US-dollar-Ebit growth.
 We also like TCS (BUY) for its ability to exploit a recovery in financial services and
digital, and Wipro (O-PF) for its turnaround potential and low expectations.
Tech stocks’ valuations

Stock Rec Target MCap ADTO PE (x) PB (x) ROE (%)
HCL Tech BUY 1,080 19.5 21 14.7 14.3 12.5 3.6 3.4 27.0 24.5 25.2
Infosys BUY 1,070 31.4 94 14.2 14.7 14.0 3.0 2.7 22.0 19.2 18.9
TCS BUY 2,850 76.7 45 18.7 19.2 16.5 5.6 6.6 32.6 31.5 38.3
Tech Mahindra SELL 370 6.7 18 13.6 13.5 13.1 2.3 2.1 18.1 16.3 15.3
Wipro O-PF 310 22.0 15 16.7 15.7 14.4 2.7 2.7 17.2 16.9 17.7
Source: CLSA
www.clsa.com

IT services India strategy
Growth to bottom out at 7-9% for leading Indian IT firms

Figure 173
Growth in IT services Indian IT exports

exports has slowed down (US$bn) (%)
120 India IT exports % YoY (RHS) 60
to single digits . . .
100 50
80 40
60 30
40 20
20 10
0 0
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
Source: CLSA, Nasscom
Figure 174
. . . but the share of global Market share of Indian IT companies

spending is sub 6% for
(%)
top-six Indian IT firms 6
0
2008 2009 2010 2011 2012 2013 2014 2015 2016
Note: TCS, Infosys, Wipro, HCL Tech, Tech Mahindra, Cognizant. Source: IDC, CLSA
Figure 175
Revenue growth slowed Industry US-dollar revenue growth

in the past 24 months
(% YoY)
due to structural and 45
cyclical factors
40
35
We expect growth
stabilisation in FY18 30
25
20
15
10
5
0
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
FY19CL
FY20CL
Note: TCS, Infosys, Wipro, HCL Tech. Source: CLSA, Companies
74 ankur.rudra@clsa.com 29 August 2017

Rising digital revenue can help per-employee economics

Figure 176
Per-employee realisations Revenue per employee

have been volatile over
55 (US$ '000s)
the past three years
50
45
40
35
30
Figure 177
Leading Indian IT firms Share of digital in total revenue

earn 18-23% of revenue
from Digital services 3,500 (US$m) (%) 25
Digital revenue (LHS) As % of total revenue
24
3,000
23
2,500 22
21
2,000
20
1,500
19
1,000 18
17
500
16
0 15
TCS Cognizant Infosys Wipro HCLT
Figure 178
After a currency-led Ebit margin

margin spike in FY14, (%)
28 Ebit margin US$/Rs (RHS) 70
margins have declined
sharply over the past
27 65
three years from FX and
pricing pressure 26 60
25 55
24 50
23 45
22 40
21 35
20 30
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
FY19CL
FY20CL
29 August 2017 ankur.rudra@clsa.com 75

Rising costs from FX and pricing has impacted Ebit yields

Figure 179
Employee costs have Employee cost as a % of revenue

steadily moved up
56 (% of revenues)
54
52
50
48
46
44
42
40
Figure 180
Per employee profitability Ebit per employee

has declined with margins
(US$ '000s)
13
This can improve with
greater use of automation
12
11
10
6
Figure 181
Cash conversion Cash conversion (CFO/Ebitda)

reached 90% in FY17
(%)
100
90
80
70
60
50
40
30
20
10
0
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
FY19CL
FY20CL

Higher cash returns can improve ROEs sharply

Figure 182
ROEs have eroded sharply Return on equity

over the past two years
(%)
from falling margins and 36
rising cash levels
34
We expect stabilising 32
margins and improved
cash return to drive 30
ROE improvement
28
26
24
22
20
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
FY19CL
FY20CL
Figure 183
Capex per employee has Capex per employee

remained muted as
(US$ '000s)
companies saw 4.5
growth slowdown
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Figure 184
Total payout ratio has Total payout ratio (div/buybacks as a % of PAT)

averaged 70% over 100 (%) Dividend payout Buyback
last 10 years
90
80
70
60
50
40
30
20
10
0
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
FY19CL
FY20CL
29 August 2017 ankur.rudra@clsa.com 77

Leading IT firms have derated over the past three years

Figure 185
TCS continues to One-year forward PE for Indian IT names

command industry-
(x) TCS Infosys HCLT Wipro
leading valuations 25
23
21
19
17
15
13
11
7
Aug 09 Dec 10 Apr 12 Aug 13 Dec 14 Apr 16 Aug 17
Figure 186
TCS trades at a discount One-year forward PE for TCS

to its 10-year, five-year 26 (x) PE Average +1sd -1sd
and three-year average
24
22
20
18
16
14
12
Aug 09 Aug 10 Aug 11 Aug 12 Aug 13 Aug 14 Aug 15 Aug 16 Aug 17
Figure 187
HCL is trading at a One-year forward PE for HCLT

discount to its 10 year
20 (x) PE Average +1sd -1sd
and three-year average
18
16
14
12
10
8
Aug 09 Aug 10 Aug 11 Aug 12 Aug 13 Aug 14 Aug 15 Aug 16 Aug 17

Media
Deepti Chaturvedi Broadcasting leads

Executive Director TV advertising and subscriptions expanding; Zee is top pick
deepti.chaturvedi@clsa.com
+91 22 6650 5066 The advertising market is set for a rebound after demonetisation and GST
caused sub-nominal growth. With TV’s growing viewership, broadcasters
Akshat Agarwal, CFA will benefit both from a rebound in adspend and digitisation. Top
+91 22 6650 5065 broadcasters with leading channels have high flexibility in tariffs even
under TRAI’s proposed regulations. Zee, with both advertising and
subscription engines firing, is our top media pick and is forecast to deliver
a 22% earnings Cagr over FY17-19CL.
Advertising to rebound post demonetisation and GST
29 August 2017  Over FY17-19CL we forecast industry adspend to post a 12% Cagr as we expect an
improvement after the demonetisation hit in 2HFY17 and recent GST disruption.
India  GST has brought a short-term hit to ad pend, led by supply-chain disruptions in the
FMCG sector; broadcasters are worst hit as FMCG forms over 50% of adspend.
Media  However, we expect industry adspend to return to high growth in 2HFY18 and TV to
grow faster at a 13% Cagr over FY17-19CL.
 Print-advertising growth recovery is muted as the large real-estate category is
weak and digital is also taking market share away, especially from English print.
Digitisation to boost subscription revenue

 Over 100m of India’s TV/cable/satellite households (32m pre-digitisation) have
moved to digital with set-top-box (STB) and we forecast these at 143m by FY19.
 Government data is that over 40% STB seeding has been achieved in phase-4
digitisation, given that it has notified 100% seeding in phase-3 markets.
 Meanwhile TRAI’s proposed tariff and interconnect regulations led by Star India
continues to be contested in courts, implying implementation will be delayed.
 Nevertheless, digitisation benefits will flow most to top broadcasters with leading
channels, giving flexibility in pricing even under proposed TRAI regulations.
Content, newsprint costs key to margins

 Broadcasters have had to contend with rising content investments due to new
channel launches, improved content and cost inflation. For Zee, content costs as a
percentage of revenue have risen from 39% in FY11 to 41% in FY17. However,
Ebitda margins have risen to 30%, led by improved content monetisation. We
expect margins to further improve with digitisation-led monetisation.
 Newsprint company margins have benefited over FY15-17 from stable raw-material
costs. A rise in ad yields for regional print companies is a key margin trigger.
 DTH companies are enjoying the benefits of operating leverage as content costs
stabilise as a percentage of their revenue at about a third of total costs.
Zee Entertainment is our top sector pick

 The media sector is low capex/high cash generating with good ROEs. We expect the
trend to continue with current leaders seeing limited new competition.
 Zee is our top pick as network-viewership market-share gains and the ad industry
rebounding alongside subs growth will drive our 22% earnings Cagr over FY17-19.
 While Sun TV is a play on digitisation in its home market of Tamil Nadu, led by
Arasu Cable, the sustained stock rerating remains pegged to ad growth.
 Among distributors, we like Dish TV, as its all-stock Videocon d2h merger will
improve its positioning to capitalise on the digitisation-led growth opportunity.
Media sector valuations
Price Target Rec Upside Mkt cap PE (x) EPS Cagr EV/Ebitda (x) Ebitda Cagr ROE Div yield
(Rs) (Rs) (%) (US$m) FY18 FY19 FY17-19 FY18 FY19 FY17-19 FY18 FY18
(%) (%) (%) (%)
DB Corp 370 450 BUY 21 1,065 15.6 13.7 15 8.7 7.6 14 26.1 3.4
Dish TV 80 97 BUY 21 1,332 64.4 48.4 43 8.23 7.4 8 23.8 0.0
Jagran 175 222 BUY 27 894 15.7 13.6 14 6.5 5.4 11 16.9 2.0
Sun TV 715 890 BUY 25 4,397 27.3 24.5 17 13.1 10.8 16 27.4 2.9
Zee Ent 514 660 BUY 28 7,713 33.9 27.2 22 21.4 17.5 15 20.1 0.7
HT Media 91 73 SELL (20) 332 11.7 10.6 8 1.7 1.0 10 7.8 0.6
Source: CLSA
www.clsa.com

Media India strategy
Robust adspend growth; TV to maintain its share

Figure 188
Ad spending has room to India adspend to nominal GDP ratio

grow faster than nominal
(% YoY) Advertisement growth (LHS) Ad growth to GDP growth (x)
GDP in medium term
25 2.0
1.8
20 1.6
1.4
15 1.2
1.0
10 0.8
0.6
5 0.4
0.2
0 0.0
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
FY19CL
Source: CLSA, FICCI, Group M, RBI
Figure 189
Expect increasing TV adspend and growth

viewership to drive TV
(Rsbn) TV ad spend (LHS) Growth in TV ad spend (% YoY)
adspend further
300 20
256 18
250 224 16
201
14
200 181
155 12
150 136 10
125
116
103 8
100 82 88
61
71 6
4
50
2
0 0
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
FY19CL
Source: CLSA, FICCI, Group M

Figure 190
While TV has had a stable Medium-wise share of adspend in India

share in adspend, print TV Non-English print English Print
(% total ad spend)
has lost out to digital
Out of Home Radio Digital
100 4 5 7
4 8 11 13
4 4 15 16 19
6 6 4 4
6 5 4
5 4 4
80 5 5 5 5
20 19 18 5
17 16 14 13 12 10
60
27 28 28 28 27 26 25 25 24
40
20 39 39 38 37 37 38 38 38 38
0
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18CL FY19CL
Source: FICCI, Group M, CLSA
80 deepti.chaturvedi@clsa.com 29 August 2017

Digitisation to boost subscription revenues

Figure 191
Shift of cable households Cable and satellite TV households in India

from analogue to digital
200 (m) DTH subscribers
/DTH is a key
subscription revenue 180 Digital cable subscribers
driver for broadcasters 160 Analogue cable subscribers
140
120
100
80
60
40
20
0
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
FY19CL
Source: CLSA, TAM, Companies
Figure 192
Government has claimed Seeding status of Phase 3 and 4 markets

that 60% seeding has
(m) Govt's target Boxes seeded
taken place in Phase 3 120 114
and 4 markets
100
Phase 4 markets
80 74
lag in seeding 68
60
41 40
40
28
20
0
Phase 3 & 4 markets Phase 3 markets Phase 4 markets
Source: MIB, CLSA
Figure 193
Broadcaster subscription Broadcaster subscription revenue

revenues to rise led by
(Rsbn)
digitisation benefits 140
121
120
101
100
83
77
80
64
59
60 49
40
40
20
0
FY12 FY13 FY14 FY15 FY16 FY17CL FY18CL FY19CL
Source: FICCI, GroupM, CLSA
29 August 2017 deepti.chaturvedi@clsa.com 81

Content and newsprint costs key to margins

Figure 194
Content costs are the Zee: Content cost and Ebitda margin trend
largest component of
45 (%) Content cost as a % of revenues Ebitda margins
revenues and investments
will continue here 40
35
30
25
20
15
10
5
0
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
FY19CL
Source: CLSA
Figure 195
DTH companies enjoying Dish TV: Ebitda margin and content cost trend
scale benefits and set for
60 (%) Ebitda margin (LHS) (%) 105
much improved
profitability Content cost as a % of revenues 90
40
75
20
60
0
45
(20)
30
(40)
15
(60)
0
(80) (15)
(100) (30)
FY07 FY09 FY11 FY13 FY15 FY17 FY19CL
Source: CLSA, Dish TV
Figure 196
Raw-material prices for Benchmark international newsprint prices (annual average)

print firms have been flat
over the past four years 40,000 (Rs/tonne)
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
Source: CLSA, Bloomberg

Media sector is low capex high ROE business

Figure 197
Print companies revenue Print companies¹ revenue and Ebitda growth

and Ebitda growth tends
30 (% YoY) Revenue growth (% YoY) 140
to be more volatile due to
dependence on Ebitda growth (RHS) 120
discretionary sector for 25
ads and newsprint prices 100
for raw material 20 80
60
15
40
10 20
0
5
(20)
0 (40)
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
FY19CL
¹ HT Media, Jagran and DB Corp. Source: CLSA
Figure 198
The media sector is a Net debt-to-equity ratio

strong cash-generating,
low-capex business 40 (%) Broadcasters Print
30
20
10
0
(10)
(20)
(30)
(40)
(50)
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
FY19CL
Source: CLSA, Broadcasters: Zee and Sun TV; Print: DB Corp, Jagran and HT Media
Figure 199
ROEs have largely been ROE

consistent over the past
(%) Broadcasters Print
five years for both print 25
and broadcasters
20
With balance sheets

15
having substantial net
cash, its return may
further boost ROE 10
0
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
FY19CL
Source: CLSA, Broadcasters: Zee and Sun TV; Print: DB Corp, Jagran and HT Media

Sector valuations have rerated

Figure 200
Rerating of Zee and Media sector’s¹ PE

SunTV has resulted in
(x)
higher aggregate 45
valuations
40
35
30
+1sd27.7x
25
avg22.4x
20
-1sd17.0x
15
10
Aug 07 Aug 09 Aug 11 Aug 13 Aug 15 Aug 17
¹ Zee, Sun TV, DB Corp and Jagran. Source: CLSA
Figure 201
Zee’s industry-beating Zee Entertainment’s PE

growth rates has
(x)
driven rerating 45
40
35 +1sd34.2x
30
avg26.7x
25
20 -1sd19.3x
15
10
5
Source: CLSA
Figure 202
With limited profitable Dish TV’s EV/Ebitda

history, last five-year
16 (x)
Ebitda multiples are most
relevant for Dish TV
15
14
Improvement in Arpu
outlook will drive rerating 13
12 +1sd11.7x
11
10
avg9.6x
9
8
-1sd7.5x
7
6
Source: CLSA

Metals
Nitij Mangal Shining bright

nitij.mangal@clsa.com Multiple levers for strong stock performance
+91 22 6650 5064
Global commodity prices have been on an upswing, driven by better
demand and potential supply-side reforms in China. India’s steel industry
is seeing a confluence of positive factors led by improved pricing visibility
due to anti-dumping duties and tightening demand-supply post FY19. We
expect Indian steel multiples to expand and are BUYers of Tata Steel and
JSW Steel. In the nonferrous space, we advise BUYing Vedanta, given its
strong growth outlook, doubling ROE and significant deleveraging. With
this note I assume coverage of the sector.
29 August 2017
Global commodity prices on an upswing
India  Commodity prices have been rising from early 2016, with an improving outlook,
driven by better demand and potential supply-side reforms in China.
Materials  Our resources team has become optimistic on the global steel outlook for 2H17 and
2018 on expectation of stronger Chinese domestic demand driving lower exports.
 We also expect the improvement in base-metal prices to largely sustain, led by
favourable demand-supply dynamics.
Indian steel industry seeing a confluence of positive factors

 The federal government has notified anti-dumping duties on flat-steel products for
the next four years. This provides a floor to Indian steel prices, which improves
margin visibility and reduces earnings volatility for domestic steel companies.
 India’s steel demand-supply is on the cusp of a multiyear tightening phase, given a
lack of capacity additions. The steel demand outlook is also improving due to the
government’s affordable housing scheme and likely start of an investment cycle.
 We expect India’s net steel imports to rise sharply from FY20, which should
improve the pricing power of Indian steelmakers and could push up domestic steel
prices to a big premium over imports.
Indian steel stocks should command higher multiples; BUY Tata, JSW
 We expect Indian steel stocks to rerate, given better pricing visibility on the back of
anti-dumping duties and improving demand-supply outlook.
 Tata and JSW have the best balance sheets in the Indian steel space, with large
brownfield expansion potential and are the best plays on this theme.
 We recommend BUYing Tata Steel and JSW Steel.
In nonferrous space, we prefer Vedanta over Hindalco

 Vedanta has a strong volume growth outlook, led by a rampup of its new aluminium
and power facilities, along with ongoing zinc expansion. Together with favourable
commodity prices, this should drive 16% Ebitda and 40% EPS Cagrs over FY17-20.
 We see ROE doubling and net debt falling to near-zero for Vedanta by FY20. Its 5%
dividend yield is also attractive.
 We prefer Vedanta (BUY, target Rs340) over Hindalco (BUY, target Rs270) in
India’s nonferrous space.
Metals stock valuation

Company Rec Target MCap ADTO PE (x) EV/Ebitda (x) ROE (%)
(Rs) (US$bn) (US$m) 18CL 19CL 20CL 18CL 19CL 20CL 18CL 19CL 20CL
Hindalco BUY 270.00 7.4 36.9 11.0 9.3 8.2 7.1 6.2 5.6 9.1 9.8 10.1
JSW Steel BUY 300.00 9.0 17.7 14.1 11.4 9.9 7.9 7.0 6.6 16.9 18.1 18.0
Tata Steel BUY 800.00 9.5 53.0 11.3 10.2 8.9 6.9 6.8 6.1 15.6 17.1 16.8
Vedanta BUY 340.00 17.3 49.3 11.1 9.0 7.2 7.0 6.0 4.9 16.0 18.4 20.8
Coal India U-PF 230.00 23.6 14.8 15.6 13.8 12.2 9.0 7.7 6.6 41.0 51.2 66.0
www.clsa.com

Metals India strategy
Figure 203
Global commodity prices Commodity prices have been in an upswing since early-2016
have been in an upswing
150 US$ prices indexed to Jan 15
driven by better demand
and potential supply-side 140
reforms in China Aluminium
130
Zinc
120 East Asian HRC steel
110
100
90
80
70
60
50
Jan 15 Jun 15 Nov 15 Apr 16 Sep 16 Feb 17 Jul 17
Source: SBB, Bloomberg, CLSA
Figure 204
Asian steel spreads have Asian steel spreads have risen to 2.5-year highs
improved to US$263/t at
300 (US$/t) Spread between East Asian steel price and raw material prices
spot prices vs US$190/t
in 2016 and the long-term 275
Avg: US$201/t
average of US$200/t 250
225
200
175
150
125
100
75
50
25
0
1QCY11
2QCY11
3QCY11
4QCY11
1QCY12
2QCY12
3QCY12
4QCY12
1QCY13
2QCY13
3QCY13
4QCY13
1QCY14
2QCY14
3QCY14
4QCY14
1QCY15
2QCY15
3QCY15
4QCY15
1QCY16
2QCY16
3QCY16
4QCY16
1QCY17
2QCY17
Spot
Chinese steel exports have come off sharply in 2016-17 Global steel cap utilisation has seen an uptick in 2017
(kt) China Steel net exports (%) 85 (%) Global steel capacity utilization
12,000 As % of ex-China demand (RHS) 14
10,000 12 80
10
8,000 75
8
6,000
6 70
4,000
4
2,000 65
2
0 0 60
Apr 13
Apr 14
Apr 15
Apr 16
Apr 17
Oct 13
Oct 14
Oct 15
Oct 16
Jan 13
Jul 13
Jan 14
Jul 14
Jan 15
Jul 15
Jan 16
Jul 16
Jan 17
Jul 17
Jan 11
Jul 11
Jan 12
Jul 12
Jan 13
Jul 13
Jan 14
Jul 14
Jan 15
Jul 15
Jan 16
Jul 16
Jan 17
Jul 17
Source: Bloomberg, CLSA Source: Bloomberg, CLSA

Figure 207
Indian flat steel prices Indian steel prices have seen a sharp improvement over the past two years
have been far more
40,000 (Rs/t) India HRC price
resilient that Asian prices
in 1H17 thanks to the anti-
38,000
dumping duties
36,000
34,000
32,000
30,000
28,000
26,000
24,000
Mar 16
May 16
Jun 16
Mar 17
Jul 16
May 17
Jun 17
Sep 16
Nov 16
Jul 17
Dec 16
Aug 16
Jan 16
Oct 16
Feb 16
Apr 16
Jan 17
Feb 17
Apr 17
Figure 208
We see a potential for Indian steel prices are now below price of landed imports
Indian steel prices to rise
700 (US$/t) HRC steel prices
further given the sharp
rally in Asian prices, 591
570 578
optimism on the global 600 560 562
steel cycle and potential 484

for uptick in domestic 500
demand
400
300
200
100
0
East Asia Landed price Import price Current Domestic Domestic
import HRC of imports under anti- domestic steel steel price steel price
price (CFR) under FTA dumping duty prices (FY18CL) (FY19CL)
Figure 209
A sharp deterioration in Capacity additions in the Indian steel industry have come to a grinding halt
the global steel industry
environment in FY15-16 140 (mt) India: Crude steel capacity
coupled with the highly
leveraged balance sheets 120
of Indian steel producers
has brought capital spend 100
for fresh capacity creation
to a grinding halt in India
80
60
40
20
0
FY11 FY12 FY13 FY14 FY15 FY16 FY17 18CL 19CL 20CL 21CL
Source: JPC, CMIE, CLSA

Lack of new capacity additions to hurt supply from FY19 Industry to reach c.95% capacity utilisation by FY20¹
(mt) (%) 100 (%) Effective capacity utilization
India: Finished steel production
140 16
YoY growth (RHS)
120
12
100 90
80 8
60 4
40 80
0
20
0 (4)
70
FY11
FY12
FY13
FY14
FY15
FY16
FY17
18CL
19CL
20CL
21CL
FY15 FY16 FY17 18CL 19CL 20CL 21CL

Source: JPC, CMIE, CLSA ¹ We understand that a part of the unorganised steel capacity in India
has exited the system. Utilisation rates have been calculated on
operating capacity. Source: JPC, CMIE, CLSA
Figure 212
Steel demand outlook is Indian steel demand-supply should tighten significantly from FY20
improving led by:
120 (mt) India: Steel consumption (mt) 10
1) the government’s India: Net steel imports (RHS) 8
affordable housing 100
programme, 6
80
2) likely start of an 4
investment cycle by FY19,
and 60 2
3) the government’s 0
40
rising focus on increasing
domestic procurement in (2)
public sector projects 20
(4)
0 (6)
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
18CL
19CL
20CL
21CL
Source: JPC, CMIE, CLSA
Figure 213
We see limited volume Frontline steel firms Tata & JSW should see modest volume growth in FY19-20
growth in Tata & JSW in
40 (%) Volume growth of Tata Steel + JSW Steel
FY19-20 as the current
capacities will reach close
to full utilisation in FY18 35
30
25
20
15
10
0
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 18CL 19CL 20CL
Based on combined financials of Tata Steel India and JSW Steel. Source: Companies, CLSA

Figure 214
Improving domestic steel Ebitda/t of Indian steel companies should rise over the next three years
prices should provide a
16,000 (Rs) Combined Ebitda/t of Tata Steel and JSW Steel
boost to margins
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
18CL
19CL
20CL
Based on combined financials of Tata Steel India and JSW Steel. Source: Companies. CLSA
Figure 215
Favourable commodity ROEs of Indian metal companies will expand over the next three years
prices would be a key
(%) Metal sector: RoE
driver for higher ROEs 30
25
20
15
10
0
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
18CL
19CL
20CL
Note: Includes Tata, JSW, Hindalco, Vedanta; Vedanta’s financials are from FY14; Source: Companies. CLSA
Figure 216
We see higher Indian metal sector will deleverage over the next three years
deleveraging in non-
(Rsbn) Metal sector: Net debt
ferrous companies 1,800
(Vedanta/Hindalco) than
in steel companies over 1,600
the next three years 1,400
1,200
1,000
800
600
400
200
0
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
18CL
19CL
20CL
Note: Includes Tata, JSW, Hindalco, Vedanta; Vedanta’s financials are from FY14; Source: Companies. CLSA

Figure 217
Tata Steel is currently Tata Steel has historically traded at 6.5x 1Y forward EV/Ebitda
trading at 6.8x FY19
9 (x) Tata Steel: 1Y fwd EV/Ebitda
EV/Ebitda on our
estimates Average
8
We see a case for steel
stock valuations to
improve given improved 7
pricing outlook and
tightening demand-supply
6
4
Aug 10 Aug 11 Aug 12 Aug 13 Aug 14 Aug 15 Aug 16 Aug 17
Figure 218
JSW is currently trading JSW has historically traded at 6x 1Y forward EV/Ebitda

at 7.0x FY19 EV/Ebitda on
8.0 (x) JSW Steel: 1Y fwd EV/Ebitda
our estimates
Average
7.5
7.0
6.5
6.0
5.5
5.0
4.5
4.0
3.5
3.0
Figure 219
Vedanta is currently Post restructuring, Vedanta has traded at an average 6x EV/Ebitda

trading at 6.0x FY19
7.5 (x) Vedanta: 1 yr rolling fwd EV/EBITDA
EV/Ebitda
Average
7.0
6.5
6.0
5.5
5.0
4.5
4.0
3.5
3.0
Sep 13 May 14 Jan 15 Aug 15 Apr 16 Dec 16 Aug 17

Midcaps
Sector outlook
Chirag Shah Eye on earnings visibility

chirag.shah@clsa.com Top picks: Astral, Aditya Birla, Crompton and PVR
+91 22 6650 5055
Building materials, multiplexes and branded apparels are our structural
long-term, high-growth themes within midcaps. The space is attracting
significant investor interest with the Nifty Midcap 100 index (NSEMCAP)
outperforming the Nifty by 4.4% YTD. However, with NSEMCAP trading
near all-time highs, we advise taking a cautious approach and prefer
firms that have good quality fundamentals and strong growth visibility.
Our top BUYs are Astral, Aditya Birla, Crompton Consumer and PVR.
Branded apparels: Structural growth drivers in place

29 August 2017  India’s branded-apparels sector is on the cusp of rapid expansion, with strong
structural drivers: rising income levels, favourable demographics, increasing
India penetration and entry of foreign brands.
 We expect it to replicate the growth witnessed in China as the industry typically
Midcaps undergoes a J-curve expansion once a country’s per-capita GDP reaches US$2,000.
 We forecast the domestic market to double in size by 2021.
 We prefer companies with strong brand penetration and which have a focus on the
fast-growing value retail and fast-fashion categories.
Multiplexes: Organic growth, footfall monetisation key drivers

 Consolidation in the domestic multiplex industry is mostly complete, with the top-
four players together controlling 73% of the market in terms of number of screens.
 The sector will continue to witness strong organic growth as the top-four companies
may cumulatively add more than 200 screens over the next couple of years.
 F&B share as a proportion of average ticket prices could improve from 35-40% now
to about 50% over the next few years, in line with global trends.
 Ad-revenue growth will be another key industry driver as more advertisers realise
the potential of cinema advertising.
Building materials: Play on affordable housing

 We expect the building-materials space to be a top beneficiary of the government’s
push for affordable housing.
 However, the sector is not homogeneous and while new housing is a key demand
driver, factors such as premiumisation, inflation and substitute products imply
differing demand trends across subsectors.
 We prefer segments with low import substitution threats and relatively high barriers
to entry.
Midcaps’ valuations
Company Mcap Rec PE (x) PE/G (x) EV/Ebitda (x) ROE (%) EPS Cagr
(US$m) FY17-19CL
FY18CL FY19CL FY19CL FY18CL FY19CL FY18CL FY19CL
(%)
Arvind 1,466 BUY 22.3 16.7 0.5 10.7 8.9 11.3 13.7 29
Aditya Birla 2,039 BUY 155.7 82.5 1.8 28.1 21.5 8.3 13.9 72
Astral 1,203 BUY 44.3 33.4 1.4 24.6 19.4 20.5 22.3 33
Crompton 2,106 BUY 34.6 28.1 1.5 23.1 19.1 61.6 55.9 27
Havells 4,652 SELL 44.6 36.2 1.6 28.5 23.3 22.6 24.7 19
PVR 918 BUY 38.2 32.0 2.0 12.8 11.1 15.2 15.8 27
Inox Leisure 352 BUY 25.7 20.7 1.1 9.7 8.0 12.1 13.3 47
Pidilite 6,525 O-PF 46.8 39.9 2.7 30.7 26.4 24.8 24.7 11
TTK Prestige 1,154 SELL 44.5 35.7 1.8 27.8 23.4 19.6 21.3 15
Source: CLSA
www.clsa.com

Midcaps India strategy
Midcaps index trades at a 6.4% premium over Nifty

Figure 220
NSEMCAP index has Midcaps vs Nifty price performance

outperformed Nifty by
350 (index, rebased to 100) Nifty
3.4% YTD
Nifty Midcap 100
300
250
200
150
100
50
Aug 07 Aug 08 Aug 09 Aug 10 Aug 11 Aug 12 Aug 13 Aug 14 Aug 15 Aug 16 Aug 17
Figure 221
NSEMCAP 12M EPS is Midcaps vs Nifty 12M EPS

expected to grow faster
250 (index, rebased to 100) Nifty
than Nifty
230 Nifty Midcap 100
210
190
170
150
130
110
90
70
50
Figure 222
NSEMCAP index trades at Midcaps vs Nifty 12M premium/discount

a 6.4% premium over
20 (index, rebased to 100) Nifty Midcap 100
Nifty, above its 10-year
median discount of 8.6% Median
10
(10)
(20)
(30)
(40)
92 chirag.shah@clsa.com 29 August 2017

Branded apparels: Structural growth drivers in place

Figure 223
Domestic branded- Domestic branded-apparel market to double by 2021

apparel market set to
reach US$30bn by 2021 Total apparel market Branded-apparel market
30
88
15
10
52
40
0.5 2011 1.5 2015 2.5 2021E 3.5

Source: CLSA, Euromonitor, Wazir Advisors
Figure 224
India has structural Key drivers for rising consumption of branded apparels
catalysts in place to
support robust industry
growth Expanding
middle class
Rise of Favourable
e-commerce demographics
Branded apparel
growth drivers
Value retail Deepening

format penetration
Entry of
foreign brands
Source: CLSA
Figure 225
Apparel demand could India is on the cusp of witnessing exponential growth in apparel demand
enjoy J-curve expansion
1,800 (US$) India - Per-capita consumption of apparel 40
as India’s per-capita GDP
approaches US$2,000 1,600 India - Per-capita GDP (LHS) 35
1,400 30
1,200
25
1,000
20
800
15
600
400 10
200 5
0 0
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Source: Euromonitor, CLSA, World Bank
29 August 2017 chirag.shah@clsa.com 93

Multiplex: Organic growth, footfall monetisation key drivers

Figure 226
India’s multiplex industry Consolidation has left top-four players with 73% of market
has undergone rapid
80 (%)
consolidation 73%
70
60
50
40 35%
30
20
10
0
FY11 FY17E
Figure 227
With limited meaningful Focus shifting back to organic growth

inorganic acquisition
3,500 (No.)
opportunities, multiplex
players are focusing on
organic growth 3,000
2,500
2,000
1,500
1,000
500
0
FY16 FY17E FY18E FY19E FY20E
Source: Industry sources, CLSA estimates
Figure 228
F&B could approach Footfall monetisation will be the key driver of industry growth
nearly 50% of average
90 (%) PVR - Ad-revenue growth (% of avg ticket price) 45
ticket prices, in line with
global trends PVR - F&B spend per head (RHS)
80 40
70 35
60 30
50 25
40 20
30 15
20 10
10 5
0 0
FY11 FY12 FY13 FY14 FY15 FY16 FY17

Building materials: Play on affordable housing

Figure 229
Demand acceleration from Expected incremental demand for building-materials subsectors over FY17-24
affordable housing to
Cement 11% Cagr
drive growth in building-
materials subsectors Steel TMT 8% Cagr¹
Paints 15% Cagr
Ply & laminates 12% Cagr
Tile 11% Cagr
Plumbing pipes 14% Cagr

Sanitaryware 12% Cagr
Cables 13% Cagr
Adhesives & CC 13% Cagr
Fans 14% Cagr
Lighting & fixtures 14% Cagr
Switch & switchgears 8% Cagr
Water heaters 12% Cagr (Rsbn)
0 200 400 600 800 1,000 1,200

¹ Based on volume. Source: Companies, industry sources, CLSA
Figure 230
Companies introducing Companies are repositioning to gain benefits from housing-led demand boost
new products and brands
Astral is
to tap demand from aggressively
affordable housing pushing its
sales and Havells
Finolex Cables
has recently
distribution introduced Reo, entered into
towards Greenply: fans, lightings
a value brand
New markets
affordable Medium-density and switchgears

for affordable
housing fiberboards
housing
provide lower-
cost options to
furnishing Century’s
Pidilite and
brands sub-brand
Asian Paints
Orient is Sainik serves
are improving
venturing into the value
penetration in
lighting and segment
the rural
market switchgear
Emerging strategies
Asian Paints Asian Paints &

has a broad Berger Paints
product line have recently
Crompton has ranging from entered into the
Existing markets
fans and light value to luxury waterproofing

offerings across segment segment
all price points
Century
Somany/ launched ready-
Kajaria has made furniture Kajaria has
HSIL has a wide and medium- launched new
brands to product range density products in
cater to fiberboards to sanitaryware
different cater to housing
customers expansion
Existing product/brand New product/brand
Source: Companies, industry sources, CLSA

Figure 231
Potentially robust market Large share of unorganised players in most of building-materials subsectors
share gains for organised
(%) Organised Unorganised
players 100
30 25 30
80 47
50
60 60
60
40 75
70 70
50 53
20 40 40
0
Paints Pipes Tiles Adhesives Light Wood Sanitaryware
electricals panel
Source: Companies, industry sources, CLSA
29 August 2017 chirag.shah@clsa.com 95

Figure 232
Astral trades at 39.7x Astral - 1Y forward PE

one-year forward PE,
above its average 70 (x)
of 31.3x
60
50 +1sd48.0x
40
30 avg31.3x
20
-1sd14.5x
10
0
Aug 12
Aug 13
Aug 14
Aug 15
Aug 16
Aug 17
Feb 13
Feb 14
Feb 15
Feb 16
Feb 17
Source: Evalu@tor
Figure 233
PVR trades at 12.6x one- PVR - 1Y forward EV/Ebitda

year forward EV/Ebitda,
near its average of 12.5x 17 (x)
16
15 +1sd15.0x
14
13
avg12.5x
12
11
10 -1sd10.0x
9
8
7
Aug 12
Aug 13
Aug 14
Aug 15
Aug 16
Aug 17
Feb 13
Feb 14
Feb 15
Feb 16
Feb 17
Source: Evalu@tor
Figure 234
Crompton trades at 34.1x Crompton Consumer - 1Y forward PE multiple

one-year forward PE,
40 (x)
above its average of
30.6x
38
36
34 +1sd34.0x
32
avg30.6x
30
28
-1sd27.2x
26
24
May 16
Jun 16
Mar 17
Jul 16
May 17
Jun 17
Sep 16
Nov 16
Jul 17
Dec 16
Aug 16
Aug 17
Oct 16
Oct 16
Jan 17
Feb 17
Apr 17
Source: Evalu@tor

Oil & Gas
Sector outlook - Neutral
Vikash Kumar Jain Prefer the under-owned

vikash.jain@clsa.com RIL and ONGC are our preferred BUYs
+91 22 6650 5015
We are negative on IOC, Bharat Petroleum and Hindustan Petroleum as
valuations are ignoring risks from weak volume growth, increased
competition, impact from digital discounts and GST. We expect improved
realisations and production for ONGC and Oil India, even as they trade
below historical and peer averages. The end of Reliance’s biggest every
capex programme will drive further upside. We maintain our SELL on Gail
and PLNG due to risks from long-term LNG and expensive valuations.
OMCs: Premium valuations ignoring risks

29 August 2017  India’s oil-demand growth has seen a sharp deceleration with 4QFY17 being the
worst quarter in more than a decade and 1QFY18, reporting weak 3% YoY growth.
India This, along with intensifying competition, could hurt OMCs.
 OMCs will also face earnings risks of 6-11% due to a GST-led increase in opex and
Petro/Chems discount/merchant discount rate (MDR) on the digital sale of retail fuels - currently
ignored by the market.
 Despite these headwinds, IOC/BP/HP trade at 7x/8x/10x FY19EV/Ebitda - a
premium to global peer averages (6.6x CY18 EV/Ebitda). We thus find risk-reward
unattractive in this space and maintain SELL calls on all three OMCs.
Upstream: Favourable risk-reward with improving fundamentals

 ONGC is showing signs of production growth. Its June-2017 gas production is the
highest monthly level in well over five years and management expects more gains.
 We expect crude prices to recover on the extension of Opec’s production cuts. The
formula-based domestic gas price is also likely to have bottomed.
 Both ONGC and Oil India are pricing in Brent at US$46/bbl and are good crude-
price-recovery trades. With the government’s ongoing efforts, they may get full
exemption from the LPG/kerosene subsidy burden in the medium term. In this
context, stock prices are attractive at below historical average and peer valuations.
Reliance: Momentum to continue in its year of fruition

 Projects worth more than US$40bn come on stream this year for Reliance (RIL),
and the stock typically does well in periods when large capacities come online.
 Driven by these downstream projects and commercial operations of Jio, we expect
RIL’s consolidated Ebitda to almost double in three years.
 With Jio on the cusp of its next subscriber growth leg with its 4G feature phone
launch, we expect positive momentum to continue for Jio, as well as the stock.
Remain negative on gas names

 Placing US LNG volume (landed price premium of US$2.5/mmbtu versus spot LNG)
seems difficult for Gail. Every US$1/mmbtu price mismatch could impact the
company by US$250m/year (20% of 19CL Ebitda). With ROE to stay well below
COE, Gail’s 1.7x FY17 PB is unattractive and we rate the stock a SELL.
 With no volume-led earnings surprise likely for PLNG until next year, current
expensive valuations (15x FY19CL PE) leave no room for upside. Maintain SELL.
Oil & gas stock valuations

Company Rec Target Mkt cap ADTO PE (x) EV/E (x) PB (x) ROE (%)
(Rs) (US$bn) (US$m)
Oil India BUY 360.00 3.3 2.2 9.6 8.0 5.9 5.1 0.7 0.7 7.8 8.8
ONGC BUY 225.00 31.9 20.8 9.9 7.8 4.1 3.6 0.9 0.8 9.3 10.7
Reliance Ind BUY 1,920.00 79.4 104.7 19.1 14.9 11.3 7.9 1.8 1.6 9.8 11.6
BPCL SELL 465.00 17.2 31.7 12.6 10.8 9.3 7.9 3.0 2.5 26.0 25.4
Gail SELL 345.00 9.9 18.4 14.7 13.7 7.0 6.1 1.6 1.5 11.2 11.3
HPCL SELL 405.00 10.7 32.6 14.7 14.8 9.6 9.8 3.0 2.7 21.9 19.3
IOCL SELL 405.00 32.1 38.9 10.3 11.5 7.2 7.3 1.8 1.6 18.5 15.0
Petronet LNG SELL 180.00 5.4 27.6 17.3 15.2 10.3 8.9 3.5 2.9 22.4 21.1
Source: CLSA
www.clsa.com

Oil & Gas India strategy
Figure 235
Slowdown in India’s oil- Growth in sale of oil products (marketing segment) for industry
demand growth . . .
14 (%YoY)
12
10
4 3.0
0
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 1QFY18
Source: CLSA, PPAC, Company
Figure 236
. . . along with market- Recent growth in sale of oil products for public OMCs and industry
share losses to private
10 (%YoY) IOCL BPCL HPCL Industry
players are major 8.6
concerns for public OMCs
8
5.7 6.0
5.5
6 4.9
4.3
4 3.1 3.2 3.5 3.0
2.3
1.8
2
(2)
(4) (2.8)
(3.1)
(3.5)
(6) (5.3)
(8)
2QFY17 3QFY17 4QFY17 1QFY18
Source: CLSA, PPAC, Company
Figure 237
We expect ONGC’s oil ONGC’s annual average domestic crude-oil production vs quarterly exit production
production to increase Domestic crude production
(mt)
23 4Q17 exit (annualised) 22.9
1Q18 exit (annualised)
22.7
22.7
22.6
22.6
22.3
22.2 22.3
22.2
22
First signs of which are

already visible
21
FY13 FY14 FY15 FY16 FY17 18CL 19CL
Source: CLSA, Company, PNGRB
98 vikash.jain@clsa.com 29 August 2017

Figure 238
IOCL and HPCL’s GRM’s Gross refining margins (GRMs) for Indian oil PSUs
for FY17 were enhanced
9 (US$/bbl) IOCL BPCL HPCL
by large inventory gains
8.0
7.8
8
7.0
6.8
6.8
6.7
6.7
6.5
6.5
7
6.2
5.9
6
5.3
5.3
5.1
5.1
4.6
4.4
5
4.2
3.7
3.6
3.4
4
3.3
3.2
3.2
2.9
3
2.1
2
0.3
0
FY11 FY12 FY13 FY14 FY15 FY16 17CL 18CL 19CL
Figure 239
Increased competition is IOCL’s unit Ebitda for marketing and others segment
impacting blended-unit Market and others Ebitda
2,500 (Rs/mt)
marketing margins
for OMCs Average for FY
2,000
1,500
1,000
500
0
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
18CL
Figure 240
ONGC’s post-subsidy ONGC’s annual pre and post-subsidy crude-price realisation

crude realisation to rise
(US$/bbl) Net realisations after subsidy sharing
120 Gross Billing Price
100
80
58 60
56 55
60 53 54
50
48 48 47
42 44 45
41
40
20
0
29 August 2017 vikash.jain@clsa.com 99

Figure 241
OMCs have shown a Return on equity for OMCs

strong ROE improvement
35 (%) IOCL BPCL HPCL
30
25
20
15
10
0
FY12 FY13 FY14 FY15 FY16 17CL 18CL 19CL
Figure 242
While it has broadly Return on equity for upstream, gas companies and Reliance
deteriorated for upstream
25 (%) ONGC Oil India Gail Reliance
and gas names
20
15
10
5
FY12 FY13 FY14 FY15 FY16 17CL 18CL 19CL
Figure 243
Lower crude prices and Net working-capital days for public OMCs
under-recoveries have led
(No. of days) IOCL BPCL HPCL
to working-capital
savings for OMCs 25
20
15
10
(5)
(10)
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

Figure 244
We calculate ONGC is Sensitivity of ONGC’s valuation to crude-oil price

pricing in crude at
350 (Rs/share) ONGC's fair value
US$46/bbl
Current market price
289
300
262
250 235
209
200 182
155
150 128
100
100
50
0
35 40 45 50 55 60 65 70
(US$/bbl)
Figure 245
We calculate Oil India is Sensitivity of Oil India’s valuation to crude-oil price

also pricing in crude at
500 (Rs/share) Oil India's fair value
US$46/bbl 448
450 Current market price
414
381
400
348
350 311
300 267
250 222
200 177
150
100
50
0
35 40 45 50 55 60 65 70
(US$/bbl)
Figure 246
Despite some correction, FY19 EV/Ebitda for public OMCs vs global refining peer average (CY18)
Indian OMCs are still at a 9.8
10 (x)
premium to global
refining valuations
Global peer average
7.9
8
7.3
6.6
2
IOCL BPCL HPCL
29 August 2017 vikash.jain@clsa.com 101

Figure 247
Projects worth over Reliance’s timelines for key projects

US$40bn are slated
to start soon Capacity (mtpa) Commissioning date
PX 2.2 1QFY18
Refinery off-gas cracker 3.3 3QFY18
Ethane imports 1.5 1QFY18
Petcoke gasification project na 4QFY18
Start of 4G telecom services¹ na Apr-17
¹Commercial operations. Source: CLSA, Company
Figure 248
We expect Reliance’s Reliance’s consolidated Ebitda (US$)

Ebitda to almost double in
(US$bn) Refining Petchem Oil & gas Telecom Others
the next three years
16
13.8
14 12.3
12
9.1
10 8.5
7.3
8 6.9
6.4 6.1 6.2 6.3
5.8
6
(2)
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 18CL 19CL 20CL
Figure 249
Reliance’s current Implied equity value assigned to Jio

valuation implied an
(Rs/share)
equity value of
US$13bn for Jio Mar-18 CLSA fair equity value (ex-telecom) 1,446
Current price (rounded off) 1,600
Implied price as of Mar 18 (using 12% COE) 1,728
Value gap, implied equity value for telecom 282
No. of shares (ex-Treasury) (m) 2,959
Implied negative equity value assigned to telecom (Rsbn) 834
Rs/US$ 64.1
Implied equity value assigned to telecom (US$bn) 13.0

Pharma
Alok Dalal Indian generics at crossroads

alok.dalal@clsa.com Remaining cautious until earnings visibility improves
+91 22 6650 5063
Intense pricing pressure in the USA, US regulatory compliance issues and
Alok Srivastava rising R&D investment in complex products has impacted the profitability
+91 22 6650 5037 of Indian generics drugmakers. Despite steady growth in India and
emerging markets, earnings growth has decelerated over the past two
years. We retain a cautious near-term sector outlook, rating Cadila, Cipla
and Torrent as BUYs, given their better earnings visibility versus peers.
Despite challenges, USA remains key focus market

 Earnings growth by Indian generic drugmakers has decelerated to 10% in the past
29 August 2017 two years, compared to the robust 18% Cagr enjoyed over the past decade.
 Profitability was impacted by unprecedented pricing pressure from customer
India consolidation and increased competition in the USA.
Healthcare  Noncompliance with US Food and Drug Administration guidelines has led to delays
in key approvals.
India/EM to provide critical support in these testing times

 India and emerging markets (EMs) - which comprise 40% of FY17 sales - are on
the path to recovery after suffering from the adverse impact of demonetisation and
currency-related issues.
 Strong macro and underlying demand should drive 10-12% growth in the Indian
pharma market, along with robust cashflow.
 Key EMs are recovering after sharp currency depreciation.
Differentiation with disciplined R&D should be the focus

 R&D spend has doubled over the past five years to 9% of sales in FY17, targeting
complex product categories such as injectables, respiratory and biologics.
 While results have been slow to materialise, we believe that moving up the
complexity chain and focusing on R&D productivity is the key to future success.
 Sun Pharma and Dr Reddy’s have most advanced complex drug portfolios.
Remaining positive on the long-term story; cautious in the near term

 The NSE Pharma Index has fallen by 24% over the past 12 months and key players
have corrected due to sharp earnings cuts. However, their PE valuations have not
experienced a material correction.
 While we remain cautious on the sector in the near term and await an improvement
in earnings visibility, we are still positive on the long-term story.
 Cadila, Cipla and Torrent are our sector BUYs, owing to high earnings visibility. We
have SELLs on Sun Pharma, Glenmark, Biocon and IPCA Labs.
Valuation matrix
Stock Rec Target Mkt cap ADTO PE (x) PB (x) ROE (%)
Aurobindo O-PF 770 6.4 41.2 17.8 14.8 14.5 4.4 3.5 28.3 26.4 21.7
Biocon SELL 210 3.1 21.7 32.3 44.1 31.9 4.1 3.7 13.8 8.8 11.1
Cadila BUY 580 7.5 11.8 31.8 28.4 18.3 6.8 5.8 23.5 22.0 28.4
Cipla BUY 655 7.0 12.3 43.4 27.1 21.2 3.6 3.2 8.6 12.6 14.3
Dr Reddy’s SELL 2,390 5.1 21.2 28.0 30.7 18.3 2.8 2.6 9.5 8.6 13.3
Glenmark SELL 630 2.6 11.5 18.5 16.1 14.0 3.3 2.8 19.5 18.7 18.1
Ipca SELL 410 0.8 2.5 27.5 20.5 15.1 2.1 1.9 7.9 9.8 12.0
Lupin O-PF 1,100 6.7 39.6 16.8 24.8 18.8 3.2 2.9 20.7 12.3 14.5
Sun Pharma SELL 370 17.6 53.4 16.2 51.4 24.4 3.0 2.9 20.2 5.8 11.5
Torrent BUY 1,660 3.2 3.9 21.9 21.9 16.9 4.7 4.1 23.8 19.9 22.2
www.clsa.com

Pharma India strategy
Figure 250
US revenues of Indian US revenue and revenue growth

pharma firms in our Total US sale
8,000 (US$m) (%) 50
coverage expected to
% YoY (RHS)
decline YoY for the first 7,000
time in 10 years 40
6,000
30
5,000
4,000 20
3,000
10
2,000
0
1,000
0 (10)
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
FY19CL
Figure 251
Growing market share by Market share of Indian pharma in US generics space

Indian companies
80 Generic market (LHS) 14
Market share of leading Indian cos
70 12
60
10
50
8
40
6
30
4
20
10 2
0 0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Note: Excluding branded generics. Source: IMS Health, CLSA
Figure 252
Products going off-patent Patent expiry in the USA

will fall in brand value
18 (US$bn) Brand value going off-patent
over the next few years
16
14
12
10
8
6
4
2
0
2017E
2018E
2019E
2020E
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Note: Excluding branded generics. Source: IMS Health, CLSA
104 alok.dalal@clsa.com 29 August 2017

Figure 253
Faster pace of approvals ANDA¹ filings and approvals by the US FDA

by the US FDA has closed
1,600 (No.) Total ANDA approvals Total filings
the gap between filings
and approvals which is
1,400
driving higher
competition
1,200
1,000
800
600
400
200
0
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
¹ Abbreviated New Drug Application. Source: Companies, CLSA
Figure 254
Type of observations has Type of observations received in inspection by Indian facilities

changed significantly by
(% of observations) To 2010 2010 onwards
the US FDA with more lab
control related 45 43
observations vs 40
building/procedure 40 36
related observations 35
earlier 30
30
More procedural in nature
25
18
20
14 15
15
10
5 3
0
Building, equipment Organisation and Production, process Records and reports
and packaging personnel and lab controls
Source: Companies, US FDA, CLSA
Figure 255
Domestic market Domestic market growth

expected to continue
(Rsbn) India pharma market (% YoY)
growing at 10-12% pa
1,200 Growth (RHS) 35
1,000 30
25
800
20
600
15
400
10
200 5
0 0
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
Source: AIOCD Pharmasofttech AWACS, CLSA
29 August 2017 alok.dalal@clsa.com 105

Figure 256
Most emerging markets Pharma market size of key emerging markets

are expected to see
(US$bn) 2014 2020
strong growth, presenting 90
significant opportunities
to Indian firms 80
70
60
50
40
30
20
10
0
China Korea Brazil Mexico Turkey India Russia
Source: IMS Health
Figure 257
R&D spend as a R&D spend and as a proportion of sales

proportion of sales R&D (LHS)
120,000 (Rsm) (%) 12
continues rise and is set
to reach 10% by FY19 R&D as a % of sales
100,000 10
80,000 8
60,000 6
40,000 4
20,000 2
0 0
Note: Based on coverage universe. Source: Companies, CLSA
Figure 258
EBITDA of Indian Indian pharma companies: Ebitda growth

companies expected to
(Rsbn) Ebitda (% YoY)
decline in FY18 but expect 400 100
a recovery in FY19 on the Growth (RHS)
350
back of differentiated 80
launches 300
60
250
200 40
150
20
100
0
50
0 (20)
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
FY19CL
Note: Based on coverage universe. Source: CLSA, Companies

Figure 259
Margins under pressure Indian pharma companies: Ebitda margin

due to high pricing
pressure in the USA and 30 (%) 27.5 27.0
higher R&D allocations 26.0 25.3 25.5
24.5 24.1 24.0 24.2
25 23.6
22.4 22.8
21.5
20 17.5
15
10
0
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
FY19CL
Note: Based on coverage universe. Source: CLSA, Companies
Figure 260
ROEs have dipped, but are Indian pharma companies: ROE

set to improve in FY19
35 (%)
30
25
20
15
10
0
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
FY19CL
Note: Based on coverage universe. Source: Companies, CLSA
Figure 261
Robust balance sheets Indian pharma companies: Net debt/equity

provide headroom for
acquisitions in a 80 (%)
challenging growth
70
situation
60
50
40
30
20
10
0
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
FY19CL
29 August 2017 alok.dalal@clsa.com 107

Figure 262
Earnings growth for some Indian pharma companies: Earnings Cagr over FY17-19CL
firms remaining strong
over FY17-19CL, but most 45 (%)
39
will experience 40 35
challenges in FY18 35
28
30
24
25
20 15
14
15 11
10
5
0
(5) (2)
(10) (5)
Biocon
Cadila
Cipla
Dr Reddy's
Lupin
Sun Pharma
Aurobindo
Glenmark
Torrent
Ipca
Figure 263
Indian pharma sector at NSE Pharma: PE

1sd below its five-year
average 33 (x) PE Average +1sd -1sd
31
29
27
25
23
21
19
17
15
Jul 16
Jul 17
Aug 12
Aug 13
Aug 14
Aug 15
Feb 13
Feb 14
Feb 15
Jan 16
Jan 17
Source: Bloomberg
Figure 264
Premium of NSE Pharma NSE Pharma’s premium to Nifty

to Nifty is at five-year low
100 (%) NSE Pharma premium to Nifty
Average premium
90 +1sd
80 -1sd
70
60
50
40
30
20
10
0
Jul 16
Jul 17
Aug 12
Aug 13
Aug 14
Aug 15
Feb 13
Feb 14
Feb 15
Jan 16
Jan 17
Source: Bloomberg

Power and infra
Sector outlook: Overweight
Bharat Parekh Recovery in sight

bharat.parekh@clsa.com Government initiatives will boost sectors
+91 22 6650 5020
Public power utilities are recovering, but infrastructure assets - such as
ports and roads - are enjoying better performance. State-owned
enterprises will strengthen their dominance in the upcoming capex cycle,
with a structural uptick among electricity players, following a bottoming
out of thermal plant-load factors. The national revival plan for power-
distribution firms will lead to sector reform. We prefer NTPC among
independent power producers and ADSEZ in the infrastructure space.
Road and port developers in a sweet spot

29 August 2017  Infrastructure developers are in an ideal situation, with falling interest rates, lower
crude prices, rebounding traffic and recent tender wins for new roads.
India  Government actions - such as a new scheme that will help developers to exit from
Power projects more easily, the recently-launched annuity model and the resolution of
land issues - will increase the sector’s attractiveness. We also expect a growing
number of road-tender wins ahead of general elections in 2019.
NTPC capitalisation to cross capex - a rerating catalyst

 We expect NTPC to deliver significant regulated equity growth from 2QFY18.
 Our analysis and site visits suggest that of its 8.3GW thermal capacity we pencil for
commercial operation to FY19, NTPC has spent more than 83% of its costs on 82%
of its projects, improving the visibility of its project starts. Hence, we have more
confidence that its capitalisation-to-capex ratio will improve from FY18.
Will state-generation companies acquire banks’ stressed assets?

 State-owned power utilities might acquire banks’ stressed power assets after NTPC
turned down their deal proposals. However, valuations and deal structuring are key
challenges which are keeping public-sector utilities from buying private assets.
 Adani Power is demerging its Mundra plant for a potential divesture (to Gujarat). AP
state might bail out East Coast group, while Telangana could acquire assets from
GMR Infrastructure, according to media reports.
Prefer NTPC, Power Grid, Adani Ports, IRB

 An increase in thermal project starts will raise NTPC’s capitalisation above capex for
the first time in five years in FY18; we are upbeat on the stock and remain BUYers.
 Power Grid’s robust capitalisation in FY17-19 will sustain EPS growth (14% Cagr),
enhance cashflow and double its dividend. Its high-margin telecom and consultancy
businesses are upcoming catalysts.
 Adani Ports, with long duration concessions, is a strategic asset. We forecast it will
deliver 54% growth in port Ebitda over FY17-20CL, despite tough global trade.
Power and developer stocks valuation

Company Rec Target M cap EPS Cagr PE (x) PB (x) ROAE (%)
(Rs) (US$m) (%) 17-19 FY17 FY18 FY19 FY17 FY18 FY19 FY17 FY18 FY19
Power
Adani Power SELL 26 1,674 LP NA NA NA 5.1 13.5 NA (41) (90) 426
Adani Transmission SELL 95 1,856 50 40 19 18 4.1 3.2 2.5 11 19 16
CESC BUY 1,000 1,931 3 15 14 14 1.1 1.0 1.0 8 8 7
JSW Energy SELL 57 1,562 9 11 10 9 1.1 1.0 0.9 10 10 10
NTPC BUY 186 21,525 17 15 14 11 1.5 1.4 1.3 10 10 12
Power Grid BUY 265 17,920 14 15 14 12 2.4 2.1 1.9 16 16 17
Tata Power BUY 100 3,375 22 16 12 11 2.2 1.8 1.6 13 16 16
Average 19 14 12 2.5 3.4 1.5 4 (1) 72
Developers
Adani Ent SELL 74 1,820 13 11 10 9 0.8 0.8 0.7 8 8 8.5
Adani Ports BUY 458 12,106 2 21 23 20 4.6 3.9 3.5 24 19 18.0
IRB Infra BUY 320 1,149 (6) 11 11 13 1.4 1.3 1.2 13 13 10
Average 14 15 14 2.3 2.0 1.8 15 13 12.2
Source: CLSA
www.clsa.com

Power and infra India strategy
Robust capacity additions to drive revenue

Figure 265
Capacity additions Capacity additions and energy deficit

to peak in FY19
(GW) Total¹ Renewables Enerygy deficit (RHS) (%)
35 12
30 10
Substantial drop in
25
energy deficit over the 8
past three years . . . 20
6
15
. . . which we expect to 4
continue as distribution 10
players compress demand
5 2
via load shedding
0 0
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
FY19CL
FY20CL
FY21CL
FY22CL
¹ Excluding renewables. Source: Central Electricity Authority (CEA), CLSA
Figure 266
We expect a pickup in India Power generation

generation growth . . . (bn units)
2,000 Thermal Hydro Nuclear Wind Solar
1,800
1,600
1,400
. . . by 48% over FY17-22 1,200
1,000
800
600
400
200
0
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
FY19CL
FY20CL
FY21CL
FY22CL
Source: CEA, CLSA
Figure 267
Thermal plant-load factor India thermal plant-load factor

bottomed out in FY17; we
80 Plant-load factor (%)
expect significant
improvement over the
next 5-6 years 75
70
65
60
55
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
FY19CL
FY20CL
FY21CL
FY22CL
Source: CEA, CLSA

Figure 268
Electricity production Electricity production growth

growth at 4-7% band due
9 YoY growth (%)
to weak health of
distribution firms
8
2
Source: Centre for Monitoring Indian Economy, CLSA
Figure 269
Coal production has India’s coal production

increased over the past
800 (mt)
few years . . .
700
600
500
. . . solving power plants’
400
fuel-supply issues and
lowering coal imports,
leading to lower costs for 300
generation companies
such as NTPC 200
100
0
Source: Ministry of Coal, CLSA
Figure 270
Revenue growth from Power sector revenue growth

capacity additions and
2,500 (Rsbn) Total YoY growth (RHS) (%) 25
volatility in fuel prices
2,000 20
1,500 15
1,000 10
500 5
0 0
Note: Data for power companies under coverage. Source: CLSA

Margins: Set to improve on new project starts

Figure 271
Ebitda margins not a Power-sector Ebitda margins

meaningful indicator, as
40 (%)
the sector is dominated
by regulated utilities
38
36
34
32
30
28
26
Figure 272
Despite peaking in Movement in Indonesian coal prices
Dec 2017, coal prices
(US$/ton) Indo (6322Kcal) (%)
are up 50%YoY
120 Indo (6322Kcal) YoY (RHS) 100
90 80
60 60
30 40
0 20
(30) 0
(60) (20)
(90) (40)
10
10
11
11
12
12
13
13
14
14
15
15
16
16
17
17
10
10
11
11
12
12
13
13
14
14
15
15
16
16
Jun
Jun
Jun
Jun
Jun
Jun
Jun
Jun
Dec
Dec
Dec
Dec
Dec
Dec
Dec
Mar
Sep
Mar
Sep
Mar
Sep
Mar
Sep
Mar
Sep
Mar
Sep
Mar
Sep
Mar
Figure 273
May 2017 monthly Indian Energy Exchange tariff
average tariff was flat
MoM at Rs2.92/Kwh, but 10 (Rs/kWh) Daily average Monthly average Avg
up 26% YoY . . . 9
8
7
6
5
4
. . . showing first signs of 3
bottoming out
2
1
0
10
10
11
11
12
12
13
13
14
14
15
15
16
16
17
17
10
10
11
11
12
12
13
13
14
14
15
15
16
16
Jun
Jun
Jun
Jun
Jun
Jun
Jun
Jun
Dec
Dec
Dec
Dec
Dec
Dec
Dec
Mar
Sep
Mar
Sep
Mar
Sep
Mar
Sep
Mar
Sep
Mar
Sep
Mar
Sep
Mar

Improving ROE, led by rising capital work-in-progress

Figure 274
ROE dip on high capex, Power-sector ROE

less commissioning and (%)
15
weak merchant demand
due to poor state of
distribution firms’ 14
financials . . .
13
. . . but govt actions and 12

increased focus on
capitalisation vs capex
will improve prospects 11
over next few years
10
8
Figure 275
NTPC regulated equity

NTPC’s regulated equity,
its key earnings driver, 1,000 (Rsbn) 920
saw single-digit growth in 900 828
FY13-17 . . . 54% rise in RE
800 over FY17-19
678
700
600 534
. . . but is set to expand 500 412

440
405
by 54% over FY17-19CL 400 326
351
254 272
300 237
200
100
0
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
FY19CL
FY20CL
FY21CL
Figure 276
Gearing to peak as Power Power-sector gross debt/equity
Grid and highly-levered
firms such as Jaiprakash 2.0
Power and Adani Power 1.8
reduce their debt
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0

Indian utilities and infra developers remain inexpensive

Figure 277
NTPC is trading below its NTPC one-year forward PE

average PE of 12.8x
17 (x)
16
15
+1sd14.15x
14
13 avg12.78x
12
-1sd11.41x
11
10
9
May 11 May 12 May 13 May 14 May 15 May 16 May 17
Source: CLSA
Figure 278
PWGR currently trades at Power Grid one-year forward PE

12.7x PE
16 (x)
15
14
+1sd13.37x
13
12 avg12.06x
11
-1sd10.75x
10
9
Aug 10 Aug 11 Aug 12 Aug 13 Aug 14 Aug 15 Aug 16
Source: CLSA
Figure 279
Tata Power is trading at Tata Power one-year forward PE

11.8x PE
110 (x)
100
90
80
70
60 +1sd49.25x
50
40
avg26.65x
30
20
10
-1sd4.05x
0
Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17
Source: CLSA

Developers: In a sweet spot

Figure 280
We expect Infrastructure developers: Revenue and growth

growth for developers as (Rsbn) (%)
800 Total YoY growth (RHS) 25
economic activity picks up
20
700
15
600 10
Traffic and road
construction activity 5
500
to rise
0
400
(5)
300 (10)
200 (15)
(20)
100
(25)
0 (30)
FY12 FY13 FY14 FY15 FY16 FY17 FY18CL FY19CL
Note: Data for coverage companies in infra developers. Source: CLSA,
Figure 281
Volume at major ports India major ports volumes on the rise

grew 7%YoY during FY17
660 (m tonnes)
640
620
600
580
560
540
FY15 FY16 FY17
Note: Data for coverage companies in infra developers. Source: CLSA
Figure 282
Adani Ports is trading Adani Ports one-year forward PE

above +1sd over the past
28 (x)
few months
26
24
22
+1sd21.48x
20
18 avg17.92x
16
-1sd14.35x
14
12
10
Jun 12 Jun 13 Jun 14 Jun 15 Jun 16 Jun 17

Notes

Property
Abhinav Sinha Cyclical low

abhi.sinha@clsa.com Residential sales bottoming out; robust lease assets
+91 22 6650 5069
We expect residential property to emerge stronger from a pair of major
disruptive events: demonetisation and the Real Estate Regulatory Act
rollout. Weak prices over the past three years and decade-low mortgage
rates have improved affordability. The office and retail segments will
meanwhile enjoy good demand-supply dynamics, along with cap-rate
compression. We prefer Godrej, Oberoi and Sobha among residential
players and Phoenix, Prestige and IBREL in the commercial division.
Residential real estate reaching cyclical lows

29 August 2017  Back-to-back disruptive events of demonetisation and the rollout of Real Estate
Regulatory Act have severely impacted the residential segment as buyers and
India developers grapple with the changes.
 Data for the June 2017 quarter shows that on a trailing 12-month basis, property
Property sales in the top-eight cities are down 40% from the 2013 peak; launches fell 65%.
 Since 2014, property prices have been flattish (2% Cagr) versus 8% per-capita
GDP growth. Mortgage rates are also down 250bps from peak and are at a decade
low. Overall, affordability is at a decade high, supporting end-user demand.
 Meanwhile, the office market has done well, with vacancy down to single digits in
important micro markets where lease rentals are up 10-20% over the past two
years. While job outlook is important for demand, limited supply remains a positive.
Weak residential prices, but rising lease income supports margins

 Sector revenue, because of accounting-policy issues, are backward looking by
about four to six quarters. As such, a near-term pickup in presales (which we
expect from 2HFY18) will not necessarily translate into revenue/earnings
acceleration. We build a slow 8% revenue Cagr over FY17-20.
 Industry margin has nearly halved from the 60% peak in FY08 to the 30% bottom
in FY16. Ebitda margin improved by 3ppts in FY17.
 We believe that while residential property prices may stay weak in the near term,
the low input-price environment and rising lease incomes (inherently higher
margin) will lead to a margin improvement of about 3ppts over FY17-20.
Unlikely to see significant deleveraging

 Net gearing for property companies increased from 70-80% in FY09-15 to 95-100%
in FY17, partly due to the shift to the new Indian Accounting Standards, which led
to lower net worth. Gearing should fall back below 90% by FY20 due to limited
landbanking, but there will be cases of continuing capex for new offices and malls.
 While property firms no longer build landbanks (except for joint developments), we
expect working-capital days to trend near last decade’s average of about 700 days.
Market-share gains a positive for organised developers

 Disruptive changes in the property sector are ideal for larger listed developers with
access to institutional finance as they can gain significant market share.
 We prefer Godrej, Oberoi and Sobha among residential players and Phoenix,
Prestige and IBREL in the commercial segment.
Property sector valuations

Company Rec Target Mkt cap 3M ADTO PE (x) PB (x) ROE (%)
Godrej Properties BUY 636.00 1.7 2.4 53.4 58.6 35.7 5.5 5.1 11.0 9.1 13.6
Indiabulls Real Est BUY 282.00 1.7 65.7 25.6 26.2 24.1 2.5 2.1 9.9 9.0 8.3
Oberoi Realty BUY 484.00 2.0 1.4 33.8 15.2 14.1 2.2 2.0 6.8 13.8 13.2
Phoenix Mills BUY 597.00 1.3 0.9 49.9 36.1 27.9 3.8 3.5 8.0 10.2 12.0
Prestige Estates BUY 324.00 1.5 1.4 37.6 27.4 25.6 2.2 2.0 6.0 7.7 7.7
Sobha BUY 525.00 0.6 1.8 23.7 20.8 16.7 1.4 1.3 6.2 6.7 7.8
DLF SELL 139.00 5.2 34.3 116.2 58.6 39.7 1.4 1.4 1.3 2.5 3.6
Source: CLSA
www.clsa.com

Property India strategy
At a cyclical low
Figure 283
Mortgage rates have Benchmark mortgage rate

recently fallen to near
14 (%)
12-year lows of 8.4%
13
12
11 Average 10.4%
10
7
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
Source: CLSA, Housing Development Finance Corporation (HDFC), State Bank of India (SBI)
Figure 284
Pace of property launches Property units launched and sold¹

and sales are down 65%
300,000 (Units) Trailing 12M launches Trailing 12M sales
and 40% from 2013 peak
250,000
200,000
150,000
100,000
50,000
0
4Q08
2Q09
4Q09
2Q10
4Q10
2Q11
4Q11
2Q12
4Q12
2Q13
4Q13
2Q14
4Q14
2Q15
4Q15
2Q16
4Q16
2Q17
¹ Top-eight cities. Source: CLSA, REIS JLL
Figure 285
Property-price rise over Nationwide residential property-price change¹

past three years has
50 (% YoY)
averaged 2% versus 8%
gain in per-capita income
40
30
20
10
(10)
(20)
1Q00
4Q00
3Q01
2Q02
1Q03
4Q03
3Q04
2Q05
1Q06
4Q06
3Q07
2Q08
1Q09
4Q09
3Q10
2Q11
1Q12
4Q12
3Q13
2Q14
1Q15
4Q15
3Q16
2Q17
¹ Top-seven cities. Source: CLSA, Cushman and Wakefield
118 abhi.sinha@clsa.com 29 August 2017

Figure 286
Following recent Year-end home-affordability¹ ratio

mortgage rate cuts,
affordability has fallen 60 (%) 56
54
just below cycle average
49
50 45 46 46
45
42
41 41
38
40 36 34 35
34
31 31
28 27
30
20
10
0
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
¹ Mortgage payment to family income ratio. Source: CLSA
Figure 287
Office absorption and Annual office supply and absorption

supply are driving
70 (m sf) Absorption Supply
improvements in industry
vacancy rates and rentals
60
50
40
30
20
10
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Source: CLSA, Cushman and Wakefield
Figure 288
Steady appreciation in Monthly office rentals in key micro markets

office rentals at key Bengaluru - IT
(Rs/sf/month)
locations due to supply
140 Hyderabad - IT
constraints and ongoing
demand Gurgaon prime
120
100
80
60
40
20
0
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
Source: CLSA, Cushman and Wakefield
29 August 2017 abhi.sinha@clsa.com 119

Figure 289
Change in accounting Revenue growth¹

standards and residential
300 (% YoY)
sales slowdown have hurt 274
revenue growth
250
FY18 revenue expansion
driven by one-off large 200
project entries in revenue
recognition and a 150
low base 89
100 69
51
50 31 27
17 12
4 9 7 6
0
0
(1)
(15) (13)
(50) (28)
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
FY19CL
FY20CL
¹ Like-to-like for DLF, Sobha, Prestige Estates, Phoenix Mills, Oberoi, Godrej Properties. Source: CLSA
Figure 290
FY17 Ebitda for six Ebitda growth¹

companies combined was
450 (% YoY)
lower than that in FY09 411
400
350
300
250
181
200 169
150
100 64
50 15 3 7 17 12 15 13 8
0
(50) (12) (7)
(39) (38) (29)
(100)
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
FY19CL
FY20CL
Figure 291
Mildly positive margin Ebitda margin¹

trend despite weak
70 (%)
residential prices, due to
rising share of higher- 60
margin lease income in 60

52
revenue
50 44 43
38 39
40 35 34 34
35 36
33 32 33
31 30
30
21
19
20
10
0
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
FY19CL
FY20CL

Figure 292
Net gearing rose to 100% Sector net gearing ratio¹

in FY16-17 as new
400 (%)
accounting standards led
some firms to restate
350
their net worth
300
250
200
150
100
50
0
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
FY19CL
FY20CL
Figure 293
Single-digit sector ROE Sector ROE

over the past eight years,
60 (%)
but should improve as
profitability rises
50
40
30
20
10
0
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
FY19CL
FY20CL
Figure 294
Net working capital Sector net-working capital¹

includes land (Days)
1,000
Likely to see a release of
working capital as
landbanking is currently 750
not a focus
500
250
0
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18CL
FY19CL
FY20CL
29 August 2017 abhi.sinha@clsa.com 121

Figure 295
Sector PEs are still Sector PE¹

trending near averages
(x)
50
45
40
35 +1sd35.31x
30 avg29.5x
25
-1sd23.69x
20
15
10
Figure 296
Reratings have brought Sector PB¹

ROE back to 10-year
(x)
average in anticipation of 9
a sector upturn
8
4
+1sd3.37x
3
2 avg2.04x
1
-1sd0.71x
0
Figure 297
DLF’s low PB ratio a DLF - PB

reflection of muted ROE
10 (x)
9
8
7
6
5
4
+1sd3.37x
3
2 avg1.9x
1
-1sd0.44x
0
Source: CLSA

Telecoms
Deepti Chaturvedi In a state of flux

Executive Director Revenue fall to reverse due to consolidation, data uptake
deepti.chaturvedi@clsa.com
+91 22 6650 5066 India mobile-sector revenue is declining with unprecedented
disruption by new entrant Reliance Jio, but exploding data usage will
Akshat Agarwal, CFA drive long-term growth. Also, sector consolidation is likely to leave
+91 22 6650 5065 the top-three operators controlling 90% of industry earnings. For
now, margins are under pressure, given aggressive network rollouts
and balance sheets are burdened by high gearing and losses. We
prefer Bharti Infratel for its widening telecom tower tenancy ratio.
Sector in flux; top-three to gain share
29 August 2017  India’s telecom sector saw a revenue decline in FY17, led by the sharp 11% YoY fall
in Arpu due to free services offered by new mobile-market entrant Reliance Jio.
India  We expect high-Arpu subscribers to continue to switch to cheaper contracts during
FY18, driving a 1.5% decline in industry revenue in FY18 before growing by 3% in
Telecoms FY19, led by Arpu stability with widening adoption of bundled plans.
 Over FY17-19, we expect a 6% subscriber Cagr, led by rural areas, which have a
56% penetration rate - one-third that of the urban population’s 167%.
 While sector revenue will be flat over FY17-19, the top-three operators - Bharti
Airtel, Reliance Jio and Idea Celluar/Vodafone combine - will collectively deliver an
11% Cagr as they will capture over 90% of industry revenue.
Margins to remain under pressure

 Telco margins steadily declined from 39% to 30% over FY09-13, largely due to
higher network operating costs as they increased coverage.
 Over FY13-16, margins increased by 7ppts to 37%, and saw a further 2ppt decline
to 35% in FY17 due to a fall in sector revenue.
 We expect operator margins to further narrow to 32% by FY18 due to continued revenue
contraction, and see margins improving only in FY19 as market stability returns.
 However, aggressive network rollouts will drive a 220bp margin expansion for
Bharti Infratel over FY17-19, led by a 32bp increase in tenancy ratio to 2.6x.
Balance-sheet stress unlikely to ease

 Over FY10-17, telcos have seen a sharp increase in net debt due to wireless
spectrum purchases via multiple auctions, driving net debt to 3.8x FY17 Ebitda.
 We expect industry leverage to remain elevated over FY17-19, given limited growth
in operating cashflow and high capex levels.
 Furthermore, we expect operators to post losses in FY18-19, due to high operating
leverage. As a consequence, aggregate ROEs will turn negative during FY18-19.
Our top pick: Bharti Infratel

 Despite declining revenue and balance-sheet stress, mobile operators continue to
trade 20% above their five-year average multiples.
 Given limited growth prospects and rich valuations, we remain Underweight the
sector, with an Underperform rating for Bharti Airtel and a SELL recommendation
for Idea Cellular.
 However we like Bharti Infratel, as it will benefit from aggressive data-network
rollouts by operators. With a strong tenancy demand outlook for its telecom towers,
it is set to deliver a 12% Ebitda Cagr, driving 16% profit growth over FY17-19CL.
 Furthermore, it has an attractive valuation, with the stock trading below its five-
year average EV/Ebitda multiple. We maintain our BUY call and Rs490 target.
Telecom sector valuations

Company Price Target Rec Upside Mkt cap PE (x) EPS Cagr EV/Ebitda (x) Ebitda Cagr ROE Div yield
(Rs) (Rs) (%) (US$m) FY17-19 FY17-19 FY18 FY18
FY18 FY19 FY18 FY19
(%) (%) (%) (%)
Bharti Airtel 432 444 U-PF 3 27,059 132 75 (22) 8.5 7.3 0 1.9 0.3
Bharti Infratel 383 490 BUY 28 11,058 22.3 19.6 16 9.0 8.1 12 21.0 3.9
Idea Cellular 91 78 SELL (14) 5,100 (10.9) (16.8) na 10.0 8.3 (2) (13.0) 0.0
Source: CLSA
www.clsa.com

Telecoms India strategy
Flat industry revenue, driven by data subscriber growth

Figure 298
Industry revenue to Flat sector revenue over FY17-19

decline in FY18 before
2,500 (Rsbn) Industry revenue (% YoY) 25
recovering in FY19
Revenue growth (RHS)
20
2,000
15
1,500
10
1,000
5
500
0
0 (5)
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 18CL 19CL
Source: Telecom Regulatory Authority of India (TRAI), CLSA
Figure 299
Rural markets will lead Subscriber growth will be driven by increasing rural penetration
mobile penetration to rise
200 (%)
to 100% by FY19 . . . 178
180 167
160
140
120
91 100
100
80 65
56
60
40
20
0
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
18CL
19CL
18CL
19CL
18CL
19CL
Urban Rural Overall
Source: TRAI, CLSA
Figure 300
. . . while helping to We expect stable subscriber growth at 6% over FY17-19

stabilise subscriber Urban subscribers
1,400 (m) (% YoY) 60
growth
Rural subscribers
596
1,200 Subcriber growth (RHS) 559 50
498
1,000 40
445
414
323 372
800 343 30
274
600 20
191
400 10
112
200 0
280 393 538 596 525 533 556 589 672 719 727
0 (10)
Source: TRAI, CLSA

Rising data adoption to support Arpu; top-three to benefit

Figure 301
Rising adoption of Data penetration to rise to nearly 50% by FY19

bundled plans will drive
450 (m) Data subscribers (% mobile subs) 60
data adoption
Data penetration (RHS) 393
410
400
354 50
350 322
300 283 40
250 233
30
200
147
150 20
100
10
50
0 0
FY13 FY14 FY15 FY16 FY17 18CL 19CL
Source: TRAI, CLSA
Figure 302
A shift to cheaper Sector Arpu to further decline in FY18 before stabilising in FY19
contracts by high-Arpu
(Rs/month)
subscribers will impact
Arpu in FY18 . . . 350 332
300
263
. . . but rising adoption of 250

bundled plans will bring
stability in FY19 200 185
163 161
155
144 140 144
150 134 128 125
100
50
0
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 18CL 19CL
Source: TRAI, CLSA
Figure 303
Smaller operators that are Top operators will gain share at an accelerated pace
unable to offer unlimited
(% revenues) Bharti Airtel Idea-Vodafone Reliance Jio Others
plans will hurt and drive
consolidation 100
9
90 24
30 29 27 29
36 34 34 34 32
80 21
70 9
Top-three operators to
gain control 91% sector 60
revenue by FY19 42
50 33 39 41 40 37
31 34 36 38 38
40
30
20
33 33 31 30 30 31 31 31 30 29 33
10
0
Source: TRAI, CLSA

Margins driven by operating leverage and data revenue

Figure 304
Revenue decline in FY17 Aggregate Ebitda margins to improve

has impacted margins due
45 (% sales)
to operating leverage
39
40 37
36 36 35
35 34
35 32
33
32
30
30
We expect margins to
continue to come under 25
pressure as earnings
further contract 20
15
10
0
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18CL FY19CL
Note: Aggregated for Bharti-India, Idea and Reliance Communications. Source: Companies, CLSA
Figure 305
Higher access costs due Margin levers for telecom companies over FY09-17 and FY17-19
to adoption of unlimited
45 (% sales) 1.4 0.8 7.7
voice-calling plans . . . 1.7
43 2.0
41 38.8
39
37 35.4 0.4 0.2 0.2 0.6
0.8 34.0
35
33 1. Rising adoption of unlimited plans to
1. Margins supported by operating leverage
31 increase access costs.
2. Aggressive network rollouts and increase in
29 fuel costs drove up network operating costs
2. Network operating costs to increase
27 due to data network rollouts
25
SG&A
Ebitda margin,
Employee exp
Employee exp
SG&A
Ebitda margin, FY09
Access & roaming
Licence fees
Ebitda margin, FY17
Licence fees
Access & roaming

Network op. costs
Network op. costs
FY19CL
Note: Aggregated for Bharti-India, Idea and Reliance. Source: Companies, CLSA
Figure 306
. . . while higher network- 3G/4G sites on networks for Bharti, Idea Cellular and Vodafone
operating costs will Idea Cellular
('000) (% 2G sites)
impact margins Vodafone
450 Bharti Airtel 100
400 Ratio of data to voice sites for top-three operators (RHS) 90
350 134,054 80
122,054 70
300
110,054 60
250
130,300 50
200 64,703 118,300
106,300 40
150 62,673 30
100 30,291 20
160,241
21,381 34,985 138,717
116,717
50 17,140 22,400
105,465 10
12,500 45,730
24,573 31,301
0 0
Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Mar 18CL Mar 19CL

Bharti Infratel benefits from network rollouts

Figure 307
Network rollouts to drive Bharti Infratel: Towers and tenancy ratio

higher tenancy ratio for
120 ('000) Towers Tenancy ratio (RHS) (x) 3.0
Bharti Infratel . . .
100 2.5
80 2.0
60 1.5
40 1.0
20 0.5
0 0.0
Figure 308
. . . while tenancy ratio Bharti Infratel: Core Ebitda margin and tenancy ratio
improvement will drive Core Ebitda margin
80 (% core revenue) (x) 3.0
margins
Tenancy ratio (RHS) 69
68
70 65 66 67 67
2.5
57 58 58
60 54
49 2.0
50
40 1.5
30
1.0
20
0.5
10
0 0.0
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18CLFY19CL
Core Ebitda margin = Reported margins adjusted for pass-through revenues. Source: Company, CLSA
Figure 309
Improving margins will Bharti Infratel: Net profit and profit growth
drive 16% earnings Cagr
(Rsbn) Net profit Profit growth (RHS) (% YoY)
over FY17-19
40 36.9 60
35 32.5
50
30 27.5
40
25 22.5
19.9
20 30
15.2
15
10.0
20
10 7.5
5.5
10
5
0 0

Balance-sheet stress unlikely to ease

Figure 310
Pressure on free Elevated capex levels will keep free cashflow under pressure
cashflow . . .
600 (Rsbn) Operating cashflow Capex Free cashflow
500
400
300
200
100
0
Figure 311
. . . will keep balance Net debt to Ebitda ratio to remain high at 3.6x by FY19
sheets under stress
2,500 (Rsbn) Net debt (LHS) Net debt/Ebitda (x) 5.0
4.5
2,000 4.0
3.5
1,500 3.0
2.5
1,000 2.0
1.5
500 1.0
0.5
0 0.0
Figure 312
Falling revenue, higher Aggregate return on equity

interest costs and
20 (% avg equity)
amortisation on spectrum
purchases will drive
losses 15.35
15
10
7.66 7.52 7.75
5.43 5.34
5 3.80
1.63
0
(1.20)
(3.03)
(5)

Telcos at rich valuations; prefer Bharti Infratel

Figure 313
Bharti Airtel is trading Bharti Airtel: 12-month forward EV/Ebitda valuation range
20% above its average
(x)
valuation 8.5
8.0
7.5
+1 Std, 7.2x
7.0
Avg, 6.8x
6.5
-1 Std, 6.3x
6.0
5.5
Figure 314
Idea Cellular is trading Idea Cellular: 12-month forward EV/Ebitda valuation range
20% above its five-year
12 (x)
average
11
10
+1 Std, 9.0x
9
Avg, 8.0x
8
-1 Std, 7.0x
7
5
Figure 315
Bharti Infratel is trading Bharti Infratel: 12-month forward EV/Ebitda valuation range
below its average
16 (x)
valuation
14
12 +1 Std, 12.1x
Avg, 10.4x
10
-1 Std, 8.8x
8
4
Aug 14 Feb 15 Aug 15 Feb 16 Aug 16 Feb 17 Aug 17

India strategy
Notes

Important disclosures India strategy
Companies mentioned
ABB Ltd (N-R) Hulic (N-R)
ACC (ACC IB - RS1,789.8 - O-PF) ICICI Bank (ICICIBC IB - RS293.1 - BUY)
Adani Ports (ADSEZ IB - RS386.6 - BUY) Idea Cellular (IDEA IB - RS90.3 - SELL)
Adani Power (ADANI IB - RS28.8 - SELL) IL&FS (N-R)
Aditya Birla F&R (ABFRL IN - RS170.9 - BUY) India Cements (ICEM IS - RS182.8 - BUY)
Alstom (N-R) Indiabulls Housing (IHFL IS - RS1,202.4 - BUY)
Ambuja Cements (ACEM IB - RS274.8 - BUY) Indian Oil (IOCL IB - RS426.8 - SELL)
Arvind (ARVND IN - RS370.0 - BUY) IndusInd Bank (IIB IS - RS1,621.0 - BUY)
Ashok Leyland (AL IB - RS103.7 - BUY) Infosys (INFO IB - RS923.1 - U-PF)
Asian Paints (APNT IS - RS1,140.0 - SELL) Inox Leisure (INOL IS - RS239.7 - BUY)
Astral (ASTRA IN - RS660.3 - BUY) Ipca (IPCA IB - RS412.7 - SELL)
Aurobindo Pharma (ARBP IB - RS704.5 - O-PF) IRB Infra (IRB IB - RS213.1 - BUY)
Axis Bank (AXSB IB - RS490.7 - O-PF) ITC (ITC IB - RS281.8 - U-PF)
Bajaj Auto (BJAUT IS - RS2,811.3 - O-PF) J Kumar Infra (JKIL IN - RS207.4 - BUY)
Bank of Baroda (BOB IB - RS147.1 - BUY) Jagran (JAGP IB - RS172.3 - BUY)
Bank of India (BOI IB - RS143.3 - SELL) JSW Energy (JSW IB - RS64.0 - SELL)
Bharat Electronics (N-R) JSW Steel (JSTL IB - RS237.3 - BUY)
Bharat Petro (BPCL IB - RS502.7 - SELL) Jubilant Food (JUBI IN - RS1,395.7 - BUY)
Bharti Airtel (BHARTI IS - RS421.0 - U-PF) Kalpataru Power (N-R)
Bharti Infratel (BHIN IS - RS395.3 - BUY) KEC (N-R)
Biocon (BIOS IB - RS328.6 - SELL) KNR Constructions (N-R)
Cadila Healthcare (CDH IB - RS473.5 - BUY) Kotak Bank (KMB IB - RS983.5 - O-PF)
Canara Bank (CBK IB - RS332.4 - SELL) L&T Tech (LTTS IS - RS740.5 - BUY)
Cipla (CIPLA IB - RS565.7 - BUY) Larsen & Toubro (LT IB - RS1,131.0 - BUY)
Coal India (COAL IS - RS243.3 - U-PF) LIC Housing Finance (LICHF IB - RS658.3 - BUY)
Colgate (N-R) Lupin (LPC IB - RS940.8 - O-PF)
Colgate India (CLGT IB - RS1,068.9 - SELL) Marico (MRCO IB - RS319.3 - SELL)
Corporation Bank (CRPBK IB - RS45.5 - SELL) Maruti Suzuki (MSIL IB - RS7,620.1 - BUY)
Crompton Greaves (N-R) NBCC (N-R)
Dabur (DABUR IS - RS310.1 - O-PF) NCC (N-R)
DB Corp (DBCL IB - RS375.0 - BUY) Nestle India (NEST IB - RS6,645.5 - U-PF)
Dish TV (DITV IB - RS78.0 - BUY) NTPC (NTPC IS - RS173.4 - BUY)
Dr Reddy's (DRRD IB - RS1,982.9 - SELL) Oberoi Realty (OBER IN - RS369.9 - BUY)
Eicher Motors (EIM IS - RS31,511.5 - BUY) Oil & Natural Gas (ONGC IB - RS160.8 - BUY)
Emami (HMN IS - RS1,101.7 - BUY) Oil India (OINL IS - RS286.4 - BUY)
Gail (GAIL IB - RS381.8 - SELL) Oriental Bank (OBC IB - RS123.0 - SELL)
Glenmark Pharma (GNP IS - RS610.9 - SELL) Petronet LNG (PLNG IB - RS229.3 - SELL)
Godrej Consumer (GCPL IB - RS919.6 - SELL) Phoenix Mills (PHNX IN - RS539.3 - BUY)
GSK (N-R) Pidilite (PIDI IS - RS821.5 - O-PF)
Havells India (HAVL IB - RS477.5 - SELL) PNB (PNB IB - RS142.3 - SELL)
HCL Tech (HCLT IB - RS876.2 - BUY) Power Finance (POWF IB - RS123.0 - SELL)
HDFC Bank (HDFCB IB - RS1,753.7 - BUY) Power Grid (PWGR IB - RS222.8 - BUY)
Hero Motocorp (HMCL IB - RS3,982.8 - SELL) Prestige Estates (PEPL IN - RS263.6 - BUY)
Hindalco (HNDL IB - RS229.9 - BUY) Punj Lloyd (N-R)
Hindustan Construction (N-R) PVR (PVRL IS - RS1,321.8 - BUY)
Hindustan Petro (HPCL IB - RS442.4 - SELL) Ramco Cements (TRCL IN - RS684.3 - SELL)
HT Media (HTML IB - RS86.8 - SELL) Reliance Industries (RIL IB - RS1,575.4 - BUY)

Rural Electrification (RECL IB - RS166.9 - SELL) Torrent Pharma (TRP IB - RS1,267.8 - BUY)
Sadbhav (SADE IN - RS268.0 - BUY) TTK Prestige (TTKPT IN - RS6,160.8 - SELL)
SBI (N-R) TVS Motor (TVSL IS - RS584.6 - SELL)
Shree Cement (SRCM IB - RS17,281.3 - U-PF) UltraTech (UTCEM IS - RS4,014.3 - O-PF)
Shriram Transport (SHTF IS - RS972.4 - SELL) Union Bank (UNBK IB - RS132.1 - SELL)
Siemens Ltd (N-R) United Spirits (UNSP IB - RS2,603.0 - SELL)
Simplex Infra (N-R) Varun Beverages (VBL IN - RS547.1 - BUY)
Sobha (SOBHA IS - RS386.3 - BUY) Vedanta (VEDL IS - RS298.4 - BUY)
Sun TV (SUNTV IB - RS741.8 - BUY) Vodafone (N-R)
T&D Holdings (N-R) Voltas (VOLT IS - RS537.7 - SELL)
Tata Consultancy (TCS IB - RS2,512.8 - BUY) Westlife (WLDL IN - RS255.4 - BUY)
Tata Motors (TTMT IB - RS380.7 - SELL) Wipro (WPRO IB - RS288.2 - O-PF)
Tech Mahindra (TECHM IB - RS427.6 - SELL) Yes Bank (YES IB - RS1,720.1 - BUY)
Thermax (N-R) Zee Entertainment (Z IB - RS513.0 - BUY)
Titan (TTAN IB - RS624.9 - BUY)
Analyst certification
The analyst(s) of this report hereby certify that the views expressed in this research report accurately reflect
my/our own personal views about the securities and/or the issuers and that no part of my/our compensation
was, is, or will be directly or indirectly related to the specific recommendation or views contained in this
research report.
Important disclosures
The policy of CLSA (which for the purpose of this Sales and Trading department supervises or controls
disclosure includes its subsidiary CLSA B.V.) and CL the activities of CLSA’s research analysts. CLSA’s
Securities Taiwan Co., Ltd. (“CLST”) is to only research analysts report to the management of the
publish research that is impartial, independent, Research department, who in turn report to CLSA’s
clear, fair, and not misleading. Analysts may not senior management.
receive compensation from the companies they
cover. Regulations or market practice of some CLSA has put in place a number of internal
jurisdictions/markets prescribe certain disclosures to controls designed to manage conflicts of interest
be made for certain actual, potential or perceived that may arise as a result of CLSA engaging in
conflicts of interests relating to a research report as Corporate Finance, Sales and Trading and Research
below. This research disclosure should be read in activities. Some examples of these controls include:
conjunction with the research disclaimer as set out the use of information barriers and other information
at www.clsa.com/disclaimer.html and the applicable controls designed to ensure that confidential
regulation of the concerned market where the information is only shared on a “need to know” basis
analyst is stationed and hence subject to. This and in compliance with CLSA’s Chinese Wall policies
research disclosure is for your information only and and procedures; measures designed to ensure that
does not constitute any recommendation, interactions that may occur among CLSA’s Research
representation or warranty. Absence of a personnel, Corporate Finance and Sales and Trading
discloseable position should not be taken as personnel, CLSA’s financial product issuers and
endorsement on the validity or quality of the CLSA’s research analysts do not compromise the
research report or recommendation. integrity and independence of CLSA’s research.
To maintain the independence and integrity of Neither analysts nor their household
CLSA’s research, our Corporate Finance, Sales members/associates/may have a financial interest
Trading and Research business lines are distinct in, or be an officer, director or advisory board
from one another. This means that CLSA’s Research member of companies covered by the analyst unless
department is not part of and does not report to disclosed herein. In circumstances where an analyst
CLSA Corporate Finance (or “investment banking”) has a pre-existing holding in any securities under
department or CLSA’s Sales and Trading business. coverage, those holdings are grandfathered and the
Accordingly, neither the Corporate Finance nor the analyst is prohibited from trading such securities.

Unless specified otherwise, CLSA/CLST did not Overall rating distribution for CLSA/CLST only
receive investment banking/non-investment banking Universe:
income from, and did not manage/co-manage a
public offering for, the listed company during the Overall rating distribution: BUY / Outperform -
past 12 months, and it does not expect to receive CLSA: 64.52%; CLST only: 67.61%, Underperform /
investment banking compensation from the listed SELL - CLSA: 35.48%; CLST only: 32.39%,
company within the coming three months. Unless Restricted - CLSA: 0.00%; CLST only: 0.00%. Data
mentioned otherwise, CLSA/CLST does not own a as of 30 June 2017.
material discloseable position, and does not make a
market, in the securities. Investment banking clients as a % of rating
category: BUY / Outperform - CLSA: 4.77%; CLST
As analyst(s) of this report, I/we hereby certify only: 0.00%, Underperform / SELL - CLSA: 2.98%;
that the views expressed in this research report CLST only: 0.00%, Restricted - CLSA: 0.00%; CLST
accurately reflect my/our own personal views about only: 0.00%. Data for 12-month period ending 30
the securities and/or the issuers and that no part of June 2017.
my/our compensation was, is, or will be directly or
indirectly related to the specific recommendation or There are no numbers for Hold/Neutral as
views contained in this report or to any investment CLSA/CLST do not have such investment rankings.
banking relationship with the subject company For a history of the recommendations and price
covered in this report (for the past one year) or targets for companies mentioned in this report, as
otherwise any other relationship with such company well as company specific disclosures, please write to:
which leads to receipt of fees from the company (a) CLSA, Group Compliance, 18/F, One Pacific
except in ordinary course of business of the company. Place, 88 Queensway, Hong Kong and/or; (b) CLST
The analyst/s also state/s and confirm/s that Compliance (27/F, 95, Section 2 Dun Hua South
he/she/they has/have not been placed under any Road, Taipei 10682, Taiwan, telephone (886) 2 2326
undue influence, intervention or pressure by any 8188). © 2017 CLSA Limited and/or CLST.
person/s in compiling this research report. In
addition, the analysts included herein attest that they © 2017 CLSA Limited, and/or CL Securities
were not in possession of any material, nonpublic Taiwan Co., Ltd. (“CLST”)
information regarding the subject company at the
time of publication of the report. Save from the This publication/communication is subject to and
disclosure below (if any), the analyst(s) is/are not incorporates the terms and conditions of use set out
aware of any material conflict of interest. on the www.clsa.com website
(www.clsa.com/disclaimer.html.). Neither the
Key to CLSA/CLST investment rankings: BUY: publication/communication nor any portion hereof
Total stock return (including dividends) expected to may be reprinted, sold, resold, copied, reproduced,
exceed 20%; O-PF: Total expected return below distributed, redistributed, published, republished,
20% but exceeding market return; U-PF: Total displayed, posted or transmitted in any form or
expected return positive but below market return; media or by any means without the written consent
SELL: Total return expected to be negative. For of CLSA group of companies (“CLSA”) and/or CLST.
relative performance, we benchmark the 12-month
total forecast return (including dividends) for the CLSA and/or CLST have produced this
stock against the 12-month forecast return publication/communication for private circulation to
(including dividends) for the market on which the professional, institutional and/or wholesale clients
stock trades. only. This publication/communication may not be
distributed or redistributed to retail investors. The
We define as “Double Baggers” stocks we expect information, opinions and estimates herein are not
to yield 100% or more (including dividends) within directed at, or intended for distribution to or use by,
three years at the time the stocks are introduced to any person or entity in any jurisdiction where doing
our “Double Bagger” list. "High Conviction" Ideas are so would be contrary to law or regulation or which
not necessarily stocks with the most would subject CLSA and/or CLST to any additional
upside/downside, but those where the Research registration or licensing requirement within such
Head/Strategist believes there is the highest jurisdiction. The information and statistical data
likelihood of positive/negative returns. The list for herein have been obtained from sources we believe
each market is monitored weekly. to be reliable. Such information has not been

independently verified and we make no advisors and/or any other connected parties. As a
representation or warranty as to its accuracy, result, investors should be aware that CLSA, CLST
completeness or correctness. Any opinions or and/or their respective affiliates or companies or
estimates herein reflect the judgment of CLSA such individuals may have one or more conflicts of
and/or CLST at the date of this interest. Regulations or market practice of some
publication/communication and are subject to jurisdictions/markets prescribe certain disclosures to
change at any time without notice. Where any part be made for certain actual, potential or perceived
of the information, opinions or estimates contained conflicts of interests relating to research reports.
herein reflects the views and opinions of a sales Details of the discloseable interest can be found in
person or a non-analyst, such views and opinions certain reports as required by the relevant rules and
may not correspond to the published view of CLSA regulation and the full details are available at
and/or CLST. This is not a solicitation or any offer to http://www.clsa.com/member/research_disclosures/
buy or sell. This publication/communication is for . Disclosures therein include the position of CLSA
information purposes only and does not constitute and CLST only. Unless specified otherwise, CLSA did
any recommendation, representation, warranty or not receive any compensation or other benefits from
guarantee of performance. Any price target given in the subject company covered in this
the report may be projected from one or more publication/communication, or from any third party
valuation models and hence any price target may be in connection with this report. If investors have any
subject to the inherent risk of the selected model as difficulty accessing this website, please contact
well as other external risk factors. This is not webadmin@clsa.com on +852 2600 8111. If you
intended to provide professional, investment or any require disclosure information on previous dates,
other type of advice or recommendation and does please contact compliance_hk@clsa.com.
not take into account the particular investment
objectives, financial situation or needs of individual This publication/communication is distributed for
recipients. Before acting on any information in this and on behalf of CLSA Limited (for research
publication/communication, you should consider compiled by non-US and non-Taiwan analyst(s)),
whether it is suitable for your particular and/or CLST (for research compiled by Taiwan
circumstances and, if appropriate, seek professional analyst(s)) in Australia by CLSA Australia Pty Ltd; in
advice, including tax advice. CLSA and/or CLST Hong Kong by CLSA Limited; in India by CLSA India
do/does not accept any responsibility and cannot be Private Limited, (Address: 8/F, Dalamal House,
held liable for any person’s use of or reliance on the Nariman Point, Mumbai 400021. Tel No: +91-22-
information and opinions contained herein. To the 66505050. Fax No: +91-22-22840271; CIN:
extent permitted by applicable securities laws and U67120MH1994PLC083118; SEBI Registration No:
regulations, CLSA and/or CLST accept(s) no liability INZ000001735; in Indonesia by PT CLSA Sekuritas
whatsoever for any direct or consequential loss Indonesia; in Japan by CLSA Securities Japan Co.,
arising from the use of this Ltd; in Korea by CLSA Securities Korea Ltd; in
publication/communication or its contents. Where Malaysia by CLSA Securities Malaysia Sdn Bhd; in
the publication does not contain ratings, the material the Philippines by CLSA Philippines Inc (a member of
should not be construed as research but is offered as Philippine Stock Exchange and Securities Investors
factual commentary. It is not intended to, nor should Protection Fund); in Thailand by CLSA Securities
it be used to form an investment opinion about the (Thailand) Limited; in Taiwan by CLST and in the
non-rated companies. United Kingdom by CLSA (UK).
Subject to any applicable laws and regulations at India: CLSA India Private Limited, incorporated in
any given time, CLSA, CLST, their respective November 1994 provides equity brokerage services
affiliates or companies or individuals connected with (SEBI Registration No: INZ000001735), research
CLSA /CLST may have used the information services (SEBI Registration No: INH000001113) and
contained herein before publication and may have merchant banking services (SEBI Registration
positions in, may from time to time purchase or sell No.INM000010619) to global institutional investors,
or have a material interest in any of the securities pension funds and corporates. CLSA and its
mentioned or related securities, or may currently or associates may have debt holdings in the subject
in future have or have had a business or financial company. Further, CLSA and its associates, in the
relationship with, or may provide or have provided past 12 months, may have received compensation
investment banking, capital markets and/or other for non-investment banking securities and/or non-
services to, the entities referred to herein, their securities related services from the subject

company. For further details of “associates” of CLSA and an exempt financial adviser, solely to persons
India please contact Compliance-India@clsa.com. who qualify as an institutional investor, accredited
investor or expert investor, as defined in s.4A(1) of
United States of America: Where any section is the Securities and Futures Act. Pursuant to
compiled by non-US analyst(s), it is distributed into Paragraphs 33, 34, 35 and 36 of the Financial
the United States by CLSA solely to persons who Advisers (Amendment) Regulations 2005 of the
qualify as "Major US Institutional Investors" as Financial Advisers Act (Cap 110) with regards to an
defined in Rule 15a-6 under the Securities and institutional investor, accredited investor, expert
Exchange Act of 1934 and who deal with CLSA investor or Overseas Investor, sections 25, 27 and
Americas. However, the delivery of this research 36 of the Financial Adviser Act (Cap 110) shall not
report to any person in the United States shall not be apply to CLSA Singapore Pte Ltd. Please contact
deemed a recommendation to effect any transactions CLSA Singapore Pte Ltd (telephone No.: +65 6416
in the securities discussed herein or an endorsement 7888) in connection with queries on the report. MCI
of any opinion expressed herein. Any recipient of this (P) 033/11/2016
research in the United States wishing to effect a
transaction in any security mentioned herein should The analysts/contributors to this
do so by contacting CLSA Americas. publication/communication may be employed by any
relevant CLSA entity, CLST or a subsidiary of CITIC
Canada: The delivery of this research report to Securities Company Limited which is different from
any person in Canada shall not be deemed a the entity that distributes the
recommendation to effect any transactions in the publication/communication in the respective
securities discussed herein or an endorsement of any jurisdictions.
opinion expressed herein. Any recipient of this
research in Canada wishing to effect a transaction in MSCI-sourced information is the exclusive
any security mentioned herein should do so by property of Morgan Stanley Capital International Inc
contacting CLSA Americas. (MSCI). Without prior written permission of MSCI,
this information and any other MSCI intellectual
United Kingdom: In the United Kingdom, this property may not be reproduced, redisseminated or
research is a marketing communication. It has not used to create any financial products, including any
been prepared in accordance with the legal indices. This information is provided on an "as is"
requirements designed to promote the independence basis. The user assumes the entire risk of any use
of investment research, and is not subject to any made of this information. MSCI, its affiliates and any
prohibition on dealing ahead of the dissemination of third party involved in, or related to, computing or
investment research. The research is disseminated compiling the information hereby expressly disclaim
in the EU by CLSA (UK), which is authorised and all warranties of originality, accuracy, completeness,
regulated by the Financial Conduct Authority. This merchantability or fitness for a particular purpose
document is directed at persons having professional with respect to any of this information. Without
experience in matters relating to investments as limiting any of the foregoing, in no event shall MSCI,
defined in Article 19 of the FSMA 2000 (Financial any of its affiliates or any third party involved in, or
Promotion) Order 2005. Any investment activity to related to, computing or compiling the information
which it relates is only available to such persons. If have any liability for any damages of any kind.
you do not have professional experience in matters MSCI, Morgan Stanley Capital International and the
relating to investments you should not rely on this MSCI indexes are service marks of MSCI and its
document. Where the research material is compiled affiliates. The Global Industry Classification Standard
by the UK analyst(s), it is produced and (GICS) was developed by and is the exclusive
disseminated by CLSA (UK). For the purposes of the property of MSCI and Standard & Poor's. GICS is a
Financial Conduct Rules this research is prepared service mark of MSCI and S&P and has been licensed
and intended as substantive research material. for use by CLSA.
Singapore: In Singapore, research is issued EVA® is a registered trademark of Stern, Stewart

and/or distributed by CLSA Singapore Pte Ltd & Co. "CL" in charts and tables stands for CLSA and
(Company Registration No.: 198703750W), a Capital “CT” stands for CLST estimates unless otherwise
Markets Services licence holder to deal in securities noted in the source.

Research & sales offices
www.clsa.com
Australia - Melbourne Hong Kong Korea Taiwan

CLSA Australia Pty Ltd CLSA Limited CLSA Securities Korea Ltd CL Securities Taiwan
Level 30 18/F, One Pacific Place 30/F, One IFC Company Limited*
35 Collins Street 88 Queensway 10 Gukjegeumyung-ro 27/F, 95, Section 2
Melbourne VIC 3000 Hong Kong Yeongdeungpo-gu Dun Hua South Road
Tel: +61 2 8571 4200 Tel: +852 2600 8888 Seoul, 07326 Taipei 10682
Fax: +61 2 9221 1188 Fax: +852 2868 0189 Tel: +82 2 397 8400 Tel: +886 2 2326 8188
Fax: +82 2 771 8583 Fax: +886 2 2326 8166
Australia - Sydney India Malaysia Thailand

CLSA Australia Pty Ltd CLSA India Private Limited CLSA Securities Malaysia Sdn CLSA Securities (Thailand) Ltd
Level 35 8/F, Dalamal House Bhd 16/F, M. Thai Tower
Grosvenor Place Nariman Point Suite 20-01, Level 20 All Seasons Place
225 George Street Mumbai 400021 Menara Dion 87 Wireless Road,
Sydney NSW 2000 Tel: +91 22 6650 5050 27 Jalan Sultan Ismail Pathumwan, Bangkok 10330
Tel: +61 2 8571 4200 Fax: +91 22 2284 0271 50250 Kuala Lumpur Tel: +66 2 257 4600
Fax: +61 2 9221 1188 Tel: +60 3 2056 7888 Fax: +66 2 253 0532
Fax: +60 3 2056 7988
China - Beijing Indonesia Philippines United Kingdom

CLSA Limited - Beijing Rep Office PT CLSA Sekuritas Indonesia CLSA Philippines, Inc CLSA (UK)
Unit 10-12, Level 25 WISMA GKBI Suite 901 19/F, Tower 2 12/F, Moor House
China World Trade Center Tower 2 Jl Jendral Sudirman No.28 The Enterprise Center 120 London Wall
1 Jian Guo Men Wai Ave Jakarta 10210 6766 Ayala corner Paseo de London EC2Y 5ET
Beijing 100004 Tel: +62 21 2554 8888 Roxas Tel: +44 20 7614 7000
Tel: +86 10 5965 2188 Fax: +62 21 574 6920 Makati City Fax: +44 20 7614 7070
Fax: +86 10 6505 2209 Tel: +63 2 860 4000
Fax: +63 2 860 4051
China - Shanghai Japan Singapore USA - New York

CLSA Limited - Shanghai Rep Office CLSA Securities Japan Co. Ltd. CLSA Singapore Pte Ltd CLSA Americas, LLC
Room 910, 9/F 16/F, Shiodome Sumitomo 80 Raffles Place, No.18-01 1301 Avenue of The Americas
100 Century Avenue Building UOB Plaza 1 15th Floor,
Pudong New Area 1-9-2, Higashi-Shimbashi Singapore 048624 New York 10019
Shanghai 200120 Minato-ku, Tokyo 105-0021 Tel: +65 6416 7888 Tel: +1 212 408 5888
Tel: +86 21 2020 5888 Tel: +81 3 4578 8000 Fax: +65 6533 8922 Fax: +1 212 261 2502
Fax: +86 21 2020 5777 Fax: +81 3 4578 8080
China - Shenzhen * CLST is an exclusive Taiwan

CLSA Limited - Shenzhen Rep Office research provider to CLSA
Room 3111, Shun Hing Square
Di Wang Commercial Centre
5002 Shennan Road East
Shenzhen 518008
Tel: +86 755 8246 1755
Fax: +86 755 8246 1754
CLSA Sales Trading Team

Australia +61 2 8571 4201 Malaysia +60 3 2056 7852 CLEAN
China (Shanghai) +86 21 2020 5810 Philippines +63 2 860 4030 & GREEN TM
Hong Kong +852 2600 7003 Singapore +65 6416 7878 At CLSA we support
sustainable development.
India +91 22 6622 5000 Taiwan* +886 2 2326 8124 We print on paper sourced from
Indonesia +62 21 573 9460 Thailand +66 2 257 4611 environmentally conservative
factories that only use fibres
Japan +81 3 4580 5169 UK +44 207 614 7260 from plantation forests.
Korea +82 2 397 8512 US +1 212 408 5800 CLSA is certified ISO14001:2004 Please recycle.
Research subscriptions
To change your report distribution requirements, please contact your CLSA sales representative or email us at cib@clsa.com.
You can also fine-tune your Research Alert email preferences at https://www.clsa.com/member/tools/email_alert/.
© 2017 CLSA Limited (“CLSA”) and/or CL Securities Taiwan Co. Ltd (“CLST”).
Key to CLSA/CLST investment rankings: BUY: Total stock return (including dividends) expected to exceed 20%; O-PF: Total expected return
below 20% but exceeding market return; U-PF: Total expected return positive but below market return; SELL: Total expected return to be negative.
For relative performance, we benchmark the 12-month total forecast return (including dividends) for the stock against the 12-month forecast return
(including dividends) for the market on which the stock trades. • We define as “Double Baggers” stocks we expect to yield 100% or more (including
dividends) within three years at the time the stocks are introduced to our “Double Bagger” list. "High Conviction" Ideas are not necessarily stocks
with the most upside/downside but those where the Research Head/Strategist believes there is the highest likelihood of positive/negative returns.
The list for each market is monitored weekly. 06/07/2017

Gems Jewellery Sector - Insig

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

Gems Jewellery Sector - Insig

Uploaded by

Copyright:

Available Formats

Primed and ready

India’s story through charts

Mahesh Nandurkar Contents

Autos ........................................ 39 Metals ....................................... 85

Banks ....................................... 45 Midcaps ..................................... 91

Capital goods ............................. 51 Oil & Gas ................................... 97

Cement ..................................... 57 Pharma ................................... 103

Consumer .................................. 65 Power and infra ........................ 109

IT services ................................. 73 Property .................................. 117

Two years ago we Media........................................ 79 Telecoms ................................. 123

Tracking the changes

2 mahesh.nandurkar@clsa.com 29 August 2017

Primed and ready

Valuations for preferred stock ideas

29 August 2017 mahesh.nandurkar@clsa.com 3

India’s macro variables look good on global comparison

India’s fiscal deficit is Fiscal deficit vs Government primary net lending/borrowing

India has seen the most FDI vs Current-account deficit

(0.5) CAD (% of GDP)

India’s debt-to-GDP has Non-financial sector debt-to-GDP ratio

China Brazil India Russia Mexico Indonesia

29 August 2017 mahesh.nandurkar@clsa.com 5

India saw the highest Global Competitiveness Index

Rank - 81 Rank - 28 Rank - 41 Rank - 51 Rank - 57 Rank - 43 Rank - 39

India’s real policy rates Real policy rates

Source: CMIE, CLSA

6 mahesh.nandurkar@clsa.com 29 August 2017

India’s forex reserves and import cover

Import cover 13 months 15 months 8 months 9 months

US$54bn US$310bn US$304bn US$392bn

FY02 FY08 FY14 FY18

Source: CMIE, RBI, CLSA

Quantum of external debt India’s non-rupee external debt vs forex reserves

Source: CMIE, CLSA

29 August 2017 mahesh.nandurkar@clsa.com 7

8 mahesh.nandurkar@clsa.com 29 August 2017

Lower inflation is policy driven . . .

Nearly half the weight of Components of CPI by weight contribution

Despite implementation Annual central-government procurement of wheat and rice

29 August 2017 mahesh.nandurkar@clsa.com 9

. . . helping reduce interest costs, though real rates still high

RBI has cut the policy Repo rate

Source: RBI, SBI, CLSA

Mortgage rates moving Mortgage rate

Source: HDFC, SBI, CLSA

10 mahesh.nandurkar@clsa.com 29 August 2017

Bank-lending-rate cuts SBI base rate

The reduction in bond Corporate AAA bond yields

Source: RBI, CMIE, CLSA

29 August 2017 mahesh.nandurkar@clsa.com 11

Capex has been weak . . .

Weak GFCF is responsible GFCF growth

Source: CMIE, RBI

12 mahesh.nandurkar@clsa.com 29 August 2017

Government share in GFCF (current) composition

By sector, the biggest Split of GFCF (current) over FY14-16 by industry

Real estate Electricity, gas &

29 August 2017 mahesh.nandurkar@clsa.com 13

. . . but there are signs of bottoming out . . .

Order backlog in the Sector order backlog

JSW steel has already Steel capex

matter of time 600 574

14 mahesh.nandurkar@clsa.com 29 August 2017