IIFL - India - Strategy 2015 - Earnings Bouncing Back - 20141217 - 15!18!23

Institutional Equities
India Strategy
Earnings bouncing back
We believe that 2015 will be another good year for Indian
equities. The earnings downgrade cycle of the past six years
(FY09-14) will likely end in FY15 when actual growth should
match consensus estimates in the beginning of the year. We
expect to see earnings upgrades from FY16 onwards. Key
macro factors are already showing signs of turning around.
Indian households are expected to emerge as big buyers of
equities in coming years, making Indian markets less
susceptible to FII flows. Valuations are reasonable vis--vis
the historical and global context.
Prabodh Agrawal
prabodh@iiflcap.com
91 22 4646 4697
Amit Tiwari
amit.tiwari@iiflcap.com
91 22 4646 4649
Performanceof2014Topbuys
Return(%)
AbsoluteRelative
toNifty
Nifty
28.0
Largecap
DrReddys
24.8
(3.2)
HeroMotoCorp
56.5
28.5
ICICIBank
52.9
24.9
L&T
39.9
12.0
Wipro
(2.6) (30.6)
Midcap
CromptonGreaves
IPCALabs
RamcoCements
Motherson
ShriramTransport
32.2
0.5
59.8
127.7
62.7
4.2
(27.4)
31.8
99.8
34.7
Source:Bloomberg,IIFLResearch.Basedon
marketdataason16Dec2014
Earnings are depressed; recovery can be sharp: For BSE500

non-financial companies, Ebitda and PAT margins are at a 15-year
low, net debt/equity is at a 15-year high and ROE has nearly halved
from the peak level of FY07. A cyclical upturn will drive the earnings
bounce back, reinforced by pro-business initiatives of the new
government. The recent sharp fall in prices of crude oil and industrial
commodities can save India more than $30bn annually, equal to the
countrys current account deficit in FY14.
Key macro factors are showing signs of turning around:
Expectations abound of acceleration in GDP growth, narrowing of
fiscal and current account deficit, fall in inflation, reduction in
interest rates, stable INR, growth in GFCF, and an increase in
household savings. After going through great stress in the past three
years, Banks and Financials, the largest constituent of Indian equity
indices, should record an improvement in asset quality and higher
earnings growth.
Domestics to emerge as major buyers of equity: Indian
households are expected to emerge as big buyers of equities. They
hardly participated in equities in the past six years. We estimate
households to invest about $74bn over the next three years (FY16FY18E) versus $40bn in the past six years (FY10-FY15E). This should
make the Indian markets less susceptible to FII flows.
Valuations reasonable vis--vis historical and global context:
Niftys current one-year forward PE of 14.9x is slightly above its
long-term average of 14.3x. We believe this would appear more
reasonable as we enter an earnings upgrade cycle. Valuations are in
line with long-term average premium/discount to global indices such
as S&P500 and Euro STOXX600. The current trailing PEx is well
below the peak PEx of the last three bull runs that ended in Feb00,
Dec07, and Nov10.
Toppicksfor2015
TopLargeCapBuys
ICICIBank
HCLTech
Maruti
UltratechCement
ShriramTransportFinance
Source:IIFLResearch
TopMidCapBuys
TataChemicals
Mindtree
KaveriSeeds
JKLakshmiCement
BlueStar
Sectorweights
Keyoverweightsectors
Financials
Auto
IT
Industrials
Cement
Source:IIFLResearch
Keyunderweightsectors
ConsumerStaples
Energy
Metals
India Strategy
Key Macro Trends
Recentpasttrend
FY1617E
GDPgrowthtoaccelerate Sub5%growthinFY13andFY14,nonagri
GDPgrowthatlowestlevelinthepast20
years
Expectedtogrowat67%
Fiscaldeficittonarrow
Declinedto4.5%inFY14fromthepeak
levelof7.9%inFY09perceivedvisually
ratherthantheactualreality
Expectedtoremainbetween3.5%4.0%
CurrentAccountDeficit
tonarrow
Reducedto1.7%inFY14fromthepeak
levelof4.7%inFY13
Expectedtoreducefurtherprimarilydueto
fallingcommodityprices
Inflationtofall
CPIhasaveragedabove8%forthepastsix Expectedtoaverage~6%overthenextfew
yearsandiscurrentlyat~6%
months,withadownwardbiasovernexttwo
years
Interestratestodecline
BankPLRshaverisen100bpsinthepast
threeyears.Incontrast,10yearGSec
yieldsremainedunchangedinthisperiod
buttheyfellby90bpsinCY2014
StableRupee
Depreciatedby17%inthepastthreeyears DeclineinCADandbuoyantoutlookfor
capitalflowswillkeeprupeelargelystable;
weexpectanaverage34%annual
depreciationgoingahead
Bankloangrowthtopick Loangrowthhasdeceleratedforthepast
up
fouryearsandthecurrentgrowthof12%
YoYisthelowestinpasttwodecades
Policyratesexpectedtodeclineby100bpsin
next12mthsand150bpsinnext24mths.
Withliquidityimproving,banksshouldpass
onthereductioninpolicyratetoborrowers
Expectedtogrowinmidteensat2.5xreal
GDPgrowth
GrossFixedCapital
Formationgrowthto
accelerate
Near0%growthinthepastthreeyears,the Expectedtogrowat510%annually
worstphaseinthepast25years
Consumptiongrowthto
remainslow
Consumption,inparticularrural
consumption,wasthekeydriverof
economicgrowthinthepast45years
Agriculturegrowth
unlikelytoaccelerate
Agriculturegrowthhasaveraged~4%inthe Agriculturegrowthisunlikelytoaccelerate
lastfewyears
andshouldcontinueatitstrendgrowthrate
of34%
Householdsavingstorise Droppedfrompeakof25%inFY10to22%
inthelasttwoyears;withinthat,the
shareoffinancialsavingsdroppedfrom
48%to35%
Ruralconsumptionislikelytocontinueto
moderateasruralwagegrowthandpaceof
MSPincreaseshavesloweddown
Expectagradualpickupasrealinterestrates
becomepositive;theshareoffinancial
savingsisalsoexpectedtoriseasreturns
fromphysicalassetshavebecomerelatively
unattractive
Fuelsubsidytodecline
Seemedoutofcontrolandpeakedat1.6% Expectedtobe0.6%ofGDPinFY15andfall
ofGDPinFY13
furtherto0.3%nextyear,assumingoilprices
remainatthecurrentlevel
Totalsubsidiesremain
high
Aggregatesubsidiesaveraged2.6%ofGDP Aggregatesubsidylikelytofallto1.8%ofGDP
duringFY0914
inFY16,primarilyduetofallinfuelsubsidies,
whereasfoodandfertilisersubsidieswould
continuetorise;shifttoAADHAARbased
distributioncanbringdownothersubsidies
prabodh@iiflcap.com
India Strategy
Key Industry Trends
Recentpasttrend
FY1617E
Investmentlegs
Iron&Steel
Lowsingledigitdemandgrowthinlast23 Expectdemandtopickupto67%YoYfromFY16
years,expectedtobeflatinFY15;prices onwards;however,pricesarelikelytoremain
wereflat
weakduetoweakglobaldemandandprices
Aluminum
Domesticdemandgrew2.0/2.5%in
Domesticdemandexpectedtoaccelerateto7%
FY13/FY14andisexpectedtoriseslightlytoCagrinFY16andFY17;weexpectpricestorise2
6%inFY15;pricesdeclinedby15%inFY13 3%annually
and10%inFY14,beforerisingby10%YTD
inFY15
Petrochemicals
Polymervolumegrowthof45%inlasttwo Volumegrowthexpectedtoaccelerateto56%
yearsasGDPgrowthsloweddown;prices asGDPgrowthpicksup;pricesexpectedto
havebeenfirmduetosupplyconstraints remainstable
Diesel
VolumegrowthwasnegativeinFY14andis Expectedtogrowat5%Cagr,inlinewithlong
expectedtobeflatinFY15
termtrend
Cement
Volumesgrewat3%YoYinFY14,butare Volumegrowthexpectedtoaccelerateto78%
expectedtopickupto67%YoYinFY15; YoYinFY16/FY17;pricesexpectedtorise78%
pricesdeclined4%inFY14andhaverisen annually
23%sofarinFY15
Coal
Domesticconsumptiongrewat57%Cagr Expectdomesticproductiontogrowat1213%
inthepastthreeyearswhereasdomestic annuallyinFY16andFY17;importgrowthlikely
productiongrewatonly35%Cagr;imports toslowdown;weexpectpriceincreaseof45%
grew80%overthisperiodandwill
annually
constitutenearly20%ofIndia's
consumptioninFY15;domesticpriceshave
beenflatinthisperiod
CapitalGoodsnew
orderinflows
Neworderinflowsgrewatanaverage34% Expectedtoaccelerateto2025%YoYgrowthin
Cagrinpastfiveyears
thenexttwoyears
Bankloan
Loangrowthdeceleratedoverthepast
Expectedtogrowinmidteensat2.5xrealGDP
fouryearsandcurrentgrowthof12%YoYisgrowth
thelowestinlasttwodecades
Consumptionlegs
Twowheelers
Averagevolumegrowthof5%inFY13/FY14 Expectvolumegrowthof1314%YoYinFY16/17;
andpickedupto13%YoYinFY15;prices pricesexpectedtoriseat2%Cagr
grewat2%Cagr
Passengercars
Averagevolumesdeclined2%inFY13/FY14 Expectstrongvolumegrowthof1516%YoYin
andpickedupto3%YoYinFY15;prices
FY16/17;pricesexpectedtoriseat3%Cagr
grewat12%Cagr
LightCommercial
Vehicle
Volumedeclined18%inFY14andaredownExpectstrongvolumegrowthof15%YoYin
further14%YTDinFY15;priceswereflat FY16/17;pricesexpectedtoriseat3%Cagr
M&HCommercial
Vehicles
Volumesdeclined24%eachinFY13and
Expectstrongvolumegrowthof24%Cagrin
FY14andpickedupto8%YoYYTDinFY15; FY16/17;pricesexpectedtoriseat4%Cagr
pricesdeclinedby3%Cagr
CommercialReal
Estate
Officespaceabsorptiondroppedfrom40m Expectedtoreboundandgrowby50%YoYto20
sqftannuallyin2007to1215msqftin
22msqftinFY16andto30msqftinFY17;
2014;rentalswereflat(BangaloreandNCR)rentalsexpectedtorise5%annually
todown4050%(Mumbai)
prabodh@iiflcap.com
India Strategy
Recentpasttrend
FY1617E
ResidentialRealEstate Residentialsalesvolume:NCRdown75%,
Mumbaidown4050%,Chennaidown60
70%,Bangaloreup1012%fromthepeak
in2009;residentialprices:NCRdown25
30%,Mumbaiflat,Bangaloreup1012%
NCRsalesvolumecanjump34x,Mumbai&
Chennaicandoubleovernext3yrs,Bangalore
cangrowby1012%annually;NCRpricescango
upby3040%,Mumbai20%,Bangalore2025%
overnext3yrs
FMCG
Volumegrowthsloweddownfrom8%in
FY13to6%inthepasttwoyears;annual
priceincreaseshaveaveraged6%inthe
pastthreeyears
Advertisement
revenue
Growthof9%inFY13/FY14and11%YTDin Expectedtoaccelerateto15%annuallyinFY16
FY15
andFY17
Mobilerevenue
Revenuegrowthsloweddownto910%
Expectrevenuegrowthtoaccelerateto12%
Cagrinthepastthreeyearsfroman
annually,driven1/3rdbyvoicemin,1/3rdby
averageof12%growthinthepreviousfive voicepricingand1/3rdbydata
years
QuickService
Restaurants(QSR)
Samestoresales(SSS)growthwas616%in ExpectSSSgrowthtoreboundandgrow8/13%
FY13butitdeclined38%ineachofthe inFY16/FY17
pasttwoyears
Afternearflatgrowthof3%in2012and Weexpecttrafficgrowthof1214%as
4.4%in2013,traffichaspickedupto9% affordabilityincreasesduetoasharpdeclinein
YoYinCY2014YTDand18%YoYinOct'14 aviationfuelprices
Airlinepassenger
traffic
Weexpectvolumegrowthtoremainweakat6%
inFY16andpickupto8%inFY17;weexpect
priceriseof34%inFY16and6%inFY17
prabodh@iiflcap.com
India Strategy
Corporate profits are depressed; recovery can be

sharp
Aggregate Ebitda and PAT
margins are at 15-year low,
Net Debt/Equity is at a 15year high and ROE has
collapsed by nearly half
from its peak in FY07
An analysis of BSE500 non-financial companies shows that aggregate

Ebitda and PAT margins are at a 15-year low, net debt/equity is at a
15-year high, and ROE has nearly halved from its peak in FY07. We
see considerable scope for expansion of PAT margins and ROE for
companies in the Industrials, Materials, Real Estate, Telecom, and
Utilities sectors.
Only 273 non-financial companies out of the current BSE500
constituents were part of the index 15 years ago. In our view, this
sample is a fairly good representation of the investible universe for
foreign and domestic institutional investors.
For these 273 companies, sales growth fell to single digits in the past
two years from 20-25% growth YoY for much of the last decade.
Sales growth has slowed

down to single digits over
the past two years
Figure1: Salesgrowthhassloweddowntosingledigitsoverthepasttwoyears
(YoY%)
SalesGrowth
Average
30
25
20
15
10
5
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
FY03
FY02
FY01
FY00
Source:CMIE,IIFLResearch.Note:Basedoncommonsampleof273nonfinancialBSE500
companiesthathavedatasinceFY2000
Ebitda growth was slow in five out of the past six years.
Figure2: Ebitda growthhassloweddownoverlastsixyears
(YoY%)
35
EBITDAGrowth
Average
30
25
20
15
10
5
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
FY03
FY02
FY01
0
FY00
Ebitda growth was slow in

five out of the past six
years
prabodh@iiflcap.com
India Strategy
Similarly, PAT growth also slowed down significantly over the past
six years.
Figure3: PATgrowthalsosloweddownoverthepastsixyears
FY14
FY13
FY12
FY11
FY10
FY08
Average
FY07
FY06
FY05
FY04
FY03
FY02
FY01
PATGrowth
FY09
(YoY%)
60
50
40
30
20
10
0
(10)
(20)
FY00
PAT growth also slowed

down significantly over the
past six years
Ebitda margins are at 15year low
Figure4: Ebitda marginareat15yearlow

(%)
17
EBITDAMargin
Average
16
15
14
13
12
11
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
FY03
FY02
FY01
FY00
10
PAT margins are also at 15-year low, 40% below the peak level of
FY07. Except for Consumer Discretionary, Consumer Staples, Health
Care and IT, they are sharply down for all other sectors.
Figure5: PATmarginsareata15yearlow,40%belowthepeaklevelof FY07
(%)
10
PATMargin
Average
8
6
4
2
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
FY03
FY02
FY01
FY00
PAT margins are also at a

15-year low, 40% below
the peak level of FY07
prabodh@iiflcap.com
India Strategy
Net debt/equity is at a 15year high, having almost
doubled since FY07
Net debt/equity is at a 15-year high. It troughed at 0.3x in FY05 and

since then has more than doubled to 0.7x in end-FY14. It is
especially high for Telecom (2.6x) and Industrials (1.4x).
Figure6: Netdebt/equityisata15yearhigh,havingnearlydoubledsinceFY07
NetDebt/Equity
(x)
0.7
Average
0.6
0.5
0.4
0.3
0.2
0.1
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
FY03
FY02
FY01
FY00
0.0
Interest expense/Ebitda at an average of 14.5% for the universe, is

at a 12-year high. It remains extremely high for Real Estate (69%),
Industrials (52%), Telecom (30%), Consumer Discretionary (24%)
and Utilities (22%) sectors. The actual interest burden would be
much higher, since a large part of interest expenses are capitalised
by companies in these sectors.
Figure7: Interest/Ebitda isata12yearhigh; actualdebtburdenwouldbemuch
highersincealargepartoftheinterestexpensesarecapitalised
(%)
25
Interest/EBITDA
Average
20
15
10
5
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
FY03
FY02
FY01
FY00
Interest expense/Ebitda is
extremely high for the Real
Estate (69%), Industrials
(52%), Telecom (30%),
Consumer Discretionary
(24%) and Utilities (22%)
sectors
Source:CMIE,IIFLResearch.Note:Note:Basedoncommonsampleof273nonfinancial
BSE500companiesthathavedatasinceFY2000
ROE for the 273 companies nearly halved to 12.1% from the peak of
21.5% in FY07. It declined for all sectors except Consumer Staples.
The sharpest declines have been in the Industrials, Materials and
Real Estate sectors.
prabodh@iiflcap.com
India Strategy
Figure8: ROEhasnearlyhalvedfromthepeakof FY07
FY14
FY13
FY12
FY11
FY10
FY08
FY07
Average
FY06
FY05
FY04
FY03
FY02
FY01
FY00
ROE
FY09
(%)
24
21
18
15
12
9
6
3
0
ROE for the 273 companies

has nearly halved to 12.1%
from the peak of 21.5% in
FY07
Figure9:SectorwisebreakdownofEbitdamargin
EbitdaMargin(%)
FY07
ConsumerDiscretionary
10.7
ConsumerStaples
13.8
Energy
12.2
HealthCare
19.8
Industrials
10.8
InformationTechnology
20.6
Materials
25.1
RealEstate
50.4
TelecommunicationServices
20.1
Utilities
27.0
BSE500
15.3
FY14
11.4
16.1
9.1
22.8
11.2
23.3
14.1
27.4
21.8
24.9
12.6
Source:CMIE,IIFLResearch.
Figure11: SectorwiseNetDebttoEquity
NetDebttoEquity(%)
ConsumerStaples
Energy
HealthCare
Industrials
Materials
RealEstate
Utilities
BSE500
Figure10: SectorwisebreakdownofPATmargin
PATMargin(%)
FY07
6.5
ConsumerStaples
9.1
Energy
6.7
HealthCare
13.7
Industrials
6.0
16.5
Materials
15.1
RealEstate
38.8
0.5
Utilities
18.6
BSE500
9.1
FY14
5.0
10.3
3.9
13.5
2.0
16.5
5.7
8.3
(4.8)
9.9
5.3
FY07
0.6
0.3
0.3
0.4
0.4
(0.3)
0.4
2.3
0.4
0.4
0.4
FY14
0.8
(0.0)
0.5
0.2
1.4
(0.3)
0.8
0.7
2.6
1.0
0.7
Figure12: SectorwiseROE
ROE(%)
ConsumerStaples
Energy
HealthCare
Industrials
Materials
RealEstate
Utilities
BSE500
FY07
20.6
27.3
22.1
23.3
18.6
29.7
29.6
46.8
0.6
12.0
21.5
FY14
16.3
31.6
13.4
17.9
4.5
21.3
9.7
2.6
(12.8)
9.3
12.1
prabodh@iiflcap.com
India Strategy
Financials under great stress, asset quality and

earnings growth to improve
Financials, the single largest component of Indian equity indices,
have been under great stress in the past three years. NPAs and
restructured loans have ballooned and earnings growth has slowed
down due to slowness in loan growth and fee income growth and
higher loan loss provision (LLP) charges. We expect asset quality
concerns to ease and earnings growth to accelerate.
Figure13: NetProfitgrowthofBanks&FinancecompaniesinBSE500
FY14
FY13
FY12
FY11
FY10
FY08
Average
FY07
FY06
FY05
FY04
FY03
FY02
FY01
PATGrowth
FY09
(YoY%)
60
50
40
30
20
10
0
(10)
(20)
FY00
NPAs and restructured

loans have ballooned and
earnings growth has slowed
down due to slowness in
loan growth and fee income
growth and higher loan loss
provision charges
Source:CMIE,IIFLResearch.Note:Basedoncommonsampleof59BSE500financialcompanies
thathavedatasinceFY2004
Private banks and financials
accounted for nearly 50%
of the total sector profit in
FY14, compared with only
25% in FY04
Figure14: ShareofPrivateBanksand FinancialsintotalNetProfit

(%)
ShareofPvt.SectorinFinancials
50
45
40
35
30
25
20
15
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
prabodh@iiflcap.com
India Strategy
Figure15: ROEofPrivateandPSUFinancials
ROE of private banks and
financials has risen
whereas it declined sharply
for PSU financials
(%)
PrivateFinancials
PSUFinancials
21.0
19.0
17.0
15.0
13.0
11.0
9.0
7.0
5.0
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
We expect total stressed

loans to peak in FY15 and
start declining thereafter
Figure16: Totalstressedloansofbanks(NPAs+Restructuredloans)
(%)
GNPAratio
Restructuredloans ratio
10
8
6
4
3.4
3.0
2.6
2.5
1.7
2
3.1
2.5
2.4
2.4
3.8
3.0
4.0
3.4
4.3
4.3
3.8
4.2
3.0
2.1
4.6
4.1
0
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15ii FY16ii FY17ii
Source:CEIC,IIFLResearch.Note:BasedonBanksandNBFCsinIIFLcoverageuniverse
Figure17: LLP chargesas%ofaverageloans

We have currently assumed
a gradual decline in LLP
charges in FY16 and FY17;
there is scope for earnings
upgrades if provision
charges reduce further led
by improvement in asset
quality
Loanlossprovisioncharges
1.1
%ofaverageloans
1.0
PSUBanks
PrivateBanks
IIFLUniverse
0.9
0.8
0.7
0.6
0.5
0.4
0.3
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15ii FY16ii FY17ii
Source:CEIC,IIFLResearch.Note:BasedonBanksandNBFCsinIIFLcoverageuniverse
prabodh@iiflcap.com
10
India Strategy
PAT forecast and earnings upgrade potential for

IIFL coverage universe
PAT growth for IIFL
universe to accelerate to
18.6%YoY in FY16ii and
17.6%YoY in FY17ii, from
only 9% Cagr in the
previous three years (FY12FY15ii)
We believe there is
potential for earnings
upgrades in Consumer
Discretionary, Financials,
Industrials and IT sectors
For 159 companies under IIFL coverage for which financial data is
available since FY09, we forecast acceleration in aggregate PAT
growth to 18.6% YoY in FY16 and 17.6% YoY in FY17, from only 9%
Cagr in the previous three years (FY12-FY15ii).
We forecast higher PAT growth for companies in the Consumer
Discretionary, Energy, Financials, Industrials, Materials and Real
Estate sectors. We believe that there is potential for earnings
upgrades in the Consumer Discretionary, Financials and
Industrials sectors. In addition, the IT sector may see
earnings upgrades in case of gradual depreciation in INR.
INR depreciation has a much larger impact on bottom lines of IT
companies than any other sector. For example, an x% depreciation
of INR has a 2-3x% impact on PAT of IT companies versus 0.5x%
impact on PAT of Pharma companies.
Figure18: SectorwiseearningsgrowthofcompaniesinIIFLcoverageuniverse
Sector
MktCap
NetProfit(YoY%)
(US$bn)
FY10
FY11
FY12
FY13
FY14
252.6
75.2
15.0
0.2
26.0
105
ConsumerStaples
19.1
17.9
19.3
20.4
12.6
114
Energy
34.1
17.5
14.3
1.8
4.9
163
Financials
19.9
17.8
22.5
18.1
3.1
221
HealthCare
17.4
20.9
20.3
24.5
30.2
73
Industrials
22.9
23.1
5.3
(3.4)
(17.6)
65
18.2
18.5
26.3
28.5
31.7
145
Materials
(13.3)
30.5
0.3
(6.5)
(5.7)
84
RealEstate
(55.5)
(10.4)
(17.5)
(26.9)
24.5
5
TelecommunicationServices 43
(4.0)
(41.1)
(24.6)
(28.1)
44.5
Utilities
17.5
10.4
6.9
1.9
14.7
49
IIFLUniverse
19.0
18.1
12.9
6.8
9.2
1,067
FY15ii
FY16ii
FY17ii
14.4
20.3
2.7
17.5
14.0
3.5
12.4
11.7
(3.7)
70.0
(6.1)
11.0
19.2
19.3
18.9
17.3
13.4
23.9
53.3
13.6
9.5
18.6
18.2
17.9
11.3
25.5
14.8
26.0
13.5
22.6
34.8
8.8
10.2
17.6
FY16ii
FY17ii
10.0
5.3
23.7
24.2
4.7
3.5
11.2
8.3
0.4
2.9
5.7
100.0
10.1
5.3
22.4
25.8
4.6
3.8
10.8
8.7
0.5
2.7
5.4
100.0
19.6
28.1
Source:Company,IIFLResearch.Basedon159companiesthathavedataforFY09FY17iiandmarketdataason16Dec2014
Figure19: SectorwiseearningscontributionofcompaniesinIIFLcoverageuniverse
Sector
MktCap
EarningsContribution(%)
Share(%)
FY10
FY11
FY12
FY13
FY14
FY15ii
9.8
2.0
5.8
8.6
8.8
8.2
10.0
ConsumerStaples
10.7
4.1
4.1
4.1
4.3
4.9
5.3
Energy
15.3
24.5
27.6
27.5
27.8
26.5
23.6
Financials
20.7
19.9
20.0
20.0
21.7
24.0
24.0
HealthCare
6.8
2.8
2.8
2.8
3.0
3.5
4.3
Industrials
6.1
5.8
6.0
6.3
5.8
5.3
3.6
13.6
7.1
7.0
7.1
7.9
9.5
11.7
Materials
7.9
14.6
10.7
11.8
10.5
9.2
8.0
RealEstate
0.5
2.4
0.9
0.7
0.5
0.3
0.3
4.1
8.2
6.6
3.3
2.2
1.5
3.0
Utilities
4.6
8.5
8.4
7.9
7.4
7.1
6.2
IIFLUniverse
100.0
100.0
100.0
100.0
100.0
100.0
100.0
Source:Company,IIFLResearch.Basedon159companiesthathavedataforFY09FY17iiandmarketdataason16Dec2014
prabodh@iiflcap.com
11
India Strategy
Pick-up in new order

inflows of the Capital Goods
sector can be stronger than
our current forecasts
Figure20: CapitalGoods:Growthinneworderinflows
(YoY)
70%
OrderInflow
50%
30%
10%
10%
FY17ii
FY16ii
FY15ii
1HFY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
30%
Source:CEIC,IIFLResearch.Note:BasedondatafromABB,BHEL,Crompton,Cummins,L&T,
NCC,Sadbhav,Siemens,SimplexandThermax
Over the last few months power sector has seen consolidation which
should be good news for banks.
Figure21: M&AinpowersectorsinceNov2014
Project
Seller
Capacity Acquirer
(MW)
Type
Hydro
EV
(Rsbn)
97
Status
Karcham
Wangtoo/BaspaII
UdupiPower
Korba
Nagpur
1,391 JSWEnergy
JPPower
Operational
1,200 AdaniPower
600 AdaniPower
540 TataPower
LancoInfra
Coal
AvanthaPower Coal
IdealEnergy
Coal
120
42
16
Operational;Saleagreementsigned
Operational;Saleagreementsigned
Underconstruction(oneunit
commissioned);Saleagreementsigned
Bina/Nigrie
1,820 JSWEnergy
JPPower
Coal
120
Total
5,551
395
Partiallyoperational(aspermediareports,
noformalannouncement)
Source:IIFLResearch
prabodh@iiflcap.com
12
India Strategy
Falling commodity prices A major boost for India

Decline in prices of crude
oil, industrial commodities,
coal and precious metal is a
big positive for the Indian
economy
Prices of major commodities have softened 5-40% YTD and are

down nearly 20-70% from their ten-year peak. Prices of crude oil,
hard commodities, and agricultural products have all declined. Prices
have declined significantly in CY14 YTD: Brent crude was down 47%,
Newcastle coal fell 27%, rubber corrected 30%, palm oil slipped
23%, and copper slid 12%.
This is a significant positive development for India since the
countrys net imports of commodities were at $178bn in FY14 (9.5%
of GDP), including crude oil, industrial commodities, coal, and
precious metals. A 10% average decline in prices of these
commodities can halve the countrys CAD.
Indias net oil import bill is

estimated to fall from
$102bn in FY14 to $85bn in
FY15 and further to $75bn
in FY16
Indias net oil import bill is estimated to fall from $102bn in FY14 to
$85bn in FY15 and further to $75bn in FY16.
The BBG commodity index declined for five years in a row and is
currently 55% below its 10-year peak. Economic slowdown in
developed nations and China has reduced demand for commodities
and softened prices.
Figure22: CRBCommodityIndex
CRBCMDT Index
600
575
550
525
500
475
450
425
400
Jan10 Aug10 Mar11 Nov11 Jun12 Feb13 Sep13 Apr14 Dec14
Source:Bloomberg,IIFLResearch.Marketdataason16Dec2014
Indias CAD of US$32bn or

1.7% of GDP in FY14 is
expected to moderate
sharply in FY15
Indias CAD expected to moderate sharply in FY15

In FY14, India was a net importer of crude oil and petroleum
products worth US$102bn and of precious metals worth US$33bn. It
was a large net importer of coal and coke (US$16.4bn), iron and
steel, ores, scrap (US$8.2bn), fertilisers (US$6.5bn), non-ferrous
metals (US$5.4bn), paper and paper products (US$3.9bn), and
rubber (US$2.1bn). In aggregate, these commodity imports
amounted to US$178bn or 9.5% of GDP. Indias current CAD of
US$32bn or 1.7% of GDP in FY14 is expected to sharply moderate in
FY15.
prabodh@iiflcap.com
13
India Strategy
India was a net importer of
commodities of US$178bn
or 9.5% of GDP in FY14
Figure23: NetimportsofIndia
NetImports(FY14)
1 Petroleum,CrudeandProducts
2 Commodities
3 CapitalGoods
4 Gold&Silver
5 Coal,Coke&Briquettes
6 Agriculture&Alliedproducts
7 Pearls,stones,textilesetc
8 Others
Tradedeficit
CurrentAccountdeficit
GDP
Netimportofcommodities(1+2+4+5)
US$bn
102
26
23
33
16
(31)
(29)
7
148
32
1,877
178
%ofGDP
5.5
1.4
1.2
1.8
0.9
(1.7)
(1.6)
(0.4)
7.9
9.5
Source:IIFLResearch
Decline in prices of oil and
industrial commodities
would benefit companies in
the Airlines, Consumer
Discretionary (Auto, Auto
ancillaries, Paints),
Consumer Staples, and
Industrial sectors
The decline in prices of oil and industrial commodities would benefit

companies in the Airlines, Consumer Discretionary (Auto, Auto
ancillaries, Paints), Consumer Staples, and Industrial sectors. On the
other hand, commodity producers in the Metals and Energy sectors
would be losers.
Figure24: Commoditypricesdeclinedsharplyoverthelastoneyear
BBGTicker
XAUCurrency
XAGCurncy
LMAHDYComdty
LMCADYComdty
LMPBDYComdty
LMZSDYComdty
MBSTST58Index
LMSNDYComdty
LMNIDYComdty
EUCRBRDTIndex
NAPHSINFIndex
CLSPAUNEIndex
SPGSWHIndex
SPGSCNIndex
SPGCSOPIndex
SPGSSBIndex
SPGSCTIndex
RRS4KOIndex
PFA0MYM1Index
Commodity
Gold
Silver
Aluminium
Copper
Lead
Zinc
Steel
Tin
Nickel
BrentCrude
NaphthafobSingapore
Coal(Newcastle)
S&PGSCIWheatIndex
S&PGSCICornIndex
S&PGSCISoybeansIndex
S&PGSCISugarIndex
S&PGSCICottonIndex
RubberRSS4Kottayam
PFADPalmFattyAcid
Unit
US$/Oz
US$/Oz
USS$/MT
USS$/MT
USS$/MT
USS$/MT
USS$/MT
USS$/MT
USS$/MT
USS$/bbl
USS$/bbl
USS$/MT
Rs./MT
USS$/MT
CMP
1,197
16
1,877
6,410
1,905
2,124
458
20,023
15,928
59
53
62
423
335
447
155
85
11,425
555
PerformanceSince(%)
31Dec12
31Dec13
(28.6)
(48.2)
(8.1)
(18.9)
(17.8)
3.6
(17.6)
(14.4)
(6.3)
(47.1)
(48.8)
(31.8)
(19.9)
(41.9)
5.2
(24.6)
(20.4)
(29.8)
(7.1)
(0.4)
(19.2)
6.9
(13.1)
(13.0)
3.5
(13.7)
(10.4)
15.2
(46.6)
(50.8)
(27.0)
3.0
(3.8)
(4.8)
(10.4)
(29.4)
(30.3)
(22.7)
10YrPeak
(37.0)
(67.5)
(42.6)
(37.0)
(52.2)
(53.9)
(55.6)
(39.8)
(70.5)
(59.4)
(61.0)
(67.9)
(51.4)
(51.6)
(20.7)
(58.3)
(72.1)
(52.9)
(48.9)
Source:Bloomberg,IIFLResearch.Basedonmarketdataason16Dec2014
prabodh@iiflcap.com
14
India Strategy
Domestics to emerge as major buyers of equities,

after a gap of six years
In the past six years (FY10FY15E), Indian households
invested an estimated
US$40bn into equities as
against investment of
$108bn by FIIs
In the past six years (FY10-FY15E), Indian households invested an

estimated US$40bn into equities at an average annual rate of
$6.7bn. This included direct equity purchase and purchases through
mutual funds and life insurance. During the same period, FIIs inflows
amounted to US$108bn at an average annual rate of $18bn. This
excessive dependence on FIIs is likely to change as domestic
investors warm up to equities.
We estimate households to invest $74bn over the next three years
(FY16-FY18E) at an average annual rate of nearly $25bn. Two key
assumptions here are: 1) a slight pickup in household savings rate
from 20.3% of GDP in FY14 to 23.5% in FY18 (it was 25.2% of GDP
in FY10); and 2) increase in share of equity investments from 1.6%
of total household savings in FY14 to 5.0% in FY18 (it was 5.0% in
FY08).
The last time Indian households were bullish on equities was in FY08.
In that year, 52% of household savings went into financial assets
(they have since fallen to 35% in FY14) and an estimated 5.0% of
total savings went into equities (they fell to 1.6% in FY14). In FY16,
when we expect households to again warm up to equities in a big
way, Indias nominal GDP is estimated at Rs137tn (US$2.2tn at
current exchange rate) versus Rs50tn in FY08. In other words, the
size of GDP in FY16 would be 2.7x that of FY08 and so would be the
size of household savings and potential flows into equities.
Figure25: Shareofannualhouseholdsavingsinvestedinequities
Indias estimated nominal

GDP of Rs137tn in FY16
would be 2.7x the nominal
GDP of Rs50tn in FY08, the
last time Indian households
were bullish on equities
(%)
Shareofhouseholdsavings flowing intoequity

5.0
5.0
4.5
3.9
3.5
3.3
2.9
1.8 1.6 2.0
1.6 1.5
FY04
1.1
FY06
FY08
1.1 0.9
FY10
FY12
FY14
FY16ii
FY18ii
Source:CEIC,RBI,IIFLResearch.
prabodh@iiflcap.com
15
India Strategy
We estimate that
households could invest
$74bn over the next three
years (FY16-FY18E), at an
average annual rate of
nearly $25bn
Figure26: Estimatedequityinvestmentsbyhouseholds(US$bn)
(US$bn)
Household'sinvestmentintoequity
32.6
25.1
16.8
13.8
6.4
10.0
8.6
FY04
4.1 3.8
3.2
2.3 2.6
FY06
FY08
FY10
7.3 6.1 8.7
FY12
FY14
FY16ii
FY18ii
Source:CEIC,RBI,IIFLResearch.
Figure27: FIIinflows(US$bn)
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
FIIFlows
2001
2000
(US$bn)
30
25
20
15
10
5
0
(5)
(10)
(15)
Figure28: Tableofhouseholdsavingsinvestedinequities
Rs.bn
FY09
FY10
FY11
FY12
FY13
FY14
FY15ii FY16ii FY17ii FY18ii
HouseholdSavings
13,309 16,308 17,833 20,522 22,135 24,898 26,230 29,540 34,315 40,141
YoY%
19.0
22.5
9.4
15.1
7.9
12.5
5.4
12.6
16.2
17.0
Shareoffinancialassets(%)
42.9
47.5
42.4
30.7
32.4
32.6
38.0
42.0
45.0
50.0
Shareofphysicalassets(%)
57.1
52.5
57.6
69.3
67.6
67.4
62.0
58.0
55.0
50.0
Householdsavings(%ofGDP)
23.6
25.2
22.9
22.8
21.9
21.9
21.0
21.5
22.5
23.5
GDP
56,301 64,778 77,841 90,097 101,133 113,551 124,906 137,396 152,510 170,811
YoY%
12.9
15.1
20.2
15.7
12.2
12.3
10.0
10.0
11.0
12.0
Source:RBI,IIFLResearch
prabodh@iiflcap.com
16
India Strategy
Domestic mutual funds are
witnessing robust inflows
since May 2014. We expect
this to accelerate
Figure29: SignificantjumpinflowsintodomesticequitymutualfundssinceMay14
MFEquity
(Rsbn)
428
77
14
2009
(104)
(156)
(158)
2010
2011
2012
2013
2014
Source:Bloomberg,IIFLResearch.2014databasedonflowsforJantoNov2014
New paper supply still muted; can rise significantly to absorb

domestic and FII inflows: Primary equity issuance has remained
muted in the past two years, after peaking in FY08. Given its current
size, the market can easily absorb a much higher level of new paper
supply, including divestment of PSU stakes by the government. New
paper supply as a percentage of year-end market capitalisation is
significantly below the previous peak level.
Figure30: PrimaryEquityissuance(IPO+ AdditionalEquity+Rights+QIP)
PrimaryEquityIssuance
30
US$bn(LHS)
%ofMarketCap(RHS)
2.4
0.0
FY15
0.4
FY14
FY13
0.8
FY12
10
FY11
1.2
FY10
15
FY09
1.6
FY08
20
FY07
2.0
FY06
25
FY05
New paper supply as

percentage of year-end
market capitalisation is
significantly below the
previous peak level
Source:Bloomberg,IIFLResearch.
Real interest rates turned positive after a long time, which increases
the attractiveness of financial assets.
prabodh@iiflcap.com
17
India Strategy
Real interest rates turned
positive after a long time,
which increases the
attractiveness of financial
assets
Figure31: Realinterestrates(10yearGSecyield CPI)

RealRates
(%)
15
10
5
0
(5)
(10)
Jan99
Jan01
Jan03
Dec04 Dec06 Dec08 Nov10 Nov12
Oct14
Source:Bloomberg,IIFLResearch.Basedonmonthlyaverageof10YrGSecyieldandCPIIW
Valuations are reasonable vis--vis historical and

global context
The Nifty currently trades
at slightly above its longterm average valuations
After rising 28% in CY2014 until 16-Dec-14, the Nifty trades at

14.9x one-year forward PE versus long-term average of 14.3x and
at 2.3x one-year forward PB versus long-term average of 2.6x.
Figure32: NiftyforwardPEx
12mFwdPE
1StdDev
Average
+1StdDev
21
18
15
12
9
6
Jul05 Aug06 Aug07 Sep08 Sep09 Oct10 Oct11 Nov12 Nov13 Dec14
Source:Bloomberg,IIFLResearch.BasedonBloombergconsensusestimates
Figure33: NiftyforwardPBx
12mFwdPB
1StdDev
Average
+1StdDev
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
Jul05 Aug06 Aug07 Sep08 Sep09 Oct10 Oct11 Nov12 Nov13 Dec14
Source:Bloomberg,IIFLResearch.BasedonBloombergconsensusestimates
prabodh@iiflcap.com
18
India Strategy
These valuations are based on assumption of EPS growth of 20% for

FY16 and 15% for FY17 for the Nifty. As discussed in the earlier
sections, these earnings growth forecasts are rather conservative
and do not build in sufficient economic recovery in FY16. Companies
are still not confident of a strong recovery in FY16 and are providing
muted guidance.
For the past six years
(FY09-FY14), actual
earnings growth was below
consensus estimates in the
beginning of the year
We expect to enter an
earnings upgrade cycle
from FY16 onwards
For the past six years (FY09-FY14), actual earnings growth was
below consensus estimates in the beginning of the year. FY15 will
likely see actual earnings growth in line with consensus estimates in
the beginning of the year. We expect to enter an earnings upgrade
cycle from FY16 onwards.
Figure34: Consensusestimatesinyearbeginningversusactualearningsgrowth
(YoY%)
Nifty EPS
35
20
19
10
16
16
16
10
(5)
20
19
15
Actual
30
30
25
ConsensusEstimate
17
15
11 12 9
1 0
(0)
FY09
FY10
FY11
FY12
FY13
FY14
FY15*
FY16
FY17
Source:Bloomberg,IIFLResearch.BasedonBloombergconsensusestimate.*forFY15current
estimatesversusbeginningoftheyearestimate
Nifty forward PEx and PBx are not significantly above their long-term
averages even on the current earnings forecasts. As earnings
upgrades come through, valuations would appear more reasonable in
hindsight and continue to propel the market to higher levels.
Current bull-run has long way to go

The Indian markets have experienced six major bull runs since 1991,
including the current one, which technically started in June 2012.
Having run for 30 months, it is already the second longest running
bull-run after the 57-month long bull-run between April 2003 and
January 2008.
However, in terms of returns, the current bull-run has so far
delivered the least upside among all the previous bull-runs. The BSE
Sensex has risen 67% since its bottom in June 2012, versus 611% in
the biggest bull run of Apr03-Jan08, and between 100-300% in
other previous bull-runs.
prabodh@iiflcap.com
19
India Strategy
Figure35: BSESensexHistoryofBullandBearphases
Bullrun
Bearrun
FlatRun
Sensex
30,000
25,000
20,000
15,000
10,000
Dec14
Jan14
Mar13
May12
Jul11
Aug10
Oct09
Dec08
Feb08
Mar07
May06
Jul05
Sep04
Oct03
Dec02
Feb02
Apr01
May00
Jul99
Sep98
Nov97
Dec96
Feb96
Apr95
Jun94
Jul93
Sep92
Nov91
Jan91
5,000
Figure36: BSESensexreturnsinBullandBearperiods
SensexReturnsinBullandBearPeriods
(%)
650
611
550
450
350
319
250
157
127
150
110
67
50
13
(50)
(54)
(35)
(6)
(56)
(61)
(28)
(150)
Jan91 Apr92 Apr93 Sep94 May95 Nov98 Feb00 Sep01 Apr03 Jan08 Mar09 Nov10 Dec11 Jun12
Apr92 Apr93 Sep94 May95 Nov98 Feb00 Sep01 Apr03 Jan08 Mar09 Nov10 Dec11 Jun12 Dec14
prabodh@iiflcap.com
20
India Strategy
The BSE Sensex has risen
by 67% since its bottom in
June 2012, versus 611% in
the biggest bull-run of
Apr03-Jan08, and between
100-300% in other
previous bull runs
In the past three bull runs,

which ended in Feb00,
Jan08 and Nov10, the BSE
Sensex peaked at trailing
PE of 24-28x, versus its
current trailing PE of 18x
In the last three bull runs, which ended in Feb00, Jan08 and
Nov10, the BSE Sensex peaked at trailing PE of 24-28x, versus its
current trailing PE of 18x. That leaves enough upside through a
combination of higher earnings growth and further expansion in PEx.
Figure37: BullandBearperiods%returns,duration,startandendPEx
Period
%Returns Duration(mths) StarttrailingPEx EndtrailingPEx
Jan91Apr92
319
15
17.8
55.8
Apr92Apr93
(54)
13
55.8
25.3
Apr93Sep94
127
17
25.3
47.0
Sep94May95
(35)
8
47.0
26.8
May95Nov98
(6)
43
26.8
11.2
Nov98Feb00
110
15
11.2
25.5
Feb00Sep01
(56)
20
25.5
13.5
Sep01Apr03
13
19
13.5
12.8
Apr03Jan08
611
57
12.8
28.5
Jan08Mar09
(61)
14
28.5
11.6
Mar09Nov10
157
20
11.6
24.2
Nov10Dec11
(28)
14
24.2
16.2
Dec11Jun12
6
6
16.2
15.7
Jun12Dec14
67
30
15.7
18.0
Nifty not expensive versus global indices - S&P500

and Euro STOXX600
In the past 13 years, Niftys
trailing PEx has been at an
average 4% discount to
S&P500. Currently it is at a
6% premium, but much
lower than 40-55%
premium in the two recent
bull runs in India
Nifty not expensive versus S&P500: In the past 13 years, Niftys

trailing PEx has been at an average 4% discount to S&P500.
Currently it is at a 6% premium. On the two recent bull runs in India
in Dec 2007 and in Sep 2010, Niftys PEx was at 40-55% premium to
S&P500.
Since Jan 2006, Nifty has traded at a discount to S&P500 only for
two periods May 2008-Apr 2009 (during the global financial crisis)
and Jul 2013-May 2014. In other words, in the last nine-year period,
Nifty has traded at a discount to S&P500 for just less than two years.
Figure38: NiftyPExpremium/discounttoS&P500
NiftyPEPremium(+)/Discount()wrtS&P500Index
60
40
20
0
(20)
(40)
(60)
Jan02
Nov03
Sep05
Jul07
May09
Mar11
Jan13
Dec14
prabodh@iiflcap.com
21
India Strategy
In terms of PBx, Niftys average trailing PBx premium over S&P500

has been 21% in the past 13 years. It is currently trading at only 7%
premium. Since July 2005, Nifty has always traded at more than
21% premium to S&P500, except for brief occasions in Jan-Mar 2009
and since Jan 2013 until date.
Figure39: NiftyPBxpremium/discounttoS&P500
In terms of PBx, Niftys
average trailing PBx
premium over S&P500 has
been 21% in the last 13
years. It is currently trading
at only 7% premium
NiftyPBPremium(+)/Discount()wrtS&P500Index
150
125
100
75
50
25
0
(25)
(50)
Jan02
Nov03
Sep05
Jul07
May09
Mar11
Jan13
Dec14
Nifty versus Euro STOXX600: In the past 13 years, Niftys trailing

PEx has been at an average 10% discount to Euro STOXX600.
Currently too, it is at 9% discount. On the two recent bull runs in
India, in Dec 2007 and in Dec 2010, Niftys PEx was at 50-80%
premium to Euro STOXX600.
Trading history of the past nine years suggests that Nifty has
generally traded at a premium to Euro STOXX600. It has traded at a
discount in only two periods - between Dec 2008 and Dec 2009, and
since Apr 2012.
In the past 13 years, Niftys
trailing PEx has been at
average 10% discount to
Euro STOXX600. Currently it
is at 9% discount
Figure40: NiftyPExpremium/discounttoSTOX600
NiftyPEPremium(+)/Discount()wrtStoxx600Index
100
75
50
25
0
(25)
(50)
(75)
(100)
Jan02
Nov03
Sep05
Jul07
May09
Mar11
Jan13
Dec14
In terms of PBx, in the past 13 years, Niftys average trailing PBx

premium over Euro STOX600 has been 64% and it is currently
trading at 66% premium.
prabodh@iiflcap.com
22
India Strategy
In terms of PBx, in the past
13 years, Niftys average
trailing PBx premium over
Euro STOX600 has been
64% and it is currently
trading at 66% premium
Figure41: NiftyPBxpremium/discounttoSTOX600
200
175
150
125
100
75
50
25
0
(25)
Jan02
NiftyPBPremium(+)/Discount()wrtStoxx600Index
Nov03
Sep05
Jul07
May09
Mar11
Jan13
Dec14
Nifty EPS Cagr superior to S&P500 and Euro STOXX600: Niftys

EPS Cagr of 12.7% in the last decade (2003-2013) was superior to
S&P500s 7.0% and Euro STOX600s of 5.9%. Consensus forecasts
for 2013-2016E suggest that Nifty earnings are expected to grow at
18.9% versus 10.9% for S&P500 and 17.7% for Euro STOXX600.
Consensus forecasts Nifty
earnings to grow at 18.9%
versus 10.9% for S&P500
and 17.7% for Euro
STOXX600 for 2013-2016E
EPSCAGR
20032013
20032008
20082013
20132016E
S&P500Index
7.0
0.4
14.0
10.9
Stoxx600Index
5.9
0.2
11.9
17.7
NiftyIndex
12.7
16.3
9.2
18.9
Source:Bloomberg,IIFLResearch
India A liquid and diversified market

Contrary to general perception of India being a relatively illiquid
market, it is fairly liquid in terms of the number of stocks with
market cap of more than $1bn and stocks that trade more than $1m
in daily value. Currently, there are 206 stocks with market cap of
more than $1bn and 358 stocks with average daily trading value of
more than $1m in the past three months.
Figure42: NumberofstockswithMarketCapofmorethanUS$1bn
NumberofStockswithMCap >US$1bn
300
231
250
210
150
150
100
185
179
200
121
66
206
162
101
89
50
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
India currently has 206 stocks

with market cap of more than
$1bn and 358 stocks with
average daily trading value of
more than $1m in the past
three months
Source:Bloomberg,IIFLResearch.Basedonmarketdataofcalendaryearend.2014databased
onclosingpricesof16Dec2014
prabodh@iiflcap.com
23
India Strategy
Similarly, it is a much-diversified market in terms of the spread of

sectors.
India- a highly diversified
market
Figure43: SectorwisebreakupofIndiasMarketCap
Materials,10.4
RealEstate, 0.9
Telecom,3.1
IT,12.3
Utilities,4.3
Industrials,9.8
Shareof Sectors
inlisteduniverse
HealthCare,
7.2
Financials,19.8
Cons.Disc.,
11.6
Cons.Staples,
9.2
Energy,11.4
Source:Bloomberg,IIFLResearch.Basedonmarketcapof2,988listedcompaniesason16Dec
2014
Global funds cannot be
indifferent to India, given
the size of its economy and
its equity market and its
strong growth prospects
Figure44: IndiasMarketCapintheglobalcontext
Country
MCap
(US$bn)
1
UnitedStates
23,400
2
China
4,938
3
Japan
4,392
4
HongKong
3,873
5
UnitedKingdom
3,568
6
Canada
1,987
7
France
1,930
8
Germany
1,846
9
Switzerland
1,596
10 India
1,474
11 SouthKorea
1,175
12 Australia
1,164
13 Taiwan
940
14 Brazil
737
15 Spain
731
16 Sweden
656
17 Italy
567
18 Mexico
422
19 Indonesia
393
20 Russia
325
2014GDP
(US$bn)
MCap/GDP
(%)
17,416
10,465
4,670
293
2,815
1,785
2,868
3,775
672
2,115
1,434
1,464
503
2,202
1,384
551
2,104
1,300
852
1,967
134
47
94
1,324
127
111
67
49
238
70
82
80
187
33
53
119
27
32
46
17
Source:Company,IIFLResearch.Basedon2014GDPestimatesofIMFandmarketdataason
16Dec2014
prabodh@iiflcap.com
24
India Strategy
Sector and stock picks

Key overweight sectors:
1. Financials Play on falling interest rates and improved business
and consumer confidence, resulting in higher loan growth and fee
income and lower loan-loss provision charges.
2. Autos Play on falling interest rates, soft oil prices, and rise in
consumer confidence, resulting in higher volume growth and
better operating leverage and pricing power.
3. Information Technology Play on sustained strong
discretionary IT spend in developed countries and possible
tailwind from INR depreciation (INR depreciation has 2-3x impact
on the bottom line), resulting in strong USD revenue and
stronger INR bottom line.
4. Cement Play on pickup in construction and acceleration in
demand on one hand and lagging new capacity additions on the
other, resulting in higher capacity utilisation and better pricing.
5. Industrials Play on rising business confidence and proactive
government policies resulting in acceleration in new order inflows
and faster execution of existing orders.
Key underweight sectors:
1. Consumer Staples Consumption growth is expected to remain
weak due to slowing rural income and cut back in government
expenditure. Ebitda/PAT margins and ROE are at peak levels,
leaving little scope for improvement in the event of an economic
upcycle.
2. Energy Earnings momentum is unpredictable and likely to
remain weak. Valuations are cheap but the timing of re-rating
triggers is uncertain.
3. Metals Global demand and prices are expected to remain soft.
In addition, companies in this sector face execution and raw
material sourcing hurdles, which the new government will slowly
address; one would need patience.
Figure45: IIFLrecommendedsectorweights
Sector
Weight
10.1
ConsumerStaples
9.0
Energy
10.1
Financials
30.2
HealthCare
6.1
Industrials
5.5
16.2
Materials
7.2
RealEstate
0.2
1.9
Utilities
3.5
NiftyIndex
100.0
Recommended
Weight
12.5
6.5
8.0
33.0
6.5
6.5
17.5
4.0
0.0
2.0
3.5
100.0
IIFLPicks
Maruti,Hero,MothersonSumi
Marico,Emami,Britannia
BPCL,ONGC,Reliance,CoalIndia
ICICIBk,ShriramTransFin,BajajFin,Axis
DrReddy'sLab,Lupin,Cadilla
BlueStar,L&T,Voltas
HCLTech,TechM,Mindtree
UltratechCem,ShreeCem,JKLakshmi
BhartiAirtel
PowerGrid
Source:IIFLResearch
prabodh@iiflcap.com
25
India Strategy
Figure46: ValuationmatrixofIIFLstop5largecapandtop5midcappicks
Company
Mcap
Price
PERatio
(US$mn)
(Rs.)
FY16ii
FY17ii
LargeCaps
ICICIBank
30,138
331
14.3
11.9
HCLTech
17,219
1,559
13.4
11.6
Maruti
15,736
3,310
19.8
15.9
UltratechCement
10,731
2,485
19.7
16.5
ShriramTransportFin.
3,872
1,084
13.2
9.6
MidCaps
TataChemicals
1,654
413
10.3
8.8
Mindtree
1,570
1,192
15.6
12.9
KaveriSeeds
881
813
14.5
11.0
JKLakshmiCement
718
388
19.5
11.8
BlueStar
433
306
18.0
13.5
PBRatio
FY16ii
EV/EBITDA
FY16ii
ROE
FY16ii
2.1
3.6
3.6
3.0
2.2
NA
9.1
10.1
11.5
NA
14.7
29.6
18.9
16.6
18.3
1.6
4.0
5.1
2.7
4.2
6.4
10.1
12.8
9.1
12.0
16.4
27.3
41.5
15.0
25.5
Source:Bloomberg,IFLResearch.BasedonIIFLestimatesandmarketdataason16Dec14
prabodh@iiflcap.com
26
India Strategy
Annexure I - Governments reform agenda

Key areas, which we believe are top priorities of the Modi
government where work has already started or is likely to start in
the near future include:
1. Subsidy reforms The government spent 2.3% of GDP on fuel,
food and fertiliser subsidy in FY14. The subsidy bill is expected to fall
to 1.9% of GDP in FY15 and further to 1.6% of GDP in FY16 due to
lower global commodity prices, deregulation of diesel prices, and the
move towards direct benefit transfer on LPG. The next logical step
will be better targeting the recipients of these subsidies, to bring
down the subsidy bill further.
2. PSU reforms They aim to provide greater autonomy to PSU
managements. Eventually, they would work towards a holding
company structure for all government stakes in PSUs to detach them
from direct government interference.
3. Power Sector reforms They aim to strengthen power
production, transmission and distribution, fortify the SEBs, augment
transmission lines, and fast-track execution of slow-moving
generation projects. A proposal has been mooted to extend the
financial restructuring package to SEBs until date; earlier, the
package was for accumulated losses until FY12.
4. Pooling of imported and domestic gas and coal prices - Coal
India may import coal to overcome the near-term demand-supply
gap. Pooling of coal prices would ensure that tariffs are kept within
limits. Similarly prices of domestic gas and imported RNLG may be
pooled for power plants. This would ensure that enough fuel is
available for upcoming and existing power plants.
5. Coal sector reforms Auctioning of 72 coalmines de-allocated
by Supreme Court in Sep14 is expected to be completed by Mar15.
Auctioning of the balance 140 odd mines would happen in phases.
The government has set a target to raise Coal Indias production
from 462MT in FY14 to 925MT in FY20 (12% Cagr) and Indias total
production from 565MT in FY14 to 1200MT in FY20 (12% Cagr).
Mine-wise plans are being drawn. Government is seeking to modify
the Coal Nationalisation Act to allow third-party sales by the private
sector.
6. Labour reforms - Stringent labour laws, which place significant
restrictions on terminating employment and entail cumbersome
compliance process, are a major constraint for the manufacturing
sector. The government has initiated labour reforms process with
two key steps aimed to remove discretionary powers of labour
inspectors and create transparency in use of labour rules. The
government has also proposed doing away with stringent penal
provisions in some labour laws.
7. Amendment to Land Acquisition Act This needs to be
amended for faster land acquisition for industrial and infrastructure
projects.
8. Amendment to Companies Act, 2013 Since the new
company law came into effect on April 1, 2014, the government has
prabodh@iiflcap.com
27
India Strategy
made 45-odd changes and has proposed 14 more changes. These

changes pertain to provisions in related-party transactions, corporate
social responsibility, issue of consolidated financial statements, and
the role of directors and key management personnel. These changes
are driven by calls from the industry, auditors, and consultants, to
ease the environment to do business.
9. Goods and Services Tax (GST) Constitutional Amendment Bill
in this regard is expected to be introduced in the Parliament. There is
a high probability of GST being implemented from April 1, 2016.
10. Infrastructure build-up Roads, Railways, Airports, and
Urban Infra are among areas that are likely to see major policy
initiatives. National Highway Authority of India (NHAI) has
accelerated tendering and awarding of new road projects. Pace of
work on Dedicated Freight Corridors (DFC) is picking up. The
governments vision of new industrial corridors and smart cities is
translating into reality.
11. 3G spectrum availability to improve The Ministry of
Defence has agreed to release 15MHz of 2100MHz spectrum. This
will increase availability of 2100MHz spectrum by 75%. If 2100MHz
is auctioned together with 900MHz, it would be positive for telcos
because: 1) 2) higher spectrum supply would keep spectrum prices
cooler; and 2) they would ease capacity constraints at a time when
data traffic is increasing rapidly. It would also be critical for enabling
the government to meet its budgeted telecom receipts of Rs455bn in
FY15.
12. Stable and predictable tax regime - A High Level Committee
(HLC) has been set up to provide a stable and predictable taxation
regime with the objective of restoring investor confidence. The HLC
will interact with trade and industry and ascertain areas where clarity
on tax laws is required. The HLC would then provide
recommendations to the Central Board of Direct Taxes
(CBDT)/Central Board of Excise and Customs (CBEC), which would
thereafter be obliged to make changes and provide the necessary
clarifications and circulars within two months.
13. Ease of doing business From special courts to settle
commercial disputes in Delhi and Mumbai to a unique identity
number for all firms and three forms instead of 17 for imports and
exports, the Prime Ministers Office (PMO) has listed out 36 steps to
be undertaken by various ministries by Jan-15 end as part of a
strategy to propel India up the ranking in the Ease of Doing
Business.
prabodh@iiflcap.com
28
CMP
Rs331
Target12m
Rs420(27%)
Marketcap(US$m)
Bloomberg
Sector
30,075
Dec162014
52WkHigh/Low(Rs)
366/189
Shareso/s(m)
5790
Dailyvolume(US$m)
63.0
DividendyieldFY15ii(%)
1.5
Freefloat(%)
100.0
Shareholdingpattern(%)
Promoter
0.0
FII
41.1
DII
22.3
Others
36.6
Priceperformance(%)
1M 3M
1Y
ICICIBank
(2.3)
8.4 51.0
Absolute(US$)
(5.0)
2.6 49.0
Rel.toSensex 2.2
7.3 21.0
CAGR(%)
3yrs 5yrs
EPS
23.9 20.3
Stockmovement
Volume(LHS)
Price(RHS)
(Rs)
20,000
400
15,000
300
10,000
200
5,000
100
0
Dec12
Feb13
Apr13
Jun13
Aug13
Oct13
Dec13
Feb14
Apr14
Jun14
Aug14
Oct14
Dec14
SampathKumar
sampath.kumar@iiflcap.com
+912246464665
AbhishekMurarka
abhishek.murarka@iiflcap.com
912246464661
www.iiflcap.com
BUY
Improving fortunes
ICICIBCIN ICICI Bank (ICICIB) is well poised to benefit from recovery in

Banks the economy and flexible structuring of long-term project
Shares(000')
ICICI Bank
loans. This would lower risk of infrastructure loans. Strong

capitalisation ratios would allow ICICIB to exploit growth
opportunities and deliver market share gains over the
medium term. Robust earnings and sharp increase in ROE of
190bps over the medium term are likely to provide significant
upside to the stock price over the next 12-18 months.
Improvement in subsidiaries performance too would be a
catalyst for the stock.
Well poised to benefit from recovery in operating

environment: Improvement in macro-economic conditions and
renewed focus on expanding the retail lending franchise should help
ICICIB to achieve higher-than-industry loan growth. Expanding
margins and uptick in non-interest income growth would boost
revenue growth. An enabling regulatory environment for resolution
of distressed assets, particularly in the infrastructure segment, would
allow the bank to adopt flexible loan structuring and lower the risk
profile of assets over the medium term.
Robust earnings growth, sharp increase in ROE likely: Strong
capitalization places ICICIB well to exploit growth opportunities,
deliver market share gains, and stronger earnings growth. ICICIB is
set to deliver 19% earnings Cagr over FY15-17, driven by
acceleration in loan growth, increase in contribution of non-interest
income, sustained operating efficiency, and stable asset quality. The
bank is likely to record sharp increase in ROE of 190bps over the
same period.
Strong capitalization, attractive valuation to drive upside:
High tier I CAR places ICICIB well even under the new capital rules
(Basel III). Earnings growth would be non-dilutive despite higher
capital requirements kicking in through FY19. Trading at 2.2X FY16ii
P/B, ICICIB is attractively valued, given non-dilutive earnings growth
and increasing ROE. In our SOTP, the bank contributes to 85% and
life insurance 7.5% of the value. Valuations of non-banking
subsidiaries should increase significantly and aid in sustaining strong
returns over the next 12-months.
Financialsummary(Rsbn)
Y/e31Mar,Parent
Preprov.operatinginc.(Rsbn)
PreexceptionalPAT(Rsbn)
ReportedPAT(Rsbn)
PreexceptionalEPS(Rs)
Growth(%)
IIFLvsconsensus(%)
PER(x)
Bookvalue(Rs)
PB(x)
CAR(%)
ROA(%)
ROE(%)
FY13A
132
83
83
14.4
28.6
22.9
116
2.9
18.7
1.6
13.1
FY14A
166
98
98
17.0
17.8
19.4
127
2.6
17.7
1.7
14.0
FY15ii
194
113
113
19.5
14.9
0.4
16.9
141
2.3
16.7
1.8
14.6
FY16ii
227
133
133
23.1
17.9
0.1
14.3
158
2.1
16.1
1.8
15.4
FY17ii
270
160
160
27.7
20.3
1.1
11.9
178
1.9
15.5
1.9
16.5
Source:Company,IIFLResearch.Priceasatcloseofbusinesson16December2014.
1
HCL Technologies
BUY
CMP
Rs1559
Target12m
Rs1880(21%)
Marketcap(US$m)
17,077 Strong growth, cheap valuations
Enterprisevalue(US$m)15,937
A lacklustre growth at HCL Techs non-infrastructure business
Bloomberg
HCLTIN was a key issue over the past three years (revenue Cqgr of
Sector
Technology less than 1% over 4QFY12-1QFY14). However, this has
Dec162014
52WkHigh/Low(Rs)
1,776/1,159
Shareso/s(m)
702
Dailyvolume(US$m)
27
1.9
Freefloat(%)
38.5
Promoter
61.5
FII
29.1
DII
3.6
Others
5.8
Priceperformance(%)
1M 3M
1Y
HCLTech
(3.2) (3.0) 32.5
Absolute(US$)
(6.0) (6.3) 31.0
Rel.toSensex (1.3) (4.0) 3.0
CAGR(%)
3yrs 5yrs
EPS
57.4 37.7
Stockmovement
Shares(000')
Volume(LHS)
Price(RHS)
10,000
8,000
6,000
4,000
2,000
0
(Rs)
2,000
1,500
1,000
500
Dec12
Feb13
Apr13
Jun13
Aug13
Oct13
Dec13
Feb14
Apr14
Jun14
Aug14
Oct14
Dec14
SandeepMuthangi
sandeep.muthangi@iiflcap.com
912246464686
NandishDalal
nandish.dalal@iiflcap.com
912240609310
www.iiflcap.com
changed over the past year. The non-infrastructure

businesses contributed to 55% of incremental revenue (vs.
20% over 1QFY13-1QFY14). Deal wins continue to be strong
(USD6bn over the past five quarters). These factors highlight
the underlying strength in business traction. Consequently,
we expect HCLTs revenue growth to be among the best in
Indian IT over FY15-17 (13% Cagr). Despite such robust
growth, valuations are the cheapest in the peer group (13.5x
FY16ii PER). We expect the stock to re-rate. BUY.
Growth is increasingly diversified: Infrastructure service (34% of
revenue) was the key revenue driver for HCL Tech during FY13/14. A
lacklustre market for ERP services (16% of revenue) and increasing
commoditization in ADM services (28% of revenue) were among the
key headwinds for HCLTs other services. Over the past one year,
growth in the non-infrastructure business has improved. A cyclical
recovery in engineering services (17% of revenue), better cross
selling of ADM services, and strong demand for analytics services
have resulted in better growth. The strong deal wins (USD6bn over
the past five quarters) also indicate that the underlying business
traction remains strong.
Benefiting from early entry into Europe: Over the past two
years, European business grew 7-22% for the top-4 Indian IT
companies, whereas US business grew only 3-14%. Low penetration
of offshoring and increased local presence of Indian IT have been the
key reasons for better growth in Europe. HCLT was an early mover
with the acquisition of Axon. Europe accounts for 32% of HCLTs
revenue now and should remain a key growth driver.
Cheapest valuations among large caps: We believe HCLTs
revenue growth to be among the best in Indian IT. Margins are likely
to be stable over FY15-17, following a sharp increase over the past
three years. We envisage robust 15% EPS Cagr over FY15-17ii.
Despite such strong fundamentals, valuations (13.5x FY16ii PER) are
the cheapest in the peer group. HCLT is our top pick in IT services.
Financialsummary(Rsm)
Y/e30Jun,Consolidated
Revenues(Rsm)
Ebitdamargins(%)
PreexceptionalPAT(Rsm)
ReportedPAT(Rsm)
Growth(%)
IIFLvsconsensus(%)
PER(x)
ROE(%)
Netdebt/equity(x)
EV/Ebitda(x)
Price/book(x)
FY13A
257,337
22.7
41,027
41,027
58.2
66.0
FY14A
329,180
26.3
63,237
63,710
89.5
53.9
26.8
33.7
(0.3)
18.1
7.8
17.4
37.1
(0.5)
11.7
5.5
FY15ii
365,650
24.6
71,964
73,518
102.0
13.9
(1.6)
15.3
32.0
(0.5)
10.7
4.4
FY16ii
413,931
24.4
82,206
82,206
116.5
14.2
1.0
13.4
29.6
(0.6)
9.1
3.6
FY17ii
468,201
24.5
94,680
94,680
134.2
15.2
3.4
11.6
27.9
(0.6)
7.5
2.9
1
Maruti Suzuki
BUY
CMP
Rs3310
Target12m
Rs4000(21%)
Marketcap(US$m)
15,764 Ideally positioned for recovery
Enterprisevalue(US$m)14,382
Bloomberg
MSILIN Maruti is the best auto OEM play on macro-economic recovery
in India. Following flat volumes for the past four years, we
Sector
Autos expect car sales to bounce back, led by high pent-up demand,
Dec162014
52WkHigh/Low(Rs)
3,440/1,540
Shareso/s(m)
302
Dailyvolume(US$m)
16.0
0.8
Freefloat(%)
43.8
Promoter
56.2
FII
21.7
DII
14.5
Others
7.6
Priceperformance(%)
1M 3M
1Y
MarutiSuzuki
(0.6) 12.0 94.5
Absolute(US$)
(3.3)
8.0 90.0
Rel.toSensex 4.0 11.0 65.0
CAGR(%)
3yrs 5yrs
EPS
6.5 17.8
Stockmovement
Shares(000')
Volume(LHS)
Price(RHS)
(Rs)
8,000
4,000
6,000
3,000
4,000
2,000
2,000
1,000
0
Dec12
Feb13
Apr13
Jun13
Aug13
Oct13
Dec13
Feb14
Apr14
Jun14
Aug14
Oct14
Dec14
JosephGeorge
joseph.george@iiflcap.com
912246464667
KevinMehta
kevin.mehta@iiflcap.com
912240077193
www.iiflcap.com
economic recovery, and deceleration in car ownership costs.

Marutis strong product pipeline, coupled with lower
competitive intensity, should help it consolidate its
leadership. Margins are likely to expand from the current
levels, as demand growth would reduce discounts. Weak JPY
would help reduce import costs and aid margins. BUY.
Car industry showing initial signs of recovery; we expect
acceleration in CY15: The passenger car industry is showing signs
of recovery (up 3% YTD FY15) after remaining flat over FY11-FY14.
An economic recovery, fall in ownership costs (fuel, interest cost)
and high pent-up demand would drive improvement in demand. We
forecast industry volumes to grow at 15% Cagr over FY15-FY17.
Marutis competitive positioning extremely strong: Successful
new models and a strong rural presence have helped Maruti improve
its market share from a low of 38% in FY12 to 45% YTD FY15. We
expect Marutis competitive positioning to remain strong over the
medium term, driven by a pipeline of 4-5 new models scheduled for
launch over the next 18 months. On the other hand, competition
seems to have taken the foot off the pedal, especially in the small
car segment (Marutis forte). A sharp reduction in pricing premium of
petrol over diesel would work in Marutis favour as it has a much
higher market share in the petrol segment than in diesel.
Margins set to improve: Margins are likely to expand from current
levels, as demand growth would reduce discounts (average discount
at 5% of ASP vs. 2.5-3.0% normally) and bring in operating
leverage. Marutis high import costs are likely to come down due to
focus on component localization as well as due to weakness in JPY.
Expect 30% EPS Cagr over FY14-17: A combination of industry
recovery, market share gains and margin expansion should drive
30% EPS Cagr over FY14-17. We expect FCF generation to be strong
(FCF=PAT in FY16, FY17), especially given that Suzuki is likely to
fund Marutis capacity expansion in India.
Y/e31Mar,Parent
Revenues(Rsm)
Ebitdamargins(%)
ReportedPAT(Rsm)
Growth(%)
IIFLvsconsensus(%)
PER(x)
ROE(%)
Netdebt/equity(x)
EV/Ebitda(x)
Price/book(x)
FY13A
435,879
9.7
23,921
23,921
79.2
39.9
FY14A
438,436
11.9
28,923
27,830
95.8
20.9
41.8
14.2
(0.3)
22.1
5.4
34.6
14.6
(0.4)
17.4
4.8
FY15ii
492,210
12.9
36,451
36,451
120.7
26.0
0.0
27.4
16.3
(0.4)
14.1
4.2
FY16ii
592,152
14.2
50,538
50,538
167.3
38.6
4.5
19.8
19.7
(0.5)
10.1
3.6
FY17ii
701,919
14.3
62,927
62,927
208.3
24.5
(9.9)
15.9
21.0
(0.6)
8.0
3.1
1
UltraTech Cement
BUY
CMP
Rs2485
Target12m
Rs2967(19%)
Marketcap(US$m)
10,736
Enterprisevalue(US$m)11,431 Industry-beating growth
Bloomberg
UTCEMIN We expect UltraTech Cement (UCL) to report 26% earnings
Sector
Cement Cagr for FY14-FY17 driven by: 1) increased pricing power for
Dec162014
52WkHigh/Low(Rs)
2,872/1,634
Shareso/s(m)
274
Dailyvolume(US$m)
9.4
0.4
Freefloat(%)
38.3
Promoter
61.7
FII
19.9
DII
5.7
Others
12.7
Priceperformance(%)
1M 3M
1Y
UltraTechCem
(5.0) (2.6) 40.4
Absolute(US$)
(7.6) (7.5) 37.0
Rel.toSensex (0.5) (4.0) 11.0
CAGR(%)
3yrs 5yrs
EPS
13.4 (1.0)
Stockmovement
Shares(000')
Volume(LHS)
Price(RHS)
2,500
2,000
1,500
1,000
500
0
(Rs)
Dec12
Feb13
Apr13
Jun13
Aug13
Oct13
Dec13
Feb14
Apr14
Jun14
Aug14
Oct14
Dec14
3,000
2,500
2,000
1,500
1,000
500
0
cement producers with an improvement in industry demand

and utilisation; 2) increased volumes driven by new capacity
additions; and 3) improved efficiency, led by a cost reduction
programme. UCL trades at EV/Ebitda of 11.5x on our FY16
and 9.2x on our FY17 estimates.
26% earnings Cagr in FY14-FY17 driven by volume growth
and pricing power: We expect all-India utilisation to improve from
77% to 84% over the next three years. This would lead to improved
pricing power for the industry and expansion in margins. We expect
UCL to record above-industry volume growth (8-15% vis--vis 610% for the industry) driven by stabilisation of new capacities added
in FY14 and further additions in FY15-FY16. We expect cost reduction
measures to lower cost growth for UCL compared with peers.
Capacity addition growth ahead of industry: UCLs domestic
cement capacity increased from 51mtpa in FY13 to 54mtpa in FY14
owing to de-bottlenecking at its Gujarat plant and at the grinding
units in the Eastern and Southern regions. UCL increased its clinker
capacity by 6.6mtpa in end-FY13 and early FY14. The company is
slated to add grinding units of 6mtpa in FY15; a 3mtpa plant in
Rajasthan is scheduled to commence production in FY16. UCL
acquired a 4.8mtpa plant in Gujarat from Jaypee Cement in FY14
and it completed the transaction recently.
Efficiency improvement programme leading to growth at low
cost: UCL increased use of petcoke in its overall fuel mix from 25%
in 4QFY12 to 50% in 4QFY14; it is reducing lead distance by
establishing more blending and packaging terminals closer to
consumption centers. Further, it is reducing costs by increasing
captive power and capacity to recover waste heat.
JRadhakrishnan
radhakrishnan@iiflcap.com
912246464653
www.iiflcap.com
Y/e31Mar,Consolidated
Revenues(Rsm)
Ebitdamargins(%)
ReportedPAT(Rsm)
Growth(%)
IIFLvsconsensus(%)
PER(x)
ROE(%)
Netdebt/equity(x)
EV/Ebitda(x)
Price/book(x)
FY13A
201,749
23.2
26,516
26,516
96.7
8.4
FY14A
202,798
18.8
20,489
20,489
74.7
(22.7)
25.7
18.9
0.2
15.5
4.5
33.3
12.7
0.1
19.0
4.0
FY15ii
244,949
19.8
25,546
25,546
93.2
24.7
(3.0)
26.7
14.0
0.3
15.6
3.5
FY16ii
290,624
22.1
34,646
34,646
126.3
35.6
(5.2)
19.7
16.6
0.2
11.5
3.0
FY17ii
333,977
23.2
41,371
41,371
150.9
19.4
(12.9)
16.5
17.1
0.0
9.2
2.6
1
CMP
Rs1084
Target12m
Rs1460(35%)
Marketcap(US$m)
Bloomberg
3,879
Banks
Dec162014
52WkHigh/Low(Rs)
1,224/549
Shareso/s(m)
227
Dailyvolume(US$m)
13.0
0.7
Freefloat(%)
74.0
ShriramHoldings
26.0
FII
49.4
DII
6.3
Others
18.3
Priceperformance(%)
1M 3M 1Y
ShriramTranspFin
4.0 17.0 76.0
Absolute(US$)
1.2
8.0 73.0
Rel.toSensex
8.5 15.5 46.0
CAGR(%)
3yrs 5yrs
EPS
0.9 13.2
Stockmovement
Volume(LHS)
Price(RHS)
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
(Rs)
Dec12
Feb13
Apr13
Jun13
Aug13
Oct13
Dec13
Feb14
Apr14
Jun14
Aug14
Oct14
Dec14
1,400
1,200
1,000
800
600
400
200
0
SampathKumar
sampath.kumar@iiflcap.com
+912246464665
AbhishekMurarka
abhishek.murarka@iiflcap.com
912246464661
www.iiflcap.com
BUY
Operating leverage to drive earnings
SHTFIN Operating environment for Shriram Transport Finance (SHTF)
Sector
Shares(000')
Shriram Transp Fin
is at the cusp of a change. Improvement in the finances of

SHTFs borrowers, uptick in demand for loans and reduction
in NPLs and funding cost are likely to drive sharp
improvement in the companys earnings and profitability over
the medium term. Significant operating leverage should lead
to upside to its earnings and profitability beyond FY16ii and
drive valuation beyond its historical average. We raise our
12-m TP to Rs1460, 2.5X FY17ii P/B. BUY.
At the cusp of change: A number of changes in the operating
environment underpin the prospects for SHTF. These include: 1)
improvement in the finances of SHTFs borrowers driven by recovery
in demand conditions for freight movement and decline in operating
costs, 2) gradual decline in interest rate resulting in lower funding
cost for SHTF, and 3) reduction in NPLs would drive significant
upside to the earnings and profitability of the company over the
medium term. Earnings growth could a get boost from increase in
the volume of assets securitized and reduction in liquid investments
maintained by the company.
Benefits from operating leverage to accrue beyond FY16ii:
SHTFs lending yields declined significantly since FY12 as the
company sought to mitigate the impact of sharp deterioration in the
operating environment by reducing the risk profile of its borrowers.
With improvement in growth conditions, SHTF would relax its
underwriting norms and likely to deliver improvement in lending
yields. SHTFs borrowing cost should reduce sharply if its credit
rating were to be upgraded by a notch from the current level. These
benefits are likely to accrue over the medium term and are not
factored into the current market expectations.
Pro-cyclical growth conditions likely to boost valuation:
Significant improvement in outlook for earnings and profitability and
potential upsides from benefits of changes in the operating
environment should drive SHTFs valuation well beyond its historical
average. The risk-reward is attractive, given a stable regulatory
environment, and non-diluted earnings growth due to SHTFs strong
capitalization ratios.
Y/e31Mar,Parent
Preprov.operatinginc.(Rsm)
ReportedPAT(Rsm)
Growth(%)
IIFLvsconsensus(%)
PER(x)
Bookvalue(Rs)
PB(x)
CAR(%)
ROA(%)
ROE(%)
FY13A
28,613
13,606
13,606
60.0
7.9
18.1
317
3.4
21.6
3.4
20.6
FY14A
29,768
12,689
12,689
55.9
(6.7)
19.4
365
3.0
21.5
2.7
16.4
FY15ii
31,458
13,345
13,345
58.8
5.2
(4.1)
18.4
414
2.6
21.5
2.6
15.1
FY16ii
39,329
18,621
18,621
82.1
39.5
7.7
13.2
485
2.2
20.5
3.2
18.3
FY17ii
51,197
25,528
25,528
112.5
37.1
20.7
9.6
582
1.9
20.0
3.6
21.1
1
Tata Chemicals
BUY
CMP
Rs413
Target12m
Rs610(48%)
Marketcap(US$m)
1,657
Enterprisevalue(US$m) 2,803 Turnaround underway
Bloomberg
TTCHIN Under the new Tata Group Chairman Cyrus Mistry, Tata
Sector
Midcaps Chemicals is making a serious effort to turn around its
Dec162014
52WkHigh/Low(Rs)
461/244
Shareso/s(m)
255
Dailyvolume(US$m)
4.4
2.4
Freefloat(%)
68.9
Promoter
31.1
FII
21.8
DII
24.6
Others
22.5
Priceperformance(%)
1M 3M
1Y
TataChemicals
(3.0)
6.0 56.0
Absolute(US$)
(5.5) (1.3) 56.0
Rel.toSensex 1.6
5.0 26.5
CAGR(%)
3yrs 5yrs
EPS
(12.8) (13.6)
Stockmovement
Shares(000')
Volume(LHS)
Price(RHS)
(Rs)
500
400
300
200
100
0
Dec12
Feb13
Apr13
Jun13
Aug13
Oct13
Dec13
Feb14
Apr14
Jun14
Aug14
Oct14
Dec14
5,000
4,000
3,000
2,000
1,000
0
AbhijitR.Akella,CFA
abhijit.akella@iiflcap.com
912246464654
AnubhavGoel
anubhav.goel@iiflcap.com
912240077154
www.iiflcap.com
business by shutting down unprofitable units, milking its

commodity businesses for cash, focusing on asset-light
branded businesses for growth, and de-leveraging the
balance sheet. These initiatives should drive a 22% EPS Cagr
over FY15-17, even as valuations at 11x FY16ii P/E remain
attractive and leave room for re-rating. BUY.
Turnaround to make further headway in FY16: We estimate

28% EPS growth for FY16, driven by: 1) improved profitability at the
restructured soda ash operations in Europe and Kenya; 2) growth in
the consumer and specialty farm inputs businesses; 3) margin uptick
in the US on firming soda ash prices and falling input costs; and 4)
lower interest expense. We expect ROE to tick up to 16% and free
cash flow generation to remain strong, permitting reduction in debt.
All key metrics therefore seem likely to improve, in turn likely
boosting investor confidence in the turnaround.
Earnings growth + potential re-rating + debt repayment:
Ebitda growth could potentially be complemented by a re-rating in
the EV/Ebitda multiple as the business mix shifts towards consumer /
specialty businesses (which generate higher margins, return ratios
and cash flows) and as investor confidence in the sustainability of
earnings increases. Furthermore, Tata Chemicals also plans to cut
debt by more than half within five years, thanks to strong free cash
flow generation enabled by the focus on asset-light businesses. Debt
reduction would further boost value for equity holders.
Attractive valuations, substantial value in asset base: Tata
Chemicals possesses some high-quality assets, including its salt
business in India (c70% market share with high margins and steady
growth), the US soda ash business (lowest-cost producer globally),
and the specialty farm-inputs business including Rallis. Moreover,
the companys holding in parent Tata Sons alone is worth more than
its entire market cap. Valuations at 11x FY16ii P/E / 6.6x FY16ii
EV/Ebitda are attractive and can re-rate as the turnaround makes
further progress.
Revenues(Rsm)
Ebitdamargins(%)
ReportedPAT(Rsm)
Growth(%)
IIFLvsconsensus(%)
PER(x)
ROE(%)
Netdebt/equity(x)
EV/Ebitda (x)
Price/book(x)
FY13A
147,110
14.7
6,810
4,004
26.7
(18.7)
FY14A
158,954
11.4
4,484
(10,320)
17.6
(34.1)
15.4
10.6
1.0
8.1
1.6
23.4
7.5
1.2
9.8
1.9
FY15ii
168,617
13.2
7,938
7,945
31.2
77.0
1.1
13.2
13.8
1.0
7.8
1.8
FY16ii
177,888
14.4
10,158
10,158
39.9
28.0
4.9
10.3
16.4
0.7
6.4
1.6
FY17ii
188,235
14.9
11,873
11,873
46.6
16.9
4.0
8.8
17.4
0.5
5.5
1.5
1
Mindtree
BUY
CMP
Rs1192
Target12m
Rs1500(26%)
Marketcap(US$m)
1,565
Enterprisevalue(US$m) 1,472 Citius, Altius, Fortius
Bloomberg
MTCLIN
We believe Mindtrees revenue growth will continue to be
Sector
Technology among the highest in the industry. Key drivers for revenue
Dec162014
52WkHigh/Low(Rs)
1,270/647
Shareso/s(m)
84
Dailyvolume(US$m)
4.1
1.4
Freefloat(%)
84.3
Promoter
15.7
FII
38.8
DII
8.4
Others
37.2
Priceperformance(%)
1M 3M
1Y
Mindtree
6.0
5.5 72.0
Absolute(US$)
3.0 (0.1) 70.0
Rel.toSensex 10.4
4.4 42.5
CAGR(%)
3yrs 5yrs
EPS
63.0 51.5
Stockmovement
Shares(000')
Volume(LHS)
Price(RHS)
1,000
800
600
400
200
0
(Rs)
Dec12
Feb13
Apr13
Jun13
Aug13
Oct13
Dec13
Feb14
Apr14
Jun14
Aug14
Oct14
Dec14
1,400
1,200
1,000
800
600
400
200
0
SandeepMuthangi
sandeep.muthangi@iiflcap.com
912246464686
NandishDalal
nandish.dalal@iiflcap.com
912240609310
www.iiflcap.com
growth are: 1) Strong positioning and increasing investments

in the digital business; 2) Improving outlook at Hi-Tech
accounts; 3) Strong account mining; and 4) Focus on
marquee account wins. With low utilisation and improving
age pyramid, margins levers are reasonably high. However,
investments in digital for the next two years may constrain
significant margin improvement. Valuations have re-rated
substantially over the past three years. Nevertheless, they
are reasonable at 16x FY16ii PER (1x PEG). Mindtree is our
top pick in mid-cap IT underpinned by robust growth,
consistent performance, and a scalable operating model.
Industry-leading revenue growth to sustain: We expect
Mindtree to deliver sector-leading 16% revenue Cagr over FY15-17ii.
In FY15, the company expanded its account mining initiative beyond
the top-10 accounts. Focus has increased on new marquee client
wins and large deals. One of its co-founders heads the sales initiative
now. In addition, large exposure to the fast-growing digital business
and improvement in outlook for its hi-tech customers are the key
tailwinds.
Digital business is a key driver: At 33% of revenue, Mindtree has
significant exposure to the fast-growing digital business. Our
interactions with management indicate that client initiatives in cloud
and mobility are the key segments of its digital business. Further, we
expect the company to invest significantly in this business over
FY15-17. Management believes that this would result in a much
higher market share of incremental digital spend.
Robust and consistent growth merit premium valuations:
Mindtrees valuations (16x FY16ii PER) are now at a premium to
even some of the larger vendors. However, we see Mindtree
delivering among the highest revenue growth in the industry. We
believe consistent performance and investments in building a
scalable operating model justify the premium valuations.
Revenues(Rsm)
Ebitdamargins(%)
ReportedPAT(Rsm)
Growth(%)
IIFLvsconsensus(%)
PER(x)
ROE(%)
Netdebt/equity(x)
EV/Ebitda(x)
Price/book(x)
FY13A
23,618
20.6
3,389
3,389
40.9
52.2
FY14A
30,316
20.1
4,508
4,508
53.8
31.5
29.1
29.8
(0.4)
19.2
7.5
22.2
30.5
(0.4)
15.3
6.1
FY15ii
36,013
20.1
5,406
5,406
64.5
19.8
5.7
18.5
29.4
(0.4)
12.7
4.9
FY16ii
43,383
20.2
6,420
6,420
76.4
18.6
6.2
15.6
28.3
(0.5)
10.1
4.0
FY17ii
51,326
20.2
7,739
7,739
92.1
20.5
13.8
12.9
27.8
(0.5)
8.1
3.3
1
Kaveri Seed Company
BUY
CMP
Rs813
Target12m
Rs1110(37%)
Marketcap(US$m)
883
Enterprisevalue(US$m) 833 Market share gains to continue
Bloomberg
KSCLIN One of Indias leading and fastest-growing seed companies,
Sector
Midcaps Kaveri is likely to have another good year in FY16 driven by
Dec162014
52WkHigh/Low(Rs)
1,025/328
Shareso/s(m)
69
Dailyvolume(US$m)
2.4
0.8
Freefloat(%)
42.3
Promoter
57.7
FII
18.9
DII
9.3
Others
14.1
Priceperformance(%)
1M 3M
1Y
KaveriSeed
(10.5) (10.0) 138.2
Absolute(US$) (13.0) (17.0) 134.0
Rel.toSensex (6.0) (11.3) 109.0
CAGR(%)
3yrs 5yrs
EPS
70.1 50.7
Stockmovement
Shares(000')
Volume(LHS)
Price(RHS)
4,000
(Rs)
1,200
1,000
800
600
400
200
0
3,000
2,000
1,000
Dec12
Feb13
Apr13
Jun13
Aug13
Oct13
Dec13
Feb14
Apr14
Jun14
Aug14
Oct14
Dec14
AbhijitR.Akella,CFA
abhijit.akella@iiflcap.com
912246464654
AnubhavGoel
anubhav.goel@iiflcap.com
912240077154
continued market share gains in cottonseed and further

expansion in margins. We estimate 29% EPS Cagr over FY1517ii, while current valuations are attractive (14x FY16ii P/E).
Other possible triggers for the stock include regulatory
approval for herbicide-tolerant cotton and a price increase in
cottonseed.
Market share gains in cottonseed likely to continue: In

cottonseed, which will likely contribute c65% of Kaveris FY15
revenue, the company is on track to increase revenue by at least 1520% in FY16 driven by further gains in market share. Kaveris
market share in cottonseed has increased from 1% in FY10 to c18%
in FY15 due to growing brand recall among farmers thanks to
superior yields generated by the companys seeds. Our channel
checks indicate that further gains are likely, especially in areas
where Kaveri currently has a less dominant presence.
Scope for further improvement in margins: Kaveris Ebitda
margin expanded by 270 bps in FY15 as the company capitalized on
its growing scale (now #2 in the cottonseed market) to extract more
margins from its supply chain. Our channel checks suggest that
advance bookings by dealers will probably fall sharply in FY16. This
should lead to a decrease in discounts provided by Kaveri to dealers,
enabling further margin expansion for the company. Our estimates
do not presume a price increase in cottonseed, which if permitted by
the government, could lead to further margin improvement.
Attractive valuations, positive growth outlook: Following the
recent 20%+ correction in stock price on concerns of a decrease in
the promoters stake in the company, valuations are attractive at
14x FY16ii P/E. Our estimates imply 29% EPS Cagr over FY15-17.
The longer-term growth outlook is positive, underpinned by: 1) low
hybridization rates in corn and paddy seeds in India; 2) a possibility
of regulatory approval for herbicide-tolerant cotton; and 3) an
expected increase in high-density planting of cotton. Return ratios
and free cash flow generation remain strong.
FY13A
FY14A
FY15ii
FY16ii
FY17ii
Revenues(Rsm)
12,497
14,928
18,323
7,120
10,111
Ebitdamargins(%)
19.6
21.9
24.6
25.3
26.7
1,268
2,090
3,063
3,864
5,100
ReportedPAT(Rsm)
1,281
2,090
3,063
3,864
5,100
18.5
30.5
44.5
56.1
74.0
Growth(%)
100.7
65.0
45.7
26.2
32.0
IIFLvsconsensus(%)
3.7
7.3
12.7
PER(x)
44.0
26.6
18.3
14.5
11.0
ROE(%)
43.3
48.6
47.7
41.5
39.1
Netdebt/equity(x)
(0.4)
(0.6)
(0.6)
(0.7)
(0.8)
EV/Ebitda(x)
39.0
23.9
16.6
12.8
9.1
Price/book(x)
16.2
10.8
7.3
5.1
3.7
www.iiflcap.com
1
JK Lakshmi Cement
BUY
CMP
Rs388
Target12m
Rs494(27%)
Marketcap(US$m)
720
Enterprisevalue(US$m) 908 Expansions to help ride the upcycle
Bloomberg
JKLCIN We expect JK Lakshmi Cement (JKLC) to be a major
Sector
Cement beneficiary of the likely upcycle in demand growth and
Dec162014
52WkHigh/Low(Rs)
426/64
Shareso/s(m)
118
Dailyvolume(US$m)
2.3
0.5
Freefloat(%)
54.1
Promoter
45.9
FII
10.9
DII
18.7
Others
24.5
Priceperformance(%)
1M 3M
1Y
JKLakshmiCem (1.3) 26.0 426.0
Absolute(US$)
(4.0) 18.0 416.0
Rel.toSensex 3.2 25.0 397.0
CAGR(%)
3yrs 5yrs
EPS
17.8 (11.5)
Stockmovement
Shares(000')
Volume(LHS)
Price(RHS)
500
400
300
200
100
0
Dec12
Feb13
Apr13
Jun13
Aug13
Oct13
Dec13
Feb14
Apr14
Jun14
Aug14
Oct14
Dec14
Near-doubling of capacity over FY14-FY16 to boost volumes:

JKLC expanded its clinker and cement capacity in FY14. It achieved
this through de-bottlenecking clinker capacity by 0.3mtpa and
addition of a 0.6mtpa split grinding unit at Haryana by end-FY14.
JKLCs 2.7mtpa greenfield cement capacity in Chhattisgarh in the
eastern region is likely to go on stream in 3QFY15. Further, JKLCs
75% subsidiary, Udaipur Cement Works, is likely to commence
operation of cement capacity of 1.4mtpa in FY16. Following these
expansions, JKLCs cement capacity will reach 10mtpa. We expect
stabilisation of these capacities to boost volume growth.
Increase in utilisation in Northern and Western regions to
boost margins: We expect improvement in demand growth to boost
utilisation and pricing power in the Northern and Western regions for
the next 2-3 years (69%/65% of volumes in FY16/FY17). Our
channel checks indicate that infighting in the Northern region during
the major part of FY14 is unlikely to continue. Although the Eastern
region is a high-margin market structurally (due to a small number
of participants), margins could decline for 1-2 quarters in FY16 due
to entry of two new players (JKLC and Shree Cement) in the region.
Strong re-rating candidate; recommend BUY: JKLCs stock has
appreciated more than 4x from the August 2013 bottom due to
improvement in market sentiment and robust outlook for the cement
sector. However, we believe there is scope for further re-rating,
given strong growth prospects for JKLC and the industry. JKLC trades
at EV/Ebitda of 9.2 on FY16ii and EV/tonne of USD102 (19%
discount to replacement cost of USD125/tonne).
(Rs)
3,000
2,500
2,000
1,500
1,000
500
0
utilisation. JKLCs capacity expansion in the next two years

should drive a robust increase in volumes and Ebitda. We
expect JKLC to record 47% Ebitda Cagr in FY14-FY17.
Further, we expect JKLC to outperform peers in the current
upcycle (visible already in FY14 performance) driven by
timely expansion and focus on costs. BUY.
JRadhakrishnan
radhakrishnan@iiflcap.com
912246464653
www.iiflcap.com
Revenues(Rsm)
Ebitdamargins(%)
ReportedPAT(Rsm)
Growth(%)
IIFLvsconsensus(%)
PER(x)
ROE(%)
Netdebt/equity(x)
EV/Ebitda(x)
Price/book(x)
FY13A
20,550
20.9
1,757
1,757
14.9
68.0
FY14A
20,566
14.7
930
930
7.9
(47.1)
26.0
14.4
0.6
12.7
3.6
49.1
7.3
0.8
19.1
3.5
FY15ii
24,962
17.3
1,783
1,783
15.1
91.6
1.3
25.6
12.9
1.0
14.1
3.1
FY16ii
33,804
20.0
2,340
2,340
19.9
31.3
(11.7)
19.5
15.0
0.9
9.1
2.7
FY17ii
43,810
22.3
3,855
3,855
32.7
64.7
(3.7)
11.8
21.0
0.4
5.6
2.3
1
Blue Star
BUY
CMP
Rs306
Target12m
Rs405(32%)
Marketcap(US$m)
433
Improving outlook
Enterprisevalue(US$m) 501
Bloomberg
BLSTRIN Enquiries for addressable quality projects have improved
Sector
CapitalGoods driven by sectors such as IT/SEZ, hospitals and metro rail,
Dec162014
52WkHigh/Low(Rs)
388/134
Shareso/s(m)
90
Dailyvolume(US$m)
0
1.3
Freefloat(%)
60.5
Promoter
39.5
FII
6.1
DII
19.1
Others
35.3
Priceperformance(%)
1M 3M
1Y
BlueStar
(14.0) (12.0) 95.0
Absolute(US$) (16.0) (17.0) 93.0
Rel.toSensex (9.0) (13.0) 65.6
CAGR(%)
3yrs 5yrs
EPS
(21.5) (15.5)
Stockmovement
Shares(000')
Volume(LHS)
Price(RHS)
1,200
1,000
800
600
400
200
0
(Rs)
after a lull of almost four years. Profitability of the project

business should also trend up, driven by improvement in
execution and increasing revenue contribution from highermargin orders. In the room AC business, Blue Star aims to
grow faster than the industry and increase market share from
current 8% to 11% over the next three years. Pickup in
revenue growth and margin recovery should help drive 38%
EPS Cagr over FY15-17. BUY.
Improving enquiry levels bode well for project order inflows:
Even as the broad market for MEP projects remains stagnant, growth
in Blue Stars order inflow should be robust in FY15. The company
registered an improvement in project enquiries for jobs it wants to
target (healthy margins, low risk profile, and quality customers)
from segments such as IT/SEZ, hospitals, and metro rail. Absence of
such quality orders in the last four years hurt Blue Stars prospects.
Order finalisation, which is slow currently, should pick up through the
year and boost inflows.
New higher-margin orders to aid margin improvement: Blue
Star has been booking orders with site margins upward of 11-12%
(7-8% Ebit margin). However, slower-than-expected execution and
closure of legacy zero-margin orders affected 1Q margins. As
execution picks up on a reduced cost base, the share of highermargin projects increases, and revenue from the service and
equipment business inches up, margins in the projects segment
should trend up to sustainable levels of ~8%. However, closure of
legacy orders worth Rs1.25bn would affect FY15 margins.
400
300
200
100
Dec12
Feb13
Apr13
Jun13
Aug13
Oct13
Dec13
Feb14
Apr14
Jun14
Aug14
Oct14
Dec14
Faster-than-industry growth in room AC to continue:

Continuing the trend of the past few years, Blue Star should grow
faster than the industry on the back of expanding reach and strong
brand recall. The company is targeting 11% market share in three
years, up from 8% now, by leveraging on an improved product
portfolio. Segment margins should increase to 9-10% vs. 8.8% in
FY14 helped by increasing volumes and higher indigenisation levels.
Revenues(Rsm)
Ebitdamargins(%)
ReportedPAT(Rsm)
Growth(%)
IIFLvsconsensus(%)
PER(x)
ROE(%)
Netdebt/equity(x)
EV/Ebitda(x)
Price/book(x)
www.iiflcap.com
AnupamGupta
anupam.gupta@iiflcap.com
912246464641
FY13A
29,240
3.1
391
391
4.3
(137.2)
FY14A
29,149
3.6
775
775
8.6
98.5
70.3
9.8
1.0
34.9
6.9
35.4
17.6
0.9
30.2
5.7
FY15ii
31,738
5.2
1,064
1,064
11.8
37.2
(8.2)
25.8
20.8
0.7
18.8
5.1
FY16ii
36,815
7.0
1,525
1,525
17.0
43.3
1.2
18.0
25.5
0.5
12.0
4.2
FY17ii
43,474
8.2
2,029
2,029
22.6
33.1
9.5
13.5
27.6
0.3
8.4
3.4
1
Published in 2014, India Infoline Ltd 2014
This research report was prepared by India Infoline Limiteds Institutional Equities Research Desk (IIFL), a company authorized to
engage in securities activities in India. IIFL is not a registered broker-dealer in the United States and, therefore, is not subject to U.S.
rules regarding the preparation of research reports and the independence of research analysts. This research report is provided for
distribution to major U.S. institutional investors in reliance on the exemption from registration provided by Rule 15a-6 of the U.S.
Securities Exchange Act of 1934, as amended (the Exchange Act). Any U.S. recipient of this research report wishing to effect any
transaction to buy or sell securities or related financial instruments based on the information provided in this research report should do so
only through IIFL Capital Inc (IIFLCAP), a registered broker dealer in the United States.
IIFLCAP accepts responsibility for the contents of this research report, subject to the terms set out below, to the extent that it is delivered
to a U.S. person other than a major U.S. institutional investor. The analyst whose name appears in this research report is not registered
or qualified as a research analyst with the Financial Industry Regulatory Authority (FINRA) and may not be an associated person of
IIFLCAP and, therefore, may not be subject to applicable restrictions under FINRA Rules on communications with a subject company,
public appearances and trading securities held by a research analyst account.
IIFL has other business units with independent research teams separated by Chinese walls, and therefore may, at times, have different or
contrary views on stocks and markets. This report is for the personal information of the authorized recipient and is not for public
distribution. This should not be reproduced or redistributed to any other person or in any form. This report is for the general information
of the investors, and should not be construed as an offer or solicitation of an offer to buy/sell any securities.
We have exercised due diligence in checking the correctness and authenticity of the information contained herein, so far as it relates to
current and historical information, but do not guarantee its accuracy or completeness. The opinions expressed are our current opinions as
of the date appearing in the material and may be subject to change from time to time without notice. IIFL or any persons connected with
it do not accept any liability arising from the use of this document. The recipients of this material should rely on their own judgment and
take their own professional advice before acting on this information.
IIFL or any of its connected persons including its directors or subsidiaries or associates or employees shall not be in any way responsible
for any loss or damage that may arise to any person from any inadvertent error in the information contained, views and opinions
expressed in this publication.
IIFL and/or its affiliate companies may deal in the securities mentioned herein as a broker or for any other transaction as a Market Maker,
Investment Advisor, etc. to the issuer company or its connected persons. IIFL generally prohibits its analysts from having financial
interest in the securities of any of the companies that the analysts cover. In addition, the company prohibits its employees from
conducting Futures & Options transactions or holding any shares for a period of less than 30 days.
Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or
implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment of its
original date of publication by IIFL and are subject to change without notice. The price, value of and income from any of the securities or
financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to
exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments.
Analyst Certification: (a) that the views expressed in the research report accurately reflect such research analyst's personal views
about the subject securities and companies; and (b) that no part of his or her compensation was, is, or will be directly or indirectly related
to the specific recommendation or views contained in the research report.
Key to our recommendation structure
BUY - Absolute - Stock expected to give a positive return of over 20% over a 1-year horizon.
SELL - Absolute - Stock expected to fall by more than 10% over a 1-year horizon.
In addition, Add and Reduce recommendations are based on expected returns relative to a hurdle rate. Investment horizon for Add and
Reduce recommendations is up to a year. We assume the current hurdle rate at 10%, this being the average return on a debt instrument
available for investment.
Add - Stock expected to give a return of 0-10% over the hurdle rate, i.e. a positive return of 10%+.
Reduce - Stock expected to return less than the hurdle rate, i.e. return of less than 10%.
Distribution of Ratings: Out of 182 stocks rated in the IIFL coverage universe, 107 have BUY ratings, 5 have SELL ratings, 33 have
ADD ratings, 2 have NR and 35 have REDUCE ratings.
Price Target: Unless otherwise stated in the text of this report, target prices in this report are based on either a discounted cash flow
valuation or comparison of valuation ratios with companies seen by the analyst as comparable or a combination of the two methods. The
result of this fundamental valuation is adjusted to reflect the analysts views on the likely course of investor sentiment. Whichever
valuation method is used there is a significant risk that the target price will not be achieved within the expected timeframe. Risk factors
include unforeseen changes in competitive pressures or in the level of demand for the companys products. Such demand variations may
result from changes in technology, in the overall level of economic activity or, in some cases, in fashion. Valuations may also be affected
by changes in taxation, in exchange rates and, in certain industries, in regulations. Investment in overseas markets and instruments such
as ADRs can result in increased risk from factors such as exchange rates, exchange controls, taxation, and political and social conditions.
This discussion of valuation methods and risk factors is not comprehensive further information is available upon request.
ICICIBank:3yearpriceandratinghistory
(Rs)
2,000
Price
TP/Recochangeddate
1,500
1,000
500
Dec11
Jan12
Feb12
Mar12
Apr12
May12
Jun12
Jul12
Aug12
Sep12
Oct12
Nov12
Dec12
Jan13
Feb13
Mar13
Apr13
May13
Jun13
Jul13
Aug13
Sep13
Oct13
Nov13
Dec13
Jan14
Feb14
Mar14
Apr14
May14
Jun14
Jul14
Aug14
Sep14
Oct14
Nov14
Dec14
Date
Close
1-Feb-12
30-Apr-12
8-Jun-12
29-Oct-12
1-Feb-13
29-Apr-13
1-Aug-13
12-Aug-13
28-Oct-13
10-Dec-13
30-Jan-14
28-Apr-14
price
(Rs)
902
861
830
1,078
1,191
1,156
909
853
1,022
1,202
1,001
1,271
Target
Rating
price
(Rs)
1,050
BUY
1,020
BUY
1,000
BUY
1,170
BUY
1,280
BUY
1,290
BUY
1,280
BUY
620 REDUCE
650 REDUCE
1,330
ADD
1,340
ADD
1,500
ADD
Date
Close
Target
19-May-14
1-Aug-14
31-Oct-14
price
(Rs)
1,465
1,471
1,614
price
(Rs)
1,760
1,780
1,790
Rating
BUY
BUY
BUY
HCLTechnologies:3yearpriceandratinghistory
(Rs)
2,000
Price
TP/Recochangeddate
1,500
1,000
500
Dec11
Jan12
Feb12
Mar12
Apr12
May12
Jun12
Jul12
Aug12
Sep12
Oct12
Nov12
Dec12
Jan13
Feb13
Mar13
Apr13
May13
Jun13
Jul13
Aug13
Sep13
Oct13
Nov13
Dec13
Jan14
Feb14
Mar14
Apr14
May14
Jun14
Jul14
Aug14
Sep14
Oct14
Nov14
Dec14
MarutiSuzuki:3yearpriceandratinghistory
Price
TP/Recochangeddate
Dec11
Jan12
Feb12
Mar12
Apr12
May12
Jun12
Jul12
Aug12
Sep12
Oct12
Nov12
Dec12
Jan13
Feb13
Mar13
Apr13
May13
Jun13
Jul13
Aug13
Sep13
Oct13
Nov13
Dec13
Jan14
Feb14
Mar14
Apr14
May14
Jun14
Jul14
Aug14
Sep14
Oct14
Nov14
Dec14
(Rs)
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
UltraTechCement:3yearpriceandratinghistory
Price
TP/Recochangeddate
Dec11
Jan12
Feb12
Mar12
Apr12
May12
Jun12
Jul12
Aug12
Sep12
Oct12
Nov12
Dec12
Jan13
Feb13
Mar13
Apr13
May13
Jun13
Jul13
Aug13
Sep13
Oct13
Nov13
Dec13
Jan14
Feb14
Mar14
Apr14
May14
Jun14
Jul14
Aug14
Sep14
Oct14
Nov14
Dec14
(Rs)
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
ShriramTransportFinance:3yearpriceandratinghistory
Price
Close
Target
18-Jan-12
19-Apr-12
26-Jul-12
18-Oct-12
22-Nov-12
15-Jan-13
18-Jan-13
25-Mar-13
1-Aug-13
18-Oct-13
17-Jan-14
1-Aug-14
price
(Rs)
425
494
514
581
618
673
704
768
938
1,083
1,391
1,555
price
(Rs)
508
562
606
668
716
721
830
922
1,116
1,292
1,616
1,715
Date
Close
Target
18-Jan-12
24-Jan-12
1-Mar-12
30-Apr-12
13-Jun-12
30-Jul-12
31-Oct-12
18-Dec-12
29-Apr-13
26-Jul-13
29-Oct-13
18-Mar-14
price
(Rs)
1,108
1,161
1,255
1,383
1,145
1,113
1,391
1,500
1,673
1,414
1,513
1,738
price
(Rs)
1,120
1,300
1,500
1,520
1,400
1,320
1,500
1,820
1,920
1,800
1,850
2,040
Date
Close
Target
23-Jan-12
24-Apr-12
23-Jul-12
22-Oct-12
12-Dec-12
21-Jan-13
23-Apr-13
12-Sep-13
21-Jan-14
25-Apr-14
3-Jun-14
11-Sep-14
price
(Rs)
1,214
1,464
1,567
2,011
1,974
1,909
1,872
1,735
1,719
2,170
2,451
2,695
price
(Rs)
1,413
1,750
1,875
2,381
2,425
2,578
2,400
2,048
1,850
2,300
2,658
2,967
Date
Close
Target
13-Feb-12
25-Jul-12
12-Nov-12
24-Jul-13
30-Oct-13
30-Apr-14
28-Jul-14
price
(Rs)
574
563
617
673
573
745
885
price
(Rs)
760
750
860
840
740
870
1,200
Date
Close
Target
5-Dec-11
8-Aug-12
15-Nov-12
11-Feb-13
30-May-13
6-Aug-13
21-Nov-13
6-Feb-14
3-Jun-14
6-Aug-14
12-Nov-14
price
(Rs)
353
309
320
354
302
260
279
255
301
374
419
price
(Rs)
425
410
420
390
345
315
345
320
385
465
490
TP/Recochangeddate
Rating
BUY
BUY
BUY
BUY
BUY
BUY
BUY
BUY
BUY
BUY
BUY
BUY
Rating
ADD
ADD
BUY
BUY
BUY
BUY
BUY
BUY
BUY
BUY
BUY
BUY
Rating
BUY
BUY
BUY
BUY
BUY
BUY
BUY
BUY
BUY
BUY
BUY
BUY
Rating
BUY
BUY
BUY
BUY
BUY
BUY
BUY
Dec11
Jan12
Feb12
Mar12
Apr12
May12
Jun12
Jul12
Aug12
Sep12
Oct12
Nov12
Dec12
Jan13
Feb13
Mar13
Apr13
May13
Jun13
Jul13
Aug13
Sep13
Oct13
Nov13
Dec13
Jan14
Feb14
Mar14
Apr14
May14
Jun14
Jul14
Aug14
Sep14
Oct14
Nov14
Dec14
(Rs)
1,400
1,200
1,000
800
600
400
200
0
Date
TataChemicals:3yearpriceandratinghistory
Price
TP/Recochangeddate
Dec11
Jan12
Feb12
Mar12
Apr12
May12
Jun12
Jul12
Aug12
Sep12
Oct12
Nov12
Dec12
Jan13
Feb13
Mar13
Apr13
May13
Jun13
Jul13
Aug13
Sep13
Oct13
Nov13
Dec13
Jan14
Feb14
Mar14
Apr14
May14
Jun14
Jul14
Aug14
Sep14
Oct14
Nov14
Dec14
(Rs)
600
500
400
300
200
100
0
Rating
BUY
BUY
BUY
BUY
BUY
BUY
BUY
BUY
BUY
BUY
BUY
Date
Close
Target
24-Nov-14
price
(Rs)
1,643
price
(Rs)
1,845
Date
Close
Target
28-Apr-14
16-Jun-14
1-Aug-14
price
(Rs)
1,956
2,405
2,524
price
(Rs)
2,130
2,800
2,925
Rating
BUY
Rating
BUY
BUY
BUY
MindtreeConsulting:3yearpriceandratinghistory
(Rs)
2,000
Price
TP/Recochangeddate
1,500
1,000
500
Date
Close
Target
19-Jan-12
17-Apr-12
17-Jul-12
6-Sep-13
17-Oct-13
10-Jun-14
20-Nov-14
price
(Rs)
455
489
641
1,037
1,379
791
1,172
price
(Rs)
554
648
751
1,340
1,591
929
1,310
Date
Close
Target
27-May-13
14-Aug-13
18-Nov-13
5-Feb-14
30-May-14
14-Aug-14
price
(Rs)
1,367
1,689
1,604
474
623
813
price
(Rs)
1,800
2,070
2,150
570
800
980
Date
Close
Target
4-Jul-12
10-Oct-12
8-Feb-13
3-Jun-14
19-Aug-14
price
(Rs)
75
109
134
191
277
price
(Rs)
120
158
190
240
419
Date
Close
Target
26-Mar-14
6-Jun-14
8-Aug-14
30-Oct-14
price
(Rs)
188
287
304
339
price
(Rs)
247
338
336
375
Rating
BUY
BUY
BUY
BUY
BUY
BUY
BUY
Dec11
Jan12
Feb12
Mar12
Apr12
May12
Jun12
Jul12
Aug12
Sep12
Oct12
Nov12
Dec12
Jan13
Feb13
Mar13
Apr13
May13
Jun13
Jul13
Aug13
Sep13
Oct13
Nov13
Dec13
Jan14
Feb14
Mar14
Apr14
May14
Jun14
Jul14
Aug14
Sep14
Oct14
Nov14
Dec14
KaveriSeedCompanyLimited:3yearpriceandratinghistory
Price
TP/Recochangeddate
BUY
BUY
BUY
BUY
BUY
BUY
Dec11
Jan12
Feb12
Mar12
Apr12
May12
Jun12
Jul12
Aug12
Sep12
Oct12
Nov12
Dec12
Jan13
Feb13
Mar13
Apr13
May13
Jun13
Jul13
Aug13
Sep13
Oct13
Nov13
Dec13
Jan14
Feb14
Mar14
Apr14
May14
Jun14
Jul14
Aug14
Sep14
Oct14
Nov14
Dec14
(Rs)
2,500
2,000
1,500
1,000
500
0
Rating
JKLakshmiCement:3yearpriceandratinghistory
Price
TP/Recochangeddate
BUY
BUY
BUY
BUY
BUY
Dec11
Jan12
Feb12
Mar12
Apr12
May12
Jun12
Jul12
Aug12
Sep12
Oct12
Nov12
Dec12
Jan13
Feb13
Mar13
Apr13
May13
Jun13
Jul13
Aug13
Sep13
Oct13
Nov13
Dec13
Jan14
Feb14
Mar14
Apr14
May14
Jun14
Jul14
Aug14
Sep14
Oct14
Nov14
Dec14
(Rs)
500
400
300
200
100
0
Rating
BlueStar:3yearpriceandratinghistory
Price
TP/Recochangeddate
Dec11
Jan12
Feb12
Mar12
Apr12
May12
Jun12
Jul12
Aug12
Sep12
Oct12
Nov12
Dec12
Jan13
Feb13
Mar13
Apr13
May13
Jun13
Jul13
Aug13
Sep13
Oct13
Nov13
Dec13
Jan14
Feb14
Mar14
Apr14
May14
Jun14
Jul14
Aug14
Sep14
Oct14
Nov14
Dec14
(Rs)
400
350
300
250
200
150
100
50
0
Rating
BUY
BUY
BUY
BUY

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IIFL - India - Strategy 2015 - Earnings Bouncing Back - 20141217 - 15!18!23

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Institutional Equities

Earnings are depressed; recovery can be sharp: For BSE500

Key Macro Trends

Key Industry Trends

Corporate profits are depressed; recovery can be

An analysis of BSE500 non-financial companies shows that aggregate

Sales growth has slowed

Ebitda growth was slow in

PAT growth also slowed

Figure4: Ebitda marginareat15yearlow

PAT margins are also at a

Net debt/equity is at a 15-year high. It troughed at 0.3x in FY05 and

Interest expense/Ebitda at an average of 14.5% for the universe, is

ROE for the 273 companies

Financials under great stress, asset quality and

NPAs and restructured

Figure14: ShareofPrivateBanksand FinancialsintotalNetProfit

We expect total stressed

Figure17: LLP chargesas%ofaverageloans

PAT forecast and earnings upgrade potential for

Pick-up in new order

Falling commodity prices A major boost for India

Prices of major commodities have softened 5-40% YTD and are

Indias net oil import bill is

Indias CAD of US$32bn or

Indias CAD expected to moderate sharply in FY15

The decline in prices of oil and industrial commodities would benefit

Domestics to emerge as major buyers of equities,

In the past six years (FY10-FY15E), Indian households invested an

Indias estimated nominal

Shareofhouseholdsavings flowing intoequity

7.3 6.1 8.7

New paper supply still muted; can rise significantly to absorb

New paper supply as

Figure31: Realinterestrates(10yearGSecyield CPI)

Dec04 Dec06 Dec08 Nov10 Nov12

Valuations are reasonable vis--vis historical and

After rising 28% in CY2014 until 16-Dec-14, the Nifty trades at

These valuations are based on assumption of EPS growth of 20% for

Current bull-run has long way to go

In the past three bull runs,

Nifty not expensive versus global indices - S&P500

Nifty not expensive versus S&P500: In the past 13 years, Niftys

In terms of PBx, Niftys average trailing PBx premium over S&P500

Nifty versus Euro STOXX600: In the past 13 years, Niftys trailing

In terms of PBx, in the past 13 years, Niftys average trailing PBx

Nifty EPS Cagr superior to S&P500 and Euro STOXX600: Niftys

India A liquid and diversified market

India currently has 206 stocks

Similarly, it is a much-diversified market in terms of the spread of

Sector and stock picks

Annexure I - Governments reform agenda

made 45-odd changes and has proposed 14 more changes. These

ICICIBCIN ICICI Bank (ICICIB) is well poised to benefit from recovery in

loans. This would lower risk of infrastructure loans. Strong

Well poised to benefit from recovery in operating

changed over the past year. The non-infrastructure

economic recovery, and deceleration in car ownership costs.

cement producers with an improvement in industry demand

Operating leverage to drive earnings

SHTFIN Operating environment for Shriram Transport Finance (SHTF)

Shriram Transp Fin

is at the cusp of a change. Improvement in the finances of