Ambit - Sensex Exits

STRATEGY
May 2015
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Sensex exits: The decadal story
Analysts:
Saurabh Mukherjea, CFA
saurabhmukherjea@ambitcapital.com
Tel: +91 22 3043 3174
Gaurav Mehta, CFA
gauravmehta@ambitcapital.com
Tel: +91 22 3043 3255
Karan Khanna
karankhanna@ambitcapital.com
Nitin Bhasin
nitinbhasin@ambitcapital.com
Ashvin Shetty, CFA

ashvinshetty@ambitcapital.com
Pankaj Agarwal, CFA

pankajagarwal@ambitcapital.com
Parita Ashar
paritaashar@ambitcapital.com
Tanuj Mukhija, CFA

tanujmukhija@ambitcapital.com
Bhargav Buddhadev
bhargavbuddhadev@ambitcapital.com
Sagar Rastogi
sagarrastogi@ambitcapital.com
Consultant: Anupam Gupta

anupam.gupta@aavanresearch.com
Strategy
CONTENTS
Sensex exits: The decadal story 3
Section 1: Modi hits the reset button 4
Section 2: How to play the upcoming change in the Sensex ..17
COMPANIES
Reliance Industries (NOT RATED)27
ONGC (NOT RATED). 31
State Bank of India (SELL). 35
HDFC (SELL) 39
Bharti Airtel (NOT RATED) 43
L&T (SELL). 47
NTPC (SELL). 51
Mahindra & Mahindra (NOT RATED). 55
Vedanta Ltd (NOT RATED) 59
BHEL (SELL).. 65
Bajaj Auto (SELL).69
Hero MotoCorp (SELL).. 73
Tata Steel (SELL). 77
Hindalco (SELL)... 81
Tata Power (BUY)85
May 05, 2015
Ambit Capital Pvt. Ltd.
Page 2
Strategy
THEMATIC
Sensex exits: The decadal story
May 05, 2015

Sensex exit candidates (FY16-25)
Name
Modis resets are poised to transform the Indian economy over the next
decade. Structural changes in savings patterns, disruption of the crony
capitalism model and redefinition of Indias subsidy scheme are likely to
drive down inflation and reduce the cost of factors of production whilst
causing a short-term dip in GDP growth. The biggest investment
implication of this is a sharp rise in Sensex churn. In this report we
provide a framework to identity the 15 Sensex incumbents that are likely
to exit the Sensex over the next decade, as the old order gives way to the
new. We highlight that in the wake of irreversible external change,
Sensex exit candidates underperform the index by 20% per annum until
their exit from the index.
As Modi disrupts the way the Indian economy functions
We believe that Indias Prime Minister, Narendra Modi, is driving three structural
resets that will meaningfully change the Indian economy over the long term: (1)
shift Indias savings landscape away from gold & land and towards the formal
financial system; (2) disrupt the Indian model of crony capitalism model; and (3)
redefine Indias subsidy mechanism (click here for our 23rd March thematic on this
subject). We highlight the Governments high profile campaign against black
money and crony capitalism as a measure of its intent. Thus, the old contract
between business and politics seems set for a major overhaul over the next
decade.
the economy is set for a structural change
Ticker
Mcap 6M ADV
(US$ mn) (US$ mn)
Reliance Inds. RIL IN
43,895
54.0
ONGC
40,910
26.1
St Bk of India SBIN IN
32,104
88.7
HDFC
HDFC IN
28,980
56.2
Bharti Airtel
BHARTI IN
23,962
31.7
L&T
LT IN
23,864
52.8
NTPC
NTPC IN
19,493
14.5
M&M
MM IN
11,186
22.7
Vedanta*
SSLT IN
9,786
16.8
BHE L
BHEL IN
9,165
18.3
Bajaj Auto
BJAUT IN
8,826
16.2
Hero Motocorp HMCL IN
7,315
35.3
Tata Steel
5,505
32.9
Hindalco Inds. HNDL IN
4,177
19.3
Tata Power
3,225
5.2
ONGC IN
TATA IN
TPWR IN
Source: Bloomberg, Ambit Capital research.

Note: *This is Sesa Sterlite.
These structural changes will disrupt the way business is conducted in India in
much the same way that the liberalisation measures of 1991 ended the License
Raj. In particular, we expect the resets to have three significant impacts: (a)
Inflation should fall structurally; (b) GDP growth will be adversely impacted in the
short term; and (c) the cost of factors of production should decline thus making it
easier for entrants to go head-to-head with entrenched incumbents.
Sensex churn is set to rise
Our analysis of Sensex churn across 10-year windows reveals that churn peaked
at 67% (or 20 replacements in a 30-stock index) in the years following the 1991
reforms (1993-1995). From those levels, Sensex churn has fallen to a low of 27%
(8 replacements) in the latest 10-year iteration (from 2004 to 2014). We expect a
reversion to 50% churn, implying that 15 companies will exit the Sensex in the
next decade.
THIS NOTE CANNOT BE USED BY THE MEDIA

IN ANY SHAPE OR FORM WITHOUT PRIOR
CONSENT FROM AMBIT CAPITAL.
Analyst Details
Identifying the exit candidates
Using Ambits proprietary methods such as The Coffee Can Portfolio, The
Greatness Framework and the Ambit P-75, we identify a list of 15 stocks that we
believe are the most likely Sensex exit candidates over the next decade. These
companies are Tata Power, NTPC, Hindalco, Tata Steel, Hero MotoCorp, SBI,
Sesa Sterlite, Bharti Airtel, Reliance Ind, M&M, ONGC, L&T, BHEL, HDFC and
Bajaj Auto.
+91 22 3043 3174

For those who believe that giant market-leading firms are highly unlikely to be
kicked out of the Sensex, we highlight that all of the following firms were in the
Sensex in 1992 Century Textiles, GSFC, Bombay Dyeing, GE Shipping and
Ballarpur Industries. The disruption created by the end of the License Raj was
such that all of these firms were out of the Sensex by 2002. Similarly, in 2005, all
of the following giants were in the Sensex Ranbaxy Labs, HPCL, Satyam
Computers, Grasim Industries and Reliance Infra. No prizes for guessing what
happened to these companies by 2015.
Karan Khanna
Gaurav Mehta, CFA

+91 22 3043 3255
+91 22 3043 3251

Consultant
Anupam Gupta
anupam.gupta@aavanresearch.com
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Strategy
Section 1: Modi hits the reset button

Whatever we choose to do, from reaching the cutting edge of industry to
meeting the most-critical social need, we require investment and technology,
industry and enterprise. That is why for me, Make in India is not a brand. Nor
is it simply a slogan on a smart lion!
It is a new national movement. And, it covers the whole spectrum of our
government, society and business. To this informed audience, I hardly need to
state the obvious: Our scale of transformation is vast; therefore, the
opportunities we offer are huge.
-
Prime Minister Narendra Modis remarks at the Inaugural Session of Hannover

Messe on 12 April 2015. Source: http://pmindia.gov.in/en/news_updates/pmsremarks-at-the-inaugural-session-of-hannover-messe/)
Indias Prime Minister, Narendra Modi, continues with his agenda of transforming the
way business is done in India. During his recent trip to Europe, PM Modi pushed the
Make In India initiative by reaching out to France and Germany, Europes top-2
economies. In our March 2015 thematic strategy report, Modi hits the reset button,
we posited that Mr. Modi, is likely to engineer three critical resets over the next four
years.
The Modi resets are set to

transform Indias economy
The three critical resets over the next four years

Reset 1: Shifting Indias savings landscape away from gold and land towards
the formal financial system
India has a higher savings rate than its peers (see the exhibit below). For instance,
data from the World Bank suggests that a typical emerging market has a savings rate
of 24% when its per capita income is US$1,600. India, on the other hand, had a
savings rate of 30% when its per capita income was at US$1,500 in CY13.
Gross domestic savings

(as a % of GDP)
Exhibit 1: India has a higher savings rate than its peers
Exhibit 2: however, 68% of these savings are held in

physical form
30
Russia
India
25
Bangladesh
Sri Lanka
20
Financial
savings
32%
Mexico
South Africa
Philippines
Brazil
Turkey
15
Physical
savings
68%
10
0
5000
10000
15000
20000
Per capita income (in current USD)

Source: World Bank, Ambit Capital research. Note: Data pertains to CY13
Source: CEIC, Ambit Capital research. Note: Data pertains to FY13
Despite this, India is characterised by a high cost of debt capital and poor accessibility
to capital, as more than two-thirds of Indias household savings are held in physical
form, which includes real estate and gold.
Physical savings instruments are preferred to financial savings instruments in India
because of the following two reasons:
India is characterised by a high

cost of debt capital and poor
accessibility to capital, as more
than
two-thirds
of
Indias
household savings are held in
physical form
(1) Whilst the purchase of physical assets can be funded using black money, the
purchase of financial assets cannot be funded using black money, and
(2) Physical assets are perceived to be a superior inflation hedge as against financial
assets.
May 05, 2015
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Strategy
The reset that Modi is likely to engineer
The FY16 Union Budget, which was unveiled on 28 February 2015, explicitly aimed to
disincentivise the black economy and curb the demand for gold through a range of
measures (see the exhibit below for details).
The FY16 Budget explicitly aims to

disincentivise the black economy
and curb demand for gold
Since then, the Government has shown determination with a highly visible crackdown
on black money. Our recent discussions with the promoters of small-midcap
businesses in northern and eastern India reveal that black money is already exiting
real estate at a rapid rate, as tax officials have become much more aggressive over
the past year with regards to real estate transactions. As a result, demand conditions,
according to several promoters who are active in the cement, paint, electricals and
building materials sectors, are currently the worst since the quarter in which Lehman
Brothers went bust.
A highly visible crackdown against

black money has begun
Exhibit 3: The FY16 Union Budget explicitly aimed to disincentivise the black economy and curb the demand for gold
Aim of measure
Quotes from the Budget Speech made by the Finance Minister
Disincentivising the Tracking down and bringing back the wealth which legitimately belongs to the country is our abiding commitment to the country.
black economy
Recognising the limitations under the existing legislation, we have taken a considered decision to enact a comprehensive new
law on black money to specifically deal with such money stashed away abroad. To this end, I propose to introduce a Bill in
the current Session of the Parliament.
With your permission, Madam Speaker, I would like to highlight some of the key features of the proposed new law on black money.
(1) Concealment of income and assets and evasion of tax in relation to foreign assets will be prosecutable with punishment of
rigorous imprisonment upto 10 years. Further, this offence will be made non-compoundable;
the offenders will not be
permitted to approach the Settlement Commission; and penalty for such concealment of income and assets at the rate of 300% of
tax shall be levied.
(2)Non filing of return or filing of return with inadequate disclosure of foreign assets will be liable for prosecution with punishment of
rigorous imprisonment up to 7 years.
(3)Income in relation to any undisclosed foreign asset or undisclosed income from any foreign asset will be taxable at the maximum
marginal rate. Exemptions or deductions which may otherwise be applicable in such cases shall not be allowed.
(4)Beneficial owner or beneficiary of foreign assets will be mandatorily required to file return, even if there is no taxable income.
(5)Abettors of the above offences, whether individuals, entities, banks or financial institutions will be liable for prosecution and
penalty.
(6)Date of Opening of foreign account would be mandatorily required to be specified by the assessee in the return of income.
(7)The offence of concealment of income or evasion of tax in relation to a foreign asset will be made a predicate offence under the
Prevention of Money-laundering Act, 2002 (PMLA). This provision would enable the enforcement agencies to attach and confiscate
unaccounted assets held abroad and launch prosecution against persons indulging in laundering of black money.
(8)The definition of proceeds of crime under PMLA is being amended to enable attachment and confiscation of equivalent asset in
India where the asset located abroad cannot be forfeited.
(9)The Foreign Exchange Management Act, 1999 (FEMA) is also being amended to the effect that if any foreign exchange, foreign
security or any immovable property situated outside India is held in contravention of the provisions of this Act, then action may be
taken for seizure and eventual confiscation of assets of equivalent value situated in India. These contraventions are also being made
liable for levy of penalty and prosecution with punishment of imprisonment up to five years.
As regards curbing domestic black money, a new and more comprehensive Benami Transactions (Prohibition) Bill will be
introduced in the current session of the Parliament. This law will enable confiscation of benami property and provide for
prosecution, thus blocking a major avenue for generation and holding of black money in the form of benami property, especially in
real estate.*
A few other measures are also proposed in the Budget for curbing black money within the country. The Finance Bill includes a
proposal to amend the Income-tax Act to prohibit acceptance or payment of an advance of Rs.20,000 or more in cash for
purchase of immovable property. Quoting of PAN is being made mandatory for any purchase or sale exceeding the
value of Rs1 lakh. The third party reporting entities would be required to furnish information about foreign currency sales and
cross border transactions. Provision is also being made to tackle splitting of reportable transactions. To improve enforcement, CBDT
and CBEC will leverage technology and have access to information in each others database.
Curbing demand
for gold
India is one of the largest consumers of gold in the world and imports as much as 800-1000 tonnes of gold each year. Though
stocks of gold in India are estimated to be over 20,000 tonnes, mostly this gold is neither traded, nor monetized. I propose to:
(i) Introduce a Gold Monetisation Scheme, which will replace both the present Gold Deposit and Gold metal Loan Schemes. The
new scheme will allow the depositors of gold to earn interest in their metal accounts and the jewellers to obtain loans in their metal
account. Banks/other dealers would also be able to monetize this gold.
(ii) Also develop an alternate financial asset, a Sovereign Gold Bond, as an alternative to purchasing metal gold. The Bonds will
carry a fixed rate of interest, and also be redeemable in cash in terms of the face value of the gold, at the time of redemption by the
holder of the Bond.
(iii) Commence work on developing an Indian Gold Coin, which will carry the Ashok Chakra on its face. Such an Indian Gold
Coin would help reduce the demand for coins minted outside India and also help to recycle the gold available in the country.
One way to curb the flow of black money is to discourage transactions in cash. Now that a majority of Indians has or can have, a
RUPAY debit card. I, therefore, propose to introduce soon several measures that will incentivize credit or debit card
transactions, and disincentivise cash transactions.
Source: Budget Speech for the FY16 Union Budget, Ambit Capital research. *Note: This bill has been ratified by the Cabinet and has been tabled in the Parliament.
May 05, 2015
Page 5
Strategy
Measures pertaining specifically to black money stashed away abroad (as stated by
the Finance Minister and highlighted in the first row of Exhibit 3 above) have been
incorporated in the Undisclosed Foreign Income and Assets (Imposition of Tax) Bill,
2015 which was introduced in the Lok Sabha on 20th March 2015. We expect this Bill
to be passed by the Parliament in the ongoing budget session i.e. before 8 May
2015.
The Government is intent on

promulgating a new law to curb
black money
In addition, we highlight the Governments recent proposals to enhance disclosures

on Income Tax Returns. On 18 April, the press reported (Source:
http://timesofindia.indiatimes.com/business/india-business/New-tax-form-to-seekdetails-of-foreign-travel-bank-A/Cs/articleshow/46964327.cms) that the Government
has prepared new Income Tax Return forms for the forthcoming filing season in JulyAugust 2015. Assesses filing their tax returns will have to make disclosures on:
Enhanced disclosures on IT return

forms are part of these measures
Information about all the foreign trips made during the year and money spent on
these trips;
Details of all bank accounts (in India and abroad) and balances kept in these
accounts; and
Details of immovable property, financial interest in companies and details of

trusts created outside the country.
Whilst the Finance Minister (FM) has subsequently said that he will revisit the format
of these forms, our sources suggest that even the reworked forms will ask for much
more detail than Indians have ever had to provide in their tax returns. We also
highlight that the Finance Minister said on 18th April that the Black Money Law will be
the Governments top priority when Parliament reconvenes next week.
Besides explicitly targeting the black economy, PM Modi also aims to expand the
white economy. He plans to exponentially increase the number of households with
access to banking services through the ambitious Prime Ministers Jan Dhan Yojana
(PMJDY) which was launched in August 2014 (see the exhibits below). Our meetings
with the Finance Ministry over the past nine months suggest that PMJDY has been
executed in mission mode with enormous pressure being exerted by the Prime
Ministers Office on the banks to play ball. As a result, 140 million bank accounts
have already been opened under the auspices of this scheme and in over 90% of
districts all Indian families now have at least one bank account.
PM Jan Dhan Yojana will help in

expanding the white
economy140 mn bank accounts
opened in nine months
Exhibit 4: PMJDY is the most-ambitious financial inclusion programme in Indias history

Targets of the scheme
Description
Bank accounts
Two bank accounts for each of the
estimated 75 million poor bank
households are to be opened by
August 14, 2015.
This implies opening 150 million bank accounts in less than 12 months. As on 28 February 2015, 136.8mn
accounts have been opened under PMJDY, out of which 81.7mn are in rural areas and 55mn are in urban areas.
Rupay Cards have been issued for 121.9mn accounts.
Payment services and credit

Each bank account is to be provided
with an overdraft facility of Rs5,000
and a Rupay debit card.
The Mor Committee Report envisages Ubiquitous Access to Payment Services by January 2016. As per the
additional comments made by Shikha Sharma and SS Mundra, While January 2016 can be an aspirational goal,
given the scale of the task, a target date of January 2018 may be more realistic and implementable.
The overdraft facility will only be extended to Aadhar-enabled accounts after satisfactory operation of the account
for six months. Assuming that this linkage is achieved, the banking system will have to extend credit of Rs750bn
(i.e. 75mn households x 2 bank accounts per household x Rs5,000).
Insurance cover
Each bank account will be provided
with accident insurance cover of
Rs100,000 and life insurance cover
of Rs30,000.
For life insurance cover, the Government has decided to set aside a sum of Rs500mn from the Social Security
Fund (SSF) which was set up by the Government of India in 1988-89 and is managed by the Life Corporation of
India (LIC).
The National Payments Corporation of India (NPCI), promoted by public sector banks, will provide premium on
the Rs0.1mn accident insurance cover on behalf of the customers.
Bank-based transfer of subsidies

Each bank account will be linked to
the Aadhaar card.
The linking of the Rupay debit card and the Aadhar card is critical, as this will allow the Government to transfer
subsidies through banks and thereby allow banks to earn a fee income.
Prime Minister Narendra Modi has directed the Unique Identification Authority of India (UIDAI) to ensure
universal coverage under Aadhaar by June 2015.
From 1 January 2015, the entire LPG subsidy has been transferred on the DBT platform. More subsidies and
transfers will follow soon.
Source: PMJDY, Ambit Capital research
May 05, 2015
Page 6
Strategy
Reset 2: Disrupting crony capitalism in India
PM Narendra Modi, in his first ever interview to Indian media after
becoming PM, said laws can't be different for Reliance Industries' chairman
Mukesh Ambani and for common man.
Our job is to run a policy-driven government. Red tape nahin hona chahiye.
Ab red tape nahin hona chahiye matlab Mukesh Ambani ke liye red tape na
ho aur ek common man ke liye red tape ho, waisa nahin chal sakta' (red tape
should not be there does not mean it shouldn't be there for Mukesh Ambani,
but be there for a common man; that won't do).
- Prime Minister Narendra Modi in an interview given to The Hindustan Times on 8
April (source: www.indiatoday.in)
The second reset is aimed at changing the long-standing contract between politics
and business. Until the 1990s, the pre-dominant model of corruption in India was the
cream-skimming kind of corruption whereby private companies were required to pay
an extra 5-10% of their project outlay to the local powers that be. During the ten
years of UPA rule, however, Indias core model of corruption shifted to a different
level whereby various political-business cliques captures large sectors of the economy
and then suppressed competition in the sector in a bid to maximise their gains (see
the exhibit below for details).
Indias core model of corruption

shifted to a different level under
UPA rule whereby various politicalbusiness cliques captures large
sectors of the economy and then
suppressed competition in the
sector in a bid to maximise their
gains
Exhibit 5: How high degrees of corruption led to high levels of inflation in India over
the last decade
Source: Ambit Capital research

Our discussion with policy experts suggests that Modi is cognizant of the fact that
corruption and the consequent high inflation can affect his electoral ambitions.
Hence, Modi, whose most defining character trait is his searing political ambition, is
keen to disrupt the crony capitalist model in sectors ranging from food and real estate
to improve the standard of living for the electorate (refer to the exhibits below for
details of the steps already taken by the Government to check corruption in the
Government machinery).
May 05, 2015
Modi is keen to breakdown the

crony capitalist model in sectors
ranging from food and real estate
to improve the standard of living
for the electorate
Page 7
Strategy
Exhibit 6: Steps taken by the Government to check corruption in the Government machinery
Measure
Details
The Government has created an online system for environmental and industrial clearances. A similar system has been created for
labour inspections at factories.
The direct transfer of benefits, started mostly in scholarship schemes, is set to be further expanded with a view to increasing the
number of beneficiaries from the present 10mn (i.e. 0.8% of Indias population) to 103mn (i.e. 9% of Indias population).
Direct Benefits
Similarly, Rs63bn (i.e. 0.1% of GDP) has so far been transferred directly as LPG subsidy to 115mn LPG consumers. The
Transfer (DBT)
Government plans to ramp-up this platform so as to disburse kerosene (i.e. 0.1% of GDP) as well as food subsidies (i.e. 1% of
GDP) through this platform by end-CY15.
Within two months of assuming power, the Government constituted a commission under Parliamentarian Shanta Kumar to
Reforming the Food
suggest ways to restructure the FCI. The Government is likely to implement the recommendations of the committee which will
Corporation of India
dramatically bring down the operational cost to maintain the FCI and reduce corruption within it. The panel has recommended
(FCI)
measures such as limiting the operations of the FCI to only grain-deficient states, bringing down the coverage of the National
Food Security from 67% of the population currently to 40% and introducing cash transfers for food subsidy.
Source: Various media reports, Ambit Capital research
Creation of egovernance platforms
Exhibit 7: The Government has cracked down on certain officials and politicians
Month
April 2015
April 2015
March 2015
March 2015
March 2015
February 2015
Development
In a charge-sheet, the CBI accused former Congress MP and longstanding promoter of by Jindal Steel and Power (JSPL),
Naveen Jindal, the former Chief Minister of Jharkhand, Madhu Koda, the former Minister of State for Coal, Dasari Narayana
Rao, and the former Coal Secretary, HC Gupta, of conspiring to help JSPL acquire a coal field in Jharkhand in 2008.
For theft of sensitive documents from the Ministry of Petroleum, the Delhi Police crime branch has filed a charge-sheet
against 13 people including five executives from prominent corporates (several of whom are a part of Ambits P-75 list of
connected companies), six clerical-level Government officials and two middlemen.
The Government cancelled three of the eight coal blocks, two of which were won by JSPL, citing stark differences between
bids in the same category. JSPL has taken the Government to Court and the case is currently being heard in Court.
Oil minister Dharmendra Pradhan said in a press statement that the Government is examining the latest CAG report on
irregularities in ONGCs rig hiring from RIL and will take appropriate action.
The CBI arrested a Mumbai-based chartered accountant and two Government officials for allegedly leaking and selling
confidential documents related to foreign investments from the finance, commerce and industry ministries.
The CBI arrested top officers of a consultancy firm involved in corporate espionage related to the Oil Ministry.
The CBI is likely to examine the role of the former Environment Minister Jayanthi Natarajan for her involvement in the
alleged diversion of forest land for mining purposes in Jharkhand.
The Settlement Commission alleged understatement of professional income of Abhishek Manu Singhvi, the former Congress
November 2014
spokesperson, of Rs919mn over a three-year period and imposed a penalty of Rs566mn. The order has since been stayed.
The Comptroller and Auditor General (CAG) stated that Robert Vadra (son-in-law of Congresss party President Sonia
November 2014
Gandhi) had earned Rs440mn in windfall gains because an indulgent Congress Government allowed him to do so in breach
of law and did not recover Rs415mn of the profit he made by selling the land to DLF Universal.
Source: Various media reports, Ambit Capital research.
November 2014
Similar to the move against black money, the Governments efforts against crony
capitalism are also very visible. We highlight three such examples that have been in
the press recently:
Three case studies that show the

Governments efforts against crony
capitalism are serious
Example 1: On gas pricing

In April 2015, the Government hardened its stance on the long-standing and
contentious gas pricing issue against Reliance Industries (RIL). In an affidavit
submitted to the Supreme Court, the Ministry of Petroleum and Natural Gas asked
the Court to reject RILs petition to appoint a third arbitrator of independent
nationality to decide on the pricing of natural gas. This is, reportedly, the first time
that the Government has taken the stand that this dispute cannot be solved by
arbitration. The Government also accused RIL of demanding implementation of the
pricing of January 2014, under the threat of arbitration proceedings, which was
"mala fide". We see this accusation as a strong stance taken by the Government,
which is in-line with its earlier actions (see Exhibit 7 above) aimed at attacking crony
capitalism.
(Read
the
full
news
report
here:
http://economictimes.indiatimes.com/articleshow/46914336.cms)
The Government has taken a

strong stand in the gas pricing
issue against RIL
Example 2: On coal block allocation

In March 2015, the Government cancelled three of the eight coal blocks auctioned,
two of which were won by Jindal Steel and Power (JSPL), citing stark differences
between the bids in the same category. Recently, in April 2015, the Delhi High Court
decided to hear the Governments plea against industrialist Naveen Jindal and one of
his former employees who was caught recording court proceedings during a coal
May 05, 2015
The Government has pushed back

against mispricing of bids in
auctions
Page 8
Strategy
block allocation matter relating to his company. (Read the full news report here:
http://economictimes.indiatimes.com/articleshow/46911991.cms)
Further, on 29th April, the CBI filed a charge-sheet against Mr. Naveen Jindal,
charging him with corruption and misrepresenting facts to secure a coal mine in
Jharkhand during the UPA era. The charge-sheet named Mr. Jindal along with nine
others, including Dasari Narayan Rao who was the junior Coal Minister during the
UPA regime, Madhu Koda who was former Jharkhand Chief Minister and former Coal
Secretary
HC
Gupta.
(Link:
http://economictimes.indiatimes.com/articleshow/47097991.cms).
Example 3: On stealing government secrets
On 17 February 2015, the Delhi Police Crime Branch arrested five people for stealing
key policy documents from the Ministry of Petroleum and Oil & Gass office at Shastri
Bhavan,
New
Delhi.
Since
then,
press
reports
(Source:
http://timesofindia.indiatimes.com/india/5-corporate-executives-among-13-chargedin-leakgate/articleshow/46973548.cms) suggest that:
The Delhi Police crime branch has filed a charge-sheet against 13 people
including five executives from prominent corporates (several of whom are a part
of Ambits P-75 list of connected companies);
These charges pertain to leaking of documents from the Petroleum Ministry and
there is a second charge-sheet on the way which pertains to the documents
leaked from the coal and power ministries; and
As we have argued in an op-ed piece for the Business Standard (Source:

http://www.business-standard.com/article/opinion/saurabh-mukherjea-modi-hitsthe-reset-button-115041501296_1.html), the Prime Minister seems determined to
disrupt the Indian model of crony capitalism by visibly tightening law enforcement in
the seedy borderland, where commerce and politics intersect in India.
The Prime Minister is determined to

disrupt the Indian model of crony
capitalism
Reset 3: Re-defining Indias subsidy mechanisms

According to data collected by the World Bank, Government spending on subsidies
and transfers in India as a share of total expenditure is amongst the highest in EMs
(see the exhibit below).
59%
Russia
51%
59%
South Korea
50%
Brazil
60%
Turkey
80%
62%
45%
40%
26%
India
Malaysia
20%
Thailand
Expenditure on subsidies and

transfers
(as % of total Govt. exp.)
Exhibit 8: The Indian Governments spending on subsidies and transfers is amongst

the highest in EMs
Source: World Bank, Ambit Capital research. Note: Data pertains to CY13
For instance, Indias subsidy bill expanded at a CAGR 19% p.a. between FY04 and
FY14 (see the exhibit below).
May 05, 2015
Indias subsidy bill expanded at a

CAGR 19% p.a. between FY04 and
FY14
Page 9
Strategy
100%
83%
80%
60%
40%
20%
24%
23%
20%
26%
18%
9%
5%
0%
-1%
FY15 (RE)
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY16 (BE)
-9%
-20%
FY07
Expenditure on subsidies
(YoY change, in %)
Exhibit 9: Subsidies under the UPA regime (FY04-14) expanded at a CAGR of 19% p.a.
and are now being shrunk by the NDA Government
Source: CEIC, Ambit Capital research

Modi seems likely to change the face of the subsidy regime that propped up Indias
rural economy under the former United Progressive Alliance (UPA) Government.
Given the fiscal imperatives that India faces, the Modi-led Government is set to
compress the quantum of subsidies that the Central Government pays for, as is
already evident from the last two budgets that this Government has prepared.
The Modi-led Government is set to

compress
the
quantum
of
subsidies
that
the
Central
Government pays for, as is
already evident from the last two
budgets that this Government has
prepared
Furthermore, the Modi-led Government remains committed to better targeting of

subsides in India by creating and then using the direct benefit transfer (DBT) platform,
a point which has been made to us repeatedly by several senior civil servants over the
past six months.
Exhibit 10: The Government seems committed to transferring all the subsidies onto the DBT platform
Source
Case for transferring all subsidies onto the DBT platform
Economic Survey FY15
The survey makes the point that price subsidies (such as the MSP mechanisms) are regressive and product subsidies (such as
those in kerosene and food) are subject to leakages. Hence, the Government should work towards transferring all subsidies
on to the DBT platform
Union Budget FY16
According to the Finance Minister, The JAM (Jan Dhan, Aadhaar and Mobile phones) trinity will allow us to transfer benefits
in a leakage-proof, well-targeted and cashless manner.
Source: Economic Survey FY15, Union Budget FY16, Ambit Capital research
The current Governments explicit effort aimed at checking pilferage in the subsidy
disbursement mechanism is also evident in the series of steps taken by the
Government since May 2014 to contain this dynamic (see the exhibit below).
Exhibit 11: Steps taken by the current Government to check pilferage from the subsidy system
Step
Description
Date
The Shanta Kumar committee

This committee was formed within two months of the new Government coming to power. The report
report
recommends transferring food subsidies onto the DBT platform to check leakages.
Forcing the Food Corporation of Out of the total food subsidy bill of Rs1.15trn in FY15, the operating cost of FCI alone is Rs940bn.
India (FCI) to make its
Recently, the Government has forced the FCI to get rid of surplus stock and it also plans to withdraw
operations more efficient
FCI from grain-surplus states to bring down the huge operating costs of FCI.
Transferring the LPG on to the
The Government has transferred the LPG onto the DBT platform and this marks the first in a list of
DBT
subsidies to be transferred onto the DBT.
Rapid progress on Aadhaar and The Governments commitment to roll out all the subsidies onto the DBT platform is visible in the
PMJDY
rapid progress made on PMJDY and roll out Aadhaar cards which is a prerequisite for the DBT.
Source: Media reports, Ambit Capital research. Note: PMJDY stands for Pradhan Mantri Jan Dhan Yojna
Over and above arresting the rapid growth in subsidies and the ineffective mode of
disbursing them, Modi has also halted other large-scale fiscal transfers towards rural
India. The most important amongst these is the Food Corporation of Indias
enormous programme for buying food grains at Minimum Support Prices (MSPs).
May 05, 2015
January 2015
FY15
January 2015
FY15
Over and above arresting the rapid

growth in subsidies and the
ineffective mode of disbursing
them, Modi has also halted other
large-scale fiscal transfers towards
rural India
Page 10
Strategy
Under the UPA, the FCI was forced to push through MSP hikes of 10-14% every year.
This necessitated intervention by the FCI on a grand scale in terms of buying food
grains at these ever-rising MSPS; in the year to March 2014, the FCI spent around
US$20bn (almost 1% of Indias GDP) on buying grains. Thus, by June 2013, the FCIs
stockpile of grains was a record 78mn tonnes.
Modi seems to have cut these large-scale transfers radically; MSP hikes in July 2014
were only 3-4% and the FCIs food grain stockpile has started coming down (it stands
at 38mn tonnes as of 1 March 2015). As a result, the FCIs transfer of resources from
the Centre to the states has halted in large parts of the country.
Modi seems to have cut these

large-scale transfers radically
MSP hikes in July 2014 were only
3-4% and the FCIs food grain
stockpile has started coming down
rapidly
Structural impact of the resets on Indias economy

Having discussed the three Modi resets, we now summarise their impact on the
Indian economy over the medium to long term.
Impact 1: Inflation should be structurally lower
Under the UPA as the corruption, competition, inflation triangle was entrenched,
Indias inflation rate broke away from other EMs and went into an altogether different
plane (see the exhibit below). This in turn had a range of adverse consequences for
India such as: (1) lower demand for financial savings; (2) rising demand for gold,
leading to a widening of the current account deficit (CAD) (see the exhibit below); (3)
structural downward pressure on the INR; and (4) a perpetually challenged
manufacturing sector.
5 yrs
UPA I
UPA II
FY15 YTD
before UPA (FY05-09) (FY10-14)
(FY00-04)
Fiscal deficit
CAD
It is critical to note that Indias long-term inflation track record, until the UPA came in,
was low and stable. The three resets which Modi will engineer should help bring
down inflation on a structural basis. In fact, the normalisation of inflation is already
evident to some extent, as the inflation gap between India and the other EMs has
started narrowing (see the exhibit below). Lower inflation should then result in
structurally lower interest rates, a stable CAD, a stable INR and a more competitive
manufacturing sector.
May 05, 2015
FY13
3%
FY12
4%
FY11
6%
FY10
5%
6%
FY09
7%
FY08
9%
FY07
10%
FY06
Avg. CPI inflation

(YoY change, in %)
11%
Exhibit 13: and so did the fiscal and current deficit as a

percentage of GDP
Fiscal/current account deficit

(As a % of GDP)
Exhibit 12: Inflation went into a different orbit during the

UPA regime
Indias inflation rate under the UPA

broke away from other EMs
The three resets which Modi will

engineer
should
help
bring
inflation down on a structural basis
Page 11
Strategy
Exhibit 14: The gap between Indias and developing Asias inflation has started to
narrow in CY14
Consumer prices
(YoY, change in %)
15
10
0
CY80-89
CY90-99
CY00-09
Advanced economies
CY10-13
Developing Asia
CY14
India
Impact 2: Adverse impact on GDP growth in the short term

Whilst over the longer term (two years and thereafter), the three resets should help
boost GDP growth structurally, GDP growth in FY16 seems likely to be adversely
impacted, as:
Rural and semi-urban consumption and construction activity is adversely

impacted by the rejigging of the subsidy regime: After seven years of
frenetic growth, the rural and semi-urban India story now faces a serious
challenge, as the old construct of pilfered subsidy cash being used to buy land,
gold, SUVs, cars, 2Ws, electricals and other aspirational items by the rural elite
comes to an end. The NDA will gradually unveil new rules which will govern rural
growth henceforth. However, even if one takes an optimistic view of the NDAs
as-yet unproven execution skills, it will take at least 2-3 quarters for the NDA
construct centered on capex and DBT to bite. Policymakers in Delhi tell us that
wherever the DBT regime is being introduced in India, within weeks, auto and
cement demand is falling and construction activity is coming to a halt as black
money dries up in that part of the country.
Crony capitalists refuse to begin capex activity as they see reduced scope
for supernormal profits under Modi: As the Government goes after corrupt
officials and businessmen, it seems increasingly unlikely that the big crony
capitalist conglomerates will kick-start the investment cycle; in the absence of
supernormal profits (which they earned under the UPA regime thanks to the
corruption, competition, inflation triangle), these conglomerates seem
disinterested in pushing through capex in India.
Even if one takes an optimistic view

of the NDAs as yet unproven
execution skills, it will take at least
2-3 quarters for the NDA construct
centered on capex and DBT to
bite
For a detailed account of why GDP growth is likely to surprise negatively in FY16,
click here for our 13th April 2015 note, GDP growth may surprise on the downside in
FY16. The key table from that note - summarising our growth forecasts has been
reproduced below.
Exhibit 15: We expect GDP growth in FY16 to be recorded at 7.5% YoY
Growth
(YoY change, in %)
Agriculture
FY13
FY14
FY15 (E)
1.5%
FY16
(old est.)
3.7%
FY16 Change FY16 (old)

(new est.)
vs FY16 (new)
3.7%
0bps
1.7%
3.8%
Industry
2.3%
4.4%
5.6%
6.2%
5.9%
Services
8.0%
9.1%
10.6%
10.3%
9.7%
-60bps
GDP at FC
Memo Item:
Investment
GDP at MP
4.9%
6.6%
7.4%
7.9%
7.5%
-40bps
-0.3%
3%
4.3%
6.7%
5.6%
-110bps
5.1%
6.9%
7.4%
7.9%
7.5%
-40bps
-30bps
Source: CEIC, Ambit Capital research; Note: GDP at FC refers to supply-side GDP i.e. GDP at Factor Cost. GDP
at MP refers to demand-side GDP i.e. GDP at Market Prices. This exhibit has been taken from our 23rd March
note.
May 05, 2015
Page 12
Strategy
Impact 3: Cost of factors of production set to decline
The three resets that Modi is likely to engineer over the next few years is likely to
have a profound impact on the cost of three factors of production, namely land,
labour and capital in India. In specific:
Reset 1 and Reset 3 are likely to lower the cost of capital,
Reset 1 and Reset 2 are likely to lower the cost of land, and
Reset 2 and Reset 3 are likely to lower the cost of labour.
Reset 1 and Reset 3 would lower the cost of capital

The diversion of savings away from the physical form towards the financial form is
likely to increase the quantum of bank deposits in India. Back-of-the-envelope
calculations suggest that if the share of financial savings in total savings increases
from the current levels of 32% to 40% over the next four years (assuming an increase
of 2% per year), bank deposits in the system could increase from 4.1% of GDP in
FY15 to 5.8% of GDP in FY19. This implies that bank deposits would increase at 16%
CAGR in FY15-19, which is considerably better than the FY11-14 CAGR of 2%.
The diversion of savings away from

the physical form towards the
financial form is likely to increase
the quantum of bank deposits in
India
Exhibit 16: Bank deposits will surge as a result of a rise in household financial savings
if financial savings become a larger part of household savings
Head
FY14
FY15E
FY16E
FY17E
FY18E
FY19E
Total household savings (in Rs trn)
25.4
29.3
33.6
38.7
44.5
51.2
Financial savings (as % of total
32%
32%
34%
36%
38%
40%
household savings)
Financial savings (in Rs trn)
8.1
9.4
11.4
13.9
16.9
20.5
Bank deposits (Assuming bank
deposits are 55% of financial
4.5
5.2
6.3
7.7
9.3
11.3
savings) (in Rs trn)
Annual Bank deposits (as % of
3.9%
4.1%
4.5%
4.9%
5.3%
5.8%
GDP)
Source: CEIC, Ambit Capital research. Note: Nominal GDP is assumed to grow at an average of 11.5% YoY until
FY19
Within the broader emerging market (EM) pack, India stands out as a country with a
high fiscal deficit (see the exhibit below). The low liquidity in the secondary
Government bond market is partially responsible for the high yields in India (see the
exhibit below), but the rising quantum of Government borrowing has played a key
role in driving G-sec yields higher (see the exhibit below), where a larger
Government borrowing programme has been invariably accompanied by higher
yields.
0
-2
-4
-6
Korea
China
Indonesia
Brazil
Turkey
-8
9%
FY15 FY14FY13
8%
FY07
FY08
7%
FY12
FY11
FY09
FY10
FY06
FY05
6%
FY04
5%
0%
2%
4%
6%
8%
Govt. market borrowings (as % of GDP)
Source: IMF, Ambit Capital research. Note: Data pertains to CY13 and
captures the General Government fiscal deficit as a percentage of GDP
May 05, 2015
Exhibit 18: There exists a positive relationship between the

size of Government borrowing and the risk-free rate
10 yr. G-Sec yield (in %)
India
Fiscal balance (as % of

GDP)
Exhibit 17: India has one of the highest fiscal deficits

relative to its EM peers
Within the broader emerging

market (EM) pack, India stands out
as a country with a high fiscal
deficit
Source: CEIC, Ambit Capital research. Note: Data pertains to FY04-15
Page 13
Strategy
Finally, as the Government restricts its fiscal deficit over the coming years by
migrating subsidies and transfers to the DBT platform, this is likely to also contribute
to lowering Indias elevated risk-free rate (see the exhibit below on the proven
relationship between the size of a countrys fiscal deficit and the level of its interest
rates).
As the Government restricts its

fiscal deficit over the coming years
by migrating subsidies and
transfers to the DBT platform, this
is likely to also contribute to
As the economy moves towards lower consumer prices and sustainable fiscal deficit, lowering Indias elevated risk-free
the cost of capital would go down. As the RBI will now target CPI inflation at the rate
midpoint of 4%(+/-2%) beyond FY16 and as the RBI Governor himself has said that
the RBI will target a real interest rate of 1.5%, the repo rate could come down to
somewhere around 6% (from the current 7.5%), depending upon how CPI inflation
and the Governments fiscal deficit turn out.
Reset 1 and Reset 2 would lower the cost of land
Rental yields in property markets in India have remained extremely low as compared
to its other Asian peers (see the exhibit below), thereby pointing to the over-valuation
of this asset class mainly because it can absorb black money
Rental yields in property markets in

India have remained extremely low
Exhibit 19: Rental yields in India are extremely low relative to peers
8
7
5
China
India
Hong Kong
Singapore
2
Thailand
Indonesia
Malaysia
0
Philippines
Rental yield
(in %)
Source: Global property guide, Ambit Capital research. Note: Data pertains to April 2014
The increased disincentives to operate with black money (owing to the passage of
legislations by the Central Government to penalise the same) and the reduction in
the size of the black economy (as the Modi-led administration breaks down the crony
capitalist model in India) are likely to profoundly lower the preference for land as an
asset class, thereby lowering the cost of land in India.
In a fairly-priced real estate market, the rental yield has to be somewhere close to the
cost of borrowing. Instead, Mumbai has a rental yield close to 2% whilst the lending
rate hovers around 10%. The difference between lending rates and rental yields are
one of the highest in India (see the exhibit below). Even if one assumes that buyers
are willing to live with only 5% rental yields (as they might have an extremely bullish
view of capital gains arising from real estate in India), this would imply halving of real
estate prices in Mumbai.
Research suggests that more than

30% of Indias real estate sector is
funded by black money
In a fairly-priced real estate
market, the rental yield has to be
somewhere close to the cost of
borrowing; instead Mumbai has a
rental yield close to 2% whilst the
lending rate hovers around 10%
10
8
6
Hong Kong
Singapore
5
3
0
India
China
Malaysia
Thailand
Indonesia
0
Philippines
Difference between
lending rates and rental
yields
(in %)
Exhibit 20: Difference between rental yields and lending rates is one of the highest in
Asia
Source: World Bank, Global property guide, Ambit Capital research. Note: Data pertains to CY13
May 05, 2015
Page 14
Strategy
Reset 2 and reset 3 would lower the cost of labour

The combination of reset 2 (i.e. reduction of corruption in the Government machinery
especially at the FCI; see the exhibit below) and reset 3 (i.e. reduction in the size of
the Central Governments subsidy bill) is likely to help reduce wage inflation in India,
which once again had become immune to the economic slowdown over the last few
years.
The combination of reset 2 (i.e.

reduction of corruption especially
at the FCI) and reset 3 (i.e.
reduction in the size of the
Governments subsidy bill) is likely
to help reduce wage inflation
90
80
70
60
50
40
Stock of food grains
02/2015
02/2014
05/2014
08/2014
11/2014
05/2013
08/2013
11/2013
08/2012
11/2012
02/2013
11/2011
02/2012
05/2012
11/2010
02/2011
05/2011
08/2011
02/2010
05/2010
08/2010
30
05/2009
08/2009
11/2009
Stock of grains with FCI

(in million tonnes)
Exhibit 21: The Food Corporation of India (FCI) has begun maintaining lower buffer
stocks than its long-term average since the Modi-led Government assumed control
6 yr. avg. stock of food grains
Source: FCI, Ambit Capital research. Note: The stock is as of first day of every month as reported by the FCI
The pace of growth in average daily wages in rural India systematically rose from 6%
YoY in CY06 to a staggering 21% YoY by CY11. However, this pace has been
systematically decelerating since CY11 and has fallen to 4% YoY in CY14 YTD (see
the exhibit below). The main source of job creation in India over the past five years
has been construction. Therefore, with construction activity slowing down sharply over
the past six months, this source of demand for labour has dried up and has helped
moderate the rise in rural wages.
The pace of growth in average

daily wages in rural India
systematically rose from 6% YoY in
CY06 to a staggering 21% YoY by
CY11this pace has now fallen to
4% YoY
Exhibit 22: Rate of increase of rural wages have slowed down in the past year
25%
Avg. rural wages
(YoY change, in %)
21%
20%
15%
15%
15%
10%
10%
6%
5%
18%
17%
2%
7%
4%
3%
CY14*
CY13
CY12
CY11
CY10
CY09
CY08
CY07
CY06
CY05
CY04
0%
Source: RBI, Ambit Capital research. Note: * Data for CY14 excludes December 2014
Another factor which led to higher rural wage inflation was frequent and large hikes
in the MSPs for different crops (see the exhibit below). MSPs for rice and wheat were
increased at an average rate of 14% YoY and 11% YoY respectively over FY08-13.
This pace of increases decelerated meaningfully from FY14 onwards, as MSP growth
rates slowed down to 4% YoY for wheat and rice. This will further help in curtailing
rural wage growth and hence overall inflation.
May 05, 2015
Another factor which led to higher

rural wage inflation was frequent
and large hikes in the MSPs for
different crops
Page 15
Strategy
Exhibit 23: Frequent rise in MSPs was one of the factors for high wage inflation in past
years
MSP for rice

(YoY change, in %)
35%
R = 0.2304
30%
25%
20%
15%
10%
5%
0%
-5%
0%
5%
10%
15%
20%
25%
Avg. rural wages

(YoY change in %)
Source: CEIC Ambit Capital research. Note: Data pertains to CY01-14
May 05, 2015
Page 16
Strategy
Section 2: How to play the upcoming

change in the Sensex
The fragile wants tranquility, the antifragile grows from disorder, and the
robust doesn't care too much.
- Nassim Nicholas Taleb (Antifragile: Things That Gain from Disorder, 2012)
Having laid out our case in Section 1 for a structural change in the Indian economy
over the coming decade, we now move to the investment implications. In this section
we make the case for:
a) A rise in Sensex churn in the next decade
b) A framework for identifying the most likely churn candidates
Sensex churn set to rise

In our note, Decadal changes in the Sensex dated June 28, 2012 (click here for
details), we said that the constitution of the Sensex is extremely dynamic, and churn
in the Sensex is in fact the only constant. Furthermore, churn ratios in India are
higher than that of other developed as well as emerging markets (see the exhibit
below).
Churn is the only constant in the

Sensex
Exhibit 24: The Indian market is characterised by a high churn ratio*

70
60
53
52
48
50
40
33
30
Data not available
Churn (%)
60
30
23
20
10
39
36
0
Sensex (India)
DJIA (US)
Hang Seng Bovespa (Brazil)

(Hong Kong)
1992-2002
Average
Market
2002-2012
Source: Bloomberg, Ambit Capital research. Note: * Churn is defined as the number of companies which get
ejected from the index over a given period of time / total number of companies in the index. This chart has been
reproduced without any changes from our June 28, 2012 note: Decadal changes in the Sensex
Our analysis of Sensex churns over a 10-year window from 1986 to date (ie: 19861996, 1987-1997 and so on to 2004-2014) shows that the churn ratio of the Sensex
tends to rise when the economy is undergoing irreversible structural changes. For
instance, the 10-year period spanning 1992-2002, which saw the era of the License
Raj coming to an end, saw the Sensexs churn ratio rise to 60% (vs the 53% churn
ratio in the Sensex over 2002-12).
Sensex churn rises when the

economy is undergoing irreversible
structural changes
(Note: We have calculated the Sensexs churn ratio in the following manner - 18 of
the 30 constituents of the Sensex in 1992 were no longer part of the index in 2002.
Thus, Sensex saw a churn of 60% over the 1992-02 period. Similarly, 16 of the 30
constituents of the Sensex in 2002 exited the index by 2012. Consequently, churn
over the 2002-12 period stood at 53%.)
May 05, 2015
Page 17
Strategy
Exhibit 25: Sensex churn ratio shows a tendency to rise when the economy undergoes
structural changes
60%
50%
40%
30%
20%
10%
04-14
03-13
02-12
01-11
00-10
99-09
98-08
97-07
96-06
95-05
94-04
93-03
92-02
91-01
90-00
89-99
88-98
87-97
0%
86-96
Sensex companies churned out

over the next 10 years
Sensex churn - 10-year window

70%
Source: Ambit Capital research, Bloomberg. Note: Sensex churn has been calculated as the percentage number
of companies forming a part of the Sensex in year t that get exited from the index by year t+10. For example,
50% in the 1986-96 period suggests 15 of the 30 Sensex constituents in Dec86 were no longer part of the index
10 years later, i.e. Dec 96.
The churn in the Sensex peaked in the four years following the momentous reforms
launched by PV Narsimha Rao (as PM) and Manmohan Singh (as Finance Minister). A
whole host of businesses which had flourished behind the protectionist barriers
created by the License Raj in industries were ejected from the Sensex. These
industries include: (1) Textiles (Aditya Birla Nuvo, Bombay Dyeing, Century Textiles
and Future Polyester), (2) Automobiles (Hindustan Motors and Premier), (3) Steel
(Mukand Limited), (4) Paper (Ballarpur Industries), and (5) Heavy engineering (Bharat
Forge, Cummins India, Siemens and Voltas (although this final group of companies
subsequently adapted well in the post-License Raj).
Sensex churn peaked in the four

years following the structural
reforms in 1991..
Post-1995, Sensex churn has fallen remarkably relative to the volatile era of the early
1990s. Sensex incumbents grew rapidly in size and we attribute this to the following
reasons:
and from those levels, Sensex

churn fell as incumbents
entrenched themselves in the postliberalisation era
a) Large business groups ramped up domestic capacities in a license-free era and

followed them up by large acquisitions in the noughties (Reliance, Tata Steel and
Hindalco).
b) Export-led companies like software (Infosys and TCS) and pharmaceuticals
expanded.
c)
The noughties also saw the rise of infrastructure companies (L&T) and
banks/financial institutions which funded their expansion (ICICI Bank) and also
benefited (HDFC and HDFC Bank) due to the rise in overall GDP growth (from
3.9% in FY03 to 8% in FY04, 7.1% in FY05, 9.5% in FY05 and 9.6% in FY01).
d) Finally, towards the end of the noughties, the rise in rural-led consumption (refer
to Exhibit 22 on pg 15 to see how rapidly rural wages surged) benefited auto
(Hero MotoCorp, Bajaj Auto, M&M and Maruti) and FMCG (HUL and ITC) stocks.
Further, the likelihood of churn from new company listings was also limited, at least
in the first half of the noughties.
After remaining flat for a decade (3% CAGR from FY93 to FY03), the Sensexs
recovery began meaningfully only after FY03 (55% CAGR from FY03 to FY06). This
recovery drove a slew of large IPOs, including Government disinvestment-driven ones
(see the exhibit below). These new IPOs resulted in new entrants into the Sensex such
as ONGC and NTPC from PSUs and TCS and Reliance Petroleum from the private
sector. However, in terms of numbers, the impact of these changes on Sensex churn
was much lower than those driven by the end of the License Raj regime. Only 8
replacements were made in the Sensex from 2004 to 2014 vs 20 from 1995 to 2005.
May 05, 2015
New listings of a meaningful size

happened mainly in the second
half of the noughties
Page 18
Strategy
Exhibit 26: Three of four IPOs of more than US$1bn happened only after 2004
Year
Rsbn
Coal India
Oct 2010
150
Reliance Power
Jan 2008
117
ONGC
March 2004
95
DLF
June 2007
92
Cairn India
Dec 2006
58
TCS
Aug 2004
54
NTPC
Oct 2004
54
Source: Media reports, Ambit Capital research
In light of the three resets that Modi is likely to engineer, the next ten years in India
appear likely to be akin to the 1990s rather than the noughties, as the period
spanning 1992-02 too was a decade defined by irrevocable structural changes being
administered by the political leadership.
The next ten years in India appear

likely to be akin to the 1990s
Owning a Sensex exit candidate is a losing proposition

Stocks that eventually exit the Sensex do so after a long period of underperformance.
Indeed, this is among the reasons why they lose their relevance to their benchmark
before eventually bowing out. We present the price performance of the stocks during
the 1992-2002 era and note their sharp underperformance to the Sensex during that
decade.
A long period of underperformance

usually precedes the stocks exit
from the Sensex
Exhibit 27: Exits from the Sensex over Dec91-Dec01

CAGR returns
(Dec'91-Dec'01,
rel. to sensex)
Year of exit from

Sensex
0%
-5%
1996
8%
-16%
-21%
1996
-20%
-21%
-26%
1996
-20%
Tyres
-15%
-20%
1996
-8%
-20%
-25%
1996
-12%
5%
0%
1996
21%
Futura Polyester
Diversified
Capital Goods-Non
Electrical Equipment
Textiles
-20%
-25%
1996
-22%
GE Shipping Co
Shipping
-14%
-19%
1998
-21%
Company name
Sector
Aditya Bir. Nuv.
Textiles
Ballarpur Inds.
Paper
Bombay Dyeing
Textiles
CEAT
Century Textiles
Cummins India
CAGR returns
(Dec'91-Dec'01)
CAGR returns
(Dec'91-date of
exit from Sensex)
GSFC
Fertilisers
-27%
-32%
1996
-23%
Hind.Motors
Automobile
-12%
-17%
1996
5%
Indian Hotels
Hotels & Restaurants
10%
5%
2000
19%
Mukand
Steel
-28%
-33%
1996
-12%
Philips El India
DNA
DNA
1996
DNA
-22%
-27%
1996
-2%
-1%
-6%
1996
25%
-7%
-12%
2000
-15%
Voltas
Consumer Durables
Capital Goods-Non
Electrical Equipment
Capital Goods Electrical Equipment
Power Generation &
Distribution
Diversified
-10%
-15%
1996
-23%
Zenith Birla
Steel
DNA
DNA
1992
DNA
Premier
Siemens
Tata Power Co.
Source: Bloomberg, Ambit Capital research
May 05, 2015
Page 19
Strategy
In Exhibit 28 below, we show the share price performance for all the exits from the
Sensex in two ways: over the next decade and until the time of exit from the Sensex.
Whilst on an average these stocks have underperformed the Sensex by ~7% on a
CAGR basis over the next decade, what is more interesting is its performance and
underperformance until the time of exit from the Sensex. On an average, these stocks
have delivered -10% CAGR returns until the time of exit. Further, relative to the
Sensex, the underperformance (until the time of exit from the Sensex) is as high as 20% (in CAGR terms).
Sensex exit stocks underperform

the index by ~20% (in CAGR
terms) until the time of exit
Exhibit 28: Sensex exit stocks - Massive underperformance until the time of exit from the Sensex
Period
Number of exits from

the Sensex
Median
Median performance of
underperformance (rel. to
exiting stocks over the
the Sensex) of exiting
decade
stocks over the decade
Median
Median performance of
underperformance (rel. to
exiting stocks until exit
Sensex) of exiting stocks
from the Sensex
until exit from the Sensex
1991-01
18
-15%
-20%
-12%
-23%
1992-02
19
-8%
-11%
-9%
-17%
1993-03
20
-1%
-6%
-16%
-14%
1994-04
20
-2%
-7%
-27%
-18%
1995-05
20
5%
-6%
-24%
-33%
1996-06
14
8%
-7%
-21%
-25%
1997-07
13
10%
-8%
-22%
-31%
1998-08
13
6%
-6%
-6%
-18%
1999-09
14
9%
-5%
-9%
-11%
2000-10
16
13%
-5%
-3%
-16%
2001-11
16
13%
-4%
7%
-17%
2002-12
14
21%
2%
14%
-19%
2003-13
6%
-8%
0%
-11%
2004-14
13%
-2%
-9%
-25%
Average
15
6%
-7%
-10%
-20%
Finally, in Exhibit 29 below, we show the performance of companies that were part of
the Sensex in December 04 but had exited by December 14. On a median basis,
these stocks have delivered CAGR returns of ~13% over the 2004-14 decade (and 2% CAGR returns relative to Sensex). However, what we also note from Exhibit xx
below is that these stocks have massively underperformed the Sensex until the time of
their exit (having delivered -9% CAGR returns in absolute terms and ~25% CAGR
terms vs the Sensex see the penultimate row of the table shown above).
Exhibit 29: Exits from the Sensex over Dec04-Dec14
CAGR returns (Dec'04- CAGR returns (Dec'04- Year of exit from CAGR returns (Dec'04-date
Dec'14) Dec'14, rel. to sensex)
Sensex
of exit from Sensex)
Company name
Sector
ACC
Cement
15%
0%
2010
20%
Ambuja Cements
Cement
16%
0%
2008
13%
Grasim Inds
Textiles
13%
-2%
2010
12%
HPCL
Refineries
3%
-12%
2005
-39%
Ranbaxy Labs.
0%
-15%
2009
-18%
0%
-16%
2011
-1%
Satyam Computer
Pharmaceuticals
Power Generation &
Distribution
IT Software
DNA
DNA
2009
-36%
Zee Entertainment
Entertainment
22%
6%
2005
-27%
Reliance Infra.
Hence, given the stark underperformance for the exit stocks, it becomes critical for
investors to identify potential exiting candidates in advance. We now provide a
framework for identification.
May 05, 2015
Page 20
Strategy
A framework to identify Sensex exit candidates

We provide a four-step filter for identifying stocks that are most likely to exit the
Sensex in the coming decade. To maintain consistency for a 10-year window we use
financial data for the past 10 years (from FY05 to FY14).
Our four-step filter identifies exit

candidates from the current Sensex
constituents
In the first two steps, we score companies using our Coffee Can Portfolio and
Greatness frameworks. From these scores, we select the bottom 20 companies and
shortlist them as most likely Sensex exit candidates.
In the third step, we check if the shortlisted companies feature on the Ambit P-75 list
of politically connected companies. In the final step, we check if the shortlisted
companies are in a sector that has been unnaturally insulated from foreign
competition.
We describe our methodology in detail below:
Step 1: Coffee Can Portfolio filters in reverse
In November 2014, we unveiled our Indian Coffee Can Portfolio for identifying stocks
that investors can hold for a decade, without churning the portfolio. Our back-testing
showed that a portfolio constructed on two filters, mentioned below, beats the Sensex
across five 10-year iterations. We now use the same filters but in reverse to
identify Sensex stocks that are on an exit path.
We use our Coffee Can Portfolio

filters in reverse
a) Sales growth of less than 10%: Indias nominal GDP growth rate has averaged
15% over the past ten years. As very few listed companies (only 5 out of the
~1,100 firms run under our screen) managed to achieve this over the past ten
years, we reduced this filter rate modestly to 10%. Therefore, for the purposes of
the Sensex exits exercise, we identify companies that have failed to deliver 10%
sales growth in any year for the past ten years. Hence, the more years a company
delivers sales growth of less than 10%, the lower will be its score.
We identify companies that have

failed to deliver 10% sales growth
in any year for the past ten years
b) RoCE of less than 15%: We use 15% as a minimum because we believe that if a
company can deliver 15% RoCE over ten consecutive years, it is a proxy for the
annual returns investors can expect from that stock. We also believe this is well
justified theoretically by adding the risk-free rate (8.5% in India) and an equity
risk premium of 6.5%. This equity risk premium, in turn, is calculated as 4% (the
long-term US equity risk premium) plus 250bps to account for Indias rating (BBBrating as per S&P). Note further that over the past 20 years and 30 years, the
Sensex has delivered returns of around 16% per annum, thus validating our point
of view that 15% is a sensible figure to use as a minimum RoCE criteria.
Therefore, we identify companies that have failed to deliver 15% RoCE in any
year for the past ten years. Hence, the more years a company delivers RoCE of
less than 15%, the lower will be its score.
and those that have failed to

deliver 15% RoCE in any year for
the past ten years
For Banks and Financial Services (BFSI) stocks, we modify the filters on RoCE and
sales growth as follows:
a) RoEs of 15% for NBFCs and RoAs of 1.2% for banks: Whilst we have used
RoEs (net profit to average equity) for NBFCs, we have used RoA (net profit to
average assets) for banks. Whilst the underlying profitability of operations reflects
in both RoA and RoE, RoE is also impacted by the leverage or capital position of
the bank. Historically, many banks (especially PSU banks) have delivered high
RoEs due to high leverage despite weak underlying profitability. Therefore, for
banks RoAs is a better metric to use.
For banks, we screen stocks that

failed to deliver 1.2% RoA/15% RoE
in any year for the past ten
years.
and those that have failed to
deliver 15% loan growth in any
year for the past ten years
For every year that a bank/NBFC fails to deliver 1.2% RoA/15% RoE, we allot a
lower score. Hence, the more years a bank/NBFC delivers RoA of less than 1.2%
(or RoE of less than 15% in case of banks), the lower will be its score.
b) Loan growth of 15%: We believe loan growth of 15% is an indication of a
lenders ability to lend over business cycles. Strong lenders ride the down-cycle
better, as their competitive advantages surrounding their origination, appraisal
and collection process ensure that they continue their growth profitably either
through market share improvements or upping the ante in sectors which are
May 05, 2015
Page 21
Strategy
resilient during a downturn. Therefore, we identify banks/financial institutions
that have failed to deliver 15% loan growth in any year for the past ten years.
Hence, the more years a bank/financial institution delivers loan growth of less
than 15%, the lower will be its score.
Once we have identified a list of such companies that fail to meet our filters for any
year in the past decade (FY05-14), we allot scores based on the number of years that
the company has failed to meet the filter. Our scoring is based on the parameters
mentioned in the exhibit below.
Exhibit 30: Scoring parameters - Number of years (from FY05 to FY14) that a company
fails to meet our filters
From (years)
To (years)
Score
20
15
10
10
The thumb rule for the above exhibit is the more years a companys financials
have been below our filters, the lower the score. For example, a company that
delivers less than 10% sales growth for any eight years (of the past ten years from
FY05 to FY14), gets five points. Similarly, a company that delivers RoCE of less than
15% for all ten years (of the past ten years from FY05 to FY14) gets zero points. The
scoring structure is aimed at raising the penalty on companies that fail to meet these
filters more often in the past ten years (from FY05 to FY14).
Conversely, the more often a company delivers sales growth of more than 10%
and/or RoCE of more than 15%, the higher will be its score. Therefore, a company
that delivers RoCE for all ten years (FY05 to FY14) will get the highest score of 20.
Step 2: The Greatness Framework
We had unveiled our greatness framework on 19 January 2012 with the first
iteration of the Tomorrows ten baggers note see exhibit below.
Exhibit 1: The greatness framework
a. Investment (gross
block)
In the next step, we score

companies using our Greatness
Framework
b.
Conversion
of
investment to sales
(asset turnover, sales)
c.
Pricing
discipline
(PBIT margin)
e. Cash generation
(CFO)
d.
Balance
sheet
discipline (D/E, cash
ratio)
This framework has served us remarkably well over the years and has consistently
helped us generate outperformance with our annual tenbagger portfolios. Now, to
identify exit candidates, we reverse the framework i.e. the worse the performance of
a company in greatness framework, the lower its decile as per the framework, the
lower its score.
May 05, 2015
Page 22
Strategy
Exhibit 31: Scores as per our Greatness Framework
Greatness Decile
Score
D1-D2
20
D3-D4
15
D5-D6
10
D7-D8
D9-D10
Whilst we do not have a greatness framework for NBFCs currently, in our 20 February
2013 note we had unveiled the greatness framework for the banking space. Both
these frameworks study a firms structural strengths by focusing not on absolutes but
rather on improvements over a period of time and the consistency of those
improvements.
Please refer to Appendix 1 (on pg 89) for a detailed description of the Greatness
Framework and to Appendix 2 (on pg 91) for the Greatness Framework for banks. For
our scoring purposes, we allot higher scores for companies/banks as per their decile.
A higher decile implies a higher score.
Step 3: Ambits P-75 companies
In the next step, we check this short list of Sensex exit candidates to identify stocks
that are part of Ambits P-75 companies i.e. companies whose core competitive
advantage is politically connectivity.
Companies that are already part of

Ambits P-75 companies are
already on a weak footing
We believe these companies are on a weaker footing given the impact of the Modi
Resets. In our May 2014 strategy thematic, Can India Turn Back the Clock?,
published just before the results of the 2014 General Election, we said that over the
past decade, powerful cliques of politicians and promoters have suppressed
competition in a range of sectors and driven Indias CPI inflation rate up from 4% to
11%. In that report, we posited that this vicious spiral could be on the retreat with the
changes taking place in New Delhi and in the RBI. We further said that these changes
could results in a redistribution of profits away from the winning companies of the
last decade towards the also-rans of the last decade.
Over and above the distortionary effects that politically connected companies have
had on competition and inflation, these companies are likely to have received undue
access to capital (from PSU banks), land (from state governments) and public sector
contracts (like the building of airports or roads). After peaking in the noughties, the
strength of this under-the-table cooperation model between promoters and
politicians has been ebbing since November 2010 (the month in which the 2G
spectrum auction scam came to public attention thanks to the CAGs hard hitting
report). Given that the rise of check and balance institutions (such as the Aam
Aadmi Party and civil society) seems to be permanent, we expect connected
companies in sectors such as Telecom, Real Estate, Infrastructure, Construction,
Power as well as Capital Goods to underperform the Sensex.
The demise of the connected company continues to be captured nicely by Ambits
five-year-old P-75 Index of the 75 most connected companies in the BSE500. Post
the 2G spectrum allocation report publication, the share prices of the connected
companies have systematically underperformed the BSE500, with a brief pre-General
Election rally also getting snuffed out once the market realised that Modi was not
going to indulge the connected companies (see exhibit below).
May 05, 2015
We expect connected companies in

sectors such as Telecom, Real
Estate, Infrastructure, Construction,
Power as well as Capital Goods to
underperform
Ambits five-year-old P-75 Index

nicely tracks the demise of
connected companies
Page 23
Strategy
Exhibit 32: The connected companies index has consistently underperformed the
BSE500 since the release of the CAG report in October 2010
340
300
260
220
180
140
100
60
Ambit Connected Cos Index
Jan-15
Sep-14
May-14
Jan-14
Sep-13
May-13
Jan-13
Sep-12
May-12
Jan-12
Sep-11
May-11
Jan-11
Sep-10
May-10
Jan-10
Sep-09
May-09
Jan-09
Publication of CAG report in

Oct' 10 was an inflection point
BSE 500
Thus, any company in our short list that is part of Ambits P-75 companies would
qualify automatically to be a Sensex exit candidate.
Step 4: Belongs to an unnaturally insulated sector
Finally, from our short list, we identify those companies that belong to a sector that
has been unnaturally insulated from foreign competition. We cite two-wheelers and
metals and mining as two indicative examples of sectors that have benefited from this
unnatural insulation.
Historically, the margins of incumbent metal companies in India such as Tata Steel
and Hindalco have been cushioned by access to low-cost captive raw materials (iron
ore/coal). However, with the adoption of the MMDR Act, all mines are likely to be
auctioned (access to raw material at market prices) and existing captive mines would
remain with these players up to 2030 at best. With raw material costs (iron ore and
coal) gradually moving towards market prices, this increase in coal costs would result
in a negative impact on margins and RoCEs. This coupled with our muted outlook for
global steel and aluminium prices makes us believe that the RoCEs of Indian
companies would move closer to that of global peers (high single digits), which
makes them ideal exit candidates from the Sensex.
In a high inflation environment, well-established and well-managed companies with
strong brand names tend to be better placed than their newer, more run-of-the-mill
rivals, as the pricing power of the champion company allows it to protect itself from
inflation. As a result, over the past decade, and especially, over UPA-IIs reign, high
and variable inflation has been a friend of strong companies and an enemy of weak
companies. In effect, inflation takes profit from weak firms and gives it to stronger
firms. Hence, if inflation cools down, the position of the middle-of-the-road players
could improve. In fact, in a range of sectors in India, the stronger players have been
able to protect their margins the most over the past decade.
One example of a segment leader that profited handsomely in the distorted economy
is Hero MotoCorp (HMCL IN, mkt cap US$7.3bn, SELL). Between FY04 and FY10,
when it split from its JV partner, Honda Motors, Heros operating margin was stable
at 17%. Following the end of its JV with Honda, Heros operating margin started
sliding (13.0% as at the end of 9 months ending FY15), as it started investing in R&D
and as it started losing market share to Honda; Hero MotoCorp has lost market share
of about 300bps in the domestic motorcycle space over FY12-15.
On the other hand, TVS Motors seems to be finding its feet after ten years of almost
relentless market share loss (TVSs market share in the Indian 2W (ex-mopeds)
market has fallen from 14.6% in 2003 to 7.3% in FY14). Over the past year, however,
even as Hero has slipped, TVS has started gaining market share thanks to the launch
of new models of scooters/ bikes. Exports, which accounted for only 10% of revenues
three years ago, now account for 20% of revenues. With revenue growth
accelerating, TVSs operating margins have stabilised after a decade of sliding.
May 05, 2015
Sectors that have been unnaturally

insulated from foreign competition
stand to lose in the Modi resets
Increase in coal costs will

negatively impact margins and
RoCEs of incumbent metal
companies
If inflation cools down, the position

of the middle-of-the-road players
could improve
Following the end of its JV with

Honda, Hero has lost market share
in the domestic motorcycle space
Even as Hero has slipped, TVS has

gained market share thanks to the
launch of new models of scooters/
bikes.
Page 24
Strategy
Hero MotoCorp
Bajaj Auto
TVS Motor
Source: Company, Ambit Capital research
Hero MotoCorp
Bajaj Auto
FY13
0%
FY12
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
0%
200%
FY11
5%
400%
FY10
10%
600%
FY09
15%
800%
FY04
20%
1000%
FY08
25%
Exhibit 34: RoCEs of the major two-wheeler manufacturers

in India
FY07
two-wheeler
FY06
major
FY05
of
ROCE (before tax) (in %)
EBITDA margin (in %)
Exhibit 33: EBITDA

margins
manufacturers in India
TVS Motor
Thus, any company in our short list that benefits from being a part of a sector that
has seen unnatural protection from competition would qualify automatically to be a
Sensex exit candidate.
We summarise our four-step process of identifying a Sensex exit candidate in the
checklist below.
Exhibit 35: Checklist for Sensex exit candidates
Step Criteria
1
Coffee Can filters in reverse
Greatness Framework*
Politically Connected Company
Parameters
Non BFSI: Highest number of years within FY05-14 where sales
growth was <10%
Non BFSI: Highest number of years within FY05-14 where RoCE was
<15%
Banks and financials: Highest number of years within FY05-14 where
loan growth was <15%
Banks: Highest number of years within FY05-14 where RoA was
<1.2%
NBFCs: Highest number of years within FY05-14 where RoE was
<15%
Our four-step process screens for

stocks that are most likely to exit
the Sensex
Featuring in the lowest decile
Part of Ambit's P-75 Index

Belongs to a sector that is unnaturally insulated from Foreign
Benefits from distortions in economy
Competition
Source: Ambit Capital research. *Note: As we do not have a greatness framework for NBFCs, we give an average
score to HDFC (the only NBFC in the Sensex) on this parameter.
Identifying the Sensex exit candidates

We present the results of our four-step screening of potential Sensex exit stocks over
the next 10 years.
May 05, 2015
Page 25
Strategy
Exhibit 36: Exit candidates from Sensex over the next decade
Name
Ticker
Mcap (US$ bn)
6M ADV
(US$ mn)
Reliance Industries
RIL IN
44
54
ONGC
ONGC IN
41
26
State Bk of India
SBIN IN
32
89
HDFC
HDFC IN
29
56
Bharti Airtel
BHARTI IN
24
32
Larsen & Toubro
LT IN
24
53
NTPC
NTPC IN
19
15
M&M
MM IN
11
23
Vedanta*
SSLT IN
10
17
BHE L
BHEL IN
18
Bajaj Auto
BJAUT IN
16
Hero Motocorp
HMCL IN
35
Tata Steel
TATA IN
33
Hindalco Industries
HNDL IN
19
Tata Power Co.
TPWR IN
Exit hypothesis
Uncertainty on profitability of large investments in retail and telecom;
downstream margins likely to remain muted
Falling subsidies unlikely to aid profitability; uncertainty on production growth
makes earnings growth a challenge
Relaxation of Govt protection, rising capital requirements and competition from
stronger private sector peers and introduction of new players
Slowdown in real estate prices could hit mortgage loan growth; increased
competition from banks will compress NIMs
High spectrum costs, new competition from Jio will weigh on Indian business
profitability; African business will remain a drag on consolidated profits
High competitive intensity in a fragmented industry, no discernible competitive
advantages in most sectors; L&Ts large size will be a constraint
Increase in competition from private sector, decline in power deficit and end of
preferential treatment from Coal India for fuel linkages
Utility vehicle business under threat from foreign car companies superior
offerings; tractor business bearing the brunt of slowdown in rural demand
ROEs will trend lower towards global peers; mine acquisition costs will rise under
MMDR Act as global iron ore and steel demand stays weak
Boiler-turbine-generator industry in structural downturn; over-capacity issues (and
thus greater competition) will plague BHEL and its peers
Rising competitive intensity in domestic and export markets; exports further hit
from macro-economic challenges in key geographies
Over-dependence on legacy models, uncertain indigenous technology, shift
towards scooters and rising competition from Honda
Downturn in steel prices to hurt global business; loss of low-cost raw material
advantage under MMDR Act to hurt domestic business
Weak aluminium prices and premiums to hurt global business; lack of cheap
captive coal will mute RoCEs of new domestic smelters
RoEs will remain lower than cost of equity; rise in coal prices and structural
changes in sale of power will impact long-term prospects
Source: Bloomberg, Ambit Capital research. Note: *This is Sesa Sterlite.
We have chosen 15 exit candidates from this list on the following basis:
The top nine companies with scores of less than 45 qualify automatically for
exiting the Sensex, based on our framework detailed above. These nine
companies are Tata Power, NTPC, Hindalco, Tata Steel, Hero Motocorp, State
Bank of India, Sesa Sterlite (Vedanta), Bharti Airtel and Reliance Industries.
The remaining six candidates have been chosen from companies with a score of
45-50, based on our analysts conviction of the long-term prospects of these
companies against the backdrop of the Modi reset. These six companies are
M&M, HDFC, L&T, Bajaj Auto, BHEL and ONGC.
We now present company-specific sections where our analysts present a case for
these stocks to exit the Sensex.
May 05, 2015
Page 26
Reliance Industries
NOT RATED
COMPANY UPDATE
RIL IN EQUITY
May 05, 2015
Indias dominant petrochemicals company

Reliance Industries (RIL) is one of India's largest private sector enterprises, with
business activities spanning across exploration and production (E&P) of oil and
gas, petroleum refining and marketing, petrochemicals, textiles, retail, telecom
and special economic zones (SEZ). The company has 6.3% weightage in the
Sensex. Over the last ten years, the companys shares have compounded
annually at 20% vs 16% for the Sensex.
Churn candidates key parameters
RIL has weak scores on investments in gross

block, margins and RoCE and RoE increase.
100
80
RIL
SENSEX index
Source: Ambit Capital. Note: * 1st decile is the best and 10th decile is the worst.
RoCEs has stagnated at 10-12% for the last four years

Over the past decade (FY05-14), RILs revenues have recorded a strong 24%
CAGR driven by capacity additions in petchem and refining and driven by higher
crude prices. However, RoCEs have declined from 18% in FY05 to 10% on FY14
due to rising investments in telecom/retail (which have not contributed to
earnings) and due to rising cash balances on the balance sheet.
RILs share price has underperformed Sensex by 15% p.a. over FY09-15
Over FY06-08, RILs share price increased by 10x. However, over FY09-15, RILs
share price has declined by 27% and it has underperformed the Sensex by 15%
p.a., as RoCEs stagnated due to: (1) declining gas production/reserves in the
KG-D6 block, (2) subdued downstream margins, (3) lack of revenues from new
businesses, and (4) limited clarity on the strategy for cash deployment.
Problem of plenty
We do not expect these concerns to go away as the market tries to assess
whether Jio (the 4G venture) is the next big project that can drive earnings
growth. Further, weakness in the Chinese economy and global capacity
additions are likely to keep downstream margins muted. As the NDA rings in
changes, some of RILs competitive advantages seem to be eroding.
Discount to historical valuations justified
At CMP, the stock is trading at FY16 consensus P/E of 11.2x (five-year average of
13.9x) and FY16 consensus P/B of 1.2x (five-year average of 2.1x). The discount
to the historical average is justified given the RoE deterioration and EPS growth
moderation. Given the mid-cycle refining margins, most of the global refining
companies are trading at a one-year forward EV/EBITDA of 5.5x-6.5x, in line
with RIL.
Analyst Details
Parita Ashar
+ 91 22 3043 3223
Apr-15
60
Mar-15
Share price returns over the last eight years

have been flattish given rising investments in
non-core sectors and lack of visibility with
regards to earnings growth.
120
Jan-15
Earnings grew 51% in FY10 and 21% in FY11

mainly due to increase in gas output from KGD6 block. Thereafter, production decline in
KG-D6 has been offset by increasing
profitability of the refining segment.
140
Nov-14
EPS Growth
Trajectory
FY09: -19%, FY10: 51%, FY11:21%; FY12: 2%; FY13: 7%; FY14:
8%
RED
AMBER
GREEN
Performance
Oct-14
Revenues grew ~30-35% over FY10-12

FY09: 10%, FY10: 35%, FY11: 30% mainly due to doubling of refining volumes in
FY12: 35%; FY13: 11%; FY14: 9% FY10 and increase in crude price from
US$85/bbl in FY09 to US$115/bbl in FY12.
Aug-14
Sales Growth
Trajectory
FY10-14:5th decile*
`2,791/US$44
`3,609/US$57
`862
Accounting:
Predictability:
Treatment of minorities:
Jun-14
RoCE Trajectory
Rising investments in non-core businesses

FY09: 12%, FY10: 15%, FY11: 12% such as Retail/Telecom/Cash (~45% of the
FY12: 11%; FY13: 11%; FY14: 10% capital employed in FY14) have kept RoCEs
muted at ~10-15%.
Greatness Model
(decile)
Comment
3%/-5%/20%
NOT RATED
Mcap (bn):
6M ADV (mn):
CMP:
May-14
Result
3yr/5yr/10yr
Recommendation
Flags
Parameter
Share price returns

(CAGR)
Oil & Gas
Reliance Industries
Exhibit 1: EBITDA margin decline as new projects generate
lower margins
Exhibit 2: RoCE and RoE stagnate at 12-14% due to rising

investments in non-core businesses
4,800
25%
30%
4,000
20%
25%
3,200
15%
15%
Revenues (Rs bn)
EBITDA margins (% RHS)
RoCE (%)
FY14
FY13
FY12
FY11
FY10
FY05
FY14
FY13
FY12
FY11
FY10
FY09
0%
FY08
0%
FY07
FY06
5%
FY05
5%
FY09
10%
800
FY08
1,600
FY07
10%
FY06
2,400
20%
RoE (%)
Exhibit 3: Sources of funds over the last ten years (FY05-14)
Exhibit 4: Utilisation of funds over last ten years (FY05-14)
Increase
in cash
9%
Dividend
paid
6%
Investmen
ts
purchased
11%
Debt
raised
26%
CFO
65%
Capex
83%
Exhibit 1: 1-yr forward P/E band rerating on the back of

a decline in under-recoveries offset by fall in crude prices
16.0
Exhibit 2: 1-yr forward P/B band

average given deterioration in RoEs
below historical
4
3.5
14.0
3
12.0
2.5
10.0
2
1.5
8.0
1
6.0
0.5
4.0
Apr-06
Apr-09
1-yr fwd P/E
Apr-12
Average
Source: Company, Bloomberg, Ambit Capital research
Apr-15
0
Apr-06
Apr-09
1-yr fwd P/B
Apr-12
Average
Apr-15
Source: Company, Bloomberg, Ambit Capital research
Exhibit 3: Explanation for our flags

Segment
Accounting
Score
RED
Predictability
AMBER
Treatment of
minorities
GREEN
Comments
In our forensic accounting model (see our 22 December 2014 forensic thematic for details), Reliance Industries has a subpar score (5.9 as compared to the Oil & Gas sector average of 6.9). The key drivers of this sub-par score are: (a)
CFO/EBITDA, (b) frequent changes in depreciation rates; (c) cumulative FCF to median revenues; (d) volatility in nonoperating income; (e) change in reserves (excluding Securities premium)/(PAT ex dividend); (f) cash yield; and (g) fixed
assets turnover.
RILs E&P business earnings are difficult to predict given that its reserves have been downgraded in the past and there is
limited clarity on the production trend over the next couple of years. Furthermore, the uncertainty surronding cost recovery
makes it even harder to predict the earnings from RILs E&P business.
We have not come across any transactions which are against the interest of minorities.
May 5, 2015
Page 28
Reliance Industries
Income statement (` mn)
Y/E Mar (` mn)
FY11
FY12
FY13
FY14
2,658,110
3,585,010
3,970,620
4,344,600
EBIDTA
377,360
345,080
329,880
347,990
Depreciation
141,210
124,010
112,320
112,010
24,110
28,930
34,630
38,360
Net Revenue
Interest
Other income
Consolidated PAT
EPS (Rs/share)
28,510
61,940
79,240
90,010
192,940
197,240
208,790
224,930
64.7
66.2
71.1
76.5
Balance sheet (` mn)

Y/E Mar (` mn)
FY11
FY12
FY13
FY14
Total Assets
3,075,190
3,271,910
3,623,570
4,288,430
Net Fixed Assets + CWIP
1,862,740
1,641,770
1,834,390
2,329,110
Current Assets inlcuding cash
1,074,940
1,448,490
1,559,140
1,510,690
137,510
181,650
230,040
448,630
Total Liabilities
3,075,190
3,271,910
3,623,570
4,288,430
Networth
1,541,020
1,694,450
1,820,550
1,986,870
Dept
662,360
653,520
709,600
1,010,190
Current Liabilities
750,940
796,070
962,740
1,151,560
Deferred Tax
110,710
115,670
115,880
119,250
Other Assets
Cash flow statement (` mn)

Y/E Mar (` mn)
FY11
FY12
FY13
FY14
PBT
240,550
254,080
262,170
287,630
+ Depreciation
168,200
148,270
133,130
122,840
- Incr/(Decr) in WC
(10,390)
(67,480)
73,720
110,300
Cash from operations

- Capex
Free cash flow
Cash from investing
- Dividend
333,380
244,830
369,180
432,610
(338,650)
(163,810)
(307,260)
(600,870)
(5,270)
81,020
61,920
(168,260)
(320,440)
(63,010)
(276,500)
(730,700)
(24,310)
(27,720)
(29,490)
(31,230)
+ Debt raised
207,020
(10,480)
106,540
223,170
Cash from financing
149,500
(75,900)
4,080
137,130
Net cash flow
162,440
105,920
96,760
(160,960)
Ratios and valuation parameters

Y/E Mar
EBITDA margin (%)
PAT margin (%)
Return on Equity (%)
FY11
FY12
FY13
FY14
14.2%
9.6%
8.3%
8.0%
7.3%
5.5%
5.3%
5.2%
13.1%
12.2%
11.9%
11.8%
DPS (Rs)
8.00
8.50
9.00
9.50
BVPS (Rs)
496.5
556.2
614.3
672.8
One year forward P/E (x)
15.8
10.6
10.1
11.6
One year forward P/B (x)
1.9
1.2
1.1
1.3
May 5, 2015
Page 29
Reliance Industries
This page has been intentionally left blank
May 5, 2015
Page 30
ONGC
NOT RATED
COMPANY UPDATE
ONGC IN EQUITY
May 05, 2015
Indias largest oil & gas exploration and production company
Trajectory
FY12: 23%; FY13: 10%; FY14: 7%
EPS Growth
FY09: 0%, FY10: -2%, FY11: 16%
Trajectory
FY12: 25%; FY13: -14; FY14: 9%
Share price returns

(CAGR)
Greatness Model
(decile)
3yr/5yr/10yr
5%/2%/8%
FY10-14: 5th decile*
ONGC reported double-digit EPS growth in

FY11/12 due to doubling of domestic gas
realisation and higher crude price realisation
for OVL. In other years, strong EPS growth is
hard to come by for this firm.
High uncertainty vis a vis the subsidy sharing
mechanism and muted volume growth have
underpinned ONGCs underperformance
relative to the Sensex.
AMBER
GREEN
Performance
160
140
120
100
80
60
ONGC
SENSEX index
ONGC has weak scores on EPS and CFO

increase, debt equity and cash ratio, and
RoCE and RoE increase.
RoCE slide driven by rising subsidy burden

Over FY05-14, ONGCs revenue CAGR of 15% was mainly driven by higher
crude and gas realisations, increase in refining margins and refining output for
Mangalore Refinery Petrochemicals (MRPL). However, RoCE has declined from
39% in FY05 to 20% in FY14 due to increased subsidy burden on the Indian
operations, a significant jump in capex and opex requirements for oil & gas
fields and the expensive acquisition of Imperial Energy.
Production growth seems likely to remain a challenge
ONGCs share price has underperformed the Sensex by 8% over FY05-14, as
profit growth has remained muted (5% CAGR). The benefits of crude price
increase have been largely offset by a high subsidy burden and an increase in
capex and opex for oil & gas fields whereas production has stagnated. At
current Brent prices (US$60/bbl), falling subsidies are unlikely to aid ONGCs
profitability. Further, flattish production over the last few years and lack of
visibility with regards to production growth makes earnings growth a challenge.
Valuation discount justified given deterioration in return ratios
ONGCs stock price is currently trading at one-year forward consensus P/E of
10.1x (last ten-year average of 9.3x) and consensus P/B of 1.4x (last ten-year
average of 1.9x). ONGC is trading at EV/2P reserve (proved and probable
reserve) of US$6.6boe, higher than the last ten-year average of US$5.1/boe
and at a sharp discount to the global peer average of ~US$8-20/boe.
Apr-15
FY09: 8%, FY10: -3%, FY11: 18%
AMBER
Mar-15
Sales Growth
ONGCs consolidated revenues have

reported at 10% CAGR over FY08-14 driven
by: (a) crude price increase at 5% CAGR and
doubling of domestic gas realisations vs
flattish production and (b) 14% revenue
growth by MRPL due to higher throughput
and increase in crude price.
Accounting:
Predictability:
Treatment of Minorities:
Jan-15
RoCE Trajectory
RoCEs have declined from 30% in FY09 to

20% in FY14 due to increased subsidy burden
FY09: 30%, FY10: 24%, FY11: 28% on the Indian operations, significant jump in
FY12: 29%; FY13: 23%; FY14: 20% the capex and opex requirements for oil and
gas fields, and the disastrously expensive
acquisition of Imperial Energy.
Flags
Nov-14
Comment
`2,601/US$41
`1,548/US$25
`304
Oct-14
Result
NOT RATED
Mcap (bn):
6M ADV (mn):
CMP:
Aug-14
Parameter
Recommendation
Jun-14
Oil & Gas
May-14
ONGC is the largest oil & gas exploration and production company in India.
The company has also expanded its presence outside India through its 100%
owned subsidiary, ONGC Videsh Ltd (OVL). The company has 2.7% weightage
in the Sensex. Over the last ten years, the companys shares have compounded
Analyst Details
Parita Ashar
+ 91 22 3043 3223
ONGC
Revenues (Rs bn)
RoCE (%)
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY05
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
40%
35%
30%
25%
20%
15%
10%
5%
0%
FY05
2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
200
-
Exhibit 2: RoCE and RoE decline as new projects generate

weaker margins
FY06
Exhibit 1: EBITDA margin decline driven by rising subsidy

burden and increase in opex
RoE (%)
Increase
in cash
5%
Dividend
paid
20%
Debt
raised
9%
Interest
paid
1%
Capex
34%
Dividend
and
interest
received
6%
Acquisition
,
developme
nt & others
45%
CFO
80%
Exhibit 5: 1-yr forward P/E band rerating on the back of

a decline in under-recoveries offset by fall in crude prices
Exhibit 6: 1-yr forward P/b band below historical average

given deterioration in RoEs
16.0
4
3.5
14.0
3
12.0
2.5
10.0
2
1.5
8.0
1
6.0
0.5
4.0
Apr-06
Apr-09
1-yr fwd P/E
Apr-12
Average
Apr-15
0
Apr-06
Apr-09
1-yr fwd P/B
Apr-12
Average
Apr-15

Segment
Score
Comments
Accounting
AMBER
In our forensic accounting model (see our December 2014 forensic thematic for details), ONGC has a relatively moderate
score (6.5 as compared to the Oil & Gas sector average of 6.9). The key drivers of the sub-par score are: (a) CAGR in
auditor's remuneration / CAGR in consolidated revenues; (b) non-operating expenses as a percentage of total revenues;
(c) fixed assets turnover; (d) provision for debtors as a percentage of debtors outstanding for more than six months; and (e)
volatility in non-operating income.
Predictability
AMBER
Lack of visibility over net crude realisations and subsidy sharing mechanism makes earnings volatile.
Treatment of
minorities
GREEN
May 05, 2015
Page 32
ONGC
Y/E Mar (` mn)
FY11
FY12
FY13
FY14
1,201,339
1,472,849
1,624,025
1,744,771
EBIDTA
210,739
483,938
432,384
494,000
Depreciation
113,644
131,865
117,633
165,809
4,377
4,349
4,838
6,243
Net Revenue
Interest
Other income
250,415
48,906
57,509
72,186
Consolidated PAT
224,559
281,436
242,196
265,065
26.3
32.9
28.3
31.0
EPS (Rs/share)

Y/E Mar (` mn)
FY11
FY12
FY13
FY14
Total Assets
2,240,858
2,654,186
2,887,377
3,536,146
1,278,085
1,490,405
1,730,286
2,279,571
444,057
622,671
565,405
644,442
Other Assets
513,034
531,990
581,643
604,748
Total Liabilities
2,240,858
2,654,186
2,887,377
3,536,146
Networth
1,153,272
1,364,391
1,525,276
1,721,510
39,771
52,086
88,427
316,809
Current Liabilities
364,462
515,056
495,861
686,412
Deferred Tax
663,461
700,413
758,347
782,290
Dept

Y/E Mar (` mn)
FY11
FY12
FY13
FY14
PBT
343,133
428,035
367,422
394,134
+ Depreciation
113,528
131,865
120,942
165,809
67,551
(70,506)
(60,066)
42,031
- Incr/(Decr) in WC
- Capex
Free cash flow
490,846
461,294
398,742
532,704
(361,316)
(420,052)
(460,524)
(641,433)
25,772
33,437
39,136
35,001
Cash from investing
(322,093)
(383,751)
(412,199)
(636,326)
- Dividend
(101,423)
(73,657)
(94,960)
(83,453)
+ Debt raised
Cash from financing
Net cash flow
400
91,523
45,678
247,223
(116,697)
1,015
(69,270)
152,246
52,057
78,559
(82,727)
48,624

Y/E Mar
FY11
FY12
FY13
FY14
EBITDA margin (%)
17.5%
32.9%
26.6%
28.3%
PAT margin (%)
18.7%
19.1%
14.9%
15.2%
21.1%
22.6%
16.6%
16.4%
DPS (Rs)
8.75
9.75
9.50
9.50
BVPS (Rs)
134.1
158.4
177.1
200.4
8.9
9.5
10.1
8.4
1.8
1.5
1.6
1.4
May 05, 2015
Page 33
ONGC
May 05, 2015
Page 34
State Bank of India

SELL
COMPANY UPDATE
SBIN IN EQUITY
May 05, 2015
Indias largest bank

State Bank of India (SBI) is Indias largest bank, and along with its associate
banks, it has loan market share of ~24%. The bank has 3.8% weightage in the
Sensex. Over the last ten years, the banks shares have compounded annually at
17%, vs Bankex return of 19% and Sensex return of 16%. The bank has an
enviable liability franchise (CASA at 43%) but exposure to stressed segments and
poor productivity have led to poor profitability.
Parameter
Result
RoA Trajectory
FY09: 1.08%, FY10: 0.91%, FY11: 0.73% Elevated credit costs have impacted
FY12: 0.91%; FY13: 0.97%; FY14: 0.65% profitability.
Loan Growth
FY09: 30%, FY10: 16%, FY11: 20%
Trajectory
FY12: 15%; FY13: 21%; FY14: 16%
EPS Growth
FY09: 35%, FY10: 0%, FY11: -10%
Trajectory
FY12: 34%; FY13: 18 %; FY14: -29%
Comment
Earnings have been volatile and have

reported a CAGR of 8% (FY05-14)
Accounting:
Predictability:
Earnings Momentum:
GREEN
AMBER
AMBER
Catalysts
Elevated credit costs at 130bps during
FY15-17
SBI falls behind on productivity of the

balance sheet, even as it does decently
on book value accretion.
SBI has struggled to generate RoAs of more than 1%

Since FY99, the bank has generated RoA of more than 1% in only two years.
Despite enjoying arguably the best liability franchise and branch network in
India, SBIs profitability has suffered due to weak income productivity (sub-par
cross-sell) and volatile asset quality trends. SBI and other PSU banks have been
structurally weakened over the years due to the role of the Government as the
promoter. High exposure to risky sectors at inadequate risk pricing and low
employee and branch productivities are reflections of these weaknesses.
Weak loan CAGR of 12% in FY14-16

Share price performance (%)
175
155
135
115
95
SBIN IN
Feb-15
The stock has given returns similar to

that of the Sensex.
Dec-14
8%/5%/16%
A slowing economy and over-exposure

to stressed segments led to a slowdown
in loan growth.
Flags
Oct-14
(decile)
FY09-14: 3rd decile*
`2,097/US$33.1
`5,442/US$86.0
`277
`270
3
Aug-14
Greatness Model
Mcap (bn):
3M ADV (mn):
CMP:
TP (12 mths):
Downside (%):
Jun-14
(CAGR)
3yr/5yr/10yr
Recommendation
Apr-14
Share price returns
BFSI
SENSEX
SBI has underperformed the new-gen private sector banks

In the last ten years, SBI has delivered annualised returns of 17% vs Sensex
return of 16%. Its new-gen private sector banking peers have, however,
delivered an annualised return of 27%. Whilst SBI has retained its market share
vs other PSU banks that have lost market share, it has underperformed its
private sector peers in profitability and that has driven SBIs share price
underperformance relative to its private sector peers.
A turbulent future awaits
The Governments efforts to improve corporate governance at PSU banks,
including SBI, have been underwhelming. With a large size, weak profitability,
relaxation of Government protection, rising capital requirements, competition
from stronger private sector peers and introduction of new players, SBI seems
highly likely to underperform its private sector peers on earnings growth.
Overvalued as compared to its peers
With steady-state RoA of ~1% and capped leverage of 12-13x, the bank will
struggle to deliver steady state RoEs above 12-13%. We value the standalone
bank at `204, implying 1.0x Mar17 BV. The sum-of-the-parts method for the
banks banking and non-banking subsidiaries leads to a target price of `270
(Mar16). Current valuation of ~1.3x FY16E P/B is at significant premium to its
peers, BOB (0.9x) and PNB (0.7x). We remain SELLers.
Analyst Details
Ravi Singh
+91 22 3043 3181
ravisingh@ambitcapital.com
Pankaj Agarwal, CFA
+91 3043 3206
Pankajagarwal@ambitcapital.com
Aadesh Mehta, CFA
+91 22 3043 3239
aadeshmehta@ambitcapital.com
State Bank of India
NIM % (RHS)
0.5%
5%
9.8%
9.5%
9.7%
9.4%
FY12
FY13
FY14
9MFY15
9.5%
FY10
8%
7.8%
9.4%
8.5%
FY08
FY09
8.0%
FY07
8.0%
8.4%
12%
10%
4.3%
3.0%
2.8%
3.0%
2.9%
3.6%
5.9%
10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
9.4%
Exhibit 4: Tier-I ratio of the bank is stable
8.6%
Exhibit 3: Stressed assets have increased substantially

7.8%
6.3%
9MFY15
0.0%
FY05
0%
9MFY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
1.5%
10%
FY14
2.0%
1.0%
FY13
2.5%
15%
FY11
3.0%
1.5%
20%
FY10
3.5%
RoA (RHS)
FY09
4.0%
FY08
4.5%
FY07
35%
30%
25%
20%
15%
10%
5%
0%
RoE
FY06
Loan growth %
Exhibit 2: RoA and RoE at 10-year lows now
FY12
Exhibit 1: Loan growth slowing down; NIM has peaked
6%
4%
2%
Source: Company, Ambit Capital research; Note: Until FY10, restructured

assets is not considered
Exhibit 5: P/E* band chart
Exhibit 6: P/B band chart
400
FY11
FY06
FY05
9MFY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
0%
400
2.1x
300
1.7x
13.8x
300
11x
8.2x
200
1.3x
200
100
100
0
Dec-14
Mar-14
Jun-13
Sep-12
Dec-11
Mar-11
Jun-10
Sep-09
Dec-08
Mar-08
Jun-07
Sep-06
Dec-05
Mar-05
Dec-14
Mar-14
Jun-13
Sep-12
Dec-11
Mar-11
Jun-10
Sep-09
Dec-08
Mar-08
Jun-07
Sep-06
Dec-05
Mar-05
Source: Company, Ambit Capital research; *The historical PE here uses

standalone EPS against SBIs share price.
Source: Company, Ambit Capital research; *The historical PB here uses

standalone EPS against SBIs share price.
Exhibit 7: Explanation for our flags on the first page

Segment
Score
Comments
Accounting
GREEN
We do not find anything unusual in SBIs financial statements and we believe that the reported numbers are a
true reflection of the profitability of the bank.
Predictability
AMBER
The volatility in asset quality trends lead to weak predictability of financial performance.
Earnings Momentum
AMBER
Earnings were down 23% YoY in FY14. Weak balance sheet CAGR of 13% (FY14-17E) would dampen earnings
growth even as RoA begin to improve gradually.
May 05, 2015
Page 36
State Bank of India

Balance sheet
Year to March (` mn)
FY13
FY14
FY15E
FY16E
FY17E
988,837
1,182,822
1,282,228
1,410,148
1,566,172
12,027,396
13,944,085
15,617,375
17,803,808
20,919,474
1,691,827
1,831,309
1,825,089
2,077,481
2,360,231
954,551
964,130
915,923
1,044,152
1,190,334
Total Liabilities
Cash & Balances with RBI &
Banks
Investments
15,662,610
17,922,346
19,640,615
22,335,589
26,036,211
1,148,202
1,325,496
1,645,128
1,843,046
2,120,665
3,509,273
3,983,082
4,746,876
5,365,461
6,235,038
Advances
Networth
Deposits
Borrowings
Other Liabilities
10,456,166
12,098,287
12,901,134
14,705,099
17,196,023
Other Assets
548,971
515,481
347,478
421,983
484,485
Total Assets
15,662,610
17,922,346
19,640,615
22,335,589
26,036,211
Income statement
FY13
FY14
FY15E
FY16E
FY17E
Interest Income
1,196,571
1,363,508
1,516,507
1,667,188
1,897,370
Interest Expense
753,258
870,686
973,889
1,063,685
1,201,783
Net Interest Income
443,313
492,822
542,618
603,503
695,586
Total Non-Interest Income
160,348
185,529
213,438
235,877
262,712
Total Income
603,661
678,351
756,056
839,380
958,298
Total Operating Expenses
292,844
357,259
380,705
421,862
469,036
Employees expenses
183,809
225,043
231,301
250,048
271,450
Other Operating Expenses
109,035
132,216
149,404
171,814
197,587
Pre Provisioning Profits
310,817
321,092
375,351
417,518
489,262
Provisions
111,308
159,354
183,584
174,378
195,497
PBT
199,509
161,739
191,767
243,140
293,765
Tax
58,459
52,827
61,365
77,805
94,005
141,050
108,912
130,402
165,335
199,760
FY13
FY14
FY15E
FY16E
FY17E
Credit-Deposit (%)
86.9%
86.8%
82.6%
82.6%
82.2%
CASA ratio (%)
47.7%
45.8%
45.4%
44.9%
44.3%
Cost/Income ratio (%)
48.5%
52.7%
50.4%
50.3%
48.9%
511,894
616,054
594,303
737,688
860,035
PAT
Ratio analysis
Year to March
Gross NPA (` mn)

Gross NPA (%)
4.76%
4.97%
4.51%
4.89%
4.87%
219,565
310,961
326,867
368,844
387,016
Net NPA (%)
2.10%
2.57%
2.53%
2.51%
2.25%
Provision coverage (%)
57.1%
49.5%
45.0%
50.0%
55.0%
NIMs (%)
3.18%
3.03%
2.96%
2.93%
2.93%
9.5%
9.7%
9.6%
9.3%
8.8%
Net NPA (` mn)
Tier-1 capital ratio (%)

May 05, 2015
Page 37
State Bank of India

Du-pont analysis
Year to March
FY13
FY14
FY15E
FY16E
FY17E
NII / Assets (%)
3.1%
2.9%
2.9%
2.9%
2.9%
Other income / Assets (%)
1.1%
1.1%
1.1%
1.1%
1.1%
Total Income / Assets (%)
4.2%
4.0%
4.0%
4.0%
4.0%
Cost to Assets (%)
2.0%
2.1%
2.0%
2.0%
1.9%
PPP / Assets (%)
2.1%
1.9%
2.0%
2.0%
2.0%
Provisions / Assets (%)
0.8%
0.9%
1.0%
0.8%
0.8%
PBT / Assets (%)

Tax Rate (%)
ROA (%)
Leverage
1.4%
1.0%
1.0%
1.2%
1.2%
29.3%
32.7%
32.0%
32.0%
32.0%
1.0%
0.6%
0.7%
0.8%
0.8%
15.9
15.5
15.2
15.6
16.3
15.4%
10.0%
10.6%
12.3%
13.4%
Year to March
FY13
FY14
FY15E
FY16E
FY17E
EPS (`)
20.6
14.6
17.5
22.1
26.8
ROE (%)
Valuation parameters
EPS growth (%)
18%
-29%
20%
27%
21%
144.6
158.4
171.7
188.9
209.8
P/E (x)
12.2
15.7
13.1
10.3
8.5
P/BV (x)
1.78
1.49
1.38
1.26
1.14
BVPS (`)
May 05, 2015
Page 38
HDFC
SELL
COMPANY UPDATE
HDFC IN EQUITY
A crumbling edifice
BFSI
HDFC is Indias largest mortgage financer with a loan book of Rs2.4tn and
7.6% weightage in the Sensex. Over the last ten years, the companys shares
have compounded annually at 24% vs 16% for the Sensex, even as its RoEs
have declined from 30% to 21% over FY08-15.
Parameter
Result
Comment
RoE Trajectory in
core lending
business
FY10: 29%; FY11: 37.4%; FY12:

37.4%, FY13: 30.4%, FY14:26.7%,
FY15:21.5%
HDFCs RoE has declined by ~750bps

between FY10 and FY15,
FY09: 22%, FY10: 19%, FY11: 19%
HDFCs loan growth has moderated over

the last two years due to increased
competition in the segment.
Loan Growth
Trajectory
FY12: 20%; FY13: 20%; FY14: 16%;

FY15:16%
EPS Growth
FY10: 7%; FY11: 14%; FY12: 23%,

Trajectory in core FY13: 9%, FY14:14%, FY15:5%
lending business
Share price returns
(CAGR)
3yr/5yr/10yr
May 05, 2015
25%/19%/25%
Recommendation
Mcap (bn):
6M ADV (mn):
CMP:
TP (12 mths):
Downside (%):
`1,960/US$33
`3,240/US$54
`1,245
`940
24
Flags
12% diluted EPS CAGR over FY08-15

Was driven by falling RoEs and slowing loan
growth during this period.
Steady EPS CAGR has led to
outperformance by ~9% over FY04-14
Accounting:
Predictability:
AMBER
AMBER
GREEN
Catalysts
Softening of real estate prices over

FY16-17.
Banks cutting base rates over
FY16/17.
Over the past decade (FY04-14), HDFCs core EPS has recorded 13% CAGR
despite falling margins due to robust loan growth at ~20% CAGR during this
period. However, increased competition from banks has led to growth and
profitability in the core lending business coming under pressure over the last
three years, with RoEs coming down by ~1550bps and EPS recording a CAGR
of just 9% during this period. However, despite this poor performance HDFCs
share price outperformed the Sensex by 9% over FY04-14.
Regulatory changes + Increasing competition = Existential issues
A combination of regulatory changes and competitive pressures has resulted in
HDFCs core earnings growth slowing down to ~9% CAGR over FY12-15 with
pressure on both growth and NIMs. We expect HDFCs core EPS CAGR to
remain muted and grow at ~10% CAGR due to slowdown in loan growth and
further compression in NIMs.
We expect HDFCs loan growth to further slowdown going forward due to: (i)
overall slowdown in growth in mortgage loans in India due to slowdown in real
estate prices which contributed to two-third of growth in home loans in India in
the last decade with just one-third of the growth being volume growth;
(ii) Increased competition from banks as more banks enter into the segment on
the back of CRR/SLR/PSL exempted bonds.
We expect HDFCs spreads to further decline, as: (i) Incremental spreads on
new mortgage originations would remain under pressure (~80-100bps) due to
ongoing competition from the banks; (ii) HDFCs higher spreads in its back
book decline due to higher pre-payment rates.
Valuations unreflective of structural issues
Our excess return model values HDFCs lending business at Rs442/share.
After adding the valuation of the subsidiary and associate companies, our 12month target price for the stock comes to Rs940/share. An implied valuation of
4x FY16E P/B for the lending business (after deducting value of subsidiaries) is
at a ~100% premium over its closest peer LICHF and a ~20% premium to its
historical averages; this does not look sustainable, given that the lending
business profitability would remain under structural pressure going forward.
Performance
160
140
120
100
80
60
May-14
Jun-14
Jul-14
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
Jan-15
Feb-15
Mar-15
Apr-15
Riding the real estate tide
HDFC
SENSEX
Analyst Details
Pankaj Agarwal, CFA
+91 22 3043 3206
Aadesh Mehta, CFA
+91 22 3043 3239
Ravi Singh
+91 22 3043 3181
HDFC
Exhibit 1: AUM growth and spreads over the past decade
YoY AUM growth (%)
Exhibit 2: RoAs and RoEs over the past decade
Spread (RHS, %)
RoE (%)
RoA (RHS, %)
15%
2.1%
15%
1.9%
10%
2.0%
10%
1.5%
3.5%
30%
3.1%
25%
Exhibit 3: Borrowing profile (3QFY15)
Exhibit 4: AUM composition (3QFY15)
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
2.7%
FY04
FY14
FY13
2.3%
FY12
20%
FY11
2.2%
FY10
20%
FY09
2.3%
FY08
25%
FY07
2.4%
FY06
30%
FY05
2.5%
FY04
35%
15%
11%
Individual
32%
Term Loans
Corporate - CRE
13%
Bonds & Debentures

Deposits
Corporate - Non
CRE
72%
56%
Exhibit 5: Forward P/E evolution over the past ten years
Exhibit 6: Forward P/B evolution over the past ten years
35
30
27x
6x
19x
4x
25
20
15
10
Dec-14
Mar-14
Jun-13
PB
Sep-12
Dec-11
Mar-11
Jun-10
Sep-09
Dec-08
Mar-08
Jun-07
Avg. PE
Sep-06
Dec-05
Mar-05
Dec-14
Mar-14
Jun-13
Sep-12
Dec-11
Mar-11
Jun-10
Sep-09
Dec-08
Mar-08
Jun-07
Sep-06
Dec-05
Mar-05
PE
Avg. PB

Segment
Score
Accounting
AMBER
Predictability
AMBER
Treatment of
minorities
GREEN
Comments
The company expenses the premium on ZCBs directly from the balance sheet rather than routing it through the income
statement; it also provides detailed disclosures in its annual report on this accounting practice. Nevertheless, we believe
that the reported profits do not reflect the true profitability of the company due to this accounting adjustment.
Given the rapidly changing nature of the regulations, elevated wholesale interest rates in India, and the softening of real
estate prices, we believe the companys earnings growth trajectory has some amount of unpredictability.
We did not come across any instances wherein the management has mistreated the minorities.
May 05, 2015
Page 40
HDFC
Balance sheet (in Rs mn)
FY13
FY14
FY15
FY16E
FY17E
44,407
53,432
61,193
67,034
71,095
Interest Income
189,452
218,727
247,138
273,796
316,944
Interest expense
145,046
165,294
185,945
206,762
245,848
Fee and other income
22,023
23,250
27,571
31,821
36,455
Total net income
66,430
76,683
88,764
98,855
107,551
5,480
6,281
7,066
8,277
8,871
60,950
70,402
81,697
90,577
98,680
1,450
1,000
1,650
2,114
2,596
59,500
69,402
80,047
88,464
96,084
Net Interest Income
Operating Expenditure
Operating profit
Bad debts and provisions
Profit before tax
Taxes
15,490
18,572
24,296
27,424
29,786
Adjusted PAT
44,010
50,830
55,752
61,040
66,298
Income statement (in Rs mn)

FY13
Networth
FY14
FY15
FY16E
FY17E
250,000
279,552
309,700
339,835
372,095
Borrowings
1,588,880
1,842,900
2,007,890
2,486,925
2,857,606
Total liabilities
1,838,880
2,122,452
2,317,590
2,826,761
3,229,701
2,379
2,805
6,770
6,905
7,043
1,700,460
1,971,000
2,281,809
2,640,720
3,056,876
205,782
Fixed Assets
Loan book
Investments
136,135
139,127
142,943
189,136
Deferred tax assets
6,314
6,299
Net Current assets
(63,919)
(73,933)
(147,578)
(10,000)
(40,000)
1,838,880
2,122,452
2,317,590
2,826,761
3,229,701
FY13
FY14
FY15
FY16E
FY17E
AUM growth (%)
20.7
15.9
15.8
15.7
15.8
Dil Adjusted EPS growth (%)
31%
13%
9%
10%
8%
Spreads
2.2
2.1
1.9
1.8
1.8
Cost to income (%)
7.4
7.7
7.4
8.4
8.2
Opex (% of AAUM)
0.32
0.31
0.30
0.30
0.28
0.7
0.7
0.7
0.6
0.6
Credit costs (% of AAUM)
0.08
0.05
0.07
0.08
0.08
Provisioning Coverage
32.3
40.2
31.2
33.0
32.0
Capital adequacy (%)
16.2
17.9
16.0
15.0
14.3
Tier-1 (%)
13.8
15.4
12.3
11.6
11.0
7.3
7.5
7.8
8.3
8.8
Total assets
Key ratios
Gross NPAs (%)
Leverage (x)
Valuation parameters
FY13
FY14
FY15
FY16E
FY17E
BVPS (Rs)
162
179
198
216
237
Core BVPS (Rs)
109
126
144
163
184
Adjusted EPS
41.6
28.6
32.2
35.0
38.4
ROA (%)
2.6
2.6
2.5
2.4
2.2
ROE (%)
19.0
19.2
18.9
18.8
18.6
P/E
42.1
37.4
34.3
31.4
28.9
P/B
7.4
6.7
6.1
5.6
5.1
P/E- Adjusted
33.0
28.9
27.6
25.4
23.6
P/B- Adjusted
7.4
6.4
5.5
4.9
4.3
Dividend yield (%)
1.0
1.2
1.3
1.4
1.5
May 05, 2015
Page 41
HDFC
May 05, 2015
Page 42
Bharti Airtel
NOT RATED
COMPANY UPDATE
BHARTI IN EQUITY
May 05, 2015
Indias telecom behemoth with a large presence in Africa

Bharti Airtel is Indias largest telecom operator with a presence in 20 African
and Asian countries. The company has 2.2% weightage in the Sensex and its
shares have compounded annually at 15% vs 18% for the Sensex in the last ten
years.
Mcap (bn):
6M ADV (mn):
CMP:
`1,523/US$24.1
`2,015/US$31.8
`381
Comment
Flags
Accounting:
Predictability:
Minority treatment:
GREEN
AMBER
AMBER
Performance (%)
140
120
100
Sensex
Mar-15
Jan-15
Nov-14
80
Sep-14
Bharti made super-normal RoCEs over FY05FY10 due to strong revenue growth on the
FY09: 29%, FY10: 22%, FY11: 12% back of rising penetration of mobile
RoCE Trajectory
FY12: 9%; FY13: 7%; FY14: 10% telephony. Increased competition, high
spectrum outlays and acquisition of Zain,
Africa, have put a dampener on its RoCEs.
The stellar revenue growth in FY09 slowed
FY09: 38%, FY10: 12%, FY11:
Sales Growth
down thereafter due to pricing pressure
11%*
combined with tapering subscriber growth in
Trajectory
FY12: 20%; FY13: 12%; FY14: 12%
India and poor performance in Africa.
FY09: 21%, FY10: 17%, FY11: The companys EPS growth has been volatile,
EPS Growth
33%
as margin pressure in Africa, increased
interest costs and foreign exchange
FY12: -30%; FY13: -47%; FY14:
Trajectory
movements have impacted earnings.
17%
Over a 10-year period, share prices have
returned 15%. Although this is above the
Share price returns
cost of equity, returns were front-ended, and
3yr/5yr/10yr
9%/7%/15%
(CAGR)
declining profitability has resulted in returns
of only 7% in the last five years.
Bharti ranks poorly due to sub-par
th
Greatness Model
FY10-14: 7
performance in pricing discipline and
Decile**
(decile)
deterioration of financial ratios.
Jul-14
Result
NOT RATED
May-14
Parameter
Telecom
Bharti
st
Source: Company, Ambit Capital research;* Note: FY11 revenue growth is organic. ** 1 decile is the best
and 10th decile is the worst.
Boom followed by pressure on growth and profitability

Bhartis financial performance in the last 10 years is a tale of two halves FY0509 when revenue CAGR was 49% with RoCEs of 20-34% and FY10-14 when
revenue CAGR (ex-Africa) was 7% with consolidated RoCEs of 7-22%. The first
phase was characterised by strong growth, as mobile telephony saw rapid
adoption and additional spectrum was available easily. Post FY11, Bharti was hit
by a nexus of four structural changes: higher competition, increased regulatory
oversight, highly competitive spectrum auctions and acquisition of Zain in Africa.
Poor returns in the last five years
Bharti has underperformed the Sensex by 5% CAGR in FY10-15, as profitability
declined and revenue growth tapered off. Inability to replicate its successful
India strategy in Africa was compounded by deterioration in the India business.
Bhartis India success was partly due to easy access to spectrum and limited
competition, advantages which were eroded when the Govt began to auction
spectrum.
Future to be characterised by a fight to monetise data investments
Consolidation in the Indian telecom industry and strong growth in data services
are likely to result in improvement in growth and profitability. But, super-normal
profitability is unlikely to return for Bharti. Spectrum costs will continue to bite
profitability; Reliance Jios entry could result in pressure on data tariffs. The
Governments pro net-neutrality stance (http://goo.gl/Xtq1PV) may hurt the
operators ability to monetise heavy investments in data services.
Valuations marginally below peers and history
Bharti is currently trading at 6x FY16 consensus EBITDA, a 7% discount to the
last six-year average, as increased competitive intensity (due to Jios entry)
weighs in on the valuations. It trades at a similar discount to Ideas current
valuation.
Analyst Details
Sagar Rastogi
+91 22 3043 3209
Utsav Mehta, CFA
+91 22 3043 3291
utsavmehta@ambitcapital.com
Bharti Airtel
Exhibit 1: Margins have due to pricing pressure in India
and poor performance in Africa
Revenue (Rsbn; LHS)
50%
EBITDA margin (RHS)

50%
1,000
RoE
RoCE
40%
800
30%
40%
600
Exhibit 2: Profitability has declined materially in the last

ten years
20%
400
30%
10%
200
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
20%
FY06
FY05
0%
-
Exhibit 3: Bhartis sources of funds have primarily been

internal accruals and debt (FY05-14)
Exhibit 4: and have been invested largely in capex and

acquisitions (FY05-14)
Invstments
Others
5%
2%
Interest
7%
Debt (net)
23%
Acquisition/
investments
in
subsidiaries
23%
Equity raise
6%
CFO
71%
Capex
63%
Exhibit 5: Multiples have contracted,

profitability have declined
as
growth
and
Exhibit 6: On a P/E basis, the stock has become expensive,

as EPS has slid due to interest costs & forex movements
14
30
12
25
10
20
8
15
6 yr avg
BHARTI P/E
4 yr avg
Apr-15
Oct-14
Apr-14
Oct-13
Apr-13
Oct-12
Apr-12
Oct-11
Apr-11
Oct-10
Apr-15
Oct-14
Apr-14
Oct-13
Apr-13
Oct-12
Apr-12
Oct-11
Apr-11
Oct-10
Apr-10
Oct-09
Apr-09
Oct-08
Apr-08
Oct-07
Apr-07
BHARTI EV/EBITDA
Apr-10
10
5yr Avg

Segment
Score
Accounting
GREEN
Predictability
AMBER
Treatment of
minorities
AMBER
Comments
Bharti performs well in our accounting analysis. It ranks in the top decile of companies due to its strong cash conversion,
stable depreciation rates, and capex efficiency vis--vis its peers. It presents its accounts in IFRS and hence is unlikely to
face reporting disruption when Indian companies shift to IFRS.
Although Bhartis revenue growth is typically consistent and predictable (in the last eight quarters, the average surprise to
consensus estimates on revenue has been 2%), its profits are more variable due to the impact of foreign exchange
movements (average surprise of 14%).
Our accounting analysis does not raise any major red flags with respect to dubious transactions by promoters. However,
we raise concerns over the capital allocation of the firm due to its investments in Africa.
Source: Ambit Capital
May 05, 2015
Page 44
Bharti Airtel
FY12
FY13
FY14
FY15
Property, plant and equipment
674,932
638,277
596,429
579,157
Intangible assets
660,889
648,386
809,716
922,283
223
11,552
56,702
46,257
36,341
31,260
86,488
97,132
108,727
111,206
1,308
1,109
1,422
1,339
Trade and other receivable
63,735
67,824
62,441
67,252
Derivative financial assets
2,137
1,097
819
1,207
32,621
30,860
29,656
31,828
9,049
10,093
9,319
5,750
18,132
65,546
62,265
92,840
Investment in joint ventures / associates

Other Investments
Others
Inventories
Prepayments and other assets

Income tax recoverable
Other investments
Other financial assets
Cash and cash equivalents
802
4,299
8,127
10,075
20,300
16,078
49,808
11,719
45,645
1,570,616
1,592,253
1,831,772
1,957,818
506,113
503,217
597,560
619,564
27,695
40,886
42,102
48,525
Assets of disposal group

Total assets
Shareholder's Equity
Non-controlling interest
Borrowing
690,232
667,363
758,958
663,672
Other non - financial liabilities
40,649
39,037
50,087
178,846
Deferred revenue
46,174
49,245
58,909
67,991
8,530
11,512
11,769
8,309
Provisions
Other non - financial liabilities
Trade & other payables
18,573
21,091
28,406
25,796
232,650
259,902
283,981
339,670
5,445
1,570,616
1,592,253
1,831,772
1,957,818
Liabilities of disposal group

Total equity and liabilities
Source: Company; Due to reclassification of data, FY12 figures are not comparable to FY13, FY14 and FY15

FY12
FY13
FY14
FY15
Total income
715,058
769,468
858,635
921,351
Employee cost
35,159
38,823
46,228
47,123
License fee and spectrum charges
61,099
66,486
75,971
87,391
Access and interconnection
97,361
113,227
111,923
112,759
157,598
173,333
197,202
203,372
Sales and marketing
71,369
83,778
86,075
90,070
Administration and others
54,940
60,854
61,904
65,463
409
390
902
1,290
237,123
232,577
278,430
313,883
Network operating expenses
Other expenditure
EBITDA
EBITDA margin
33.2%
30.2%
32.4%
34.1%
Depreciation and amortisation
133,681
148,147
156,496
155,311
EBIT
103,442
84,430
121,934
158,572
EBIT margin
14.5%
11.0%
14.2%
17.2%
Net finance charges

Share of gains and (losses) from
JVs and associates
Exceptional Items (gains)/ losses
38,185
40,084
49,040
50,133
-74
3,506
5,211
7,223
(538)
8,532
PBT
65,183
47,852
78,643
107,130
Tax Expenses
22,602
25,183
48,449
54,047
PAT
42,581
22,669
30,194
53,083
Minority interest
Net profit
Diluted EPS
(13)
(88)
2,467
1,248
42,594
22,757
27,727
51,835
11.22
5.99
7.01
12.97
May 05, 2015
Page 45
Bharti Airtel
In ` mn
Profit before tax
Depreciation and amortization
FY12
FY13
FY14
FY15
65,183
47,852
78,643
107,130
133,681
148,147
156,496
155,311
Finance income
(2,643)
(5,103)
(11,680)
(24,788)
Finance cost
40,828
45,187
60,060
73,252
Others
CFO before WC Changes
Change in working capital
Cash generated from operations
Others
2,391
(2,767)
(8,473)
(5,331)
239,440
233,316
275,046
305,574
15,050
19,636
17,533
(1,639)
254,490
252,952
292,579
303,935
401
1,991
4,786
18,194
Income tax paid
(29,453)
(31,294)
(35,039)
(46,111)
CFO
225,438
227,699
262,326
276,018
(150,283)
(130,373)
(174,659)
(209,786)
(10,823)
(47,389)
(21,998)
(13,821)
(8,842)
2,540
Capex
Short term investments (Net)
Net Purchase of non-current investments
Investment in subsidiary, net of cash acquired
(24,985)
102
(6,044)
(358)
Sale / Demerger of subsidiary
2,543
(8,009)
1,021
Investment in associate / joint venture
(285)
(9,281)
(2)
(10)
38
(130)
(30,179)
(154)
(183,795)
(186,761)
(249,733)
(220,481)
(2,830)
(24,026)
14,252
(72,451)
(32,352)
(34,339)
(37,620)
(33,887)
Loan to joint venture / associate (net)

CFI
Borrowings (net)
Interest and other finance charges paid
Repayment of loan to joint venture
Equity (net)
Dividend paid to Company's shareholders
Dividend paid to non - controlling interests
Sale of interest in a subsidiary
Acquisition of Non-controlling interest
CFF
Effect of exchange rate changes on cash and
cash equivalents
Net (decrease) / increase in CCE
(9,173)
(357)
31,030
68,054
552
(4,411)
(4,412)
(4,439)
(16,034)
(157)
(1,126)
(2,296)
(5,365)
40,412
(12,782)
(10,207)
(624)
(40,107)
(45,655)
27,744
(96,570)
493
(1,624)
(2,075)
43
2,029
(6,341)
38,262
(40,990)
Ratios
FY12
FY13
FY14
FY15
20%
12%
12%
7%
Growth
Revenue growth
EBITDA growth
18%
5%
20%
13%
-30%
-47%
17%
85%
EBITDA margin
33.7%
30.2%
32.4%
34.1%
EBIT margin
16.5%
11.0%
14.2%
17.2%
PAT margin
10.1%
2.9%
3.5%
5.8%
RoE
9%
4%
5%
9%
RoCE
9%
7%
10%
11%
EPS growth
Margins
Profitability
Valuation (1 yr fwd)
P/E
56.4
40.0
24.5
NA
EV/EBITDA
8.4
6.2
6.2
NA
P/B
2.5
1.9
2.1
NA
Source: Company, Bloomberg
May 05, 2015
Page 46
L&T
SELL
LT IN EQUITY
Conglomerate with leadership in E&C

L&T is Indias leading conglomerate with: (a) market leadership in E&C sectors
such as infrastructure, hydrocarbon, metallurgy & material handling and heavy
engineering; and (b) a presence in technology services and NBFC. L&T has 5.5%
weightage in the Sensex and is a major player in the infrastructure and capital
goods industry. Over the last ten years, the companys shares have compounded
Parameter
Result
Comment
ROCE Trajectory
FY09: 10.3%, FY10: 8.9%, FY11: 8.0%

FY12: 7.3%; FY13: 6.4%; FY14: 5.4%
L&Ts RoCE have declined over

FY09-14 due to capital allocation in
loss-making infra subsidiaries.
Sales Growth
Trajectory
FY09: 37.6%, FY10: 8.3%, FY11: 18.6%

FY12: 23.5%; FY13: 16.1%; FY14: 14.2%
Despite strong order inflow CAGR

over FY09-14, revenue growth
decelerated due to slow down in
execution.
EPS Growth
Trajectory
FY09: 31%, FY10: 11%, FY11: 19%

FY12: 16%; FY13: (31)%; FY14: (13)%
Consolidated PAT growth has

declined due to higher losses in
subsidiaries.
Flags
Accounting:
Predictability:
Earnings Momentum:
AMBER
AMBER
AMBER
Catalysts
L&T outperformed the Sensex over

FY05-09 and underperformed the
Sensex over FY09-14.
Slowdown in Middle East order

intake in FY16 due to lower crude
prices
L&T is ranked D5, as it has low fixed

asset turnover and low cash flow
conversion.
Execution delays and cost overruns in

large Middle East projects over FY1517E
Lower-than-expected FY16/17E
RoCE in the roads and power T&D
segment due to high competition
th
Source: Ambit Capital. Note: * 1 decile is the best and 10 decile is the worst.
Capital allocation is a story of two halves (FY05-09 vs FY09-14)

Capex in short-cycle segments was the key area for application of cash in FY0509. However, application of cash over FY09-14 in the long-gestation
infrastructure segment and loss-making subsidiaries such as Infrastructure
Development Projects Limited, ship building and heavy engineering led to a
sharp decline in RoCE (10.3% in FY09 vs 5.4% in FY14). Whilst L&Ts FY05-14
revenue CAGR was 19%, L&Ts FY05-14 EPS CAR was 5%, as L&T used debt to
fund revenue growth (Debt:Equity increased from 0.7x in FY06 to 2.1x in FY14).
and so is the stock performance
L&Ts share price has outperformed the Sensex by 14% over FY05-09 and
underperformed the Sensex by 2% over FY09-14 due to capital misallocation.
L&T is a complex company with several segments but the regular change in
reporting methodology makes like-for-like comparison of results difficult.
Growth to moderate post FY17 on a base of ~`4.2 trillion order book
Bottom-up analysis implies moderate recovery over FY15-18E (15% order inflow
CAGR) driven by the roads and power T&D segment. High competitive intensity
in a fragmented industry, no discernible competitive advantages in most sectors,
and rising working capital needs (from the increasing share of the infrastructure
segment) will restrict standalone RoEs to 17% over FY14-17. Pressure on
profitability of the Middle East (ME) hydrocarbon and ME infra segment and high
competition will limit ME RoCE to 5-10%. Size will increasingly become a
constraint and limit FY17-25E revenue CAGR to 14% and EPS CAGR to 13%.
Reiterate SELL as poor capital allocation will restrict RoE improvement
We reiterate our SELL stance with a DCF-based TP of `1,374, implying 25.8x
FY17E EPS. Valuation of 22x core EPS for FY17E is expensive given flat RoE and
likely losses in the hydrocarbon and ME infrastructure segment. L&T is trading at
~30x FY16E EPS, a ~40% unjustified premium to its ten-year average, as the
structural change in L&Ts business from a manufacturing to infrastructure firm
has led to lower RoCE over FY08-14.
L&T vs BSE Sensex performance

160
110
60
L&T
Feb-15
st
`1,603/US$25.5
`3,339/US$53.1
`1,640
`1374
16%
Dec-14
Greatness Model FY09-14: 5th decile*

(decile)
Mcap (bn):
6M ADV (mn):
CMP:
TP (12 mths):
Downside (%):
Oct-14
12%/23%/5%
Recommendation
Aug-14
3yr/5yr/10yr
Engineering & Construction
Jun-14
Share price returns

(CAGR)
May 05, 2015
Apr-14
COMPANY UPDATE
SENSEX
Analyst Details
Nitin Bhasin
+91 22 3043 3241
Tanuj Mukhija, CFA
+91 22 3043 3203
L&T
Exhibit 1: EBITDA margins and revenue growth over the
last ten years
900,000
700,000
Exhibit 2: RoCE
16%
16%
14%
14%
12%
RoE
over
the
last
ten
12%
10%
Revenue
EBITDA Margin (% RHS)
RoCE
FY14
FY13
FY12
FY11
RoE (RHS)
Exhibit 3: Sources of funds over FY05-14

Interest +
Dividend
received,
13%
FY10
4%
FY09
6%
FY08
6%
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
100,000
8%
8%
FY05
300,000
FY07
10%
years
40%
35%
30%
25%
20%
15%
10%
5%
0%
FY06
500,000
and
Exhibit 4: Utilisation of funds over FY05-14
Divestments,
3%
Others, -2%
Capex, 27%
Investment
in
Subsidiaries
, 44%
CFO, 46%
Debt (net),
23%
Equity raise,
14%
Increase in
cash and
cash
equivalents,
4%
Interest
paid, 10%
Dividend,
16%
Investments
(LT + ST),
3%
L&T P/E
6 Yr Avg
4 Yr Avg
L&T P/B
6 Yr Avg
Jul-14
Jul-13
Jul-12
Jul-11
Jul-10
Jul-09
Jul-08
Jul-07
Jul-06
14
12
10
8
6
4
2
0
Jul-05
Aug-14
Aug-13
Aug-12
Aug-11
Aug-10
Aug-09
Aug-08
Aug-07
Aug-06
Aug-05
45
40
35
30
25
20
15
10
4 Yr Avg

Field
Score
Accounting
AMBER
Predictability
AMBER
Earnings
momentum
AMBER
Comments
In our forensic analysis of 360 companies, L&T is in the top quartile and is amongst the best companies on parameters of
contingent liabilities as a percentage of net worth and provision for doubtful debts as a percentage of debtors.
However, in our E&C forensic analysis, L&T appeared to be an average player on accounting quality. Whilst the company is
amongst the top-three players on revenue recognition checks, it appeared to be an average player on cash expense
manipulation and cash pilferage checks. This is on account of the fact the L&T has significantly higher: (a) miscellaneous
expenses as a percentage of revenues; and (b) unclassified loans as a percentage of net worth as compared to other E&C
companies.
The management has made timely announcements with regard to order flow, revenue growth and EBITDA margin guidance.
However, the actual performance has been behind managements expectations in terms of order flow and margins in FY11-14.
Consensus FY15E and FY16E EPS estimates have seen 5-10% downgrades over the past six months due to weak performance of
the hydrocarbon segment.
May 05, 2015
Page 48
L&T
Income statement
Y/E March (` mn)
Revenue
% growth
Total expenses
EBITDA
FY14
FY15E
FY16E
FY17E
565,989
602,207
700,598
826,764
9.7%
6%
16%
18%
499,408
532,473
620,229
732,472
66,582
69,735
80,369
94,292
EBITDA margin
11.8%
11.6%
11.5%
11.4%
Net depreciation / amortisation
7,835
10,307
10,869
12,081
Net interest
5,812
7,697
8,099
8,624
Other income
13,859
16,466
17,140
17,813
Provision for taxation
17,748
19,095
25,133
29,248
Adjusted PAT
50,295
48,920
53,238
61,982
Adjusted PAT margin
8.9%
8.1%
7.6%
7.5%
Adjusted EPS diluted (`)
54.0
52.5
57.2
66.5
Core EPS diluted (`)
43.0
40.8
46.3
55.7
FY14
FY15E
FY16E
FY17E
Total Networth
336,618
367,918
399,248
435,793
Loans
116,839
126,839
126,839
131,839
4,099
4,781
5,567
6,481
Sources of funds
457,557
499,539
531,655
574,114
Gross Block
131,467
145,087
160,707
178,327
86,091
90,032
94,949
100,703
195,014
180,134
181,691
196,932
17,838
78,496
91,693
94,749
215,388
226,034
255,286
294,464
19,825
18,965
22,090
26,088
Loans and advances
100,672
98,434
105,442
114,430
Other current assets
154,186
159,693
181,732
209,694
Current Liabilities
303,608
318,584
361,586
416,406
Source: Company, Ambit Capital Research
Balance Sheet
Y/E March (` mn)
Deferred Tax Liability
Net block
Investments
Cash and bank balances
Sundry debtors
Inventories
Provisions
24,130
27,947
32,290
37,502
Current liabilities and provisions
327,738
346,532
393,877
453,908
Net current assets
180,171
235,089
262,367
285,516
FY14
FY15E
FY16E
FY17E
Cash Flow statement

Y/E March (` mn)
Cash flow from operations
10,472
56,136
40,906
44,492
Purchase of fixed assets
(9,620)
(12,150)
(14,150)
(16,150)
(50,159)
(2,989)
(11,557)
(15,241)
4,914
5,705
4,585
4,310
(12,144)
21,909
2,710
(13,106)
Investments/loans to subs
Interest received
CFI
Proceeds from borrowings
41,659
10,000
5,000
Interest paid
(10,253)
(13,402)
(12,684)
(12,934)
Dividends paid
(12,271)
(13,985)
(17,735)
(20,396)
CFF
5,040
(17,387)
(30,419)
(28,330)
Net change in cash
3,369
60,658
13,197
3,056
852
43,986
26,756
28,342
Free cash flow

May 05, 2015
Page 49
L&T
Key ratios
Y/E March
FY14
FY15E
FY16E
FY17E
0.32
0.30
0.3
0.2
Net debt/Equity
0.1
0.1
0.0
0.0
Working capital turnover (x)
3.8
3.2
3.2
3.4
Gross block turnover (x)
4.8
4.9
5.2
5.5
Debt:Equity
ROCE
19%
16%
16%
17.6%
ROIC
24.0%
19.4%
18.7%
20.0%
Core ROE
17.8%
15.3%
15.6%
17.1%
P/E excl. embedded value (x)
22.0
22.6
20.7
17.8
Core PE
27.4
28.8
25.4
21.1
P/B (x)
EV/EBITDA(x)
4.6
4.2
3.9
3.5
24.7
22.9
19.7
16.8
May 05, 2015
Page 50
NTPC
SELL
COMPANY UPDATE
NTPC IN EQUITY
May 05, 2015
Indias largest utility

NTPC is Indias largest utility with a ~17% share in Indias installed capacity.
NTPC, with plant availability factor (PAF) of >90% over the past decade, is one
of the most-efficient utilities in India. NTPC has 1.5% weightage in the Sensex.
Over the last ten years, the companys shares have compounded annually at
6.5% vs 15.8% for the Sensex.
Parameter
Result
FY09:
RoCE Trajectory
FY12:
Sales Growth
FY09:
Trajectory
FY12:
EPS Growth
FY09:
Trajectory
FY12:
Comment
12%, FY10: 13%, FY11: 12% Fall in RoCE over FY09-14, led by increase
in CWIP (increased as a percentage of
12%; FY13: 12%; FY14: 11% capital employed from 29% in FY09 to 33%
in FY14).
10%, FY10: 13%, FY11: 19% Deceleration in growth over FY09-14 led by
fall in NTPCs PLF from 91% in FY09 to 82%
14%; FY13: 9%; FY14: 9%
in FY14.
8%, FY10: 9%, FY11: 6%
Decline in EPS growth led by fall in revenue
and other income.
5%; FY13: 12%; FY14: 3%
Share price returns

(CAGR)
3yr/5yr/10yr
Greatness Model
FY09-14: 9th
(decile)
Decile*
-3%/-6%/6%
Negative CAGR over past five years led by

concerns over the availability of domestic
coal and downward revision in tariff as per
the CERC's stringent regulations for FY1519.
NTPC scores in the second last decile given
its high CWIP and lack of pricing discipline.
Utilities
Recommendation
Mcap (bn):
6M ADV (mn):
CMP:
TP (12 mths):
Downside (%):
Flags
Accounting:
Predictability:
Treatment of minority interest:
GREEN
GREEN
GREEN
Catalysts
Unfavourable judgment from Delhi

High Court on revised Tariff
regulation in FY16
Fall in RoE by 260bps over FY14-16
Performance (%)
Large capex led to decline in RoCE
160
Whilst NTPCs revenue has recorded a 15% CAGR over FY05-14, its EBITDA
margin declined by 410bps to 24.9% due to the fall in its standalone plant load
factor (PLF) from 88% in FY05 to 82% in FY14. Moreover, NTPCs RoCE has
declined by 320bps to 10.9% due to the increase in CWIP (as a percentage of
capital employed, CWIP increased from 17% in FY05 to 33% in FY14).
Underperformance to Sensex led by weaker earnings growth
140
120
100
80
Apr-14
May-14
Jun-14
Jul-14
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
Jan-15
Feb-15
Mar-15
NTPCs share price CAGR has underperformed the Sensex by 10% per annum
over FY05-14, as its profits have recorded a mere 7% CAGR (vs Sensexs 13%)
due to the slow pace of capacity addition CAGR of 7% over FY05-14. Moreover,
concerns over the availability of domestic coal and the fall in NTPCs realisation
under the new tariff regulation of FY15-19 have led to a de-rating of the stock.
`1,220/US$19.4
`851/US$13
`148
`106
29
Sensex
NTPC
PLF to decline by 500bps over FY15-25

NTPCs capacity addition CAGR is likely to decline from 7% over FY04-14 to 5%
over FY15-25E, given the increase in competition from the private sector and
given the rapidly declining power deficit. NTPC has failed to win any major
projects under the competitive bidding mechanism (which has been made
compulsory since 2009). Moreover, NTPCs PLF is likely to decline further to 77%
by FY25 as the company is unlikely to enjoy the preferential treatment from Coal
India in the allocation of fuel linkages, which it enjoyed historically (NTPCs
average PLF of 88% vs Indias 74% over FY05-14 were due to >90% linkage
coal). Consequently, we expect NTPC to report EPS CAGR of 6% and a meagre
140bps improvement in RoCE over FY15-25.
De-rating candidate; RoE less than cost of equity
NTPC is trading at 1.4x FY16 P/B, in line with its peers despite lower FY16
standalone RoE of 9.0% vs its peers 10.2% and -3% standalone EPS CAGR over
FY14-16 vs peers 18.3%. On comparison with its ten-year one-year forward
P/B, NTPC trades at a 22% discount due to the 190bps decline in its standalone
RoE over FY14-17E to 11%. Current multiples should de-rate, due to flat
earnings and RoEs being lower than the firms cost of equity of 14%.
Analysts Details
Bhargav Buddhadev
+91 22 3043 3252
Deepesh Agarwal
+91 22 3043 327
deepeshagarwal@ambitcapital.com
NTPC
Exhibit 1: EBITDA margins and revenue over the last ten
years
1,000
Exhibit 2: RoCE and RoE have been trending downward

over the last ten years
16.5
20.0
30
Revenue (Rsbn)
13.0
RoCE (%)
EBITDA margin (%) on RHS
FY14
FY13
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
20
13.5
10.0
FY12
14.0
12.0
FY11
22
14.5
FY10
200
14.0
FY09
24
FY08
400
15.0
FY07
26
FY06
600
15.5
16.0
FY05
28
16.0
18.0
FY04
800
RoE (%) on RHS
Exhibit 3: Internal accrual (CFO) has generated ~52% of

total cash inflows over FY05-14
Exhibit 4: out of which 54% has been spent on capex
% of cash generated over FY05-14
% of cash spent over FY05-14
Others,
Investmen 6%
ts, 7%
Debt Paid,
14%
Equity, 1%
Interest
paid, 14%
CFO
generated
, 52%
Net debt
raised,
35%
Capex,
54%
Dividend
paid, 18%
Exhibit 5: NTPC is trading near its ten-year average

forward P/E
Exhibit 6: NTPC is trading at a 22% discount to its ten-year

average forward P/B
NTPC P/E (x)
4 Yr Avg
6 Yr Avg
10 Yr Avg
NTPC P/B (x)

6 Yr Avg
Nov-14
Nov-13
Nov-12
Nov-11
Nov-10
Nov-09
Nov-08
Nov-14
Nov-13
Nov-12
Nov-11
Nov-10
Nov-09
Nov-08
Nov-07
Nov-06
Nov-05
Nov-04
8.0
Nov-07
13.0
Nov-06
18.0
Nov-05
23.0
4.0
3.5
3.0
2.5
2.0
1.5
1.0
Nov-04
28.0
4 Yr Avg
10 Yr Avg
Exhibit 7: NTPC explanation for forensic accounting scores on the cover page
Field
Score
Comments
Accounting
In our accounting analysis of BSE-500 companies, we have classified NTPC as a 'utilities company'. NTPC's overall
GREEN
score is above the industry average due to strong cash conversion, low contingent liability and higher cash yield.
Predictability
The company has always given a detailed description and has made timely disclosures regarding its future strategy,
GREEN expansion plans, expected business momentum and expected earnings performance, in its annual reports and
conference calls. Further, regulated equity model renders high predictability to earnings.
Treatment of minorities
GREEN Our accounting analysis does not raise any major red flags with respect to dubious transactions by promoters.
May 05, 2015
Page 52
NTPC
Balance Sheet
FY13
FY14
FY15E
FY16E
FY17E
168,677
153,114
103,410
(17,258)
(28,155)
Debtors
53,655
52,201
68,427
75,497
82,948
Inventory
40,572
53,734
47,909
53,686
57,886
113,790
158,933
158,933
158,933
158,933
Cash
Loans & advances

Investments
Fixed assets (incl. CWIP)
Total assets
107,601
97,579
97,579
97,579
97,579
1,000,455
1,169,995
1,282,923
1,377,617
1,448,420
126,415
109,987
109,987
109,987
109,987
1,869,168 1,856,041
1,927,598
1,611,165 1,795,542
Current liabilities & provisions
253,159
286,716
272,683
271,881
265,770
Debt
532,537
624,058
791,818
740,097
773,059
21,594
26,615
26,615
26,615
26,615
1,091,117 1,038,593
1,065,445
Other liabilities
Total liabilities
807,290
937,389
Shareholders' equity
82,455
82,455
82,455
82,455
82,455
Reserves & surpluses
721,421
775,699
695,596
734,993
779,699
Total net worth
803,875
858,153
778,051
817,448
862,153
Net working capital
249,949
241,252
215,983
108,965
115,829
Net debt (cash)
363,860
470,944
688,409
757,355
801,215
Income statement
FY13
FY14
FY15E
FY16E
FY17E
656,739
717,357
723,390
800,317
876,902
6%
9%
1%
11%
10%
Operating expenditure
485,896
542,416
571,203
638,024
682,371
EBITDA
170,843
174,941
152,187
162,293
194,531
24%
2%
-13%
7%
20%
Operating income
% growth
% growth
Depreciation
33,968
41,422
47,856
49,795
55,334
136,876
133,519
104,331
112,498
139,198
Interest expenditure
19,244
24,066
27,051
29,897
34,232
Other Income
31,016
26,889
20,776
26,060
18,337
Exceptional item / Prior Period items
16,544
128
EBIT
PBT
132,104
136,214
98,056
108,661
123,303
Tax
39,592
29,299
13,238
27,165
30,826
PAT
92,512
106,915
84,819
81,495
92,478
% growth
APAT
% growth
0%
16%
-21%
-4%
13%
75,968
106,786
84,819
81,495
92,478
-20%
41%
-21%
-4%
13%
May 05, 2015
Page 53
NTPC
Cash flow statement
PBT
FY13
FY14
FY15E
FY16E
FY17E
165,786
139,047
98,056
108,661
123,303
Depreciation
33,968
41,422
47,856
49,795
55,334
Interest
19,244
24,066
27,051
29,897
34,232
(Incr) / decr in net working capital
(5,971)
(2,919)
(24,435)
(13,649)
(17,762)
(28,956)
(25,563)
(13,238)
(27,165)
(30,826)
Tax
Others
Cash flow from operating activities
(Incr) / decr in capital expenditure
(Incr) / decr in investments
Others
Cash flow from investing activities
Incr / (decr) in borrowings
184,070
176,053
(162,912)
(167,220)
6,519
11,199
(156,394)
(156,022)
135,291
(160,784)
147,538
(144,489)
(160,784) (144,489)
164,281
(126,137)
(126,137)
72,624
73,732
64,693
(51,721)
32,962
Dividend paid
(40,688)
(57,881)
(43,816)
(42,099)
(47,772)
Interest
(39,461)
(48,941)
(27,051)
(29,897)
(34,232)
Others
Cash flow from financing activities
(7,524)
(33,090)
(6,174)
(123,717)
(49,041)
Net change in cash
20,153
(13,059)
(31,667)
(120,668)
(10,897)
Free Cash Flow
27,677
20,031
(25,493)
3,050
38,144
Ratio Analysis
Year to March (%)
FY13
FY14
FY15E
FY16E
FY17E
EBITDA margin
26%
24%
21%
20%
22%
EBIT margin
21%
19%
14%
14%
16%
Net profit margin
14%
15%
12%
10%
11%
10.1%
8.9%
7.1%
6.6%
7.4%
Return on invested capital
17.5%
14.2%
10.9%
9.2%
10.1%
Return on equity
12.0%
12.9%
10.4%
10.2%
11.0%
Adjusted Return on equity
9.9%
12.9%
10.4%
10.2%
11.0%
Net Debt: Equity
0.45
0.55
0.88
0.93
0.93
Year to March
FY13
FY14
FY15E
FY16E
FY17E
EPS (`)
Return on capital employed
Valuation Parameters
11.22
12.97
10.29
9.88
11.22
Book value per share (`)
97.5
104.1
94.4
99.1
104.6
P/E (x)
13.5
11.6
14.7
15.3
13.5
P/BV (x)
1.5
1.5
1.6
1.5
1.4
EV/EBITDA (x)
9.4
9.2
10.6
9.9
8.3
EV/Sales (x)
CFO/EBITDA
DPS
2.4
2.2
2.2
2.0
1.8
125%
115%
98%
108%
100%
6.7
6.7
5.3
5.1
5.8
May 05, 2015
Page 54
Mahindra & Mahindra

Not Rated
COMPANY UPDATE
MM IN EQUITY
May 05, 2015
Market leader in tractor and utility vehicles

Mahindra & Mahindra (M&M) is the market leader in domestic tractors (41%
market share) as well as the utility vehicles (UV) (37% market share). The
company has 2.2% weightage in the Sensex. The companys shares have
compounded annually at 25% vs 16% for the Sensex over the last ten years. The
discussion below focuses on M&Ms UV & tractor business which accounts for
60% of its capital employed.
Auto & Auto ancillaries

Recommendation
Mcap (bn):
3M ADV (mn):
CMP:
`711/US$11.2
`1.544/US$24.4
`1,145
Medium-term negative impact from Modis policy resets and long-term

challenges in retaining market share in utility vehicles
Rural demand is likely to be tepid for the next 2-6 quarters, as the NDA
Government seems to have hit the brakes on subsidies and changed the mode
of subsidy. We believe M&M through its exposure to tractors and SUVs (which
account for 70% of its standalone turnover) would be one of the biggest losers.
On the other hand, M&Ms multiple UV launches in FY16 and FY17 may help
market share in the near term, the aggressive focus of car companies on the UV
segment poses significant long-term risks and challenges to M&M as it seeks to
retain its dominant market share in the utility vehicles segment.
Inexpensive FY16 consensus consolidated EPS but challenges to rerating
In terms of the core business, the stock is trading at 18.5x FY16 consensus net
earnings, a 15% premium to the historical average but in-line with Maruti
Suzuki. On a consolidated basis, however, it trades at a relatively inexpensive
12.7x FY16 consensus net earnings. Market share challenges in UV and rural
slowdown may prevent a re-rating of the stock.
Sensex
M&M
Analyst Details
Ashvin Shetty, CFA
+91 22 3043 3285
Ritu Modi
+91 22 3043 3292
ritumodi@ambitcapital.com
Apr-15
Market share challenges in utility vehicles and massive slowdown in

tractor sales impacted FY13 and FY14 performance
Over the past ten years, M&Ms revenues have recorded a CAGR of 22% with
an average EBITDA margin of 11.8% and RoCE of 18%, as the company
benefited from strong growth in tractors (driven by rural prosperity and rising
non-agricultural use) and UVs (driven by rising incomes and low base of the
early 2000s). However, the company has struggled in the past two years due to:
(a) market share loss in the UV segment, accentuated by new launches from
competitors, lack of new launches from M&M and reducing parity between
diesel and petrol prices (which particularly impacted M&Ms diesel-dominated
UV portfolio); and (b) weak monsoons, which impacted tractor sales.
Strong share price returns over the last ten years
M&Ms share price has delivered 25% CAGR over the last ten years, 17% CAGR
over the last five years and 19% CAGR over the last three years. However, the
share price has underperformed the broader BSE Auto Index in the last 12
months by 25%.
Jan-15
19%/17%/25%
Feb-15
Mar-15
Healthy returns over the long term but

underperformance in recent months.
M&M scores relatively poor on our
Greatness Model
8th decile*
greatness model mainly on account of
(decile)
deterioration in margin and return ratios.
3yr/5yr/10yr
150
140
130
120
110
100
90
Dec-14
EBITDA growth largely follows the trend in

sales growth.
Oct-14
FY09: -18%, FY10: 171%, FY11: 16%

FY12: 9%; FY13:25%; FY14: 1%
Nov-14
EBITDA Growth
Trajectory
GREEN
AMBER
AMBER
Performance
Sep-14
FY09: 12%, FY10: 18%, FY11: 17%

FY12: 61%; FY13: 16%; FY14: 8%
Accounting:
Predictability:
Earnings Momentum:
Jul-14
Sales Growth
Trajectory
Uptick from FY11 to FY12 on the back of

demand recovery; moderation since FY13
due to slowing sales growth.
Muted sales growth in the last two years
due to market share loss in the UV
segment and slowdown in tractor sales.
Flags
Aug-14
RoCE Trajectory
FY09: 15%, FY10: 20%, FY11:17%

FY12: 16%; FY13: 16%; FY14: 16%
Share price returns

(CAGR)
Comment
Jun-14
Result
May-14
Parameter
M&M
Revenue (Rs mn)
14%
FY05
12%
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
11.0%
FY05
50,000
16%
EBITDA margin (RHS)
RoE
FY14
12.0%
100,000
years
18%
FY13
13.0%
150,000
ten
20%
FY12
14.0%
200,000
last
22%
FY11
250,000
the
24%
FY10
15.0%
300,000
over
33%
31%
29%
27%
25%
23%
21%
19%
17%
15%
FY09
16.0%
350,000
RoE
FY08
17.0%
400,000
and
FY07
450,000
Exhibit 2: RoCE
FY06

last ten years
RoCE (Post tax) - RHS
Exhibit 3: Capital allocation of M&M over the last ten years (FY05-14)

(for the core auto business)
21
20
19
18
17
16
15
14
13
12
Exhibit 5: Forward EV/EBITDA over the past ten years (for

the core auto business)
14.5
13.5
12.5
11.5
10.5
9.5
M&M 1-yr fwd P/E

Avg P/E
Bajaj Auto 1-yr fwd EV/EBITDA
Apr-15
Jan-15
Oct-14
Jul-14
Apr-14
Jan-14
Oct-13
Jul-13
Apr-13
Jan-13
Oct-12
Jul-12
Apr-12
Apr-15
Jan-15
Oct-14
Jul-14
Apr-14
Jan-14
Oct-13
Jul-13
Apr-13
Jan-13
Oct-12
Jul-12
Apr-12
8.5
Avg EV/EBITDA

Segment
Score
Accounting
GREEN
Predictability
AMBER
Earnings
momentum
AMBER
Comments
We did not come across any significant concerns surrounding M&Ms accounts.
As volume numbers are published on a monthly basis by automobile companies, there are generally no positive/negative
surprises on revenues. However, margins tend to be less predictable and are generally the source for actual results coming in
above/below expectations.
No major changes in Bloomberg consensus earnings in recent weeks.
May 05, 2015
Page 56
M&M
Balance sheet (standalone)
FY10
FY11
FY12
FY13
FY14
Share capital
2,830
2,936
2,945
2,952
2,952
Reserves and surplus
75,473
100,198
118,102
143,638
164,960
Total Networth
78,302
103,134
121,047
146,589
167,912
Loans
28,802
24,053
35,808
34,886
40,453
Deferred tax liability (net)
2,403
3,544
5,271
6,149
8,897
109,507
130,730
162,126
187,624
217,262
27,385
33,860
42,934
49,579
58,770
9,642
9,859
11,471
12,320
17,013
Investments
61,316
89,115
102,974
118,335
113,799
Cash and bank balances
17,432
6,146
11,884
17,814
29,504
Sundry debtors
12,581
13,547
19,285
22,084
25,098
Inventories
11,888
16,942
23,584
24,198
28,036
Loans and advances
18,564
24,799
25,569
30,207
40,667
Total Current Assets
60,465
61,435
80,322
94,303
123,306
Current Liabilities
34,000
47,617
58,313
67,858
74,885
Provisions
15,301
15,922
17,261
19,055
20,740
Sources of funds
Net block
Capital work-in-progress
Current liabilities and provisions
49,301
63,538
75,574
86,912
95,625
Net current assets
11,164
(2,104)
4,748
7,390
27,681
109,507
130,730
162,126
187,624
217,262
FY10
FY11
FY12
FY13
FY14
186,021
234,768
318,472
404,412
405,085
Application of funds
Income statement (standalone)

Revenue (inc. other op income)
% growth
EBITDA
42%
26%
36%
27%
0%
156,469
200,375
280,828
357,319
357,873
29,552
34,393
37,644
47,093
47,212
% growth
170%
16%
9%
25%
0%
Depreciation
3,708
4,139
5,761
7,108
8,633
25,845
30,254
31,883
39,985
38,579
1,569
709
1,628
1,912
2,592
EBIT
Non-operating income
Adjusted PBT
Tax
Adjusted PAT/ Net profit
% growth
3,284
4,476
4,721
5,492
7,180
27,560
34,021
34,976
43,565
43,166
7,590
8,575
7,270
10,943
6,111
19,970
25,446
27,706
32,622
37,056
142%
27%
9%
18%
14%
May 05, 2015
Page 57
M&M
Cash flow statement (standalone)
PBT
Depreciation
Others
Interest paid
Change in working capital
FY10
FY11
FY12
FY13
FY14
27,560
34,021
34,976
43,565
43,166
3,708
4,139
5,761
7,108
8,633
(2,313)
(3,419)
(2,741)
(3,962)
(6,047)
1,569
709
1,628
1,919
2,592
(45)
2,074
(4,843)
1,559
(2,126)
Direct taxes paid
(7,114)
(7,725)
(7,432)
(8,732)
(8,942)
CFO
23,365
29,798
27,350
41,457
37,276
Net capex
(9,607)
(12,070)
(13,404)
(13,893)
(16,776)
Net investments
(5,312)
(29,709)
(10,643)
(12,826)
(5,055)
Others
CFI
Proceeds from borrowings
Change in share capital
Interest & finance charges paid
1,465
4,429
5,194
(2,241)
(2,240)
(13,454)
(37,350)
(18,853)
(28,960)
(24,071)
(3,077)
3,311
6,442
(1,534)
1,465
724
87
1,839
(2,295)
(1,012)
(1,496)
(2,015)
(2,608)
Dividends paid
(3,114)
(6,223)
(8,008)
(8,670)
(8,935)
CFF
(7,839)
(3,837)
(3,062)
(12,219)
(8,239)
Net increase in cash
2,072
(11,390)
5,435
279
4,966
13,758
17,728
13,945
27,564
20,501
FY10
FY11
FY12
FY13
FY14
Revenue growth
42.1
26.2
35.7
27.0
0.2
EBITDA growth
170.5
16.4
9.5
25.1
0.3
PAT growth
149.5
27.5
8.1
16.5
12.1
EPS norm (dil) growth
FCF
Ratio analysis (standalone)

Year to March (%)
132.9
20.1
8.9
17.7
13.2
EBITDA margin
15.9
14.6
11.8
11.6
11.7
EBIT margin
13.9
12.9
10.0
9.9
9.5
Net margin
11.2
11.3
9.0
8.3
9.3
RoCE
78.0
73.0
64.1
68.7
53.6
RoIC
56.5
54.6
50.8
51.5
46.0
RoE
30.5
28.0
24.7
24.4
23.6
Year to March
FY10
FY11
FY12
FY13
FY14
EPS (`)
34.5
41.4
45.1
53.1
60.2
135
168
197
239
273
Valuation parameters (standalone)
Dividend per share (`)
9.5
11.5
12.5
13.0
14.0
P/E (x)
33.3
27.7
25.5
21.6
19.1
P/B(x)
8.5
6.8
5.8
4.8
4.2
Debt/Equity(x)
0.4
0.2
0.3
0.2
0.2
Net debt/Equity(x)
0.1
0.2
0.2
0.1
0.1
EV/Sales(x)
EV/EBITDA(x)
3.6
3.1
2.3
1.8
1.8
22.9
21.0
19.4
15.4
15.2
May 05, 2015
Page 58
Vedanta Ltd
NOT RATED
COMPANY UPDATE
SSLT IN EQUITY
May 05, 2015
Indias most-diversified metals and mining company in India

Vedanta Ltd (previously Sesa Sterlite) was formed as a result of the merger of
Sesa Goa and Sterlite Industries in August 2013. The merged entity has
operations across iron ore, copper, aluminium and power and two key
subsidiaries which are its cash cows, Hindustan Zinc (zinc-lead-silver) and Cairn
India (oil & gas). The company has 1% weightage in the Sensex. Over FY05-13,
the shares of Sesa Goa and Sterlite Industries (previously in the Sensex) have
compounded annually at 20% and 13% respectively vs 14% for the Sensex.
Sales Growth
Trajectory
Sterlite: FY09: -14%, FY10: 16%,
FY11: 24%; FY12: 35%; FY13: 10%
EPS Growth
Trajectory
Sesa Goa: FY09: 29%, FY10: 25%,

FY11: 54%; FY12: -36%; FY13: 15%
AMBER
AMBER
RED
Performance
210
160
110
Vedanta
SENSEX index
Earnings declined sharply in FY12 and FY13

due to mining disruptions.
EPS CAGR of merely 3% over FY08-13 as

higher EBITDA was offset by increase in
interest and depreciation.
Over FY10-13, the stock corrected by ~67%
Sesa Goa (FY13):
31%/0%/20% driven by iron ore mining bans and the
3yr/5yr/8yr
Share price
resultant impact on volumes.
returns
Over FY10-13, the stock corrected by ~56%
(CAGR)
Sterlite (FY13):
on the back of rising uncertainty about
-24%/-12%/13%
3yr/5yr/8yr
viability of fresh investments in power and
aluminium.
Sesa is in the second last decile due to weak
scores on margins, debt-equity and cash
th
Sesa Goa: FY10-13: 9 decile
conversion, margins and RoCE and RoE
Greatness Model
increase.
(decile)
Sterlite: FY09: -20%, FY10: -11%,
FY11: 35%; FY12: -4%; FY13: 26%
Sterlite: FY10-13: NA
Not available
Source: Ambit capital research; Note: Financials for FY09-13 compared for Sesa Goa and Sterlite Industries
as FY14 financials are for merged Sesa Sterlite, for which comparable data of previous years is not
available
Super-normal RoCEs a matter of past

Over the past few years (FY05-13), RoCEs for both Sesa Goa and Sterlite
Industries have declined from >30% in FY08 to 13-14% in FY13 due to: (a)
blanket mining bans in Karnataka and Goa, which are yet to restart fully; and (b)
large investments in power and aluminium, commissioning of which has been
delayed significantly due to non-availability of key raw materials such as bauxite
and coal.
Analyst Details
Parita Ashar
+ 91 22 3043 3223
Apr-15
Mar-15
Jan-15
60
Nov-14
Sesa Goa: FY09: 39%, FY10: 26%,

FY11: 52%; FY12: -11%; FY13: 69%
From high RoCEs of 45-70% pre-FY11, it

declined to 13% in FY13 due to blanket
mining bans in Karnataka and Goa, which
are yet to restart fully.
Over FY08-13, capital employed recorded
25% CAGR on the back of significant
investments in power, aluminium and zinc.
However, EBIT reported merely 4.9% CAGR
as commissioning of aluminium and power
assets has been significantly delayed due to
raw material crunch (bauxite, coal, etc).
Sales growth over FY09-11 driven by organic
and inorganic growth. Thereafter, sales have
declined sharply due to mining bans in
Karnataka and Goa.
Revenues declined 14% in FY09 due to fall in
commodity prices (copper and zinc).
Thereafter revenue growth has been driven
by the gradual commissioning of power,
aluminium and zinc capacities.
Oct-14
Sterlite: FY09: 16%, FY10: 15%,

FY11: 15%; FY12: 15%; FY13: 14%
`622/US$9.8
`997/US$15.7
`210
Accounting:
Predictability:
Earnings Momentum:
Aug-14
ROCE Trajectory
Comment
Jun-14
Sesa Goa: FY09: 70%, FY10: 46%,

FY11: 47%; FY12: 26%; FY13: 13%
Mcap (bn):
6M ADV (mn):
CMP:
May-14
Result
Recommendation
Flags

Parameter
Metals & Mining
Vedanta
Operational uncertainties drive value destruction
Over FY10-13, the share prices of Sesa Goa and Sterlite Industries have declined by
67% and 56% respectively, as profitability across businesses declined sharply. Further,
several instances of group restructuring (mergers/amalgamations), high valuations
given to promoter owned entities, and the grant of inter corporate loans within group
companies have been a matter of concern amongst minority investors.
RoCEs to mirror global peers as India adopts market price for mineral
allocation
Post the MMDR Act, merchant iron ore mines are likely to operate only until 2020
post which the company would have to bid for its mines in auctions. Rise in mine
acquisition costs coupled with the weaker outlook for global iron ore prices and steel
demand is likely to further impact profitability. Vedantas aluminium and power
plants have been operating at low capacity utilisation due to lack of bauxite and coal.
We highlight that even if Vedanta manages to get access to captive mines, these
mines will have to be acquired at high bid costs. Hence, even if utilisation levels
improve, we expect RoCEs to be similar to those of global peers (around 10-12%).
Fairly priced
The stock is trading at FY16 consensus P/B of 0.7x, justified for an RoE profile of 78%. Vedanta is trading at FY16 consensus P/E of 10.7x, at a discount to global metals
conglomerates such as Rio Tinto and BHP Billiton, which are trading at 17x.
Exhibit 2: Sesa Goa RoCE and RoE slide from >80% to 0%
120000
70%
120%
100000
60%
100%
Revenues (Rs bn)
20%
0%
0%
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
10%
-20%
RoCE (%)
FY13
20000
40%
FY12
20%
FY11
40000
60%
FY10
30%
FY09
60000
80%
FY08
40%
FY07
80000
FY06
50%
FY05
Exhibit 1: Sesa Goa FY13 revenues impacted by mining

bans
RoE (%)
Exhibit 3: Sources of funds over the last ten years
Exhibit 4: Utilisation of funds over the last ten years
Debt
raised
23%
Interest
paid
3%
Dividend
paid
11%
Capex
16%
Acquisitio
ns
0%
Equity
raised
0%
Interest &
Dividend
Received
7%
May 05, 2015
CFO
70%
Investmen
ts
purchased
70%
Page 60
Vedanta
Revenues (Rs bn)
RoCE (%)
FY13
FY12
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY11
100000
FY10
200000
FY09
300000
FY08
400000
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
FY07
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
FY05
500000
Exhibit 6: Sterlite Industries - RoCE and RoE remain at

~13-14% as new plants run at low capacity utilisation
FY06
Exhibit 5: Sterlite Industries - EBITDA margins and revenue

growth over the last ten years
RoE (%)
Exhibit 7: Sources of funds over the last ten years
Exhibit 8: Utilisation of funds over the last ten years

InterestDividend
paid paid
8%
8%
Equity raised
25%
Investments
purchased
17%
Interest &
Dividend
Received
11%
CFO
64%
Capex
64%
Increase in
cash
3%
24
20
16
12
1
Apr-15
Apr-14
Apr-13
Apr-12
Apr-11
Apr-10
Apr-09
Apr-08
Apr-07
Apr-06
Apr-15
Apr-14
Apr-13
Apr-12
Apr-11
Apr-10
Apr-09
Apr-08
Apr-07
Apr-06
Sesa 1-yr fwd P/E
Sterlite 1-yr fwd P/E
Sesa 1-yr fwd P/B
Sterlite 1-yr fwd P/B
Sesa Avg P/E
Sterlite Avg P/E
Sesa Avg P/B
Sterlite Avg P/B

Segment
Score
Comments
Accounting
AMBER
In our forensic accounting model (see our December 2014 forensic thematic for details), Vedanta has a relatively
moderate score (of 11.3, vs the metals sector average of 11.4). The key drivers on which the company has low scores are:
(a) contingent liabilities as % of networth; (b) change in depreciation rates; (c) provision for debtors; and (d) volatility in
margins.
Predictability
AMBER
Volatility in global commodity prices (crude, zinc, iron ore, aluminium, coal, etc.) weakens earnings predictability
Treatment of
minorities
RED
(a)
Several instances of group restructuring (mergers/amalgamations) and high valuations to promoter owned
entities and (b) grant of inter corporate loans; makes us assign a RED flag on the matter
May 05, 2015
Page 61
Vedanta
Vedanta Ltd. Income statement (` mn)
Y/E Mar (` mn)
Net Revenue
EBIDTA
FY11
FY12
FY13
FY14
101,365
89,780
27,489
661,524
51,642
34,750
4,655
196,246
Depreciation
964
1,061
1,975
68,823
Interest
872
4,333
4,747
50,944
Other income
Consolidated PAT
EPS (`/share)
5,790
2,596
539
20,735
42,225
26,955
22,803
62,985
48.6
31.0
26.2
21.2
Source: Company, Ambit Capital research; Note: FY14 financials are for the merged entity Sesa Sterlite
Vedanta Ltd. Balance sheet (` mn)

Y/E Mar (` mn)
Total Assets
Other Assets
FY11
FY12
FY13
FY14
155,974
204,011
230,370
2,141,184
29,593
41,443
48,590
1,303,331
124,422
23,955
18,040
635,099
1,959
138,613
163,740
201,082
Total Liabilities
155,974
204,011
230,370
2,141,184
Networth
128,104
151,182
174,754
730,087
9,805
11,162
11,792
549,658
16,506
40,559
43,512
440,090
1,558
1,108
313
421,350
Debt
Current Liabilities
Deferred Tax, Minority interest, etc.
Vedanta Ltd. Cash flow statement (` mn)

Y/E Mar (` mn)
FY11
FY12
FY13
FY14
55,597
31,292
22,373
105,745
964
1,061
1,975
68,823
- Incr/(Decr) in WC
(2,947)
(1,432)
(968)
(10,239)
35,406
22,151
222
156,008
- Capex
(9,887)
(7,386)
(6,263)
(72,836)
PBT
+ Depreciation
Dividend & Interest received

Cash from investing
- Dividend
+ Debt raised
Cash from financing
Net cash flow
1,988
275
31
10,082
(23,034)
(47,244)
(3,208)
(113,470)
(3,872)
(7,951)
(4,595)
(68,897)
(129)
25,208
6,973
18,380
(4,001)
17,256
2,378
(50,516)
8,370
(7,837)
(608)
(7,978)
Vedanta Ltd. Ratios and valuation parameters

Y/E Mar
FY11
FY12
FY13
FY14
EBITDA margin (%)
50.9%
38.7%
16.9%
29.7%
PAT margin (%)
41.7%
30.0%
83.0%
9.5%
40.7%
15.1%
-0.8%
5.6%
DPS (`)
3.50
4.00
0.10
3.25
BVPS (`)
147.4
174.0
201.1
245.7
9.4
7.4
7.3
6.7
1.7
1.0
0.6
0.7
May 05, 2015
Page 62
Vedanta
Sterlite Industries Income statement (` mn)
Y/E Mar (` mn)
Net Revenue
EBIDTA
FY10
FY11
FY12
FY13
245,006
304,285
411,789
451,623
60,958
80,498
98,633
104,689
Depreciation
7,498
10,301
18,298
20,318
Interest
2,924
3,509
8,524
9,222
Other income
18,854
25,217
31,632
34,701
Consolidated PAT
37,437
50,425
48,279
60,603
11.1
15.0
14.4
18.0
EPS (`/share)
Source: Company, Ambit Capital research; Note: Merged with Sesa Goa in August 2013
Sterlite Industries Balance sheet (` mn)

Y/E Mar (` mn)
FY10
FY11
FY12
FY13
Total Assets
611,659
744,405
856,303
986,154
233,500
304,491
375,629
440,028
373,019
388,681
396,371
479,984
Other Assets
5,140
42,562
84,302
66,141
Total Liabilities
611,659
744,405
856,303
986,154
Networth
370,120
414,355
460,557
509,552
Debt
92,600
53,555
74,486
106,232
Current Liabilities
49,319
140,017
163,041
183,851
Deferred Tax, Minority interest, etc.
99,620
124,649
144,073
166,683
Sterlite Industries Cash flow statement (` mn)

Y/E Mar (` mn)
PBT
+ Depreciation
- Incr/(Decr) in WC
- Capex
Dividend & Interest received
Cash from investing
- Dividend
FY10
FY11
FY12
FY13
67,008
88,487
90,994
102,076
7,498
10,301
18,298
20,318
(8,487)
(3,192)
5,516
(12,855)
41,817
58,509
83,998
68,244
(62,143)
(54,009)
(74,394)
(52,235)
12,279
14,114
15,519
9,214
(132,667)
(74,920)
(95,215)
(74,518)
(4,352)
(5,018)
(13,113)
(12,610)
+ Debt raised
21,795
25,628
30,457
29,476
Cash from financing
88,222
16,043
6,616
3,122
Net cash flow
(2,628)
(368)
(4,602)
(3,153)
Sterlite Industries Ratios and valuation parameters

Y/E Mar
FY10
FY11
FY12
FY13
EBITDA margin (%)
24.9%
26.5%
24.0%
23.2%
PAT margin (%)
15.3%
16.6%
11.7%
13.4%
17.3%
18.7%
17.7%
19.1%
DPS (`)
1.88
1.10
2.00
2.30
BVPS (`)
440.0
123.2
136.6
151.6
14.2
12.1
6.2
4.9
1.7
1.3
0.7
0.5
May 05, 2015
Page 63
Vedanta
May 05, 2015
Page 64
BHEL
SELL
COMPANY UPDATE
BHEL IN EQUITY
May 05, 2015
Indias largest power equipment manufacturer
BHELs share price CAGR has underperformed the Sensex by -5% over FY05-14,
as its profits have reported a mere 7% CAGR (vs Sensexs 13%) due to decline in
its EBITDA margin from 17% in FY05 to 12% in FY14 led by shrinkage in industry
size. Moreover, BHELs lack of diversification led to a de-rating.
BTG industry in a structural downturn
About 80% of Indias targeted capacity addition of ~189GW by FY22 has been
constructed or is under-construction. Over the next 4-5 years, demand for BTG is
unlikely to show a positive surprise given peak demand of ~135GW vs installed
capacity of 260GW. With the Government focusing on reducing T&D losses
(allocated `730bn on strengthening T&D infra) and improving average PLF
(higher coal production at CIL/auctions to IPPs), Indias peak deficit is likely to
further reduce without any capacity addition. Unless per capita power
consumption improves materially, BHEL and its peers could be saddled with
overcapacity for a long time. Consequently, we expect BHELs EPS to grow
merely by 3% over FY14-24 and RoCE to remain capped at 5% over FY14-24.
De-rating candidate; declining market share
Declining market share on lower opportunities and no build-up in competitive
advantages will result in RoEs consistently staying below the cost of equity of
14% over FY14-30. At CMP, the stock is trading at 19.4x FY16 earnings, a 37%
discount to peers; this is justified given poor RoEs of 8.1% vs peers 22.3%. On
comparison with its ten-year one-year forward P/E, BHEL is trading at a 98%
premium, which is unjustified given its weakening franchise. Our fair value for
the stock is `121 which implies 10.0x FY17E P/E and 0.8x FY17E P/B.
Accounting:
Predictability:
Treatment of minority interest:
RED
RED
GREEN
Catalysts
Loss of market share in FY16 from

72% in FY15
Delay in UMPP biddings beyond

FY16 end
Continued weakness in the BTG

ordering opportunities in FY16/FY17
Performance (%)
160
140
120
100
80
Sensex
Feb-15
After having registered strong revenue CAGR of 23% over FY05-11, BHEL
reported revenue CAGR of -2.5% over FY11-14 due to a ~56% decline in the
BTG industry over FY11-14 (given the reduction in power deficit from 9.8% in
FY11 to 4.5% in FY14). Addition of new capacities from 6GW in FY06 to
10GW/15GW/20GW in FY07/FY10/FY12 despite the declining industry size led
to decline in RoCE from 27% in FY05 to 13% in FY14.
Underperformance to Sensex led by weaker earnings growth
Flags
Dec-14
Capacity addition despite over-capacity in sector led to decline in RoCE
`573/US$9.0
`1,186/US$19
`234
`121
48
Oct-14
Comment
FY09: 40%, FY10: 45%, FY11: 49% Fall in RoCE over FY09-14, led by increase
in capacity from 6GW in FY06 to 20GW in
RoCE Trajectory
FY12: 45%; FY13: 32%; FY14: 13% FY14 which remains unutilised; less than
50% utilisation in FY14.
Sales Growth
FY09: 37%, FY10: 25%, FY11: 26% Deceleration in growth over FY09-14 led by
BTG industry size reducing to 10GW in FY14
Trajectory
FY12: 14%; FY13: 1%; FY14: -19% vs 23GW in FY11; BHEL's order intake has
declined by 12% CAGR over FY11-14.
EPS Growth
FY09: 9%, FY10: 39%, FY11: 40% Decline in EPS growth was led by fall in the
EBITDA margin from 15.6% in FY09 to
11.6% in FY14 due to ~35% decline in BTG
Trajectory
FY12: 17%; FY13: -6%; FY14: -48% pricing over FY09-14 and unfavourable
operating leverage.
Negative CAGR over the past five years led
Share price returns
3yr/5yr/10yr
11%/-14%/-2% by structural decline in BTG ordering
(CAGR)
opportunities and lack of diversification.
BHEL scores just below average. Whilst it
Greatness Model FY09-14: 6th
scores well on margin and RoE, it scores
(decile)
Decile*
poorly on asset turns and cash generation.
Mcap (bn):
6M ADV (mn):
CMP:
TP (12 mths):
Downside (%):
Aug-14
Result
Recommendation
Jun-14

Parameter
Capital Goods
Apr-14
BHEL is Indias largest engineering enterprise, dominating Indias power

generation market with a ~61% share in Indias total installed capacity. BHEL
has 1% weightage in the Sensex. Over the last ten years, the companys shares
have compounded annually at 11.2% vs 15.8% for the Sensex.
BHEL
Analysts Details
Bhargav Buddhadev
+91 22 3043 3252
Deepesh Agarwal
+91 22 3043 327
BHEL
Sales (Rsbn)
20
20
10
10
EBITDA (%) on RHS
RoCE (%)
FY14
30
FY13
30
FY12
40
FY11
40
FY05
50
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
22
20
18
16
14
12
10
Exhibit 2: RoCE and RoE have been trending downward

since FY11
FY10
600
500
400
300
200
100
0
been
FY09
have
FY08
revenue
FY07
and
FY06
Exhibit 1: EBITDA margins

declining since FY13
RoE (%) on RHS
Exhibit 3: Internal accruals (CFO + interest income)

accounted for the entire cash generation over FY05-14
Exhibit 4: half of which was spent on dividends and capex
% of cash generated over FY05-14
% of cash spent over FY05-14

Debt re- Investmen
paid (net),
ts, 2%
2%
Interest
received
(net), 19%
Capex,
46%
Dividend
paid, 50%
CFO
generated
, 81%
Exhibit 5: BHEL is trading at a 98% premium to its ten-year

one-year forward P/E
Exhibit 6: BHEL is trading at a 15% discount to its ten-year

one-year forward P/B
BHEL's P/E (x)

6 Yr Avg
BHEL's P/B (x)

6 Yr Avg
4 Yr Avg
10 Yr Avg
Nov-14
Nov-13
Nov-12
Nov-11
Nov-10
Nov-09
Nov-14
Nov-13
Nov-12
Nov-11
Nov-10
Nov-09
Nov-08
Nov-07
Nov-06
Nov-05
Nov-04
Nov-08
10.0
Nov-07
20.0
Nov-06
30.0
Nov-05
40.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
Nov-04
50.0
4 Yr Avg
10 Yr Avg
Exhibit 7: BHEL Explanation for forensic accounting scores on the cover page
Field
Score
Accounting
RED
Predictability
RED
GREEN
Comments
In our accounting analysis, BHEL scores poorly due to weak cash conversion cycle, high proportion of
receivables more than six months and high proportion of non-operating expense and income.
Over the past four quarters, BHEL has disappointed consensus estimates by ~35%.
Our accounting analysis does not raise any major red flags with respect to dubious transactions by
promoters.
May 05, 2015
Page 66
BHEL
Balance Sheet
FY13
FY14
FY15E
FY16E
FY17E
78,525
120,200
162,522
189,207
185,915
Debtors
293,703
281,986
236,372
242,681
257,323
Inventory
118,690
98,087
80,198
84,196
91,308
30,463
34,285
21,105
24,763
25,940
109,038
121,337
69,223
81,224
88,195
59
59
59
59
59
Cash
Loans & advances

Investments
Fixed assets
71,337
76,580
75,563
74,193
72,714
Miscellaneous
15,558
19,759
19,759
19,759
19,759
Total assets
717,373
752,292
664,801
716,083
741,214
385,773
374,475
279,210
315,395
319,667
26,226
46,207
46,207
46,207
46,207
Debt
Other liabilities
Total liabilities
46
42
42
42
42
412,044
420,723
325,458
361,644
365,915
4,895
4,895
4,895
4,895
4,895
300,432
326,674
334,447
349,544
370,404
Total networth
305,327
331,569
339,343
354,439
375,299
Net working capital

Net debt (cash)
57,083
39,882
58,464
36,245
54,904
(52,299)
(73,993)
(116,315)
(143,000)
(139,708)
Income statement
Operating income
% growth
EBITDA
% growth
Depreciation
EBIT
FY13
FY14
FY15E
FY16E
FY17E
489,158
395,704
308,128
361,546
378,721
1.2
(19.1)
(22.1)
17.3
4.8
394,328
349,910
289,666
327,661
344,608
94,830
45,795
18,461
33,885
34,114
(4.9)
(51.7)
(59.7)
83.5
0.7
9,572
9,854
10,699
11,827
12,773
85,259
35,941
7,763
22,058
21,341
1,276
1,335
1,039
1,219
1,277
Non-operational income / Exceptional items
11,325
16,170
12,361
16,220
22,673
PBT
95,307
50,777
19,084
37,059
42,736
Tax
28,376
15,753
5,916
11,488
13,248
Reported PAT
66,931
35,023
13,168
25,571
29,488
Adjustments
Adjusted PAT
% growth
37
(60)
66,894
35,083
13,168
25,571
29,488
(5.9)
(47.6)
(62.5)
94.2
15.3
May 05, 2015
Page 67
BHEL
Cash flow statement
FY13
FY14
FY15E
FY16E
FY17E
95,307
50,777
19,084
37,059
42,736
Depreciation
9,580
9,914
10,699
11,827
12,773
Interest
1,276
1,335
1,039
1,219
1,277
Tax
(31,140)
(21,585)
(5,916)
(11,488)
(13,248)
(58,934)
(5,694)
33,532
10,219
(25,631)
1,497
10,373
PBT
Others
Others
Issuance of equity
Others
Net change in cash
17,586
45,120
58,438
48,835
17,907
(17,263)
(13,706)
(9,682)
(10,457)
(11,293)
315
5,819
5,027
(11,129)
(8,679)
(9,682)
(10,457)
(11,293)
22,675
19,882
(17,950)
(14,648)
(6,433)
(11,694)
(9,905)
4,725
5,233
(6,433)
(11,694)
(9,905)
11,182
41,675
42,322
26,685
(3,292)
Ratio Analysis
Year to March (%)
FY13
FY14
FY15E
FY16E
FY17E
EBITDA margin
19.4
11.6
6.0
9.4
9.0
EBIT margin
17.4
9.1
2.5
6.1
5.6
Net profit margin
13.7
8.9
4.3
7.1
7.8
20.3
7.0
1.4
3.9
3.6
Return on equity
23.9
11.0
3.9
7.4
8.1
Current ratio (x)
1.4
1.4
1.8
1.7
1.8
29.8%
10.8%
2.5%
8.1%
7.6%
Year to March
FY13
FY14
FY15E
FY16E
FY17E
EPS (`)
27.3
14.3
5.4
10.4
12.0
124.7
135.5
138.6
144.8
153.3
8.4
16.1
42.8
22.0
19.1
RoIC

P/E (x)
P/BV (x)
1.8
1.7
1.7
1.6
1.5
EV/EBITDA (x)
5.2
10.7
26.5
14.4
14.3
EV/Sales (x)
1.0
1.2
1.6
1.4
1.3
CFO/EBITDA
51%
146%
349%
178%
91%
May 05, 2015
Page 68
Bajaj Auto
SELL
BJAUT IN EQUITY
A diversified and highly-profitable 2W company

Bajaj Auto is the second-largest domestic motorcycle player with a market share
of 16.5% (FY14) but it does not have a presence in scooters. The company is the
largest 2W exporter from India (exports contributed 41% of Bajajs volumes in
FY14). The company is also the leader in domestic passenger 3Ws (market share
54%). It is one of the most-profitable 2W companies (after Royal Enfield) with
EBITDA margin averaging 20.3% over FY12-14. The company has 1.2%
weightage in the Sensex.
GREEN
AMBER
AMBER
Catalysts
Market share challenges driven by
increasing competitive intensity
(27bps market share loss in
domestic 2Ws (ex-mopeds) in FY16)
Macro challenges to key export

markets like Nigeria
Performance
Sensex
Bajaj Auto
Analyst Details
Ashvin Shetty, CFA
+91 22 3043 3285
Ritu Modi
+91 22 3043 3292
Apr-15
150
140
130
120
110
100
90
Jan-15
Market share loss, lack of scooters and challenges in export markets

impacted performance in the last two years
Over FY08-14, the company recorded 15% revenue CAGR. Its EBITDA margin
has also increased since FY10 (average 20.6% for FY10-14 vs 13.6% for FY0809) due to strong growth in exports and depreciation in INR vs USD. However, in
the last two years, there have been severe challenges around: (1) market share
in domestic motorcycles (loss of 800bps market share over FY14 and FY15
especially to Honda); (2) rapid scooterisation (where Bajaj has no presence); and
(3) slowdown in key export markets (Sri Lanka, Nigeria and Egypt). Thus, revenue
CAGR was at just 1% over FY12-14. This has also led to RoCE moderating to an
average of 56% over FY13-14 from 71% over FY10-12. As a result, Bajajs share
price has delivered 15% CAGR in the last five years but only 6% CAGR in the last
three years.
Competitive intensity in domestic as well as export markets to increase
Honda continues to achieve its aggressive volume targets in the Indian 2W space
by rapidly ramping up its product portfolio, capacities and sales network. Bajaj
has planned a slew of launches in both entry level (Platina) and premium
motorcycles (new Pulsars), and we expect these launches to help Bajaj sustain
(rather than regain) its market share (16.5% in FY16/FY17). Macro-economic
challenges in key geographies (Nigeria) and competition from new players (TVS
and Hero) indicate moderation in export sales growth (at 12% over FY15-17E vs
21% CAGR over FY08-12).
Alongside moderating revenue growth, we expect greater competition to lower
Bajajs Indian operating margins from 21.6% in FY14 to 19.8% in FY17. We
expect revenue/net earnings CAGR of 11% and 10%, respectively over the next
ten years (FY15-25), lower than the 15% CAGR in the past five years.
Trading at 10% premium to historical average, which looks expensive
Our FCF model (using WACC of 14% and terminal growth of 4%) values the core
business at `1,985 (14.7x FY17 net earnings) and values the stake in KTM at
`165/share, resulting in an April 2016 SOTP-based TP of `2,150. The stock is
currently trading at 16.5x FY17E net earnings, a 10% premium to the historical
average and the mutliple commanded by Hero MotoCorp. We believe this
premium to the historical average is not justified, as market share challenges in
the domestic market and macro-economic challenges in the export markets
continue to loom large.
Accounting:
Predictability:
Earnings Momentum:
Feb-15
Mar-15
EBITDA Growth
FY09: -3%, FY10: 117%, FY11: 31%
Subdued sales impacted EBITDA.
Trajectory
FY12: 1%; FY13: -3%; FY14: 13%
Share price returns
Share price performance has largely tracked
3yr/5yr
6%/15%
(CAGR)
the fundamental performance.
Bajaj scores relatively well on our greatness
Greatness Model
Second decile
model helped by the significant increase in
(decile)
margin since FY10.
Flags
Dec-14
Slowing sales growth in the last two years has

been primarily responsible for the
deterioration in RoCE.
Market share loss in domestic motorcycles (to
Honda), rising scooterisation and challenges
in key export markets have impacted sales
growth in FY13/FY14.
Oct-14
FY09: -3%, FY10: 37%, FY11: 42%

FY12: 19%; FY13: 2%; FY14: 1%
Comment
Nov-14
Sales Growth
Trajectory
`604/US$9.5
`1,027/US$16.2
`2,088
`2,150
3
Sep-14
FY09: 33%, FY10: 66%, FY11: 77%

FY12: 71%; FY13: 60%; FY14: 52%
Mcap (bn):
3M ADV (mn):
CMP:
TP (12 mths):
Upside (%):
Jul-14
RoCE Trajectory
Recommendation
Aug-14
Result
Jun-14
Parameter
May 05, 2015
May-14
COMPANY UPDATE
Bajaj Auto
Exhibit 2: RoCE
225,000
23.0%
95%
200,000
21.0%
85%
100,000
65%
55%
45%
FY08
FY14
FY13
FY12
FY11
FY10
FY09
25%
FY08
11.0%
FY07
50,000
FY06
35%
FY05
13.0%
EBITDA margin (RHS)
RoE
years
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
75%
75,000
Revenue (Rs mn)
ten
FY14
15.0%
last
FY13
17.0%
125,000
the
FY12
150,000
over
FY11
19.0%
RoE
FY10
175,000
and
FY09

last ten years
Exhibit 3: Capital allocation of Bajaj Auto over the last seven years (FY08-14)
Bajaj Auto 1-yr fwd P/E

Avg P/E
Bajaj Auto 1-yr fwd EV/EBITDA
Apr-15
Sep-14
Feb-14
Jul-13
Dec-12
Apr-15
Sep-14
Feb-14
Jul-13
Dec-12
Jun-12
Nov-11
Apr-11
Sep-10
Feb-10
Jul-09
Dec-08
May-08
Jun-12
Nov-11
Apr-11
10
Sep-10
12
Feb-10
14
Jul-09
16
Dec-08
14.0
13.0
12.0
11.0
10.0
9.0
8.0
7.0
6.0
5.0
4.0
3.0
18
May-08
20
Exhibit 5: Forward EV/EBITDA evolution over the past ten

years
Avg EV/EBITDA
Explanation for our flags

Segment
Score
Accounting
GREEN
Predictability
AMBER
Earnings
momentum
AMBER
Comments
We did not come across any significant concerns surrounding Bajajs accounts
surprises on revenues. However, margins tend to be less predictable and are generally the source for actual results
coming in above/below expectations.
May 05, 2015
Page 70
Bajaj Auto
FY13
FY14
FY15E
FY16E
FY17E
2,894
2,894
2,894
2,894
2,894
76,126
93,187
101,003
108,572
117,190
Total networth
79,019
96,080
103,896
111,466
120,083
884
592
592
592
592
Debt
Deferred tax liability
Total liabilities
1,151
1,432
1,432
1,432
1,432
81,055
98,104
105,920
113,489
122,107
Gross block (inc. Goodwill on merger)
38,289
40,770
43,770
46,770
49,770
Net block (inc. Goodwill on merger)
18,044
20,060
20,313
20,370
20,233
4,135
2,830
2,830
2,830
2,830
Investments (non-current)
12,841
12,868
12,868
12,868
12,868
Cash & cash equivalents
57,052
77,583
91,160
102,395
114,895
Debtors
7,676
7,962
8,421
9,502
10,650
Inventory
6,363
6,397
6,766
7,634
8,556
Loans & advances
18,675
19,775
21,575
23,691
25,940
Total current assets
89,766
111,717
127,922
143,222
160,041
Current liabilities
26,307
29,635
31,344
35,365
39,638
Provisions
17,425
19,737
26,670
30,436
34,227
Total current liabilities
43,731
49,372
58,014
65,801
73,865
Net current assets
46,034
62,345
69,909
77,421
86,176
Total assets
81,055
98,104
105,920
113,489
122,107
FY13
FY14
FY15E
FY16E
FY17E
202,283
203,531
215,266
242,882
272,229
2%
1%
6%
12.8%
12.1%
163,592
159,670
171,030
194,737
218,267
38,691
43,861
44,237
48,145
53,962
-3%
13%
1%
8.8%
12.1%
CWIP

% growth
EBITDA
% growth
Depreciation
EBIT
Adjusted PBT
1,640
1,790
2,748
2,943
3,138
37,051
42,072
41,489
45,202
50,825
3,728
4,231
3,762
4,307
5,019
40,773
46,298
45,246
49,504
55,838
Tax
12,227
13,901
13,732
14,851
16,752
28,546
32,397
31,514
34,653
39,087
-9%
13%
-3%
10%
13%
% growth
May 05, 2015
Page 71
Bajaj Auto
Net Profit Before Tax
Depreciation
Others
Tax
FY13
FY14
FY15E
FY16E
FY17E
42,662
46,321
45,246
49,504
55,838
1,668
1,790
2,748
2,943
3,138
(4,234)
(4,587)
(12,394)
(13,153)
(13,732)
(14,851)
(16,752)
(5,011)
4,319
(758)
338
359
22,691
34,689
33,509
37,938
42,589
Capex (net)
(Incr) / decrease in investments
Other income (expenditure)
Cash flow from investments
Net borrowings
Interest paid
(5,285)
(2,547)
(3,000)
(3,000)
(3,000)
(15,845)
(21,843)
8,353
2,975
(12,778)
(21,415)
(3,000)
(3,000)
(3,000)
324
505
(5)
(5)
(5)
(5)
(5)
Dividend paid
(15,109)
(15,182)
(16,927)
(23,698)
(27,084)
Cash flow from financing
(14,791)
(14,682)
(16,932)
(23,703)
(27,088)
Net change in cash
(4,878)
(1,408)
13,577
11,235
12,500
Free cash flow
17,406
32,142
30,509
34,938
39,589
Year to March (%)
FY13
FY14
FY15E
FY16E
FY17E
EBITDA margin (%)
19.1%
21.6%
20.5%
19.8%
19.8%
EBIT margin (%)
18.3%
20.7%
19.3%
18.6%
18.7%
Net profit margin (%)
14.1%
15.9%
14.6%
14.3%
14.4%
Net debt: equity (x)
(0.7)
(0.8)
(0.9)
(0.9)
(1.0)
RoCE (pre-tax) (%)
172%
165%
165%
178%
203%
RoIC (%)
121%
116%
115%
124%
142%
RoE (%)
41%
37%
32%
32%
34%
FY13
FY14
FY15E
FY16E
FY17E
EPS (`)
99
112
109
120
135
Diluted EPS (`)
99
112
109
120
135

Year to March
273
332
359
385
415
45.0
50.0
70.0
80.0
90.0
P/E (x)
19.7
17.3
17.8
16.2
14.4
P/BV (x)
7.1
5.8
5.4
5.0
4.7
EV/EBITDA (x)
12.2
10.7
10.6
9.8
8.7
EV/EBIT (x)
12.7
11.2
11.3
10.4
9.3
May 05, 2015
Page 72
Hero MotoCorp
SELL
COMPANY UPDATE
HMCL IN EQUITY
May 05, 2015
A market-leading franchise in domestic motorcycles
Honda continues to up the ante in the Indian 2W space with aggressive

expansion in distribution, capacities and product portfolio. Heros indigenous
technology remains uncertain which is especially risky as nearly 70% of volumes
come from two legacy models (Splendor and Passion). Furthermore,
scooterisation continues to impact Hero, given its relatively weak position.
Adding to its woes is the likelihood of rural demand remaining weak over the
next 4-6 quarters. At the same time, we believe Heros rising export volumes
would be unable to compensate for the domestic market share loss. Moreover,
as competition intensifies, we expect Heros domestic operating margins to come
under pressure (14% in FY14 vs 14.2% in FY17E).
We expect revenue/net earnings CAGR of 11% over the next ten years (FY1525), much lower than the 16% CAGR seen over the past ten years.
Trading in line with the historical average on FY16E P/E
Our FCF model (using WACC of 14% and terminal growth of 4%) leads to April
2016 valuation of `2,500, implying 14.0x FY17 net earnings, a 5% discount to
the historical average. We believe the discount to the historical average is
justified due to the structural rise in competition and the consequent impact on
Heros growth and return ratios. The stock is currently trading at one-year
forward (FY16) P/E of 14.7x, in line with historical average but at a 10% discount
to Bajaj Auto.
Accounting:
Predictability:
Earnings Momentum:
GREEN
AMBER
AMBER
Catalysts
Market
share challenges from

competition (market share loss of
150bps in domestic motorcycle
space in FY16 to 51.3%)
Deteriorating
product mix and

increasing costs to impact FY16/17
EBITDA margin
Performance
Sensex
Apr-15
Jan-15
Feb-15
Mar-15
Dec-14
160
150
140
130
120
110
100
90
80
Oct-14
Over the past ten years, Heros revenues have recorded a CAGR of 16% with an
average EBITDA margin of 13.4% and RoCE of 58%, as the company benefitted
from 2W growth in India, especially in rural areas. However, the company has
struggled in the past two years due to slowing industry sales, rising competition
from its erstwhile partner, Honda, and rapid scooterisation in India. This has
resulted in tepid sales CAGR (of 5%) and below-par operating margin (10.5%)
and RoCE (45%) in the last two years. Resultantly, whilst Heros share price has
delivered 17% CAGR over the last 10 years, it has delivered a measly 6% CAGR
and 9% CAGR over the last five years.
Bumpy road ahead
Flags
Nov-14
Rising competition/scooterisation impacted growth, profitability and

returns in recent years
`477/US$7.5
`2,532/US$40.0
`2,390
`2,500
5
Sep-14
Comment
FY09: 51%, FY10: 76%, FY11: 58% Slowing sales and deteriorating margin have
ROCE Trajectory
FY12: 52%; FY13: 42%; FY14: 48% impacted RoCE in the last two years.
Strong competition (from Honda) and rising
Sales Growth
FY09: 19%, FY10:28%, FY11: 23%
scooterisation led to tepid sales growth in
Trajectory
FY12: 22%; FY13: 1%; FY14: 6%
FY13 and FY14.
EBITDA Growth
FY09: 28%, FY10: 56%, FY11:-5%
Subdued sales impacted EBITDA growth.
Trajectory
FY12: 39%; FY13: -9%; FY14: 8%
Share price returns
Share price performance has largely tracked
3yr/5yr/10yr
9%/6%/17%
(CAGR)
the fundamental performance.
Hero scores poorly on our greatness model
due to deterioration in its scores on pricing
Greatness Model
9th decile*
discipline (margin deterioration), decline in
(decile)
return ratios and moderation in EPS/CFO
growth.
Jul-14
Result
Mcap (bn):
3M ADV (mn):
CMP:
TP (12 mths):
Upside (%):
Aug-14
Parameter
Recommendation
Jun-14
May-14
Hero MotoCorp is the largest 2W player in India with market leadership in

domestic motorcycles (53% market share) but it is placed at a distant second
position in scooters (16.7% share). The company was started as a JV between
the Hero Group and Honda Motors (which exited in 2011). The company has
1.2% weightage in the Sensex. The companys shares have compounded
annually at 17% vs 16% for the Sensex over the last ten years.
Hero MotoCorp
Analyst Details
Ashvin Shetty, CFA
+91 22 3043 3285
Ritu Modi
+91 22 3043 3292
Hero MotoCorp
Revenue (Rs mn)
FY05
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
11.0%
EBITDA margin (RHS)
RoE
ten
years
FY14
12.0%
FY13
13.0%
FY12
14.0%
last
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
FY11
15.0%
the
70%
65%
60%
55%
50%
45%
40%
35%
30%
25%
FY10
16.0%
over
FY09
17.0%
RoE
FY08
18.0%
and
FY07
275,000
250,000
225,000
200,000
175,000
150,000
125,000
100,000
75,000
50,000
Exhibit 2: RoCE
FY06

last ten years
Exhibit 3: Capital allocation of Hero over the last ten years (FY05-14)
HMCL 1-yr fwd P/E
Avg P/E
HMCL 1-yr fwd EV/EBITDA
Source: Company, Ambit Capital research Note: Based on Consensus

estimates
Nov-14
Feb-14
Aug-12
May-13
Nov-11
Mar-11
Jun-10
Sep-09
Dec-08
Mar-08
Jun-07
Sep-06
Dec-05
Apr-05
Mar-15
Jun-14
Sep-13
Dec-12
Mar-12
Jul-11
Oct-10
Jan-10
Apr-09
Jul-08
Oct-07
Jan-07
Apr-06
14.0
13.0
12.0
11.0
10.0
9.0
8.0
7.0
6.0
5.0
Aug-05
20
19
18
17
16
15
14
13
12
11
10
9
Exhibit 5: Forward EV/EBITDA over the past ten years
Avg EV/EBITDA

Segment
Score
Accounting
GREEN
Predictability
AMBER
Earnings
momentum
AMBER
Comments
We did not come across any significant concerns surrounding Heros accounts.
surprises on revenues. However, the margins tend to be less predictable and are generally the source for actual results
coming in above/below expectations.
May 05, 2015
Page 74
Hero MotoCorp
FY13
FY14
FY15E
FY16E
FY17E
399
399
399
399
399
49,663
55,599
59,652
64,309
67,056
Total networth
50,062
55,999
60,051
64,709
67,456
2,812
Deferred payment credits

Deferred tax liability
1,324
(1,060)
(1,060)
(1,060)
(1,060)
Total liabilities
54,198
54,939
58,991
63,649
66,396
Gross block (inc. royalty to Honda)

Net block (inc. unamortised royalty to
Honda)
CWIP
66,851
69,089
78,120
53,781
59,308
30,710
22,433
26,104
26,860
28,147
3,173
10,040
10,040
10,040
10,040
Cash & cash equivalents
38,049
42,063
47,713
57,780
64,279
Debtors
6,650
9,206
9,992
11,211
12,582
Inventory
6,368
6,696
7,268
8,154
9,151
Loans & advances
11,467
9,477
10,287
11,541
12,953
Total current assets
62,533
67,441
75,259
88,686
98,966
Current liabilities
27,820
29,031
29,410
32,996
37,032
Provisions
14,399
15,943
23,002
28,941
33,724
Total current liabilities
42,218
44,974
52,412
61,937
70,757
Net current assets
20,315
22,466
22,848
26,748
28,209
Total assets
54,198
54,939
58,991
63,649
66,396
FY13
FY14
FY15E
FY16E
FY17E
237,681
252,755
274,354
307,811
345,462

% growth
EBITDA (before royalty to Honda)
% growth
Depreciation & amortisation (inc royalty to
Honda)
EBIT
Adjusted PBT
Tax
% growth
1%
6%
9%
12%
12%
204,836
217,354
237,951
264,199
296,515
32,845
35,401
36,403
43,612
48,947
-9%
8%
3%
20%
12%
11,418
11,074
5,329
3,860
4,241
21,427
24,327
31,074
39,752
44,706
119
118
130
130
130
3,984
4,463
5,259
5,785
6,074
25,292
28,672
36,202
45,406
50,650
4,110
7,582
9,956
12,714
15,195
21,182
21,090
26,247
32,692
35,455
-11%
0%
24%
25%
8%
May 05, 2015
Page 75
Hero MotoCorp
FY13
FY14
FY15E
FY16E
FY17E
Net Profit Before Tax
25,292
28,673
36,202
45,406
50,650
Depreciation
11,418
11,074
3,350
3,860
4,241
Others
(3,800)
(4,163)
(5,086)
(5,655)
(5,944)
Tax
(6,133)
(6,495)
(9,956)
(12,714)
(15,195)
(7,872)
545
210
326
367
18,904
29,634
24,720
31,224
34,118
Capex (net)
(6,004)
(9,328)
(9,000)
(4,617)
(5,527)
Payment to deferred credits to Honda
(7,477)
(6,854)
5,079
(1,460)
(Incr) / decrease in investments

Other income (expenditure)
Cash flow from investments
Interest paid
1,073
1,448
5,259
5,785
6,074
(7,329)
(16,193)
(3,741)
1,167
546
(119)
(118)
(130)
(130)
(130)
Dividend paid
(10,444)
(14,031)
(15,199)
(22,194)
(28,035)
Cash flow from financing
(10,563)
(14,149)
(15,329)
(22,324)
(28,165)
Net change in cash
1,012
(708)
5,650
10,067
6,500
Free cash flow
5,424
13,453
15,720
26,607
28,591
Year to March (%)
FY13
FY14
FY15E
FY16E
FY17E
EBITDA margin (%)

13.8%
14.0%
13.3%
14.2%
14.2%
EBIT margin (%)
9.0%
9.6%
11.3%
12.9%
12.9%
Net profit margin (%)
8.9%
8.3%
9.6%
10.6%
10.3%
Net debt: equity (x)
(0.8)
(0.8)
(0.8)
(0.9)
(1.0)
RoCE (pre-tax) (%)
101%
88%
101%
118%
130%
RoIC (%)
84%
65%
73%
85%
91%
RoE (%)
46%
40%
45%
52%
54%
FY13
FY14
FY15E
FY16E
FY17E
EPS (`)
106
106
131
164
178
Diluted EPS (`)
106
106
131
164
178
251
280
301
324
338
60
65
95
120
140
22.0
22.1
17.7
14.2
13.1

Year to March

P/E (x)
P/BV (x)
9.3
8.3
7.8
7.2
6.9
EV/EBITDA (x)
12.7
11.8
11.5
9.6
8.5
EV/EBIT (x)
19.5
17.2
13.4
10.5
9.3
May 05, 2015
Page 76
Tata Steel
SELL
COMPANY UPDATE
TATA IN EQUITY
India business to gradually lose its shine
May 5, 2015
Metals & Mining
Tata Steel is one of the largest steel companies in India (~15% market share),
with access to 100% captive iron ore and ~30% captive coking coal. Although
Tata Steels acquisition of Corus in 2007 increased its scale by 3x, the
profitability of the acquired European business has eroded dramatically due to
global overcapacity and the deteriorating demand outlook. Tata Steel has 1%
weightage in the Sensex. Over the last ten years, its share price has fallen at 1%
p.a. vs 16% CAGR for the Sensex.
Recommendation
Mcap (bn):
3M ADV (mn):
CMP:
TP (12 mths):
Downside (%):
`350/US$5.5
`1,951/US$30.8
` 360
`310
14%
The share price has remained flattish over

last 10 years due to continuously
deteriorating EBITDA margins in Europe
Tata Steel has weak scores on sales
Greatness Model
improvement, pricing discipline, increase
th
FY10-14: 9 decile*
(decile)
in EPS and CFO, and increase in RoCE
and RoE.
3yr/5yr/10yr
-12%/-13%/-1%
RoCE down from 53% in FY05 to 9% in FY14

Since the Corus acquisition in 2007, Tata Steels consolidated revenue CAGR
has been a mere 2%, as volume and realisation drops in Europe were offset by
rising Indian volumes. However, due to the expensive Corus acquisition
(US$12bn acquisition vs FY08 Corus EBITDA of US$2.2bn which has declined to
US$0.5bn in FY14), RoCE has declined from 53% in FY05 to 9% in FY14. The
combination of weak topline growth and rapidly sliding ROCEs has meant that
Tata Steels share price has underperformed the Sensex by 17% over FY05-14.
Margin uplift unlikely due to global overcapacity and rising Indian costs
We have a bearish outlook on steel prices given the global oversupply of iron
ore/coking coal and low capacity utilisation of steel mills (~70-75%); hence, we
do not expect RoCE to improve significantly from hereon. Further, the Indian
operations will gradually lose access to low-cost raw material (captive iron
ore/coking coal), as the MMDR Act requires all mines to be auctioned going
forward and the existing mines would remain only until 2030. As a result,
EBITDA margin of the Indian operation is likely to fall gradually.
Valuations fully price in benefits of capacity expansion
Based on our DCF-based valuation, we arrive at a TP of Rs310, 8% downside.
Our TP implies an FY17E EV/EBITDA of 6.4x, a premium to its last ten-year
average of 5.4x, as the benefits of the Odisha expansion are likely to fully
accrue only in FY18. Based on consensus estimates, Tata Steel is trading at an
FY16 EV/EBITDA of 5.4x, in line with JSW Steel (5.3x) but at a significant
discount to SAIL, which is trading at 7.4x (given SAILs high CWIP).
Mining restarts in India over the next

six months. This along with higher
steel production could increase
pressure on domestic prices
Iron ore oversupply in the global

sea-borne market over CY15-16 to
keep steel prices muted
Continued weakness in domestic

steel demand in 1HFY16
Performance
160
140
120
100
80
60
Tata Steel
Apr-15
Share price
returns
(CAGR)
Repeated restructuring and impairment

costs over FY09-14 for the European
operations coupled with deteriorating
margin profile have kept the EPS
trajectory volatile.
Catalysts
Mar-15
EPS Growth
Trajectory
FY09: -61%, FY10: -135%, FY11: NA;

FY12: -41%; FY13: NA; FY14: NA [NA
indicates that the company was loss
making in current/previous year and
hence, EPS growth cannot be
calculated]
GREEN
Jan-15
FY09: 12%, FY10: -31%, FY11: 16%,

FY12: 12%; FY13: 1%; FY14: 10%
AMBER
AMBER
Nov-14
Sales Growth
Trajectory
Accounting:
Predictability:
Oct-14
FY09:16%, FY10: 6%, FY11: 15%

FY12: 10%; FY13: 7%; FY14: 9%
RoCE has declined from 16% in FY09 to

9% in FY14 due to sharp deterioration in
sales volume and profitability in the
Europe business.
In FY10, Tata Steels sales declined by
~31% due to a ~25% cut in European
volumes. Thereafter, sales growth has
been driven by ongoing capacity additions
in India.
Flags
Aug-14
ROCE Trajectory
Comment
Jun-14
Result
May-14
Parameter
SENSEX index
Analyst Details
Parita Ashar
+91 22 3043 3223
Tata Steel
Revenues (Rs bn)
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
-20%
-30%
RoCE (%)
FY14
200
10%
0%
-10%
FY13
400
FY12
600
40%
30%
20%
FY11
800
FY10
1000
FY09
1200
FY08
1400
70%
60%
50%
FY07
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
FY06
1600
Exhibit 2: RoCE and RoE slide after the Corus acquisition
FY05
Exhibit 1: Revenue growth alongside sliding margins
RoE (%)
Increase
in cash
0%
Debt
raised
27%
Interest
paid
17%
Investmen
ts
purchased
4%
CFO
57%
Equity &
Pref.
capital
raised
13%
Dividend
paid
5%
Interest &
Dividend
Received
3%
Capex
51%
Acquisitio
ns
23%
Exhibit 5: Tata Steels one-year forward P/E - Premium to

its historical multiple
Exhibit 6: Tata Steels one-year forward P/B Discount to

the historical multiple justified given deterioration in RoE
14.0
3.0
12.0
2.5
10.0
2.0
8.0
1.5
6.0
1-yr fwd P/E

Average
1-yr fwd P/B
Apr-15
Apr-14
Apr-13
Apr-12
Apr-11
Apr-10
Apr-09
Apr-08
Apr-06
Apr-15
Apr-14
Apr-13
Apr-12
Apr-11
Apr-10
Apr-09
Apr-08
Apr-07
0.5
Apr-06
2.0
Apr-07
1.0
4.0
Average

Segment
Score
Comments
Accounting
AMBER
In our forensic accounting model (see our 22 December 2014 forensic thematic for details), Tata Steel receives a weak
score (of 9.6, as compared to the metals and mining sector average of 11.4). The key drivers of this sub-par score are: (a)
contingent liabilities as a percentage of net worth; (b) CAGR in auditors remuneration to CAGR in consolidated revenues;
(c) non-operating expenses as a percentage of total net revenues, (d) CWIP to net worth, (e) change in reserves to PAT ex
dividend and (f) volatility in non-operating income.
Predictability
AMBER
Margins for the European operations have been volatile historically, given the global overcapacity and sharp decline in
European demand over the past few years.
Treatment of
minorities
GREEN
May 05, 2015
Page 78
Tata Steel
Y/E Mar (` mn)
Net revenue
FY13
FY14
FY15E
FY16E
FY17E
1,347,115
1,486,136
1,446,766
1,460,589
1,535,544
123,212
163,549
138,863
156,372
177,021
9.1%
11.0%
9.6%
10.7%
11.5%
55,753
58,412
59,179
66,583
74,956
EBITDA
EBITDA margin %
Depreciation
Other income
EBIT
4,792
5,729
8,111
6,173
6,173
72,250
110,866
87,794
95,961
108,238
Interest expense
39,681
43,368
48,971
55,473
48,062
Adjusted PBT
32,569
67,498
38,823
40,488
60,176
Total taxes
32,294
30,582
32,495
26,617
30,418
Adjusted Net profit
3,323
36,225
4,960
12,504
28,391
Reported Net profit
(70,576)
35,949
16,786
12,504
28,391
FY13
FY14
FY15E
FY16E
FY17E
Net worth
381,378
445,647
465,518
487,958
509,624
Borrowings
659,731
814,855
894,855
894,855
894,855
64,770
79,945
79,945
79,945
79,945
1,137,428
1,366,404
1,465,868
1,488,307
1,509,974
692,132
859,806
950,627
984,043
1,034,043
32,577
50,935
35,067
35,199
35,199

Y/E Mar (` mn)
Other liabilities & provisions

Capital employed
Net Fixed Assets
Investments
Goodwill
130,650
157,488
157,488
157,488
157,488
Net current assets
281,705
297,768
322,687
311,577
283,244
1,137,428
1,366,404
1,465,868
1,488,307
1,509,974
Total assets

Y/E Mar (` mn)
Reported profit before taxes
+ Depreciation expense &impairments
Changes in working capital
Net Cash from Operating Activities
FY13
FY14
FY15E
FY16E
FY17E
(41,330)
67,221
50,648
40,488
60,176
55,753
58,412
59,179
66,583
74,956
31,293
(12,696)
25,581
(14,428)
(7,930)
133,239
131,459
143,774
115,327
138,673
Net capex
(152,224)
(161,255)
(150,000)
(100,000)
(124,956)
Net Cash from Investing Activities
(123,212)
(164,511) (126,021)
(93,959)
(118,783)
26,537
58,749
80,000
Interest paid
(31,999)
(36,763)
(48,971)
(55,473)
(48,062)
Net Cash from Financing Activities
(20,448)
10,138
32,747
(46,905)
(56,153)
Net Increase in C& CE
(10,420)
(22,914)
50,500
(25,537)
(36,264)
Net proceeds from borrowings

Y/E Mar
FY13
FY14
FY15E
FY16E
FY17E
Return on Equity
0.8%
8.8%
1.1%
2.6%
5.7%
Return on Capital employed
4.3%
7.7%
4.7%
5.7%
6.1%
1.6
1.7
1.7
1.7
1.7
-74.5
37.0
17.3
12.9
29.2
9.1
6.9
8.1
7.2
6.4
105.2
9.7
70.5
28.6
12.6
Net Debt (Cash)/ Equity (x)

Adjusted EPS Fully Diluted
EV/ EBITDA
P/E on adjusted basis
P/B
Dividend yield
0.9
0.8
0.8
0.7
0.7
2.2%
2.8%
0.4%
0.9%
0.9%
May 05, 2015
Page 79
Tata Steel
May 05, 2015
Page 80
Hindalco
SELL
COMPANY UPDATE
HNDL IN EQUITY
Indias largest aluminium company
Metals & Mining
Hindalco has the largest aluminium smelting capacity in India (1.3mt). The
companys aluminium capacity doubled over FY12-15 due to greenfield
expansions (Mahan and Aditya). Further, 60% of Hindalcos revenues are
contributed by its Canadian subsidiary, Novelis, the worlds largest aluminium
rolling company. Hindalco has 0.7% weightage in the Sensex. Over the last ten
years, the companys share price has compounded annually at 2% vs 16% for
the Sensex.
Greatness Model
(decile)
3yr/5yr/10yr
Decline in LME aluminium prices at 6% p.a. over

FY08-14 coupled with rising interest obligations
has resulted in EPS decline of 35% over FY08-14.
Hindalcos share price has grown only at 2% CAGR

over the last ten years as weaker aluminium prices
0%/-7%/2%
coupled with rising coal costs and ongoing capex
have resulted in declining earnings.
FY10-14: 7th decile*
Hindalco has weak scores on gross block, sales

improvement, increase in EPS and CFO, and
increase in RoCE and RoE.
Return profile impaired by global commodity meltdown

Post the Novelis acquisition in 2008, consolidated revenue CAGR has been 7%
driven by 4% volume CAGR in the Indian aluminium business and INR
depreciation (7% annualised over FY08-14). However, RoCE has declined from
18% in FY05 to 6% in FY14 due to weak EBIT growth (3% CAGR due to decline
in aluminium prices) vs a sharp increase in capital employed (18% CAGR) due
to ongoing capex towards capacity expansion in India and Novelis.
Unsurprisingly, Hindalcos share price has underperformed the Sensex by 15%
over FY05-14, as profits have declined due to a fall in aluminium prices and
loss of captive coal blocks.
High coal costs have structurally impaired margins
Liquidation of LME inventory to

drive
aluminium
premiums
downwards over the next three
months
Overcapacity to weigh on prices

over the next 2-3 years
Full impact of interest and

depreciation to hit the P&L from
FY16
Performance
160
140
120
100
80
60
Hindalco
SENSEX index
We expect aluminium prices and premiums to remain muted due to global

aluminium overcapacity and the overhang of inventory liquidation. This coupled
with lack of cheap captive coal (low-cost raw material advantage) is likely to
keep RoCEs of the new smelters (Mahan and Aditya) muted at ~5-6%.
Valuations in line with peers
Our DCF model values the stock at `116, implying FY17E EV/EBITDA of 6.5x, a
discount to the historical average of 6.6x, as benefits of CWIP (new domestic
capacities as well as auto capacities at Novelis) are likely to fully accrue by
FY17. Hindalco trades at 6.6x FY16 EV/EBITDA, in-line with global majors such
as Alcoa and Norsk Hydro which are trading at 6-6.6x. Although Hindalcos P/B
multiple of 0.7x is at a discount to peers, we believe the discount is justified
given its weak RoE profile of 7-8% over the coming years.
Apr-15
(CAGR)
FY09: -82%, FY10: 621%,

FY11: -37%; FY12: 38%;
FY13: -11%; FY14: -33%
Catalysts
Mar-15
Share price
returns
FY08-14 sales CAGR of 7% driven by 4% volume

FY09: 10%, FY10: -8%, FY11: CAGR in Indian aluminium business and INR
19%, FY12: 12%; FY13: -1%; depreciation. Although Novelis USD revenues
declined at 2% p.a. over FY08-14, INR depreciation
FY14: 9%
has led to revenue CAGR of 5%.
Jan-15
Trajectory
Over FY08-15, EBIT CAGR has been only 3% p.a.

(due to weaker aluminium demand and prices) vs
18% CAGR in capital employed due to ongoing
capex towards capacity expansion in India and
Novelis.
GREEN
RED
GREEN
Nov-14
EPS Growth
FY09: 1%, FY10: 16%, FY11:

10%,
Accounting:
Predictability:
Earnings Momentum:
Oct-14
Trajectory
Comment
Aug-14
Sales Growth
`266/US$4.2
`1,072/US$17
` 129
` 116
10%
Flags
Result
FY12: 9%; FY13: 7%; FY14:

6%
Mcap (bn):
3M ADV (mn):
CMP:
TP (12 mths):
Downside (%):
Jun-14
RoCE Trajectory
Recommendation
May-14
Parameter
May 05, 2015
Analyst Details
Parita Ashar
+91 22 3043 3223
Hindalco
15%
15%
10%
10%
200
5%
5%
0%
0%
Revenues (Rs bn)
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
400
RoCE (%)
FY14
20%
FY13
20%
600
FY12
25%
FY11
25%
FY10
800
FY09
30%
FY08
30%
FY05
1000
FY07
Exhibit 2: RoCE and RoE below 10% for the last five years
FY06
Exhibit 1: EBITDA margins have deteriorated since FY08
RoE (%)
Increase
in cash
3%
Debt
raised
37%
CFO
42%
Investmen
ts
purchased
5%
Interest &
Dividend
Received
4%
Equity
raised
14%
Capex
55%
Acquisitio
ns
16%
Exhibit 5: Hindalcos one-year

Above the historical average
Dividend
paid
3%
Interest
paid
21%
forward
EV/EBITDA
10
Exhibit 6: Hindalcos one-year forward P/B At a discount

to the historical multiple due to poor RoE profile
3.0
2.5
8
2.0
6
1.5
1.0
0.5
2
Mar-06
Mar-08
Mar-10
1-yr fwd EV/EBITDA
Mar-12
Mar-14
0.0
Mar-06
Avg EV/EBITDA
Mar-08
Mar-10
1-yr fwd P/B
Mar-12
Mar-14
Avg P/B

Segment
Accounting
Score
GREEN
Predictability
RED
Treatment of
minorities
GREEN
Comments
In our forensic accounting model (see our 22 December 2014 forensic thematic for details), Hindalco has a relatively
moderate score (of 11.8, vs the metals sector average of 11.4). The key drivers for which the company has low scores are:
(a) CWIP to Gross Block; (b) change in depreciation rates; (c) non-operating expenses as a percentage of total revenues;
and (d) CWIP to net worth. The company has high scores on: (a) CFO/EBITDA; (b) Provision as a percentage of debtors
more than six months; and (c) volatility in non-operating income.
Continued volatility and weakness in aluminium prices weaken earnings predictability.
May 05, 2015
Page 82
Hindalco
Balance sheet (consolidated)
Year to March (` bn)
Net worth
Borrowings
FY13
FY14
FY15E
FY16E
FY17E
353.3
406.0
422.7
449.7
483.5
563.0
647.6
667.6
667.6
667.6
1,038.8
1,172.9
1,211.7
1,241.0
1,277.4
Net block incl. CWIP
717.6
842.2
873.1
861.8
877.3
Investments
126.1
129.6
128.7
127.2
125.7
Capital employed
Net current assets
155.9
168.8
177.6
219.7
242.0
1,038.8
1,172.9
1,211.7
1,241.0
1,277.4
FY13
FY14
FY15E
FY16E
FY17E
Net Sales and operating revenues
801.9
877.0
1,022.0
1,124.1
1,205.6
Operating expenditure exc D&A
723.6
794.1
924.7
1,001.1
1,072.0
78.4
82.9
97.3
123.0
133.5
Total net assets

Income statement (consolidated)
EBITDA
Depreciation & impairment
28.6
35.5
32.1
41.3
41.9
Operating profit
49.8
47.3
65.2
81.7
91.6
Other income (expense)
10.1
10.2
7.4
8.2
8.3
EBIT
59.9
53.5
66.7
89.9
99.9
Interest and finance charges
20.8
27.0
37.0
46.1
46.7
Adjusted PBT
39.1
30.5
35.6
43.9
53.3
Taxes
Adjusted net profit
8.9
5.2
7.1
8.2
9.5
30.3
25.7
25.5
31.8
39.7
Cash flow statement (consolidated)

FY13
FY14
FY15E
FY16E
FY17E
PBT
39.1
26.5
29.7
43.9
53.3
+ Depreciation & impairments
28.6
35.5
32.1
41.3
41.9
Cash from operating
29.8
79.6
48.6
90.5
103.3
Net capex
(117.1)
(93.2)
(63.0)
(30.0)
(57.4)
Cash from investing
(137.7)
(81.1)
(55.6)
(21.8)
(49.1)
Borrowings
143.4
48.7
20.0
Interest and finance charges
(36.7)
(46.9)
(37.0)
(46.1)
(46.7)
Cash from financing
102.8
14.9
(19.4)
(49.0)
(51.4)
(5.1)
13.3
(26.4)
19.7
2.7
Change in cash
Ratio analysis / Valuation parameters (consolidated)

Year to March
FY13
FY14
FY15E
FY16E
FY17E
EBITDA margin (%)
9.8%
9.4%
9.5%
10.9%
11.1%
Adjusted net profit margin (%)
3.8%
2.9%
2.5%
2.8%
3.3%
Return on equity (%)
8.6%
6.3%
6.0%
7.1%
8.2%
Net debt (cash)/equity (x)
1.3
1.3
1.4
1.2
1.2
Adjusted EPS fully diluted
15.8
12.9
12.3
15.4
19.2
P/E on adjusted basis (x)
8.4
10.3
10.8
8.6
6.8
P/B (x)
0.7
0.7
0.6
0.6
0.6
10.8
10.5
9.0
7.1
6.5
EV/EBITDA (x)
May 05, 2015
Page 83
Hindalco
May 05, 2015
Page 84
Tata Power
BUY
COMPANY UPDATE
TPWR IN EQUITY
The largest fully integrated utility in India

Tata Power is an integrated private sector utility with a presence across the
entire value chain. Whilst it has >90% fuel linkage and offtake arrangement
for its ~8.5W capacity, over the last three years it has been waiting for a
compensatory tariff hike at its largest project, the Mundra UMPP. The company
has 0.6% weightage in the Sensex. Over the last ten years, the companys
shares have compounded annually at 8.5% vs 15.8% for the Sensex.
Trajectory
FY12:
EPS Growth
FY09:
Trajectory
FY12:
Share price returns

(CAGR)
3yr/5yr/10yr
-8%/-9%/8%
Negative CAGR over the past five years led

by losses at Mundra UMPP.
Tata Power scores in the second last decile

due to its high leverage, low RoCE and
(decile)
Decile*
poor cash conversion.
Greatness Model FY09-14: 9th
Fall in profitability due to losses at Mundra

Over FY05-14, Tata Powers revenues have increased at 22% CAGR, but its
EBITDA margin declined by 340bps to 19.1% due to losses at Mundra UMPP
(4GW) (excluding Mundra, Tata earned an EBITDA margin of 23% in FY14).
Consequent to Mundras losses, consolidated RoCE has declined by 520bps in
FY05-14 to 8% (excluding Mundra, Tata earned an RoCE of 13%).
Tata Powers share price CAGR has underperformed the Sensex by 5% in
FY05-14, as profits have slipped into the red in FY12-14 due to losses at
Mundra.
Lack of compensatory tariff hike is a catalyst for Sensex exit
Unless Mundra UMPP gets a compensatory tariff hike, the overhang of its
losses will remain on the stock price and the stock would be a likely candidate
for a Sensex exit. However, we expect a favourable compensatory tariff hike
order for Mundra UMPP over the next six months. With the recent clarification
from the Supreme Court that utilities are eligible for a compensatory tariff hike
on change in Indonesian law on coal exports, a favourable order could be
passed by APTEL soon within the next six months). In case Mundra gets a
compensatory tariff hike, our FY15-25 EBITDA CAGR of 3% should see
significant upgrades, depending on the quantum of the tariff hike. However,
even then there will be a big question mark on the ability of private sector
utility companies to build profitable business models in a country where coal
will now only be available through an expensive auction process and where
power will be largely sold through competitive tendering processes run by
State Electricity Boards.
De-rating candidate; RoE less than cost of equity
At CMP, the stock is trading at 1.5x FY16E P/B, a 9% premium to peers.
However, we believe the current multiples can de-rate in the event of a
significant delay in the award of a compensatory tariff hike to Mundra and the
receipt of US$500mn from the stake sale in the Arutmin mine. The
consolidated RoE over FY15-25E, assuming none of these catalysts play out, is
likely to remain at 12% which is below the cost of equity of 15%.
Flags
Accounting:
AMBER
Predictability:
RED
Treatment of minority interest: GREEN
Catalysts
Receipt of compensatory tariff hike at

Mundra UMPP in FY16
Receipt of US$0.5bn on sale of stake

in Arutmin mine in FY16
Performance (%)
140
120
100
80
Sensex
Feb-15
FY09:
Comment
15%, FY10: 11%, FY11: 11% Fall in RoCE over FY09-14, led by the
losses at Mundra UMPP (FY14 PAT loss at
9%; FY13: 9%; FY14: 8%
Mundra `15bn vs `2bn consolidated loss).
66%, FY10: 5%, FY11: 2% Sales growth declined as no major capacity
was commissioned after the commissioning
34%; FY13: 27%; FY14: 8% of Mundra UMPP over FY12-13.
15%, FY10: 51%, FY11: 5% Consolidated EPS slipped into the red over
FY12-14 due to the losses at Mundra
NA; FY13: NA; FY14: NA
UMPP.
Dec-14
Sales Growth
`211/US$3.3
`338/US$5.3
`78
`101
29
Oct-14
FY12:
Mcap (bn):
6M ADV (mn):
CMP:
TP (12 mths):
Upside (%):
Aug-14
FY09:
Recommendation
Jun-14
ROCE Trajectory
Result
Utilities
Apr-14
Parameter
May 05, 2015
Tata
Analysts Details
Bhargav Buddhadev
+91 22 3043 3252
Deepesh Agarwal
+91 22 3043 327
Tata Power
last ten years
Revenue (Rs mn)
EBITDA Margin (% RHS)
150,000
22%
120,000
20%
18%
90,000
16%
60,000
14%
30,000
Exhibit 2: RoCE
and
RoE
over
RoCE
60%
the
last
ten
RoE (% RHS)
years
60%
50%
50%
40%
40%
30%
30%
20%
20%
Exhibit 3: Borrowing has been the major source of funds

over FY05-14
Exhibit 4: Utilisation of funds over FY05-14
Issue of
Equity, 8%
Equity
dividend,
4%
CFO, 36%
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY05
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
10%
FY07
FY06
12%
Interest
expense,
20%
Others,
4%
Borrowing
, 53%
Interest &
Dividend,
2%
Capex,
65%
Investmen
ts, 7%
Exhibit 5: Tata Power is trading at a 28% discount to its

ten-year average forward P/B
Exhibit 6: Tata Power is trading at a 86% discount to its

ten-year average forward EV/EBITDA
4.0
13.0
3.5
3.0
11.0
2.5
9.0
2.0
7.0
1.5
Nov-13
Nov-12
Nov-11
Nov-10
Nov-09
Nov-08
Nov-07
Nov-06
TPWR's EV/EBITDA (x)

6 Yr Avg
4 Yr Avg
10 Yr Avg
Nov-05
Nov-13
Nov-12
Nov-11
Nov-10
Nov-09
Nov-08
Nov-07
Nov-06
Nov-05
Nov-04
TPWR's P/B (x)

6 Yr Avg
Nov-04
5.0
1.0
4 Yr Avg
10 Yr Avg
Exhibit 7: Tata Power explanation for forensic accounting scores on the cover page
Field
Accounting
Predictability
Score
AMBER
RED
GREEN
Comments
In our accounting framework of utilities, Tata Power scores marginally below average due to poor and volatile
cash yield, high CWIP to net worth and high non-other expenses to revenue.
Volatility in Bumis profitability along with higher than normal rate of taxation implies poor predictability.
Our accounting analysis does not raise any major red flags with respect to dubious transactions by promoters.
May 05, 2015
Page 86
Tata Power
Consolidated Financials
Balance Sheet
FY13
FY14
Cash
19,899
15,558
69,922 107,605 134,272
Debtors
33,050
45,426
44,856
50,336
52,461
Inventory
20,265
20,733
20,472
22,974
23,944
Loans & advances
FY15E
FY16E
FY17E
131,042
134,102
Investments
31,201
30,192
Fixed assets
437,109
467,823
249
150
672,814
713,983
757,966 791,947 809,564
152,091
189,093
186,719 209,532 218,378
Debt
366,465
366,767
390,156 383,213 366,773
Miscellaneous
Total assets
Other liabilities
Total liabilities
40,831
44,885
559,387
600,745
2,373
2,373
134,102 134,102 134,102

30,192
30,192
30,192
458,272 446,589 434,443

150
150
48,141
52,288
150
56,728
625,016 645,033 641,879

2,705
2,705
2,705
111,054
110,865
130,245 144,209 164,980
Total networth
113,427
113,238
132,949 146,914 167,685
Net working capital

Net debt (cash)
32,266
11,168
346,566
351,210
12,711
(2,120)
(7,871)
320,234 275,609 232,501
Income statement
FY13
FY14
330,254
356,487
27.0
7.9
263,931
279,423
283,252 311,533 324,751
66,323
77,065
68,761 83,487 86,945
24.5
16.2
Depreciation
20,517
EBIT
45,807
Operating income
% growth
EBITDA
% growth
Non-operational income / Exceptional items
4.2
22,714
47,492 61,235
64,232
26,355
34,399
37,131 32,310
28,414
11,780
10,084
Others
(8,500)
987
(333)
1842
3174
7,646
(2,600)
NA
NA
(10.8)
12.2
21,269 22,251
Tax
% growth
(1.3)
49,768
9,751
APAT
352,012 395,020 411,697
27,296
(5,619)
Minority Interest
FY17E
4.1
1,816
PAT before Minority
FY16E
21.4
21,267
PBT
FY15E
1,830
4,005
5,512
12,191 32,930 41,329

9,143 14,819
-
16,118
-
3,048 18,112 25,211

3256
4147
4440
(209) 13,965 20,771

NA
NA
48.7
May 05, 2015
Page 87
Tata Power
Cash flow statement
FY13
FY14
FY15E
FY16E
FY17E
PAT
1,935
9,751
(209)
13,965
20,771
Depreciation
Others
Others
20,517
27,296
21,269
22,251
22,714
(23,511)
(226)
(1,719)
14,831
5,751
33,855
28,010
19,341
51,047
49,236
32,796
64,831
(42,702)
(43,086)
3,247
2,178
(3,408)
3,490
(42,863)
(37,418)
Issuance of equity
Others
Net change in cash
(11,718) (10,568) (10,568)
(11,718) (10,568) (10,568)
19,764
28,779
7,149
23,389
(6,943) (16,440)
(34,646)
(39,803)
3,588
(5,867)
(32,654)
46,741
(2,796) (12,000)
4,147
4,440
(15,934)
(5,242)
54,364
37,683
26,667
Ratio Analysis
Year to March (%)
FY13
FY14
FY15E
FY16E
FY17E
EBITDA margin
20.1
21.6
19.5
21.1
21.1
EBIT margin
13.9
14.0
13.5
15.5
15.6
Net profit margin
2.3
-0.7
-0.1
3.5
5.0
10.5
10.8
10.4
7.7
9.5
Return on equity
6.6
-2.3
-0.2
10.0
13.2
Current ratio (x)
1.3
1.1
1.4
1.5
1.6
Year to March
FY13
FY14
FY15E
FY16E
FY17E
3.2
-1.1
-0.1
5.2
7.7
47.8
47.7
49.2
54.3
62.0
P/E (x)
24.2
NA
NA
15.1
10.2
1.6
1.6
1.6
1.4
1.3
EV/EBITDA (x)
6.4
5.5
6.2
5.1
4.9
EV/Sales (x)
1.3
1.2
1.2
1.1
1.0
EPS (`)
P/BV (x)
May 05, 2015
Page 88
Tata Power
Appendix 1: The greatness framework

Greatness is not in where we stand, but in what direction we are moving.
- Oliver Wendell Holmes
This quote appropriately captures the driving philosophy behind our greatness
framework that lies at the core of our process of identifying potential ten baggers. We
had unveiled this framework on 19 January 2012 with the first iteration of the
Tomorrows ten baggers note. This framework studies a firms structural strengths by
focusing not on absolutes but rather on improvements over a period of time and the
consistency of those improvements.
A basic sketch of the underlying process behind the making of a great firm has been
recaptured in Exhibit 8 below.
Exhibit 8: The greatness framework
a. Investment (gross
block)
b.
Conversion
of
investment to sales
(asset turnover, sales)
c.
Pricing
discipline
(PBIT margin)
e. Cash generation
(CFO)
d.
Balance
sheet
discipline (D/E, cash
ratio)
We rank the BSE500 universe of firms (excluding financial services firms and
excluding firms with insufficient data) on our greatness score, which consists of six
equally weighted headingsinvestments, conversion to sales, pricing discipline,
balance sheet discipline, cash generation and EPS improvement, and return ratio
improvement.
Under each of these six headings, we further look at two kinds of improvements:
Percentage improvements in performance over FY12-14 vs FY09-11; and
Consistency in performance over FY09-14 i.e. improvements adjusted for

underlying volatility in financial data
A complete list of factors that are considered whilst quantifying greatness has been
provided in Exhibit 9 on the next page.
May 05, 2015
The greatness framework
The framework essentially

hinges on using publicly
available historical data to
assess which firms have, over
a sustained period of time
(FY09-14), been able to
relentlessly and consistently:
(a) Invest capital;
(b) Turn investment into
sales;
(c) Turn sales into profit;
(d) Turn
profit
into
balance sheet strength;
(e) Turn all of that into
free cash flow; and
(f) Invest free cash flows
again.
Clearly, this approach will

have limited value if there is a
structural break in the sector
or in the company, which
makes past performance a
meaningless guide to future
performance. (For identifying
structural breaks of this sort,
for example in the Indian
boiler-turbine-generator
sector or in the Indian utilities
sector, we look to our sector
leads for help.)
However, to the extent that

such structural breaks tend to
be the exception than the
rule, the greatness model
helps in creating a shortlist of
stocks that investors can then
analyse in greater detail.
Put simply, the greatness
model separates the wheat
from the chaff. Yet, it does not
cook the whole meal for you!
Page 89
Tata Power
Exhibit 9: Factors used for quantifying greatness
Head
1 Investments
2 Conversion to sales
Criteria
a.
Above median gross block increase (FY12-14 over FY09-11)*
b.
Above median gross block increase to standard deviation
a.
Improvement in asset turnover (FY12-14 over FY09-11)*
b. Positive improvement in asset turnover adjusted for standard

deviation
c. Above median sales increase (FY12-14 over FY09-11)*
3 Pricing discipline
4 Balance sheet discipline
Cash generation and

PAT improvement
6 Return ratio improvement
d.
Above median sales increase to standard deviation
a.
Above median PBIT margin increase (FY12-14 over FY09-11)*
b.
Above median PBIT margin increase to standard deviation
a.
Below median debt-equity decline (FY12-14 over FY09-11)*
b.
Below median debt-equity decline to standard deviation
c.
Above median cash ratio increase (FY12-14 over FY09-11)*
d.
Above median cash ratio increase to standard deviation
a.
Above median CFO increase (FY12-14 over FY09-11)*
b.
Above median CFO increase to standard deviation
c.
Above median adj. PAT increase (FY12-14 over FY09-11)*
d.
Above median adj. PAT increase to standard deviation
a.
Improvement in RoE (FY12-14 over FY09-11)*
b.
Positive improvement in RoE adjusted for standard deviation
c.
Improvement in RoCE (FY12-14 over FY09-11)*
d.
Positive improvement in RoCE adjusted for standard deviation
Both improvements and the

consistency of those improvements
are important
Source: Ambit Capital research. Note: * Rather than comparing one annual endpoint to another annual endpoint
(say, FY09 to FY14), we prefer to average the data out over FY09- 11 and compare that to the averaged data
from FY12-14. This gives a more consistent picture of performance (as opposed to simply comparing FY09 to
FY14).
May 05, 2015
Page 90
Tata Power
Appendix 2: Greatness on banks

The greatness framework discussed in the preceding sections was built to identify
structurally sound businesses in India. Given the distinct nature of operations of a
bank however, most of the metrics used in the framework do not fit in the context of
a banks business environment.
In order to identify well-run franchises from the banking space, in our
20 February 2013 note, we had modified this framework, whilst retaining the
underlying philosophy, to suit the context of a banks business environment.
The greatness framework
Exhibit 10: The greatness framework for banks
1. Capital/ resource
mobilisation
(Adjusted BVPS* growth
without undue dilution)
2. Profitable lending
(Loan book growth, healthy net
interest spread)
3. Balance sheet discipline

(Delinquency ratio, provisioning
coverage, loan book/net worth,
income on contingent liabilities)
5. Return generation
(RoA, RoE, EPS
dividend/share)
and
4. Operating efficiency
(Cost to income, fee income to
total business)
Source: Ambit Capital research, Note: * Adjusted for revaluation reserves and net NPAs
Using six years of standalone financials over FY09-FY14, we rank the 40 key Indian
banks on our greatness score, which consists of 28 parameters encompassing the
five broad heads mentioned in Exhibit 15 abovecapital/ resource mobilisation,
profitable lending, balance sheet discipline, operating efficiency and return
generation.
For each of these parameters, we further look at two kinds of improvements:
Improvement in performance over FY12-14 vs FY09-11; and
Consistency in improvement over FY09-14 i.e. improvements adjusted for

standard deviations.
A complete list of factors that are considered whilst quantifying the greatness for
banks has been mentioned in Exhibit 11 on the next page.
May 05, 2015
The framework essentially

hinges on using publicly
available historical data to
assess which banks, over a
sustained period of time
(FY09-14), have been able to
relentlessly and consistently:
(a) Mobilise capital;
(b) Lend
this
capital
profitably;
(c) In
the
pursuit
of
profitability, keep risks
controlled
and
maintain balance sheet
health;
(d) Operate efficiently;
(e) Turn all of this into
returns; and
(f) Reinvest
for
future
growth.
Clearly, this approach will

have limited value if there is a
structural break in the bank,
which
makes
past
performance a meaningless
guide to future performance.
However, to the extent that

such structural breaks tend to
be the exception than the
rule, the greatness model
helps in creating a shortlist of
stocks that investors can then
analyse in greater detail.
Page 91
Tata Power
Exhibit 11: Factors used for quantifying greatness for banks
Head
1
Criteria (focusing both on improvement and consistency)
Capital/ resource mobilisation a. Above median adjusted book value per share* improvement (FY12-14 over FY09-11)
b. Above median adjusted book value per share* improvement to standard deviation
Profitable lending
c.
Below median equity dilution (FY12-14 over FY09-11)
d.
Below median equity dilution to standard deviation (FY12-14 over FY09-11)
a. Above median loan book growth (FY12-14 over FY09-11)

b. Above median loan book growth to standard deviation
c. Above median net interest spread improvement (FY12-14 over FY09-11)#
d. Above median net interest spread improvement to standard deviation#
Balance sheet discipline
e.
Below median interest expended over interest income decline (FY12-14 over FY09-11)#
f.
Below median interest expended by interest income decline to standard deviation#
a. Below median incremental delinquency ratio decline (FY12-14 over FY09-11)

b. Below median incremental delinquency ratio decline to standard deviation
c. Above median provisioning coverage ratio improvement (FY12-14 over FY09-11)
d. Above median provisioning coverage ratio improvement to standard deviation
e. Below median loan book/net worth decline (FY12-14 over FY09-11)
f.
Below median loan book/net worth decline to standard deviation
g. Above median increase in non-interest income as a percentage of contingent liabilities (FY12-14 over FY09-11)
h. Above median increase in non-interest income as a percentage of contingent liabilities to standard deviation
4
Operating efficiency
a. Below median cost-to-income ratio decline (FY12-14 over FY09-11)

b. Below median cost-to-income ratio decline to standard deviation
c. Above median increase in fee income as a percentage of total business (FY12-14 over FY09-11)
d. Above median increase in fee income as a percentage of total business to standard deviation
Return generation
a. Above median RoA improvement (FY12-14 over FY09-11)

b. Above median RoA improvement to standard deviation
c. Above median RoE improvement (FY12-14 over FY09-11)
d. Above median RoE improvement to standard deviation
e. Above median dividend per share improvement (FY12-14 over FY09-11)
f.
Above median dividend per share improvement to standard deviation
g. Above median EPS improvement (FY12-14 over FY09-11)

h. Above median EPS improvement to standard deviation
Source: Ambit Capital research. Note: Rather than comparing one annual endpoint to another annual endpoint (say, FY07 to FY12), we prefer to average the data
out over FY09- 11 and compare that to the averaged data over FY12-14. This gives a more consistent picture of performance (as opposed to simply comparing
FY09 to FY14). # Given the similarity between net interest spread and interest expended over interest income, we take an average of these and use them as a
single metric in our calculations for the greatness score. * Adjusted for revaluation reserves and net NPAs.
May 05, 2015
Page 92
Tata Power
Institutional Equities Team

CEO, Institutional Equities
(022) 30433174
Research
Analysts
Industry Sectors
Nitin Bhasin - Head of Research
E&C / Infra / Cement / Industrials
(022) 30433241
Desk-Phone E-mail
Aadesh Mehta, CFA
Banking / Financial Services
(022) 30433239
Achint Bhagat
Cement / Infrastructure
(022) 30433178
achintbhagat@ambitcapital.com
Aditya Bagul
Consumer
(022) 30433264
adityabagul@ambitcapital.com
Aditya Khemka
Healthcare
(022) 30433272
adityakhemka@ambitcapital.com
Ashvin Shetty, CFA
Automobile
(022) 30433285
Bhargav Buddhadev
Power Utilities / Capital Goods
(022) 30433252
Deepesh Agarwal
Power Utilities / Capital Goods
(022) 30433275
Gaurav Mehta, CFA
Strategy / Derivatives Research
(022) 30433255
Karan Khanna
Strategy
(022) 30433251
Krishnan ASV
Real Estate
(022) 30433205
vkrishnan@ambitcapital.com
Pankaj Agarwal, CFA
(022) 30433206
Paresh Dave, CFA
Healthcare
(022) 30433212
pareshdave@ambitcapital.com
Parita Ashar
Metals & Mining / Oil & Gas
(022) 30433223
Prashant Mittal, CFA
Derivatives
(022) 30433218
prashantmittal@ambitcapital.com
Rakshit Ranjan, CFA
Consumer / Retail
(022) 30433201
rakshitranjan@ambitcapital.com
Ravi Singh
(022) 30433181
Ritesh Gupta, CFA
Midcaps Chemical / Retail
(022) 30433242
riteshgupta@ambitcapital.com
Ritesh Vaidya
Consumer
(022) 30433246
riteshvaidya@ambitcapital.com
Ritika Mankar Mukherjee, CFA
Economy / Strategy
(022) 30433175
ritikamankar@ambitcapital.com
Ritu Modi
Automobile
(022) 30433292
Sagar Rastogi
Technology
(022) 30433291
Sumit Shekhar
Economy / Strategy
(022) 30433229
sumitshekhar@ambitcapital.com
Sandeep Gupta
Media / Midcaps
(022) 30433211
sandeepgupta@ambitcapital.com
Tanuj Mukhija, CFA
E&C / Infra / Industrials
(022) 30433203
Utsav Mehta, CFA
Technology
(022) 30433209
utsavmehta@ambitcapital.com
Sales
Name
Regions
Sarojini Ramachandran - Head of Sales
UK
Desk-Phone E-mail
Dharmen Shah
India / Asia
(022) 30433289
dharmenshah@ambitcapital.com
Dipti Mehta
India / USA
(022) 30433053
diptimehta@ambitcapital.com
Hitakshi Mehra
India
(022) 30433204
hitakshimehra@ambitcapital.com
Krishnan V
India / Asia
(022) 30433295
krishnanv@ambitcapital.com
Nityam Shah, CFA
USA / Europe
(022) 30433259
nityamshah@ambitcapital.com
Parees Purohit, CFA
UK / USA
(022) 30433169
pareespurohit@ambitcapital.com
Praveena Pattabiraman
India / Asia
(022) 30433268
praveenapattabiraman@ambitcapital.com
Shaleen Silori
India
(022) 30433256
shaleensilori@ambitcapital.com
+44 (0) 20 7614 8374 sarojini@panmure.com
USA / Canada
Ravilochan Pola - CEO
Americas
+1(646) 361 3107
ravipola@ambitpte.com
Production
Sajid Merchant
Production
(022) 30433247
sajidmerchant@ambitcapital.com
Sharoz G Hussain
Production
(022) 30433183
sharozghussain@ambitcapital.com
Joel Pereira
Editor
(022) 30433284
joelpereira@ambitcapital.com
Nikhil Pillai
Database
(022) 30433265
nikhilpillai@ambitcapital.com
E&C = Engineering & Construction
May 05, 2015
Page 93
Tata Power
Stock price performance

State Bank Of India (SBIN IN, SELL)
Housing Development Finance (HDFC IN, SELL)
350
STATE BANK OF INDIA
Jan-15
Oct-14
Jul-14
Apr-14
Jan-14
Apr-12
Jan-15
Oct-14
Jul-14
Apr-14
Jan-14
Oct-13
Jul-13
Apr-13
Jan-13
Oct-12
Jul-12
Apr-12
50
Oct-13
100
Jul-13
150
Apr-13
200
Jan-13
250
Oct-12
300
Jul-12
1,600
1,400
1,200
1,000
800
600
400
200
0
HOUSING DEVELOPMENT FINANCE
Bharti Airtel Ltd (BHARTI IN, NOT RATED)
Larsen & Toubro Ltd (LT IN, SELL)
450
400
350
300
250
200
150
100
50
0
2,000
1,500
1,000
500
Oct-14
Jan-15
Oct-14
Jan-15
Jul-14
Jan-14
Apr-14
Jul-14
Apr-14
Jan-14
Jan-15
Oct-14
Jul-14
Apr-14
Jan-14
Oct-13
Jul-13
Apr-13
Jan-13
Oct-12
NTPC LTD
Oct-13
50
0
100
Jul-13
50
250
200
150
100
Apr-13
150
Jan-13
350
300
Apr-12
200
Oct-12
Bharat Heavy Electricals (BHEL IN, SELL)
Jul-12
NTPC Ltd (NTPC IN, SELL)
Jul-12
Oct-13
Apr-12
Jul-13
LARSEN & TOUBRO LTD
BHARTI AIRTEL LTD
May 05, 2015
Apr-13
Jan-13
Oct-12
Jul-12
Apr-12
Jan-15
Oct-14
Jul-14
Apr-14
Jan-14
Oct-13
Jul-13
Apr-13
Jan-13
Oct-12
Jul-12
Apr-12
BHARAT HEAVY ELECTRICALS

Page 94
Tata Power
Hero Motocorp (HMCL IN, SELL)
Bajaj Auto Ltd (BJAUT IN, SELL)
3,500
3,000
3,000
2,500
2,000
2,500
2,000
1,500
1,500
1,000
500
0
1,000
500
Jul-14
Oct-14
Jan-15
Oct-14
Jan-15
Nov-14
Feb-15
Apr-14
Jan-14
Oct-13
Jul-13
Jul-14
HERO MOTOCORP LTD
Apr-13
Jan-13
Oct-12
Jul-12
Apr-12
Jan-15
Oct-14
Jul-14
Apr-14
Jan-14
Oct-13
Jul-13
Apr-13
Jan-13
Oct-12
Jul-12
Apr-12
BAJAJ AUTO LTD
Tata Steel Ltd (TATA IN, SELL)
Hindalco Industries Ltd (HNDL IN, SELL)
700
600
250
200
500
400
300
200
150
100
50
100
0
TATA STEEL LTD
Apr-14
Jan-14
Oct-13
May-15
Aug-14
May-14
Feb-14
Nov-13
Aug-13
May-13
Jan-15
TATA POWER CO LTD
Feb-13
0
Nov-12
May-12
200
Oct-14
20
Jul-14
400
Apr-14
40
Jan-14
600
Oct-13
60
Jul-13
800
Apr-13
80
Jan-13
1,000
Oct-12
100
Jul-12
1,200
Aug-12
Reliance Industries Ltd (RIL IN, NOT RATED)
120
Apr-12
Jul-13
Tata Power Co Ltd (TPWR IN, BUY)
May 05, 2015
Apr-13
HINDALCO INDUSTRIES LTD
Jan-13
Oct-12
Jul-12
Apr-12
Jan-15
Oct-14
Jul-14
Apr-14
Jan-14
Oct-13
Jul-13
Apr-13
Jan-13
Oct-12
Jul-12
Apr-12
RELIANCE INDUSTRIES LTD

Page 95
Tata Power
Oil & Natural Gas Corp Ltd (ONGC IN, NOT RATED)
Vedanta (SSLT IN, NOT RATED)
OIL & NATURAL GAS CORP LTD
May-15
Feb-15
Nov-14
Aug-14
May-14
Feb-14
Nov-13
Aug-13
May-15
Feb-15
Nov-14
Aug-14
May-14
Feb-14
Nov-13
Aug-13
May-13
Feb-13
Nov-12
Aug-12
May-12
May-13
100
Feb-13
200
Nov-12
300
Aug-12
400
May-12
350
300
250
200
150
100
50
0
500
Vedanta
M&M (MM IN, NOT RATED)
May-15
Feb-15
Nov-14
Aug-14
May-14
Feb-14
Nov-13
Aug-13
May-13
Feb-13
Nov-12
Aug-12
May-12
1,600
1,400
1,200
1,000
800
600
400
200
0
M&M
May 05, 2015
Page 96
Tata Power
Explanation of Investment Rating
Investment Rating
Expected return (over 12-month)
BUY
>10%
SELL
<10%
NO STANCE
UNDER REVIEW
We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation
We will revisit our recommendation, valuation and estimates on the stock following recent events
NOT RATED
We do not have any forward looking estimates, valuation or recommendation for the stock
Disclaimer
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STRATEGY

Ashvin Shetty, CFA

Pankaj Agarwal, CFA

Tanuj Mukhija, CFA

Consultant: Anupam Gupta

May 05, 2015

Ambit Capital Pvt. Ltd.

Sensex exits: The decadal story

May 05, 2015

Reliance Inds. RIL IN

Hero Motocorp HMCL IN

Hindalco Inds. HNDL IN

Source: Bloomberg, Ambit Capital research.

THIS NOTE CANNOT BE USED BY THE MEDIA

Identifying the exit candidates

Saurabh Mukherjea, CFA

+91 22 3043 3174

Gaurav Mehta, CFA

+91 22 3043 3251

Section 1: Modi hits the reset button

Prime Minister Narendra Modis remarks at the Inaugural Session of Hannover

The Modi resets are set to

The three critical resets over the next four years

Gross domestic savings

Exhibit 1: India has a higher savings rate than its peers

Exhibit 2: however, 68% of these savings are held in

Per capita income (in current USD)

Source: CEIC, Ambit Capital research. Note: Data pertains to FY13

India is characterised by a high

May 05, 2015

Ambit Capital Pvt. Ltd.

The FY16 Budget explicitly aims to

A highly visible crackdown against

Quotes from the Budget Speech made by the Finance Minister

May 05, 2015

Ambit Capital Pvt. Ltd.

The Government is intent on

In addition, we highlight the Governments recent proposals to enhance disclosures

Enhanced disclosures on IT return

Details of immovable property, financial interest in companies and details of

PM Jan Dhan Yojana will help in

Exhibit 4: PMJDY is the most-ambitious financial inclusion programme in Indias history

Payment services and credit

Bank-based transfer of subsidies

Source: PMJDY, Ambit Capital research

May 05, 2015

Ambit Capital Pvt. Ltd.

Indias core model of corruption

Source: Ambit Capital research

The reset that Modi is likely to engineer

May 05, 2015

Ambit Capital Pvt. Ltd.

Modi is keen to breakdown the

Three case studies that show the

Example 1: On gas pricing

The Government has taken a

Example 2: On coal block allocation

May 05, 2015

Ambit Capital Pvt. Ltd.

The Government has pushed back

As we have argued in an op-ed piece for the Business Standard (Source:

The Prime Minister is determined to

Reset 3: Re-defining Indias subsidy mechanisms

Expenditure on subsidies and