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STRATEGY

November 2014

2014

2024

The Indian Coffee Can Portfolio


Analysts:

Pankaj Agarwal, CFA


pankajagarwal@ambitcapital.com

Nitin Bhasin
nitinbhasin@ambitcapital.com

Rakshit Ranjan, CFA


rakshitranjan@ambitcapital.com

Ashvin Shetty, CFA


ashvinshetty@ambitcapital.com

Gaurav Mehta, CFA


gauravmehta@ambitcapital.com
Tel: +91 22 3043 3255

Sagar Rastogi
sagarrastogi@ambitcapital.com

Aditya Khemka
adityakhemkal@ambitcapital.com

Karan Khanna
karankhanna@ambitcapital.com

Bhargav Buddhadev
bhargavbuddhadev@ambitcapital.com

Anupam Gupta
anupam.gupta@aavanresearch.com

Saurabh Mukherjea, CFA


saurabhmukherjea@ambitcapital.com
Tel: +91 22 3043 3174

Strategy

CONTENTS
STRATEGY
The Indian Coffee Can Portfolio3
Section 1: The case for a Coffee Can Portfolio.. 4
Section 2: Constructing the Indian Coffee Can Portfolio. 7
Section 3: How the Coffee Can is different to our other portfolio constructs14
Section 4: Todays Coffee Can for 2014-202416

COMPANIES
ITC (NOT RATED) .. 19
HDFC Bank (SELL) . 25
HCL Tech (BUY) . 31
Axis Bank (BUY) . 37
Asian Paints (SELL) 43
Godrej Consumer (SELL) . 49
Marico (BUY) .. 55
Berger Paints (SELL) .. 61
Page Industries (BUY) ...67
IPCA Laboratories (BUY) ..73
Gruh Finance (NOT RATED) 79
Balkrishna Industries (BUY) . 83
City Union Bank (BUY) . 89
eClerx (UNDER REVIEW) ..95
V-Guard (BUY) .101
Mayur Uniquoters (NOT RATED) . 107

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Strategy
THEMATIC

November 17, 2014

The Indian Coffee Can Portfolio

The Indian Coffee Can Portfolio

We introduce the Coffee Can Portfolio for investors who have the ability to
hold stocks for very long periods of time (ideally, for ten years). Our portfolio
consists of large-cap and small-cap stocks that have delivered 10% sales
growth and 15% RoCE every single year over FY05-14. Detailed back-testing
shows that this portfolio, including a large-cap only version, beats
benchmarks across all time periods. The portfolio also performs admirably
well in stress tests of maximum drawdown (in periods like the Lehman crisis).
Left untouched for a decade, this portfolio, coupled with the power of
compounding, generates returns that are substantially higher than the
benchmark.
The case for a Coffee Can Portfolio
Thirty years ago, Robert Kirby of Capital Guardian Trust spoke of how a Coffee Can
Portfolio of stocks selected using superior research and left untouched for a decade
can deliver superior returns over the long term. Over and above the quality of the
stock selection process, three other factors help the Coffee Can Portfolio generate
superior returns: (a) no churn this reduces transaction costs; (b) the power of
compounding stocks that do well over the long term become disproportionately
large in the overall portfolio; and (c) the long holding period of the portfolio helps
the investor effectively neutralise the noise that distracts from the core investment
thesis of a stock.

ITC

Our stance: NR

Mcap (US$ bn): 47.7

ADV - 6m (US$ mn): 40.6

HDFC Bank

Our stance: SELL

Mcap (US$ bn): 36.4

ADV - 6m (US$ mn): 30.0

HCL Tech

Our stance: BUY

Mcap (US$ bn): 18.3

ADV - 6m (US$ mn): 26.9

Axis Bank

Our stance: BUY

Mcap (US$ bn): 18.2

ADV - 6m (US$ mn): 32.7

Asian Paints

Our stance: SELL

Mcap (US$ bn): 10.4

ADV - 6m (US$ mn): 12.0

Godrej Consumer

Our stance: SELL

Mcap (US$ bn): 5.4

ADV - 6m (US$ mn): 2.4

Marico

Our stance: BUY

Mcap (US$ bn): 3.4

ADV - 6m (US$ mn): 2.4

Berger Paints

Our stance: SELL

Mcap (US$ bn): 2.0

ADV - 6m (US$ mn): 1.5

Page Inds

Our stance: BUY

Constructing the India Coffee Can Portfolio (CCP)


We use two filters to build the CCP: (a) sales growth of 10% per annum or more for
each of the past ten years; and (b) RoCE of >15% every year for the past ten years.
Back-testing of these filters over five ten-year periods (from 2000 to 2014) shows that
the CCP, including a large-cap version, beats the Sensex in each iteration and
delivers alpha ranging from 0.7% to 13% on a CAGR basis for the ten-year iterations.
Furthermore, relative to the Sensex, the CCPs also have lower maximum drawdown.
How is the CCP different from our other portfolios?
Over the past four years, we have created two different approaches to cater to
investors needs. Our quarterly Good & Clean portfolio is focused on investors who
are looking for short-term returns. The ten-bagger portfolio is based on our
greatness framework and is ideal for investors looking at a 1-3 year horizon. Our
latest construct, the Coffee Can Portfolio, is for investors with a longer term
investment horizon (ideally, ten year) because there is a strong body of evidence that
says that longer time periods are a powerful driver of superior investment returns.

Mcap (US$ bn): 1.7

ADV - 6m (US$ mn): 1.3

So here is the CCP for 2014to be bought now and opened ten years hence!
Our 2014 CCP consists of 16 stocks, including four banks. The list includes large-caps
with hugely successful franchises (ITC, HDFC Bank, HCL Tech, Axis Bank and Asian
Paints) as well as robust, fast-growing mid-caps/small-caps (Godrej Consumer,
Marico, IPCA Labs, GRUH Finance, Berger Paints, Page Industries, Balkrishna
Industries, City Union Bank, eClerx, V-Guard Industries and Mayur Uniquoters).
Our research clearly shows that valuation at the entry-point does not make a
difference for those who are willing to invest for the truly long run. Hence,
valuation parameters play no role whatsoever in the construction of the CCP.

Mayur Uniquoters

Our stance: NR

Mcap (US$ bn): 0.3

ADV - 6m (US$ mn): 0.3

IPCA Labs

Our stance: BUY

Mcap (US$ bn): 1.4

ADV - 6m (US$ mn): 3.5

Gruh Finance

Our stance: NR

Mcap (US$ bn): 1.4

ADV - 6m (US$ mn): 1.1

Balkrishna Inds

Our stance: BUY

Mcap (US$ bn): 1.1

ADV - 6m (US$ mn): 1.3

City Union Bank

Our stance: BUY

Mcap (US$ bn): 0.9

ADV - 6m (US$ mn): 1.4

eClerx

Our stance: UR

Mcap (US$ bn): 0.6

ADV - 6m (US$ mn): 0.8

V-Guard Inds

Our stance: BUY

Mcap (US$ bn): 0.4

ADV - 6m (US$ mn): 0.7

Source: Bloomberg, Ambit Capital research

Analyst Details
Saurabh Mukherjea, CFA
+91 99877 85848
saurabhmukherjea@ambitcapital.com

The Coffee Can Portfolio, including the large-cap version, beats the Sensex in each Gaurav Mehta, CFA
of the five iterations that were run over 2000-2014
+91 22 3043 3255
CAGR returns for ten-year
CCP All-cap
CCP Large-cap
Sensex gauravmehta@ambitcapital.com
period starting
30 June 2000 30 June 2010

16.7%

17.8%

14.1%

29 June 2001 30 June 2011

21.7%

23.6%

18.5%

28 June 2002 29 June 2012

19.0%

19.3%

18.3%

30 June 2003 28 June 2013

25.1%

27.5%

18.3%

30 June 2004 30 June 2014

31.6%

18.2%

18.1%

Karan Khanna
+91 22 3043 3251
karankhanna@ambitcapital.com
Consultant: Anupam Gupta
anupam.gupta@aavanresearch.com

Source: Bloomberg, Ambit Capital research

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: The case for a Coffee Can


Portfolio
You can make more money being passively active than actively passive.
Robert G Kirby
In 1984, Robert G Kirby of Capital Guardian Trust wrote an article titled, The
Coffee Can portfolio in the Journal of Portfolio Management (Source:
http://www.iijournals.com/doi/abs/10.3905/jpm.1984.408988). In this article,
Kirby narrated an interesting experience with a female client.

Robert Kirby of Capital Guardian


Trust wrote about The Coffee Can
Portfolio in 1984

Following the sudden death of his clients husband who handled her financial
affairs, Kirby was intrigued to see that the husband had secretly piggy-backed the
recommendations made by Kirby for the wifes portfolio. However, the husband
had managed to outperform the portfolio that Kirby managed for the wife by
applying a twist to Kirbys advice: he paid no attention to the sale
recommendations. He had simply put US$5,000 for every purchase
recommendation, tossed the share certificate in the safe deposit box and forgotten
about it.
On evaluating the portfolio, Kirby noticed several small holdings (with a value of
less than US$2,000) and large holdings (with values in excess of US$8,000).
However, one jumbo holding worth over US$800,000 stood out since it exceeded
the value of his wifes portfolio (which Kirby was managing) and was made from a
small investment in Haloid, which later resulted in a zillion shares of Xerox.
Kirby coined it the term Coffee Can Portfolio because the concept harkens back
to the Wild West, when Americans, before the widespread advent of banks, saved
their valuables in a coffee can and kept it under a mattress.

Kirby coined the term, Coffee Can


Portfolio

Why the Coffee Can Portfolio (CCP) works


The simplicity of the Coffee Can rests on three foundations:

No churn: By holding a portfolio of stocks for over ten years, a fund manager
resists the temptation to buy/sell in the short term. With no churn, the Coffee
Can approach reduces transaction costs which add to the overall portfolio
performance over the long term. We illustrate this with an example below.
Assume that you invest US$100mn in the CCP which kicks off on 30 June 2004
(discussed in greater detail in Section 2 of this note). Assume further that you
churn this portfolio by 25% per annum (implying that a typical position is held
for four years). Assuming a total price impact cost and brokerage cost of
100bps for every trade done over a ten-year period, this portfolio would
generate CAGR returns of 30.8%. Left untouched, however, the same portfolio
would have generated CAGR returns of 31.5%. This implies ~4.4% of the final
corpus (~US$67mn in value terms) is lost to churn over the ten-year period.
Thus, a US$100mn portfolio that would have grown to US$1.53bn over the
ten-year period (30 June 2004 - 30 June 2014) in effect grows to US$1.46bn
due to high churn.

Even moderate churn has an


impact on overall portfolio
returns

To further demonstrate how churn and turn destroy return, we quote an


extract from Investing The Last Liberal Art (2nd edition, 2013) by Robert G.
Hagstrom. In this book, the author refers to an interesting experiment
conducted by a behavioural economist at the University of California. We
reproduce the extract below:
In 1997, Terence Odean, a behavioral economist at the University of California,
published a paper titled, Why do Investors Trade Too Much? To answer his
question, he reviewed the performance of 10,000 anonymous investors.
Over a seven-year period (1987-1993), Odean tracked 97,483 trades among
ten thousand randomly selected accounts of a major discount brokerage. The
first thing he learned was that the investors sold and repurchased almost 80
percent of their portfolios each year (78 percent turnover ratio). Then he
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Strategy
compared the portfolios to the market average over three different time periods
(4 months, 1 year and 2 years). In every case, he found two amazing trends: (1)
the stocks that the investors bought consistently trailed the market, and (2) the
stocks that they sold actually beat the market1.
Odean wanted to look deeper, so he next examined the trading behavior and
performance results of 6,465 households. In a paper titled, Trading Is
Hazardous to Your Wealth (2000), Odean, along with Brad Barber, professor of
finance at University of California, Davis, compared the records of people who
traded frequently versus people who traded less often. They found that, on
average, the most active traders had the poorest results, while those who traded
the least earned the highest returns2. The implication here is that people who
might have suffered the most from myopic loss aversion and acted upon it by
selling stocks and did less well much less well than those who were able to
resist the natural impulse and instead hold their ground.

Power of compounding: Holding a stock for a period as long as 10 years


allows the power of compounding to play out. Thus, over the longer term,
winning stocks are rewarded disproportionately as compared to losing stocks
whose weight naturally reduces in the portfolio. The power of this powerful
phenomenon is explained in detail in Section 2 of this note.
Neutralising the negatives of noise: Unlike investing in indices (which
are typically constructed on simplistic measures such as market capitalization),
the CCP uses a disciplined framework (sales growth of more than 10% per
annum and ROCE of more than 15% every year for 10 consecutive years) to
filter stocks from the listed universe of stocks with a market capitalization of
more than Rs1bn. In this process, the CCP is indifferent to specific sectors,
flavor-of-the-day themes and approaches such as chasing earnings and
momentum. This filter results in the CCP having a healthy mix of large cap
stocks (with large franchises and steady-state growth) and mid/small cap stocks
(which have have greater growth potential but are at a more nascent stage of
their development).

whilst compounding results in a


natural rebalancing of winners and
losers in a portfolio

By its design, the CCP is indifferent


to short-term trends, sectors,
themes, and approaches such as
chasing earnings or momentum

The CCPs indifference to short term trends (such as economic booms & busts,
sector-specific fads, performance blips in companies, etc) allows it to
outperform the benchmark consistently. In other words, the benchmark
responds to or reflects - every trend, fad and fashion in the market whilst the
CCP is indifferent to these trends, fads and fashions which are typically
temporary in nature - and even out over the longer term.
The CCP is also an effective way of killing noise that interferes with the
investment process. In Investing The Last Liberal Art, Hagstrom also talks
about the chaotic environment, with so much rumor, miscalculation, and bad
information swirling. Such an environment was labelled noise by Fischer
Black, the inventor of the Black-Scholes formula. Hagstrom goes on to say:
Is there a solution for noise in the market? Can we distinguish between noise
prices and fundamental prices? The obvious answer is to know the economic
fundamentals of your investment so you can rightly observe when prices have
moved above or below your companys intrinsic value. It is the same lesson
preached by Ben Graham and Warren Buffett. But all too often, deep-rooted
psychological issues outweigh this commonsensical advice. It is easy to say we
should ignore noise in the market but quite another thing to master the
psychological effects of that noise. What investors need is a process that allows
1

Terence Odean, Do investors trade too much? American economic review (December
1999)
2

Terence Odean and Brad Barber, "Trading Is Hazardous to Your Wealth: The Common
Stock Investment Performance of Individual Investors," Journal of Finance 55, no. 2 (April
2000)

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them to reduce the noise, which then makes it easier to make rational
decisions.
As an example, we highlight how, over the long term, Hero MotoCorps stock
price has withstood short-term news such as disappointing monthly sales,
aggressive competitive launches as well as the split with Honda.
Exhibit 1: Hero MotoCorps stock price has compounded at an impressive 18%
CAGR over 2004-2014

Jun-14

Jun-13

Jun-12

Jun-11

Jun-10

Jun-09

Jun-08

Jun-07

Jun-06

Jun-05

Jun-04

3,200
2,800
2,400
2,000
1,600
1,200
800
400
-

Hero Motocorp
Source: Bloomberg, Ambit Capital research

The chart shown above highlights that over the past ten years there are two
extended time periods when Heros share price has not gone anywhere 2006
to 2008 and then 2010 to 2013. In fact for five of the past ten years, Heros
share price has been flat. And yet, in the remaining half of the past decade,
Hero has performed so well that the 10-year CAGR of the share price is 18%.
At its simplest, this is why the Coffee Can concept works once you have
identified a great franchise and you have the ability to hold on it for a long
period time, there is no point trying to be too precise about timing your entry
or your exit. As soon as we try to time that entry/exit, we run the risk of noise
rather than fundamentals driving our investment decisions.

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Section 2: Constructing the Indian Coffee


Can Portfolio
It would be fun and interesting (and maybe very rewarding) to have someone come
along and give the idea a try.
Closing lines of Robert Kirbys 1984 article on the Coffee Can Portfolio

A: Simple filters to screen stocks for the Coffee Can


Leaving aside stocks from the Financial Services sector for now, we use three filters
to screen listed Indian companies. These filters are as simple as they are difficult to
achieve. We believe these filters should be a bare minimum for investors looking to
stay invested in a business for ten years.

Market cap of more than Rs1bn: India is the least liquid among the worlds
15 largest equity markets. Thus, for institutional clients, we believe a market
capitalisation of Rs1bn is the bare minimum to take a position in the stock.
Stocks smaller than this tend to be illiquid and create high impact costs.

Return on Capital Employed of 15% every year for consecutive years:


1

We filter stocks with a market cap


of more than Rs1bn on the basis of
10% sales growth and 15% RoCE
for every year for ten consecutive
years

Why RoCE? Whilst management teams have a natural desire for growth
and scale, growth creates shareholder value only when the returns on
capital exceed the cost of capital. RoCE, therefore, is of utmost importance
in assessing a firms performance. Our empirical work on share price
performance of Indian companies also supports the primacy of RoCE as a
share price driver (see the exhibit below).

Exhibit 2: RoCE drives share prices (This chart is based on data from March 2002 to
March 2012)
Median outperformance - Ten-year CAGR

12.0%

12%
9.0%

10%
8%
6%

5.9%

4%
2%
0%
Superior revenue growth

Superior RoCE

Superior on both

Source: Bloomberg, Ambit Capital research. Note* The universe in 2002s BSE200 firms (ex-financials);
performance relative to the BSE200 Index.

Why 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 (BBB- 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.

Revenue growth of 10% every year: Indias nominal GDP growth rate has
averaged 15% over the past ten years. A firm operating in India should,
therefore, be able to deliver sales growth of at least 15% per annum. However,
very few listed companies, only 5 out of the ~1,100 firms run under our
screen, have managed to achieve this! Therefore, we reduce this filter rate
modestly to 10% i.e. we look for companies that have delivered revenue
growth of 10% per annum every year for ten consecutive years.

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Ambit Capital Pvt. Ltd.

15% RoCE also works as a proxy


for the annual returns that
investors can expect from that
stock

Very few listed companies manage


to achieve a sales growth that
matches Indias nominal GDP
growth rate of 15%

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Strategy
In summary, our filters for non-Financial Services stocks focus on a minimum
market cap of Rs1bn, RoCE of 15% for more over ten consecutive years and sales
growth of 10% for more over ten consecutive years. In effect, a healthy RoCE
protects the franchise and sales growth expands the franchise.
For Financial Services stocks, we keep the market-cap limit of Rs1bn and modify
the filters on RoE and sales growth as follows:

ROE of 15%: We prefer Return on Equity over Return on Assets because this is
a fairer measure of the banks ability to generate higher income efficiently on
a given equity capital base over time.
Loan growth of 15%: We believe loan growth of 15% is an indication of a
banks 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
resilient during a downturn.

We use RoE of 15% and loan


growth of 15% as filters to screen
BFSI stocks

B: Back-testing proves the strength of the Coffee Can


Portfolio
Using the above filters, we ran back-tests of the CCP over five ten-year periods
(2000-2010, 2001-2011, 2002-2012, 2003-2013 and 2004-2014) on the listed
companies universe (ex-BFSI). We also ran a separate large-cap CCP consisting
solely of stocks that were in the top-100 stocks by market cap (at the start of the
period under consideration).
We also stress-tested these results for maximum drawdown (52.4% from December
2007 to December 2008) to test the strength of the portfolio during periods of
market volatility:
First, we calculate CAGR returns for each of the five portfolios and the Sensex;
Next we compute the maximum drawdown (defined as the maximum drop in
cumulative returns from the highest peak to the lowest subsequent trough);
and
Finally, we calculate the risk-adjusted returns; i.e. returns in excess of the riskfree rate (assumed at 8%, comparable to the currently prevailing 8.2% ten-year
Government Bond Yield) divided by the absolute maximum drawdown.
The results are revealing and have been summarised as under:
Each of the five CCPs has outperformed the benchmark Sensex.
Even the sub-set of the CCP i.e. the large-cap version of the CCP has been
successful in beating the Sensex.
On a risk-adjusted basis (where we define risk as maximum drawdown), all the
iterations of the all-cap portfolio as well as the large-cap portfolio have
outperformed the Sensex.
The large-cap versions of the CCP have outperformed the all-cap
versions in 2000, 2001, 2002 and 2003 (both on an absolute basis as well as
risk-adjusted basis). The 2004 version of the all-cap version of the CCP
however, has delivered superior returns compared with the 2004 large-cap
version.

Five iterations of the CCP that we


rerun from 2000 to 2014 prove the
potential of the CCP to beat the
benchmark

Exhibit 3: Back-testing results of five iterations of the Coffee Can Portfolio


All-cap
All-cap
Annualised
Large-cap
Large-cap
Annualised
CCP (start)
CCP (end)
ten-year return
CCP (start)
CCP (end)
ten-year return
2000
400
1,870
16.7%
300
1,549
17.8%
2001
400
2,855
21.7%
200
1,661
23.6%
2002
600
3,427
19.0%
400
2,346
19.3%
2003
700
6,585
25.1%
500
5,680
27.5%
2004
800
12,469
31.6%
400
2,138
18.2%
Source: Bloomberg, Capitaline, Ambit Capital research. Note: Portfolio at start denotes an equal allocation of Rs100 for the stocks qualifying to be in the CCP for
that year. *The Portfolio kicks off on 30th June of every year.
Kick-off year*

We summarise the results of each of the five iterations in the next five pages.

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Period 1: 2000-2010 (2.6% alpha relative to the


Sensex; 16.7% per annum absolute returns)
All-cap portfolio stocks: NIIT, Cipla, Hero MotoCorp, Swaraj Engines
Large-cap portfolio stocks: NIIT, Cipla, Hero MotoCorp
In the first iteration, both versions of the CCP outperformed the benchmark. Whilst
the all-cap CCP delivered a 16.7% return (2.6% alpha to the Sensex), the large-cap
portfolio delivered a 17.8% return (3.8% alpha to the Sensex). The maximum
drawdown for both the portfolios in this period was also less than the maximum
drawdown for the Sensex.
Exhibit 4: First iteration summary
2000-2010*

All-cap CCP

CAGR returns
Maximum drawdown**
Excess returns

Large-cap CCP

Sensex

16.7%

17.8%

14.1%

-42.2%

-39.2%

-52.4%

0.21

0.25

0.12

Source: Bloomberg, Ambit Capital research. Note: * Portfolio kicks off on 30 June 2000. Excess returns have
been calculated as returns in excess of risk-free rate (assumed to be 8%) divided by absolute maximum
drawdown. Maximum drawdown is defined as the maximum drop in cumulative returns from the highest peak
to the lowest subsequent trough. ** Maximum drawdown took place from June 2000 to March 2003 for the
all-cap CCP and large-cap CCP, and from December 2007 to December 2008 for the Sensex.

The four stocks that constituted the first iteration of the Coffee Can Portfolio
consisted of one IT, one pharma company, and two companies from the
automobile/auto-ancillary sector. These were NIIT, Cipla, Hero MotoCorp and
Swaraj Engines. The star performer during this period was Hero MotoCorp which
proved to be a ten-bagger whilst NIITs stock price collapsed 78% in this period.
Exhibit 5: Portfolio performance during the first iteration
Company

Price at Start (Rsbn) Price at End (Rsbn)

Date from/to

30/06/2000

Share price
CAGR

FY2000-10
PAT CAGR

30/06/2010

NIIT

295

65

-14.1%

-11%

Cipla

69

339

17.2%

23%

Hero Moto

198

2,049

26.4%

27%

Swaraj Engines

118

378

12.4%

7%

Portfolio*

400

1,870

16.7%

4,749

17,701

14.1%

Sensex

Hero Motocorp was the star


performer, whilst NIIT was the
laggard in Period 1

Source: Bloomberg, Ambit Capital research. Note: *Portfolio price at start of Rs400 denotes an equal
allocation of Rs100 in each stock at the start of the period. Portfolio price at end is the value of the portfolio
at the end of the period. Thus, for this period, the value of the portfolio rose from Rs400 at the start to
Rs1,870 at the end.

Exhibit 6: Hero MotoCorp rose exponentially whilst NIIT collapsed in 2000-2010


2,000

(Rs)

1,800
1,600
1,400
1,200

Swaraj Engines

1,000

Hero Moto

800

Cipla

600

NIIT

400
200
Value at start

Value at end

Source: Bloomberg, Ambit Capital research. Note: Value at start denotes an equal allocation of Rs100 in each
stock at the start of the period. Value at end is the value of each stock at the end of the period. Thus, for this
period, the value of the portfolio rose from Rs400 at the start to Rs1,870 at the end.

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Period 2: 2001-2011 (3.2% alpha relative to the


Sensex; 21.7% per annum absolute returns)
All-cap portfolio stocks: Cipla, Hero MotoCorp, Apollo Hospitals and Roofit
Inds
Large-cap portfolio stocks: Cipla, Hero MotoCorp
Both versions of the CCP performed well during the second iteration as well,
beating the Sensex. The large-cap CCP gave an impressive alpha of 5.1% for this
iteration. The portfolio was remarkably steady as compared to the maximum
drawdown, delivering an excess return of 0.36x-0.39x.
Exhibit 7: Second iteration summary
2001-2011*
CAGR returns
Maximum drawdown**
Excess returns

All-cap CCP
21.7%
-37.7%
0.36

Large-cap CCP
23.6%
-39.7%
0.39

Sensex
18.5%
-52.4%
0.20

Source: Bloomberg, Ambit Capital research. Note: * Portfolio kicks off on 29 June 2001. Excess returns have
been calculated as returns in excess of risk-free rate (assumed to be 8%) divided by absolute maximum
drawdown. Maximum drawdown is defined as the maximum drop in cumulative returns from the highest peak
to the lowest subsequent trough. ** Maximum drawdown took place from June 2001 to March 2003 for the
all-cap CCP and large-cap CCP, and from December 2007 to December 2008 for the Sensex.

During the second iteration as well, the Coffee Can Portfolio consisted of four
stocks with two repeats (Cipla and Hero MotoCorp from the Period 1) and two new
entries (Apollo Hospitals and Roofit Industries). During this period, note that one of
the stocks in the portfolio, Roofit Industries, was delisted during 2001-2011.
Despite this, the portfolio performed admirably. The star performer yet again was
Hero MotoCorp whose stock price rose 13x whilst Cipla was a laggard at 3.6x.
Exhibit 8: Portfolio performance during the second iteration
Price at Start
(Rsbn)
29/06/2001
91
145
40
106
400
3,457

Company
Date from/to
Cipla
Hero Motocorp
Apollo Hospitals
Roofit Inds.
Portfolio*
Sensex

Price at End
(Rsbn)
29/06/2011
331
1,877
478
NA
2,855
18,846

Share
price CAGR

FY01-11
PAT CAGR

13.7%
29.2%
28.1%
NA
21.7%
18.5%

19%
22%
19%
NA

Apollo Hospitals came close to


matching Hero MotoCorps stellar
performance in Period 2

Source: Bloomberg, Ambit Capital research. Note: NA - Data for Roofit is not available because the company
was delisted during this period. *Portfolio price at start of Rs400 denotes an equal allocation of Rs100 in each
stock at the start of the period. Portfolio price at end is the value of the portfolio at the end of the period.
Thus, for this period, the value of the portfolio rose from Rs400 at the start to Rs2,855 at the end.

Exhibit 9: Hero MotoCorp continued its stellar performance during 2001-2011


3,000

(Rs)

2,500
2,000

Roofit Inds

1,500

Apollo Hosp

1,000

Hero Moto
Cipla

500
Value at start

Value at end

Source: Bloomberg, Ambit Capital research. Note: Data for Roofit Ind is not available from FY03 onwards.
Value at start denotes an equal allocation of Rs100 in each stock at the start of the period. Value at end is the
value of each stock at the end of the period. Thus, for this period, the value of the portfolio rose from Rs400 at
the start to Rs2,855 at the end.

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Period 3: 2002-2012 (0.7% alpha to the Sensex;


19.0% per annum absolute returns)
All-cap portfolio stocks: Infosys, Hero MotoCorp,
Corporation of India, Gujarat Gas, Aurobindo Pharma

Cipla,

Container

Large-cap portfolio stocks: Infosys, Hero MotoCorp, Cipla, Container


Corporation of India
The third iteration has the weakest results for the five periods under our analysis.
During this period, the Coffee Can delivered an alpha of just 0.7%, even as the
large-cap Coffee Can delivered a higher alpha of 1.0%. However, both versions of
the Coffee Can performed well during maximum drawdown, delivering excess
returns of 0.26-0.32x, higher than the first iteration for the portfolio.
Exhibit 10: Third iteration summary
2002-2012*

All-cap CCP

CAGR returns
Maximum drawdown**
Excess returns

Large-cap CCP

Sensex

19.0%

19.3%

18.3%

-42.6%

-35.1%

-52.4%

0.26

0.32

0.20

Despite a comparatively weaker


performance, the CCP still beat the
Sensex in Period 3

Source: Bloomberg, Ambit Capital research. Note: * Portfolio kicks off on 28 June 2002. Excess returns have
been calculated as returns in excess of risk-free rate (assumed to be 8%) divided by absolute maximum
drawdown. Maximum drawdown is defined as the maximum drop in cumulative returns from the highest peak
to the lowest subsequent trough. ** Maximum drawdown took place from June 2007 to December 2008 for
the all-cap CCP, from December 2006 to December 2008 for the large-cap CCP and from December 2007 to
December 2008 for the Sensex.

The Coffee Can Portfolio expanded in size during the third iteration. Compared
with the four stocks in the first two iterations, six stocks qualified to be part of the
Coffee Can Portfolio in the third iteration. Cipla and Hero MotoCorp were
repeated yet again whilst the other four stocks were Infosys, Container
Corporation, Gujarat Gas and Aurobindo Pharma.
Exhibit 11: Portfolio performance during the third iteration
Company

Price at Start (Rsbn) Price at End (Rsbn)

Date from/to

Share price FY02-12 PAT


CAGR
CAGR

28/06/2002

29/06/2012

Infosys

411

2,509

19.8%

26%

Hero Motocorp

308

2,149

21.4%

17%

Cipla

75

317

15.4%

18%

Container Corpn.

99

613

20.0%

13%

Guj Gas Company

50

310

20.0%

17%
11%

Aurobindo Pharma
Portfolio*
Sensex

24

110

16.6%

600

3,427

19.0%

3,245

17,430

18.3%

Source: Bloomberg, Ambit Capital research. Note: *Portfolio price at start of Rs600 denotes an equal
allocation of Rs100 in each stock at the start of the period. Portfolio price at end is the value of the portfolio
at the end of the period. Thus, for this period, the value of the portfolio rose from Rs600 at the start to
Rs3,427 at the end.

Exhibit 12: During this phase, the portfolio broadly tracked the Sensex
4,000

(Rs)

Auro Pharma
3,000

Guj Gas

2,000

ConCor
Cipla

1,000

Hero Moto
Infosys

Value at start

Value at end

Source: Bloomberg, Ambit Capital research. Note: Value at start denotes an equal allocation of Rs100 in each
stock at the start of the period. Value at end is the value of each stock at the end of the period. Thus, for this
period, the value of the portfolio rose from Rs600 at the start to Rs3,427 at the end.

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Period 4: 2003-2013 (6.8% alpha to the Sensex;


25.1% per annum absolute returns)
All-cap portfolio stocks: Infosys, Hero MotoCorp, Cipla, Sun Pharma,
Container Corporation of India, Gujarat Gas, Aurobindo Pharma
Large-cap portfolio stocks: Infosys, Hero MotoCorp, Cipla, Container
Corporation of India, Sun Pharma
Whilst the all-cap version of the Portfolio delivered a 7% alpha, the large-cap
version gave a higher 9% in the fourth iteration. In a maximum drawdown
situation, both versions remained steady and beat the Sensex, thereby delivering
excess returns of 0.60-.0.88x.
Exhibit 13: Fourth iteration summary
2003-2013*

All-cap CCP

CAGR returns
Maximum drawdown**
Excess returns

Large-cap CCP

Sensex

25.1%

27.5%

18.3%

-28.4%

-22.2%

-52.4%

0.60

0.88

0.20

Sun Pharma powered through to


be the best-performing stock in
Period 4

Source: Bloomberg, Ambit Capital research. Note: * Portfolio kicks off on 30 June 2003. Excess returns have
been calculated as returns in excess of risk-free rate (assumed to be 8%) divided by absolute maximum
drawdown. Maximum drawdown is defined as the maximum drop in cumulative returns from the highest peak
to the lowest subsequent trough. ** Maximum drawdown took place from June 2007 to December 2008 for
the all-cap CCP, from September 2008 to December 2008 for the large-cap CCP and from December 2007 to
December 2008 for the Sensex.

Barring one addition (Sun Pharma), the Coffee Can Portfolio in its fourth iteration
was the same as that in the third iteration. Performance was driven by Sun
Pharmas stellar performance. However, the performance of the large-cap version
was better than the all-cap version of the Coffee Can Portfolio.
Exhibit 14: Portfolio performance during the fourth iteration
Company

Price at Start (Rsbn) Price at End (Rsbn)

Date from/to
Infosys
Cipla
Hero Motocorp
Sun Pharma.Inds.
Container Corpn.
Aurobindo Pharma
Guj Gas Company
Portfolio*
Sensex

30/06/2003
408
60
253
16
115
37
45
700
3,607

30/06/2013
2,499
392
1,663
506
719
181
191
6,585
19,396

Share price FY03-13 PAT


CAGR
CAGR
19.9%
20.6%
20.7%
41.1%
20.1%
17.1%
15.4%
25.1%
18.3%

26%
20%
13%
30%
13%
14%
18%

Source: Bloomberg, Ambit Capital research. Note: *Portfolio price at start of Rs700 denotes an equal
allocation of Rs100 in each stock at the start of the period. Portfolio price at end is the value of the portfolio
at the end of the period. Thus, for this period, the value of the portfolio rose from Rs700 at the start to
Rs6,585 at the end.

Exhibit 15: Sun Pharma delivered a stellar performance in Period 4


7,000

(Rs)

6,000

GujGas

5,000

Auro Pharma

4,000

ConCor
Sun Pharma

3,000

Hero Moto

2,000

Cipla

1,000

Infosys

Value at start

Value at end

Source: Bloomberg, Ambit Capital research. Note: Value at start denotes an equal allocation of Rs100 in each
stock at the start of the period. Value at end is the value of each stock at the end of the period. Thus, for this
period, the value of the portfolio rose from Rs700 at the start to Rs6,585 at the end.

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Strategy

Period 5: 2004-2014 (13% alpha to the Sensex; 31.6%


per annum absolute returns)
All-cap portfolio stocks: Infosys, Hero MotoCorp, Cipla, Container
Corporation of India, Gujarat Gas, Alok Industries, Munjal Showa and
Havells India
Large-cap portfolio stocks: Infosys, Hero MotoCorp, Cipla, Container
Corporation of India
The most recent iteration of our Coffee Can Portfolio has yielded the best results,
with a whopping 13% alpha over the Sensex. The Portfolio was equally divided
between large-caps and mid-caps/small-caps. The higher share of the midcaps/small-caps was instrumental in delivering higher alpha during this period.
Exhibit 16: Fifth iteration summary
2004-2014*
CAGR returns
Maximum drawdown**
Excess returns

All-cap CCP
31.6%
-64.1%
0.37

Large-cap CCP
18.2%
-33.9%
0.30

Sensex
18.1%
-52.4%
0.19

The CCP delivered its highest


alpha, a whopping 13% to the
Sensex, in Period 5

Source: Bloomberg, Ambit Capital research. Note: * Portfolio kicks off on 30 June 2004. Excess returns have
been calculated as returns in excess of risk-free rate (assumed to be 8%) divided by absolute maximum
drawdown. Maximum drawdown is defined as the maximum drop in cumulative returns from the highest peak
to the lowest subsequent trough. ** Maximum drawdown took place from December 2007 to December 2008
for the all-cap CCP, from December 2006 to December 2008 for the large-cap CCP and from December
2007 to December 2008 for the Sensex.

The price performance among mid-cap/small-cap stocks was extreme: Havells


stock price rose 89x whilst Alok Industries stock price fell 70% by the end of the
iteration. As a result, the price performance of the large-cap portfolio (18% CAGR)
lagged that of the all-cap portfolio (32% CAGR).
Exhibit 17: Portfolio performance during the fifth iteration
Company

Price at Start (Rsbn)Price at End (Rsbn)

Date from/to
Infosys
Hero Motocorp
Cipla
Container Corpn.
Guj Gas Company
Alok Inds.
Munjal Showa
Havells India
Portfolio*
Sensex

30/06/2004
690
508
85
188
43
45
34
3
800
4,795

30/06/2014
3,256
2,635
438
1,189
415
14
142
235
12,469
25,414

Share price FY04-14 PAT


CAGR
CAGR
16.8%
17.9%
17.8%
20.2%
25.4%
-10.9%
15.4%
56.7%
31.6%
18.1%

24%
11%
16%
10%
17%
19%
12%
37%

Extreme price performance among


mid-cap/small-cap stocks sets
apart Period 5 from the earlier
iterations of the CCP

Source: Bloomberg, Ambit Capital research. Note: * Portfolio price at start of Rs800 denotes an equal
allocation of Rs100 in each stock at the start of the period. Portfolio price at end is the value of the portfolio
at the end of the period. Thus, for this period, the value of the portfolio rose from Rs800 at the start to
Rs12,469 at the end.

Exhibit 18: Havells India was the star performer in Period 5


14,000

(Rs)

Havells

12,000

Munjal Showa

10,000

Alok Inds.

8,000
6,000

Guj Gas

4,000

ConCor

2,000

Cipla

Value at start

Value at end

Hero Moto

Source: Bloomberg, Ambit Capital research. Note: Value at start denotes an equal allocation of Rs100 in each
stock at the start of the period. Value at end is the value of each stock at the end of the period. Thus, for this
period, the value of the portfolio rose from Rs800 at the start to Rs12,469 at the end.

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Strategy

Section 3: How the Coffee Can is different


to our other portfolio constructs
"Forever is a good holding period."
Warren Buffett
Over the years, we have developed various portfolio constructions for investors
based on their outlook. We have summarised these below:
Good and Clean (G&C): We began this portfolio in 2011. The G&C portfolios
are constructed each quarter using: (i) a battery of financial tests based on the
previous fiscal years data; and (ii) our forensic accounting model. Each G&C
portfolio typically runs for a quarter before we revise it. Thus, we believe this
portfolio is ideal for investors aiming to beat benchmarks over the short term. The
methodology is:

Within each sector, we first identify firms that do well on our greatness and
accounting frameworks;

We then overlay our macro outlook and valuation filters to identify sectors
which are placed favourably; and

The sector-level champions from step 1 (for the sectors identified in step 2)
constitute our G&C portfolio.

Our G&C portfolio is ideal for


investors aiming to beat
benchmarks over the short term

Please click here for the latest G&C portfolio published on 25th July 2014.
Ten-bagger: We first unveiled this portfolio - built using our greatness
framework - in January 2012. [See our 19th January 2012 note - Tomorrows ten
baggers - for the framework behind this construct note; click here for the 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 19 below.
Exhibit 19: The greatness framework

a. Investment (gross
block)

The ten-bagger framework studies


a firm's structural strength and
focuses on improvements over a
period of time and the consistency
of those improvements

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)

Source: Ambit Capital Research

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:

November 17, 2014

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Strategy

Percentage improvements in performance over FY11-13 vs FY08-10; and

Consistency in performance over FY08-13 i.e. improvements adjusted for


underlying volatility in financial data

A complete list of factors that are considered whilst quantifying greatness has been
mentioned in Exhibit 20 below.
Exhibit 20: Factors used for quantifying greatness
Head
1 Investments
2 Conversion to sales

Criteria
a.

Above median gross block increase (FY11-13 over FY08-10)*

b.

Above median gross block increase to standard deviation

a. Improvement in asset turnover (FY11-13 over FY08-10)*


b. Positive improvement in asset turnover adjusted for standard
deviation
c. Above median sales increase (FY11-13 over FY08-10)*
d.

3 Pricing discipline
4 Balance sheet discipline

Cash generation and


5
PAT improvement

Above median sales increase to standard deviation

a.

Above median PBIT margin increase (FY11-13 over FY08-10)*

b.

Above median PBIT margin increase to standard deviation

a.

Below median debt-equity decline (FY11-13 over FY08-10)*

b.

Below median debt-equity decline to standard deviation

c.

Above median cash ratio increase (FY11-13 over FY08-10)*

d.

Above median cash ratio increase to standard deviation

a.

Above median CFO increase (FY11-13 over FY08-10)*

b.

Above median CFO increase to standard deviation

c.

Above median adj. PAT increase (FY11-13 over FY08-10)*

d.
6 Return ratio improvement a.

Above median adj. PAT increase to standard deviation


Improvement in RoE (FY11-13 over FY08-10)*

b.

Positive improvement in RoE adjusted for standard deviation

c.

Improvement in RoCE (FY11-13 over FY08-10)*

d.

Positive improvement in RoCE adjusted for standard deviation

Source: Ambit Capital research; Note: * Rather than comparing one annual endpoint to another annual
endpoint (say, FY08 to FY13), we prefer to average the data out over FY08-10 and compare that to the
averaged data from FY11-13. This gives a more consistent picture of performance (as opposed to simply
comparing FY08 to FY13).

The ten-bagger portfolio focuses on structural plays that are financially strong firms
(with credible management teams) and remain consistent performers on a crosscyclical basis. Companies are identified based on their relentless improvement in
financial performance over long periods of time (usually, six years). This portfolio is
ideal for conventional buy-and-hold investors with a 1-3 year horizon.
Adding the Coffee Can for long-term investors with a ten-year outlook
To this suite of portfolios, we now add the Coffee Can which is ideal for long-term
investors with a ten-year outlook. In the table below, we summarise our portfolio
recommendations for investors.
Exhibit 21: Our suite of Portfolios for investors looking to invest in India
Type of Investor

Recommended Ambit
Portfolio

Short-term investor with quarterly


Good and Clean Portfolio
performance focus
Conventional buy-and-hold
investor with 1-3 year horizon

Ten-bagger portfolio

Long-term investor with ten-year


Coffee Can Portfolio
outlook
Source: Ambit Capital Research

Returns over recommended time


period
The 12 instalments of our Good &
Clean portfolio have delivered a
staggering 27.7% alpha over the past
four years
The three iterations of our ten-baggers
portfolios have generated over 30%
alpha over the past three years
Average alpha of 5% over five ten-year
iterations

The Coffee Can Portfolio is ideal


for long-term investors with a tenyear outlook

In the next section, we discuss the rationale used for constructing the India Coffee
Can Portfolio.

November 17, 2014

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Strategy

Section 4: Todays Coffee Can for 20142024


Great investing requires a lot of delayed gratification.
Charlie Munger
Introducing the candidates for Coffee Can 2014-2024
We screened Indias listed universe of non-BFSI stocks with a market capitalisation
of more than Rs1bn that have delivered 10% sales growth and 15% RoCE every
year for the past year. The list is mentioned in the exhibit below.
Exhibit 22: The short list of firms with superior RoCEs and superior sales growth
over the last ten years (FY05-14)
Superior on both
ITC

Share price performance (CAGR


relative to Sensex)
11%

Market cap (Rsbn)*

FY15 P/E

2,966

28.8

HCL Tech

12%

1,134

15.5

Asian Paints

19%

622

42.3

Godrej Consumer

21%

319

37.2

Marico

17%

205

37.2

Berger Paints

19%

126

40.6

Page Ind

47%

109

53.9

IPCA

14%

80

18.4

Balkrishna Inds.

18%

80

12.2

Astral Polytechnik#

53%

41

38.9

eClerx

30%

39

15.3

V-Guard Inds.

33%

27

26.5

Mayur Uniquoters

76%

19

26.4

Insecticide India

23%

10

18.3

The Coffee Can 2014-2024


features some of Indias mostsuccessful franchises as well as the
most-compelling investment
themes

Source: Bloomberg, Capitaline, Ambit Capital research; Note: Share price performance has been measured
over a ten-year period (i.e. March 2004 to March 2014). In case of firms with a shorter listing history, the
performance has been measured over the shorter period (not less than 5 years). * Market cap as on 31
October 2014. Page Inds, eClerx, V-Guard and Insecticides India were not listed throughout the ten-year
period and hence the financial data used is based on Draft Red Herring Prospectus as provided by Capitaline,
for periods prior to their IPOs. # Comments withheld on this company due to internal policy.

We note that the stocks identified by this filter are the same as those in our Cusp
of Greatness report (published on 14th July 2014), as we had used the same filter
and the same time period in that report as well. However, whilst that report
focused on mid-cap/small-cap stocks, in this report we add commentary on the
first four large-cap names (ITC, HCL Tech, Asian Paints and Godrej Consumer). As
before, we exclude Insecticides India from this report due to its size.

We add four large-cap stocks (ITC,


HCL Tech, Asian Paints, and GCPL)
to our Cusp of Greatness list of
stocks

We run a similar filter for Indias listed BFSI stocks with a market cap of more than
Rs1bn and: (a) an RoE of 15%; and (b) loan growth of 15% for every consecutive
year for the past ten years. In a universe of 507 firms, a meagre 5 firms managed
to pass this test (representing a small fraction of ~1%). This handful of firms is
shown in the exhibit below.

Only 1% of stocks in the BFSI


universe meet our screening filters

Exhibit 23: The very short list of BFSI firms with superior RoEs and superior loan
book growth (over FY05-14)

HDFC Bank
Axis Bank
Gruh Finance
City Union Bank
Dewan Housing

Share price performance


Market cap (Rsbn)*
(CAGR relative to Sensex)
11%
2,185
11%
1,087
34%
85
12%
49
11%
49

FY15 P/E
20.5
15.4
39.8
12.9
7.9

Source: Bloomberg, Capitaline, Ambit Capital research; Note: Share price performance has been measured
over the last ten-year period (i.e. March 2004 to March 2014). * Market cap as on 31 October 2014.

From the above list, we exclude Dewan Housing due to our standard G&C filters.

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Strategy
An introduction to our stock-specific sections
In the rest of this note, we provide two-pagers for 16 of the 19 stocks (excluding
Insecticides India, Dewan Housing and Astral Polytechnik) that have made the cut
in our filters and constitute the CCP for India. Our notes focus on two critical points
that lie at the heart of any business.
Any investor taking a ten-year call must be convinced that the underlying business
has strong competitive advantages and the management has a proven ability to
take judicious capital allocation decisions:

Sustainable competitive advantages allow firms to add more value than


their rivals and to continue doing so over long periods of time. In our May
2014 thematic, The Great Indian Midcaps, we applied John Kays Innovation,
Brands and Reputation, Architecture, Strategic Asset (IBAS) framework to
analyse six firms. In the company-specific sections that follow, we have given
our view on the underlying sustainable competitive advantage for the
company. We also provide our view on what the company is doing to
strengthen the franchise further.

Capital allocation: Capital allocation is perhaps the single most-important


decision through which a management adds value to the firms shareholders.
More importantly, effective capital allocation is not just about growing but
growing profitably. Thus, in the stock-specific sections that follow, we provide
our views on the capital allocation skills of the companies as well as 10-year
pie charts on how the companies (excluding the Financial Services companies)
have raised and spent capital in the past decade. We believe these 10-year
pie-charts capture the essence of the cash-generating abilities of the business
and the managements discretion in utilising these cashflows.

For a ten-year view, investors must


convince themselves that the
underlying businesses have strong
competitive advantages

and their managements have a


proven track record of judicious
capital allocation

Exhibit 24: Summary of key attributes for stocks in the CCP


Company

Competitive
advantages

Accounting
quality

Capital
allocation

Treatment of
minorities

Succession
planning

HCL Tech
Asian Paints
Godrej
Consumer
Marico
IPCA
Berger Paints
Page Ind
Balkrishna Inds.
eClerx
V-Guard Inds.
Mayur
Uniquoters

Building scale, harnessing high-value clients


Clear long-term vision and execution track
record
Strong diversified franchise, risk around
succession planning
HDFC parentage and deep hinterland
penetration are competitive advantages.
Conservative lender with established niche Stable RoA and RoE

HDFC Bank
Axis Bank
Gruh Finance
City Union
Bank

November 17, 2014

Comments
Strong cigarette franchise; risk around
succession planning
Strong capital allocation and sales and delivery
metrics; AMBER flag in treatment of minorities
Strong brand franchise, capital misallocation
risk
Risk around capital allocation, lack of focus on
RoCE
Strong brand equity, RoCE back in focus
Sustainable low cost advantage and high focus
on brand equity and cash flow generation
Maintained #2 position, RoCE improvement on
the cards
Market leader, strong growth visibility,
aspirational brand recall
Strong player in OHT tyre exports with
sustainable low cost advantage
Niche KPO with high-quality client base
Strong franchise in south India along with
strong capital allocation; high competition in
the sector and redundancy of core product
remains a risk

ITC

Source: Ambit Capital research; Note:

Overall

= rating of 4/4;

= rating of 3/ 4 and so on.

Ambit Capital Pvt. Ltd.

Page 17

Strategy
Why valuations are NOT a consideration whilst constructing the CCP?
Whilst we acknowledge that from a tactical standpoint valuations play an
important role in shaping short-term returns, we have not paid any heed to
valuations whilst constructing the CCP. So why are we ignoring valuations?
Over long periods, it is how the underlying fundamentals evolve for the firm that
plays a more important role in determining returns than the beginning of the
period valuation itself. Put another way, over long periods how a business
fundamentally performs is overwhelmingly the most important driver of investment
returns (so much so that the valuation at the time of entering the stock becomes
almost irrelevant). This point can be understood better with the following exhibits
that plot ten-year returns over FY02-12 vs FY02 valuations as measured by P/B
and P/E at the beginning of the period (in 2002).

Our research shows that


underlying fundamentals play a
more important role in determining
stock price returns than the
beginning of the period valuation
itself

Exhibit 25: Valuation impact on long-term returns - P/B


60%

FY02-FY12 returns

40%

R2 = 0.000

20%
0%
-20%

5.0

10.0

15.0

20.0

25.0

-40%
-60%
-80%
FY02 Price to Book

Source: Ambit Capital research; Note: FY02-12 returns here are stock returns relative to the Sensex

The value of the R-squared makes the story self-explanatory. A zero for this value
indicates that the beginning-of-period valuations do not play any meaningful role
in explaining stock returns over the next ten years. This holds true for both P/B (as
seen in Exhibit 25 above) and P/E (as seen in Exhibit 26 below) as the measures of
valuation.
Exhibit 26: Valuation impact on long-term returns - P/E
60%

FY02-FY12 returns

40%
R2 = 0.001
20%
0%
-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

-20%
-40%
-60%
-80%
FY02 Price to Earnings

Source: Ambit Capital research; Note: FY02-12 returns here are stock returns relative to the Sensex

Asian Paints, Berger Paints, and HDFC Bank are three stocks from our conventional
coverage on which we have a SELL stance and which are in the portfolio. So why
are these stocks in the CCP? Firstly, all the three stocks are what we would call
valuation-driven SELLs. As valuations have NOT been considered whilst creating
the CCP, these SELL stances are not relevant from the point of the view of the CCP.
Secondly, since our conventional coverage is based on a one-year horizon whereas
the CCP is based on a ten-year horizon, we have not paid heed to these valuationdriven SELLs whilst constructing the CCP.

November 17, 2014

Ambit Capital Pvt. Ltd.

Page 18

ITC
NOT RATED
ITC IN EQUITY

November 17, 2014

Mcap (bn):
3M ADV (mn):
CMP:
TP (12 mths):
Upside (%):

`2,838/US$46.2
`1,962/US$31.9
`774
NA
NA

Flags
Accounting:
Predictability:
Treatment of Minorities:

GREEN
GREEN
AMBER

Catalysts

Consistent profitability by ITCs noncigarette FMCG

Softening/predictability
of
Governments stance on cigarette
taxation

Performance
30,000
28,000
26,000
24,000
22,000
20,000

390
360
330

Sensex

Nov 14

Sep 14

Jul 14

300
May 14

Higher dividend payout ratio indicative of prudent capital allocation


About 47% of ITCs operating cash flows have been deployed towards dividend
payouts, with an increase in the payout ratio from 28% a decade ago to over
60% consistently over FY08-13. The capex needed for the non-cigarettes FMCG
business has NOT been material (4% of CFO over FY04-13) despite this
division being 30% of HULs size and the third-largest non-cigarettes FMCG
business in India. Cash accumulation remains strong on the balance sheet at
`15bn annually leaving further headroom to increase dividend payout.
Succession planning post YCD is an area of concern
Mr. YC Deveshwar (YCD) is due to retire in 2017. He has been the sole driver
of value creation over the past 15 years. Neither of the next level of senior
management (Mr. Grant, Mr. Anand and Mr. Dhobale) will be under 60 years
of age in 2017 and hence they will not have more than 5-7 years of tenure as
Chairman. ITC has never appointed an external recruit as its Chairman in the
past. As a result, we have concerns around succession planning.

Recommendation

Mar 14

ITCs moats are its distribution network and cash-rich tobacco business
On the back of its strong cigarette franchise, ITC has developed the most
expansive distribution network in India. It has leveraged this distribution muscle
to rapidly scale up its FMCG business. The high cash generation of its tobacco
business is ITCs second critical competitive advantage. ITCs tobacco business
has ~70% operating profit margins and 100%+ RoCE with strong cash flows
which fund ITCs investments in its other nascent businesses.

Consumer

Jan 14

ITC has the largest cigarette business in India with >70% market share.
It has leveraged its wide distribution and cash flows from the cigarettes
business to rapidly expand and fund investments in its non-cigarette
FMCG business, which has become the third-largest FMCG business in
India. However, there are concerns around succession planning once
the current Chairman Mr. YC Deveshwar (YCD) retires in 2017, as the
next line of command lacks experience and will have only 5-6 years to
go before retirement from the point they get the top job.
Largest tobacco company on course to become an FMCG major
ITC has been present in India for over 100 years and is Indias largest tobacco
company with >70% market share in the branded Indian cigarette market. In
the last 15 years, the company has diversified its revenue base beyond
cigarettes (~62% of gross sales) and it now derives ~17%/11%/7% of its gross
from the FMCG/Agri products/Paper business. ITC commands ~10% market
share in the biscuit market and along with its personal care business it is
among the top-three FMCG companies in India.

Nov 13

COMPANY INSIGHT

ITC (RHS)

Source: Bloomberg, Ambit Capital research

Diversifying beyond cigarettes to drive next leg of growth


Having realised the limited growth potential of its tobacco business, ITC has
been investing heavily to grow its non-cigarette FMCG business. With continued
brand investments and strong innovation focus, the FMCG business should
become the driver of growth for ITC in the near future. In its tobacco business,
ITC continues to invest in new product development and improving product
quality and packaging to retain its leadership in cigarettes.
Key financials
Year to March
Operating income (` mn)
EBITDA (` mn)
EBITDA Margin (%)
Adjusted EPS (`)
RoCE (%)
P/E (x)

FY10

FY11

FY12

FY13

FY14

181,532

211,676

247,984

296,056

328,826

60,740

71,534

84,996

103,318

120,988

33.5%

33.8%

34.3%

34.9%

36.8%

5.1

6.3

7.8

9.4

11.1

27.6%

31.6%

34.0%

34.5%

34.3%

71.4

58.1

47.1

39.1

33.0

Analyst Details
Rakshit Ranjan, CFA
+91 22 3043 3201
rakshitranjan@ambitcapital.com
Ritesh Vaidya
+91 22 3043 3246
riteshvaidya@ambitcapital.com

Source: Company, Ambit Capital research


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.

ITC
Exhibit 1: Except for FY07-09, sales growth and profitability
has been consistent for ITC
Revenues (Rs. Bn)
350
300

Exhibit 2: Return ratios have also improved continuously


over the last decade except for FY07-09

EBITDA margin (%) RHS


38.0%
37.0%

38.0%

36.0%

34.0%

250

35.0%

200

34.0%

RoCE

RoE

30.0%

33.0%

150

32.0%

100

26.0%

31.0%
FY14

FY13

FY12

FY11

FY10

FY09

FY08

FY07

FY05

FY14

FY13

FY12

FY11

FY10

FY09

FY08

FY07

FY06

FY05

Source: Company, Ambit Capital research

Source: Company, Ambit Capital research

Exhibit 3: Cash generated from operations for ITC (FY0414)

Proceeds
from
shares,
6%

22.0%
FY06

30.0%

50

Interest
received,
13%

Exhibit 4: ..has been utilised to increase dividend payout


and enter new business segments
Increase in
cash and
cash
equivalents
5%

Purchase of
Investments
Subsidiaries
& Others

Dividend
paid
51%

Net Capex
(incl.
acquisitions
)
30% Interest

CFO, 81%

paid
1% Capital research
Source: Company, Ambit

Source: Company, Ambit Capital research

Exhibit 5: ITC P/E band chart for the last 7 years


400

Exhibit 6: ITC EV/EBITDA band chart for the last 7 years


32x
29x

400
350

12x
10.5

300

26x
23x

300

9x

250

20x

250

Source: Company, Ambit Capital research

November 17, 2014

Nov-14

Nov-13

Nov-12

Nov-11

Nov-10

Nov-09

6x

Nov-07

Nov-14

50
Nov-13

50
Nov-12

100
Nov-11

100
Nov-10

150

Nov-09

150

Nov-08

200

Nov-07

200

7.5x

Nov-08

350

Source: Company, Ambit Capital research

Ambit Capital Pvt. Ltd.

Page 20

ITC
Exhibit 7: Explanation for our flags
Segment

Score

Comments

Accounting

GREEN

The company in the past has shown high levels of cash conversion and efficient working capital management
and is professionally managed.

Predictability

GREEN

The company has high pricing power in its cigarettes business and has consistently seen margin expansion in the
segment. Further, FMCG losses are declining and hence, visibility of earnings is very high.

AMBER

Before YCD took charge of ITC in 1996, ITC had a chequered past with several failed diversification attempts
into power and global commodity trading. In 1991, ITC started a financial services venture which was finally sold
to ICICI in 1995, as the business suffered large-scale write-offs. Under YCD, ITC made failed attempts at
entering the golf course development/accessories and greeting cards business. Since 2002 however, ITC has
been more prudent with its capital allocation. It increased its dividend payout to over 60% and has looked to
expand its FMCG franchise.

Treatment of
minorities

Source: Bloomberg, Ambit Capital research

Exhibit 8: ITC Three-quarters of the pie on our STAR* framework


Criteria

Score (%)

Comment

Competitive advantage

ITCs cigarette business with >70% market share lends it two competitive
advantages: a) ITC has developed the largest pan-India distribution network, b)
The high cash generation from the cigarette business allows it to fund
investments in its nascent businesses

Accounting quality

The company in the past has shown high levels of cash conversion and efficient
working capital management and is professionally managed.

Capital allocation

ITC under the leadership of Mr. YC Deveshwar (YCD) has been very prudent with
its capital allocation. It has increased its dividend payout ratio and invested in
growing businesses for the future like its non-cigarette FMCG business.
However, with concerns around succession planning we remain sceptical around
the capital allocation abilities of the next leader.

Centrality of political connect

ITC is not part of Ambits Connected Companies Index and does not appear to
rely on political connections.

Treatment of minorities

Before YCD took charge of ITC in 1996, ITC had a chequered past with several
failed diversification attempts into power and global commodity trading. In
1991, ITC started a financial services venture which was finally sold to ICICI in
1995, as the business suffered large-scale write-offs. Under YCD, ITC made
failed attempts at entering the golf course development/accessories and
greeting cards business. Since 2002 however, ITC has been more prudent with
its capital allocation. It increased its dividend payout to over 60% and has looked
to expand its FMCG franchise.

Succession planning

YCD is due to retire in 2017. The next successor if appointed from the next level
of senior management would then get only 5-6 year tenure. ITC hasnt till date
appointed an external recruit as its Chairman. Due to this lack of visibility
around the next Chairman we remain cautious around ITCs succession planning
ability.

Total (%)
Source: Company, Ambit Capital research. Note:

November 17, 2014

= rating of 4/4;

= rating of 3/ 4 and so on. *STAR: Sustainable and Tenable Advantages Rank.

Ambit Capital Pvt. Ltd.

Page 21

ITC
Balance sheet (` mn)
Year to March

FY10

FY11

FY12

FY13

FY14

Shareholders' equity

3,818

7,738

7,818

7,902

7,953

Reserves & surpluses

136,826

151,795

180,101

214,977

254,667

Total networth

140,644

159,533

187,919

222,879

262,620

1,077

992

791

664

511

Debt
Deferred tax liability

7,850

8,019

8,727

12,037

12,970

Total liabilities

149,571

168,543

197,437

235,580

276,101

Gross block

119,679

127,658

141,444

169,444

185,449

Net block

81,424

83,451

90,992

112,093

120,127

CWIP

10,090

13,334

22,768

14,878

22,957

Investments

57,269

55,547

63,166

70,603

88,234

Cash & equivalents

11,263

22,432

28,189

36,150

32,894

Debtors

8,581

9,076

9,824

11,633

21,654

Inventory

45,491

52,675

56,378

66,002

73,595

Loans & advances

13,061

14,181

17,154

22,401

22,635

Other current assets

2,884

3,475

1,412

6,414

10,197

Total current assets

81,279

101,840

112,957

142,600

160,975

Current liabilities

34,991

44,579

48,334

52,007

56,246

Provisions

45,499

41,048

44,111

52,588

59,947

Total current liabilities

80,491

85,628

92,445

104,595

116,193

Net current assets


Total assets

788

16,212

20,512

38,006

44,782

149,571

168,543

197,437

235,580

276,101

Source: Company, Ambit Capital research

Income statement (` mn)


Year to March
Operating income
% growth

FY10

FY11

FY12

FY13

FY14

181,532

211,676

247,984

296,056

328,826

16.3%

16.6%

17.2%

19.4%

11.1%

120,792

140,141

162,988

192,738

207,838

EBITDA

60,740

71,534

84,996

103,318

120,988

% growth

25.0%

17.8%

18.8%

21.6%

17.1%

Depreciation

6,087

6,560

6,985

7,956

8,999

54,653

64,975

78,011

95,363

111,989

648

481

779

865

30

6,147

8,188

11,744

12,344

14,632

Adjusted PBT

60,153

72,682

88,975

106,842

126,591

Tax

19,543

22,806

27,352

32,658

38,739

Adjusted PAT/ Net profit

40,610

49,876

61,624

74,184

87,852

24.4%

22.8%

23.6%

20.4%

18.4%

40,610

49,876

61,624

74,184

87,852

Share of associates
1,072
Adjusted Consolidated net
41,682
profit
Source: Company, Ambit Capital research

303

958

1,897

1,062

50,178

62,579

76,078

88,910

Operating expenditure

EBIT
Interest expenditure
Non-operating income

% growth
Extraordinaries
Reported PAT / Net profit
Minority Interest

November 17, 2014

Ambit Capital Pvt. Ltd.

Page 22

ITC
Cash flow statement (` mn)
Year to March
EBIT
Depreciation
Others
Tax

FY10

FY11

FY12

FY13

FY14

60,801

73,163

89,755

107,707

126,621

6,087

6,560

6,985

7,956

8,999

(1,469)

(313)

(71)

2,445

903

(19,543)

(22,806)

(27,352)

(32,658)

(38,739)

(Incr) / decr in net working capital

34,725

(4,254)

1,457

(9,533)

(10,033)

Cash flow from operations

80,601

52,351

70,775

75,916

87,751

Capex

(12,741)

(11,831)

(23,960)

(21,168)

(25,113)

(Incr) / decr in investments

(28,891)

1,722

(7,619)

(7,437)

(17,631)

(41,633)

(10,109)

(31,579)

(28,605)

(42,744)

(698)

(85)

(201)

(127)

(153)

Others
Cash flow from investments
Net borrowings
Interest paid
Dividend paid
Others
Cash flow from financing
Net change in cash

(648)

(481)

(779)

(865)

(30)

(44,517)

(40,015)

(34,524)

(41,561)

(55,452)

7,848

9,509

2,066

3,202

7,371

(38,015)

(31,072)

(33,439)

(39,351)

(48,263)

953

11,170

5,757

7,961

(3,256)

Closing cash balance

11,263

22,432

28,189

36,150

32,894

Free cash flow

67,859

40,520

46,815

54,749

62,638

Source: Company, Ambit Capital research

Ratio analysis
Year to March

FY10

FY11

FY12

FY13

FY14

Gross margin (%)

61.4%

61.6%

61.2%

59.2%

60.0%

EBITDA margin (%)

33.5%

33.8%

34.3%

34.9%

36.8%

EBIT margin (%)

33.5%

34.6%

36.2%

36.4%

38.5%

Net profit margin (%)

22.4%

23.6%

24.8%

25.1%

26.7%

Dividend payout ratio (%)

94.0%

69.0%

57.7%

55.9%

54.0%

(0.1)

(0.1)

(0.1)

(0.2)

(0.1)

1.1

19.1

21.2

32.7

34.5

Net debt: equity (x)


Working capital turnover (x)
Fixed assets turnover (x)

1.5

1.7

1.8

1.7

1.8

RoCE (%)

27.6%

31.6%

34.0%

34.5%

34.3%

RoE (%)

29.2%

33.2%

35.5%

36.1%

36.2%

Source: Company, Ambit Capital research

Valuation parameters
Year to March

FY10

FY11

FY12

FY13

FY14

EPS (`)

5.1

6.3

7.8

9.4

11.1

Diluted EPS (`)

5.1

6.3

7.8

9.4

11.1

18.0

20.4

24.0

28.5

33.6

4.8

4.4

4.5

5.3

6.0

P/E (x)

71.4

58.1

47.1

39.1

33.0

P/BV (x)

20.4

18.0

15.3

12.9

10.9

EV/EBITDA (x)

45.8

39.4

33.4

27.7

23.9

Price/Sales (x)

7.7

13.4

11.6

9.8

8.9

Book value per share (`)


Dividend per share (`)

Source: Company, Ambit Capital research

November 17, 2014

Ambit Capital Pvt. Ltd.

Page 23

ITC

This page has been intentionally left blank

November 17, 2014

Ambit Capital Pvt. Ltd.

Page 24

HDFC Bank
SELL
HDFCB IN EQUITY

November 17, 2014

`2,246/US$36.5
`1,807/US$29.4
`930
`717
23

Flags
Accounting:
Predictability:
Treatment of Minorities:

GREEN
GREEN
GREEN

Catalysts

Increase in retail loan growth in


FY16-17

Capital infusion bolstering tier-1

Better income traction in corporate


banking

Performance

Sensex

HDFC Bank

Source: Bloomberg, Ambit Capital research

Ripe for growth in retail; filling the gaps on corporate banking


HDFC Bank has expanded its branch network by ~70% in the last three years
with a pan-India focus, putting in place drivers to further strengthen its retail
banking business. There have been few gaps in corporate banking, investment
banking and project finance, and the bank has selectively hired and built teams
in recent years to play a bigger role, as the economic recovery sets in the next
12-18 months.
Analyst Details

Key financials standalone (` mn)


Year to March

FY13

FY14

FY15E

FY16E

FY17E

Net Revenues (` mn)

226,637

264,023

308,909

369,385

445,045

Operating Profits (` mn)

114,276

143,601

172,667

210,711

260,447

67,263

84,784

99,920

122,192

147,975

28.3

35.3

41.4

50.6

61.3

RoA (%)

1.82%

1.90%

1.86%

1.87%

1.83%

RoE (%)

20.3%

21.3%

21.1%

21.9%

22.2%

6.11

5.13

4.39

3.70

3.09

Net Profits (` mn)


EPS (`)

P/B (x)

Pankaj Agarwal, CFA


+91 22 3043 3206
pankajagarwal@ambitcapital.com
Ravi Singh
+91 22 3043 3181
ravisingh@ambitcapital.com
Aadesh Mehta, CFA
+91 22 3043 3239
aadeshmehta@ambitcapital.com

Source: Company, Ambit Capital research


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.

Nov-14

Sep-14

Aug-14

Jun-14

150
140
130
120
110
100
90
May-14

High visibility on succession planning


Aditya Puri (MD & CEO) has led HDFC Bank since its inception, and following
the recent clarification by the RBI that about 70 years is the maximum age limit
for private bank CEOs, Mr Puri can serve for another six years. Many members
in the banks senior management team have been with bank for more than ten
years and hence offer ample options for succession planning.

Mcap (bn):
3M ADV (mn):
CMP:
TP (12 mths):
Downside (%):

Mar-14

Acquirer in the past, recent focus on rapid organic scale-up


A superior profitability has allowed HDFCB to sustain its capital position mainly
through internal profit generation without undue dilution of its shareholders.
The bank has made two acquisitions (Times Bank in 1999 and Centurion Bank
of Punjab in 2008) in the past, but its recent focus has been on organic growth
through accelerated branch network expansion on a pan-India basis.

Recommendation

Feb-14

Strong retail franchise, stable management


HDFC Bank has differentiated itself from its peers through its strategic focus on
a granular low-cost franchise along with a market-leading position in most
retail products since its early years. Over the last 20 years, the bank has taken
a longer-term approach of protecting its margins and asset quality rather than
pursuing near-term aggressive growth. Superior margins and controlled asset
quality have driven healthy average RoEs of ~18% in the last ten years. A
stable management team and use of technology from the beginning have
further facilitated the banks consistent performance.

BFSI

Dec-13

Since its inception 20 years ago, HDFC Bank has focused on building a
granular retail franchise on both sides of the balance sheet and
maintained a conservative approach on the balance of growth and
asset quality. With a stable management team at the helm, the bank
will seek to further penetrate its retail offering on a pan-India basis
and fill the gaps in its corporate banking offering as the economic
climate improves.
Numero uno in Indian banking
Established in 1994, HDFC Bank is Indias second-largest private sector bank
by assets. It has ~4% market share in total bank credit. Retail loans form 48%
of the banks loans, with a market-leading presence in most retail product
categories. Its corporate business has focussed on working capital financing.

Nov-13

COMPANY INSIGHT

HDFC Bank

Net interest margins - RHS

Source: Company, Ambit Capital research

5%

FY14

FY13

FY12

FY11

0%

Source: Company, Ambit Capital research

Exhibit 3: Gross NPA and provision coverage ratio


Gross NPA - LHS

10%

FY10

0.0%

15%

FY09

0%

20%

FY08

1.0%

25%

FY05

10%

RoE - RHS

2.00%
1.80%
1.60%
1.40%
1.20%
1.00%
0.80%
0.60%
0.40%
0.20%
0.00%

FY14

2.0%

FY13

20%

FY12

3.0%

FY11

30%

FY10

4.0%

FY09

40%

FY08

5.0%

FY07

50%

FY06

6.0%

FY05

60%

RoA - LHS

FY06

Loan growth - LHS

Exhibit 2: RoA and RoE

FY07

Exhibit 1: Loan growth and net interest margins

Exhibit 4: Tier-1 capital ratio

Provision coverage ratio - RHS

2.5%

100%

2.0%

80%

Tier-1 capital ratio


14%
12%

20.4x
16.8x

800

11.6%

11.1%

FY12

FY13

11.8%

12.2%

FY14

Exhibit 6: Forward P/B evolution over the long term

24.0x

1000

FY10

0%

Source: Company, Ambit Capital research

Exhibit 5: Forward P/E evolution over the long term

1200

FY11

2%

FY14

FY13

FY12

FY11

FY10

FY09

FY08

FY07

FY06

FY05

Source: Company, Ambit Capital research

13.3%

0%

10.6%

0.0%

4%

FY09

20%

10.3%

0.5%

FY08

6%

8.6%

40%

FY07

1.0%

8.6%

8%

FY06

60%

9.6%

1.5%

FY05

10%

4.11x

1000

3.56x

800

3.02x

600

600
400
400
200

200

0
Jun-06
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
Jun-12
Dec-12
Jun-13
Dec-13
Jun-14

Jun-06
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
Jun-12
Dec-12
Jun-13
Dec-13
Jun-14

Source: Company, Ambit Capital research; Trading band=Mean+1SD

November 17, 2014

Source: Company, Ambit Capital research; Trading band=Mean+1SD

Ambit Capital Pvt. Ltd.

Page 26

HDFC Bank
Exhibit 7: Explanation for our flags
Segment

Score

Comments

Accounting

GREEN

We did not find anything unusual in the accounts of the bank and we believe that the reported numbers are a
true reflection of the profitability of the bank. The bank has made adequate disclosures of its ESOP accounting
and revenue recognition norms.

Predictability

GREEN

The banks conservative approach towards growth and asset quality imparts sufficient predictability to its
financial performance.

Treatment of
minorities

GREEN

We did not find any material example of unfair treatment to minorities. Lately, the banks sensible approach
towards a possible merger with HDFC Ltd has been comforting from the investors point of view.

Source: Bloomberg, Ambit Capital research

Exhibit 8: HDFC Bank - Three quarters of the pie on our STAR* framework
Criteria

Score (%)

Competitive advantage

Comment
Strong retail franchise with long-term track record

Accounting quality

Nothing unusual in the accounting

Capital allocation

An acquirer in the past, but recent focus on organic build-up

Centrality of political connect

HDFC Bank is not part of Ambits Connected Companies Index and does not appear to have
any questionable political connections.

Treatment of minorities

Sensible approach towards a possible merger with HDFC a positive

Succession planning

Stable management team with high visibility on continuity

Total (%)
Source: Company, Ambit Capital research. Note:

November 17, 2014

= rating of 4/4;

= rating of 3/ 4 and so on. *STAR: Sustainable and Tenable Advantages Rank.

Ambit Capital Pvt. Ltd.

Page 27

HDFC Bank
Balance sheet
Year to March (Rs mn)
Networth
Deposits
Borrowings
Other Liabilities
Total Liabilities
Cash & Balances with RBI & Banks

FY13

FY14

FY15E

FY16E

FY17E

362,141

434,786

511,543

606,053

726,345

2,962,470

3,673,375

4,371,316

5,464,145

6,830,181

330,066

394,390

448,203

525,224

619,773

348,642

413,444

496,133

620,166

775,208

4,003,319

4,915,995

5,827,195

7,215,588

8,951,507

272,802

395,836

467,999

552,796

650,576

Investments

1,116,136

1,209,511

1,487,744

1,835,232

2,274,449

Advances

2,397,206

3,030,003

3,540,536

4,419,965

5,523,514

Other Assets

217,175

280,645

330,916

407,595

502,969

Total Assets

4,003,319

4,915,995

5,827,195

7,215,588

8,951,507

Source: Company, Ambit Capital research

Income statement
Year to March (Rs mn)
Interest Income

FY13

FY14

FY15E

FY16E

FY17E

350,649

411,355

485,526

572,496

681,486

Interest Expense

192,538

226,529

268,599

311,728

364,832

Net Interest Income

158,111

184,826

216,927

260,768

316,654

Total Non-Interest Income

68,526

79,196

91,982

108,617

128,391

Total Income

226,637

264,023

308,909

369,385

445,045

Total Operating Expenses

112,361

120,422

136,242

158,674

184,598

Employees expenses

39,654

41,790

45,815

51,970

58,687

Other Operating Expenses

72,707

78,632

90,427

106,704

125,911

Pre Provisioning Profits

114,276

143,601

172,667

210,711

260,447

16,764

15,873

22,412

26,963

37,928

PBT

97,512

127,728

150,255

183,748

222,519

Tax

30,249

42,944

50,335

61,556

74,544

PAT

67,263

84,784

99,920

122,192

147,975

FY13

FY14

FY15E

FY16E

FY17E

Credit-Deposit (%)

80.9%

82.5%

81.0%

80.9%

80.9%

CASA ratio (%)

47.7%

45.6%

45.3%

45.0%

44.7%

Cost/Income ratio (%)

49.6%

45.6%

44.1%

43.0%

41.5%

23,346

29,893

38,475

39,069

54,518

0.97%

0.98%

1.08%

0.88%

0.98%

Provisions

Source: Company, Ambit Capital research

Key ratios
Year to March

Gross NPA (` mn)


Gross NPA (%)
Net NPA (` mn)

4,690

8,200

13,466

13,674

19,081

Net NPA (%)

0.20%

0.27%

0.38%

0.31%

0.35%

Provision coverage (%)

79.9%

72.6%

65.0%

65.0%

65.0%

NIMs (%)

4.57%

4.39%

4.28%

4.24%

4.15%

Tier-1 capital ratio (%)

11.1%

11.8%

10.7%

10.3%

10.1%

Source: Company, Ambit Capital research

November 17, 2014

Ambit Capital Pvt. Ltd.

Page 28

HDFC Bank
Du-pont analysis
Year to March

FY13

FY14

FY15E

FY16E

FY17E

NII / Assets (%)

4.3%

4.1%

4.0%

4.0%

3.9%

Other income / Assets (%)

1.9%

1.8%

1.7%

1.7%

1.6%

Total Income / Assets (%)

6.1%

5.9%

5.8%

5.7%

5.5%

Cost to Assets (%)

3.0%

2.7%

2.5%

2.4%

2.3%

PPP / Assets (%)

3.1%

3.2%

3.2%

3.2%

3.2%

Provisions / Assets (%)

0.5%

0.4%

0.4%

0.4%

0.5%

PBT / Assets (%)

2.6%

2.9%

2.8%

2.8%

2.8%

31.0%

33.6%

33.5%

33.5%

33.5%

Tax Rate (%)


ROA (%)

1.8%

1.9%

1.9%

1.9%

1.8%

Leverage

11.2

11.2

11.4

11.7

12.1

ROE (%)

20.3%

21.3%

21.1%

21.9%

22.2%

Year to March

FY13

FY14

FY15E

FY16E

FY17E

EPS (Rs)

28.3

35.3

41.4

50.6

61.3

EPS growth (%)

28%

25%

17%

22%

21%

Source: Company, Ambit Capital research

Valuation

BVPS (Rs)

152.2

181.2

211.9

251.0

300.9

P/E (x)

32.9

26.3

22.5

18.4

15.2

P/BV (x)

6.11

5.13

4.39

3.70

3.09

Source: Company, Ambit Capital research

November 17, 2014

Ambit Capital Pvt. Ltd.

Page 29

HDFC Bank

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November 17, 2014

Ambit Capital Pvt. Ltd.

Page 30

HCL Technologies
BUY
HCLT IN EQUITY

November 17, 2014

`1,130/US$18.4
`1,684/US$27.4
`1,611
`2,110
31

Flags
Accounting:
Predictability:
Treatment of Minorities:

GREEN
AMBER
AMBER

Catalysts

Acceleration of revenue growth in


the IMS service line post 3QFY15

Continued acceleration in the


software service segment to widen
growth base

Consensus expects contraction in


EBIT margins over FY14-17 which
may not happen

Performance
2,000
1,700
1,400
1,100
800
500

27,000
24,000
21,000
18,000

Sensex (LHS)

Aug-14

Jun-14

15,000
Apr-14

Due focus on succession planning


The company is led by Mr. Anant Gupta, President and CEO. He replaced Mr.
Vineet Nayar in 2013. HCLT provides formal training (for instance, sponsoring
vertical heads for Harvard Management programmes) and on-the-job training
through additional responsibilities to build a second line of command. The
company also profiles its employees and has created top-10 performer bands
and 100 Best CEO Club to groom future leaders. We believe that HCLTs
succession planning is in line with its peers.
What is being done to strengthen the franchise further?
The company is now focused on larger-sized, more complex deals in the IMS
segment. Although HCLT was a laggard in application management services, its
growth is now accelerating due to cross-sell opportunities at IMS clients and
differentiated innovations such as ALT ASM. It is also innovating to improve its
positioning in engineering services outsourcing and digitalisation opportunities.

Mcap (bn):
3M ADV (mn):
CMP:
TP (12 mths):
Upside (%):

Feb-14

Among the best capital allocators in Indian IT


HCLT is amongst the best capital allocators in the large-sized IT services pack
and it also has high RoEs. It has the best capex productivity over the last five
years (6.2x vs 4.0x for peers) and has a conservative yet successful acquisition
strategy. It acquired Axon in 2009 by paying a sum equal to almost half its own
market cap. This enabled the company to win significantly larger deals and a
base in Europe. Whilst HCLTs dividend payout has averaged an impressive 31%
in the last three years, this has room to improve given that the top-5 Indian IT
firms have a dividend payout ratio of 35%. Given its strong competitive
advantages, we believe that its high return ratios are sustainable.

Recommendation

Dec-13

Fourth-largest India-listed IT services company


Established in 1991, HCLT is the fourth-largest Indian-listed IT company in
terms of revenues. It is one of the largest Indian companies in the fast-growing
infrastructure management services (IMS) segment, with 31% share of LTM
revenues amongst the top-6 Indian IT firms. It was one of the earliest movers in
this segment and has built better capabilities than its peers.
Strong competitive advantages built on multiple legs
HCLT has sustainable advantages built through a strong capital allocation track
record, optimal portfolio mix with leadership in the fast-growing IMS segment,
good account mining track record and a highly effective sales organisation
structure. We believe that these would enable the company to sustain high
return ratios and deliver faster growth than its peers. Indeed, its FY14 RoE of
36% is second only to TCS amongst the top-5 IT vendors in India. The
companys return profile has improved steadily in the last three years.

Technology

Oct-13

HCL Tech has built significant competitive advantages around its


industry-leading IMS practice, an innovative approach to application
management services and highly effective sales & execution that are
unlikely to be replicated by its peers. These competitive advantages,
combined with its strong capital allocation track record translate into a
high score on our proprietary CAPOM framework (Rank 2 of 6).

Aug-13

COMPANY INSIGHT

HCLT (Rs) (RHS)

Source: Bloomberg, Ambit Capital research

Key financials (` mn)


Year to March

FY13

FY14

FY15E

FY16E

FY17E

Net Revenues (US$ mn)

4,687

5,360

5,995

6,877

7,849

Analyst Details
Sagar Rastogi
+91 22 3043 3291
sagarrastogi@ambitcapital.com

EBIT (` bn)

50.4

79.4

86.3

101.5

115.9

19.6%

24.1%

23.5%

24.0%

24.0%

56.4

90.2

105.0

123.6

140.8

RoE

31.8%

37.2%

33.5%

31.9%

29.3%

P/E

28.6

17.8

15.3

13.0

11.4

EV/EBITDA

18.2

12.0

11.4

9.7

8.5

EBIT margins
Diluted EPS (`)

Utsav Mehta
+91 22 3043 3209
utsavmehta@ambitcapital.com

Source: Company, Ambit Capital research


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.

HCL Technologies

30%

3,000

15%

25%

2,000

10%

20%

1,000

5%

15%

0%

10%

Revenue(US$mn) (LHS)

FY14

FY13

FY12

FY11

FY10

FY09

FY08

FY07

FY06

FY05

EBIT margins (RHS)

Source: Company, Ambit Capital research

Equity
raised
4%

RoCE

Source: Company, Ambit Capital research

Exhibit 3: Sources of funds over the last ten years (FY04-13)

Other
income
5%

RoE

in

FY14

20%

FY13

4,000

improvement

FY12

35%

FY11

25%

marked

FY10

5,000

FY09

40%

FY08

30%

FY05

6,000

in

FY07

Exhibit 2: resulting
profitability

FY06

Exhibit 1: The companys margins have grown steadily in


the last three years

Exhibit 4: Utilisation of funds over the last ten years (FY0413)

Debt raised
3%

Interest
paid
3%

Increase in
cash
6%
Investments
10%

Dividend
paid
33%

Acquisition
17%

CFO
88%

Capex
31%
Source: Company, Ambit Capital research

HCLT P/E

6 yr avg

Source: Company, Ambit Capital research

November 17, 2014

HCLT EV/ EBITDA

4 yr avg

6 yr avg

Oct-14

Oct-13

Oct-12

Oct-11

Oct-10

Oct-07

EV/ EBITDA

Oct-06

Apr-14

Apr-13

Apr-12

Apr-11

19
17
15
13
11
9
7
5
3
Apr-10

Apr-09

Apr-08

Apr-07

Apr-06

Apr-05

P/E

Oct-05

24
22
20
18
16
14
12
10
8
6
4

Exhibit 6: Forward EV/EBITDA evolution over the past ten


years

Oct-09

Exhibit 5: Forward P/E evolution over the past ten years

Oct-08

Source: Company, Ambit Capital research

4 yr avg

Source: Company, Ambit Capital research

Ambit Capital Pvt. Ltd.

Page 32

HCL Technologies
Exhibit 7: Explanation for our flags
Segment

Accounting

Predictability

Treatment of
minorities

Score

Comments

GREEN

The company has amongst the leanest working capital cycles (receivable + unbilled revenue days at 87, lower
than the average of 91 for top-5 Indian IT vendors), high capex productivity and strong cash flow generation
(five-year FCF/ NI of 66% in line with the peer average). As a result, the company ranks in the top quartile
within the Indian IT universe in our accounting framework.

AMBER

Unlike certain peers, the company does not provide specific annual or quarterly guidance on revenues or
margins. It also has not indicated medium-term topline growth targets and the associated timeframe. HCLT has
significantly surprised in its quarterly EPS with an average surprise of 11% (positive or negative) in the last eight
quarters. Over these eight quarters, the company had a positive surprise on EPS five times. However, its sales
figures have been largely in line with consensus expectations (revenue surprise of 1% over the same period).

AMBER

Minorities were treated unfairly by HCL Infosystems, a sister concern belonging to the same promoter group as
HCLT. HCL Infosystems, among other things, was a reseller of Nokia phones in India. The promoters reduced
their stake in HCL Infosystems from 61% in June 2005 to 57% in December 2005. In February 2006, Nokia
decided to set up its own distribution channels in India and as a result, HCL Infosystems market share reduced
to 50% from 100%. This led to the stock price correcting by about 30%. There has been no other such incident
over the past eight years.

Source: Bloomberg, Ambit Capital research

Exhibit 8: HCL Tech Three-quarters of the pie on our STAR* framework


Criteria

Score (%)

Comment

Competitive advantage

The company has built strong capabilities in its industry leading IMS practise. Further, it has
created differentiated innovations such as ALT ASM.

Accounting quality

The company ranks in the top quartile of our accounting framework. It has a lean working
capital cycle, strong cash flow generation and high capex productivity.

Capital allocation

Its capital allocation track record has been good, with a conservative, yet successful acquisition
track record. Further, despite its dividend pay-out ratio is lower than peers, it is an impressive
31% (3 year average).

Centrality of political connect

HCLT is not a part of Ambits Connected Companies Index and does not have any questionable
political connection.

Treatment of minorities

Minority shareholders were treated unfairly by HCL Infosystems, a group company owned by the
same promoters.

Succession planning

The company has not faced issues with top level management transition in the past and has
programmes to create multiple layers of management.

Total (%)
Source: Company, Ambit Capital research. Note:

November 17, 2014

= rating of 4/4;

= rating of 3/ 4 and so on. *STAR: Sustainable and Tenable Advantages Rank.

Ambit Capital Pvt. Ltd.

Page 33

HCL Technologies
Income statement
Year to March (` bn)

FY13

FY14

FY15E

FY16E

FY17E

Revenue (US$ mn)

4,687

5,360

5,995

6,877

7,849

Growth

12.9%

14.4%

11.9%

14.7%

14.1%

Revenue

257.3

329.6

367.8

422.9

482.7

Cost of goods sold

172.4

209.7

236.7

268.1

306.3

SG&A expanses

34.5

40.4

44.8

53.3

60.5

EBITDA

57.1

86.8

91.1

107.4

123.0

Depreciation

6.7

7.3

4.7

5.9

7.1

50.4

79.4

86.3

101.5

115.9

19.6%

24.1%

23.5%

24.0%

24.0%

EBIT
EBIT Margin
Other Income

1.6

(0.2)

8.6

10.2

11.5

PBT

52.0

79.3

94.9

111.8

127.4

Tax

12.2

15.5

20.8

24.6

28.0

23.5%

19.5%

21.9%

22.0%

22.0%

39.8

63.8

74.1

87.2

99.3

Diluted Adj EPS

56.4

90.2

105.0

123.6

140.8

DPS

12.0

22.0

32.0

32.0

36.0

FY13

FY14

FY15E

FY16E

FY17E

142.9

200.0

242.8

304.1

373.8

22.1

22.0

20.6

20.7

20.7

Rate (%)
Reported PAT

Source: Company, Ambit Capital research

Balance sheet
Year to March (` bn)
Net Worth
Other Liabilities
Capital Employed

165.1

222.0

263.4

324.8

394.5

Net Block

76.9

82.6

89.7

97.6

106.0

Other Non-current Assets

23.0

23.5

26.7

26.8

26.8

Curr. Assets

130.7

197.5

239.7

307.0

383.3

Debtors

44.6

56.6

64.8

74.5

85.1

Unbilled revenues

17.1

20.2

25.2

29.0

33.1

Cash & Bank Balance

49.8

99.6

124.5

174.6

232.1

Other Current Assets

19.1

21.2

25.2

29.0

33.1

Current Liab. & Prov

65.4

81.6

92.7

106.6

121.7

Net Current Assets

65.2

115.9

147.0

200.4

261.7

165.1

222.0

263.4

324.8

394.5

Application of Funds

Source: Company, Ambit Capital research

November 17, 2014

Ambit Capital Pvt. Ltd.

Page 34

HCL Technologies
Cash flow statement
Year to March (` bn)

FY13

FY14

FY15E

FY16E

FY17E

Net Income

39.8

63.8

74.1

87.2

99.3

Depreciation

6.3

6.8

4.2

5.4

6.6

46.5

71.1

78.8

93.1

106.4

4.8

(0.8)

(5.8)

(3.3)

(3.7)

Net Operating CF

51.2

70.3

73.0

89.7

102.7

Net Purchase of FA

(5.8)

(6.5)

(12.8)

(13.5)

(15.4)

CF from Operations
Cash for Working Capital

Others

(1.6)

(6.8)

0.3

(0.0)

(0.0)

Net Cash from Invest.

(5.1)

(12.9)

(12.5)

(13.5)

(15.5)

Proceeds from Equity & other


Dividend Payments

(9.8)

(18.4)

(26.4)

(26.4)

(29.7)

(25.2)

(6.9)

(37.9)

(26.4)

(29.7)

Free Cash Flow

45.4

63.8

60.3

76.2

87.3

Opening cash balance

25.1

51.6

101.9

124.8

174.6

Net Cash Flow

20.9

50.6

22.6

49.8

57.6

Closing Cash Balance

46.1

102.2

124.5

174.6

232.1

FY13

FY14

FY15E

FY16E

FY17E

Revenue growth (US$)

12.9%

14.4%

11.9%

14.7%

14.1%

EBIT growth (`)

50.3%

57.6%

8.7%

17.6%

14.1%

EPS growth

62.9%

60.1%

16.4%

17.6%

13.9%

RoE

32%

37%

33%

32%

29%

RoCE

25%

33%

28%

27%

25%

ROIC

34%

54%

52%

55%

58%

Receivable days (Days)

88

85

89

89

89

Fixed Asset Turnover (x)

3.4

4.1

4.3

4.5

4.7

Year to March

FY13

FY14

FY15E

FY16E

FY17E

P/E

28.6

17.8

15.3

13.0

11.4

EV/EBITDA

Cash Flow from Fin.

Source: Company, Ambit Capital research

Ratio analysis
Growth

Return Ratios (%)

Turnover Ratios

Source: Company, Ambit Capital research

Valuation parameters

18.2

12.0

11.4

9.7

8.5

EV/Sales

4.0

3.2

2.8

2.5

2.2

Price/Book Value

8.0

5.7

4.7

3.7

3.0

0.7%

1.4%

2.0%

2.0%

2.2%

Dividend Yield (%)


Source: Company, Ambit Capital research

November 17, 2014

Ambit Capital Pvt. Ltd.

Page 35

HCL Technologies

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November 17, 2014

Ambit Capital Pvt. Ltd.

Page 36

Axis Bank
BUY
AXSB IN EQUITY

November 17, 2014

Well placed to explore a wider range of opportunities


As corporate asset quality began to come under stress in 2011, Axis Bank was
early to de-risk its balance sheet by lowering the share of corporate loans and
wholesale funding and by building a retail franchise. With a diversified balance
sheet mix now and improving outlook for GDP growth over FY16-17, the bank is
well placed to exploit opportunities across a wider spectrum of banking in
corporate, commercial, retail, rural and international banking.
Key financials standalone (` mn)
Year to March

FY13

FY14

FY15E

FY16E

FY17E

162,174

193,569

216,578

253,664

299,001

Operating Profits (Rs mn)

93,031

114,561

125,507

147,703

176,709

Net Profits (Rs mn)

51,794

62,181

70,061

84,016

102,196

Net Revenues (Rs mn)

EPS (Rs)

22.1

26.5

29.8

35.8

43.5

RoA (%)

1.65%

1.72%

1.70%

1.74%

1.77%

RoE (%)

18.5%

17.4%

17.1%

17.8%

18.6%

3.37

2.93

2.55

2.21

1.90

P/B (x)

Source: Company, Ambit Capital research

Flags
Accounting:
Predictability:
Treatment of Minorities:

GREEN
GREEN
GREEN

Catalysts

Sequential decline of stressed asset


accretion over FY15-16

Increase in loan growth in FY16

Turn in the investment cycle to


provide fee income opportunities

Performance

Sensex

Axis Bank

Source: Bloomberg, Ambit Capital research

Analyst Details
Pankaj Agarwal, CFA
+91 22 3043 3206
pankajagarwal@ambitcapital.com
Ravi Singh
+91 22 3043 3181
ravisingh@ambitcapital.com
Aadesh Mehta, CFA
+91 22 3043 3239
aadeshmehta@ambitcapital.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.

Nov-14

240
210
180
150
120
90
Sep-14

Professional approach to succession planning


The current MD & CEO, Shikha Sharma, was appointed in 2009. She is 55 years
old and her second three-year term ends in May 2015. Whilst the RBI now allows
private bank CEOs to work until the age of 70 years, the board of Axis Bank
began looking for a successor when the last chairman turned 60. In any event,
succession is likely to take place through a professional process that will consider
both internal and expernal candidates.

`1,126/US$18.3
`1,618/US$26.3
`477
`450
-6

Jul-14

Investing in organic growth


Unlike its large banking peers, Axis Bank has made investments in organically
creating a wide diversified branch network on a pan-India basis. The bank has
also been a pioneer in investing in ATM network, technology and infrastructure.
The bank has a leading market share in transaction banking, cash management
and loan syndication and has one of the highest productivity (per branch and per
employee), which underscore the effectiveness of the banks investments. Axis
Bank is well capitalised with tier-1 capital at 12.6%.

Mcap (bn):
3M ADV (mn):
CMP:
TP (12 mths):
Upside (%):

May-14

Solid roots in corporate banking; efficient retail network


With leading PSU mutual fund and insurance companies as promoters, Axis Bank
cornered a significant market share in cash management and transaction
businesses and built a formidable corporate and commercial banking franchise
in its early years. Over the years, the bank built a highly diversified branch
network entirely organically, which has led to among the best branch and
employee productivity and has facilitated the retail scale-up of the bank.

Recommendation

Mar-14

Changing with the times


Established in 1994, Axis Bank is Indias third-largest private sector bank by
assets. It has ~3% market share in total bank credit. Whilst the bank has
historically been a leader in corporate and commercial banking, it has also
aggressively built its retail franchise (33% of loans) in the last three years.

BFSI

Jan-14

Having built a formidable corporate and commercial franchise in the


early years of its existence, Axis Bank has decisively de-risked and
diversified its franchise towards retail in recent years. The bank is a good
example of how professional management at a bank with quasigovernment ownership can drive high branch and employee productivity
and build market share. With a diversified balance sheet mix, adequate
capital, and strong profitability, the bank is well placed to exploit
opportunities across a wider range of banking vis-a-vis the last cycle.

Nov-13

COMPANY INSIGHT

Axis Bank

Net interest margins - RHS

FY14

Exhibit 4: Tier-1 capital ratio


Tier-1 capital ratio
14%
12%

Source: Company, Ambit Capital research;

11.2%

9.4%

9.5%

FY10

FY11

FY12

12.2%

9.3%

FY14

FY13

0%

Source: Company, Ambit Capital research

Exhibit 5: Forward P/E evolution over the long term

Exhibit 6: Forward P/B evolution over the long term


18.4x

600

FY09

2%

10.2%

10%
0%

FY08

4%

6.4%

20%

FY07

6%

7.3%

8%

12.6%

10%

FY14

FY13

FY12

FY11

FY10

FY09

0.0%
FY08

0%

FY05

0.5%
FY07

0.00%

Source: Company, Ambit Capital research

Exhibit 3: Gross NPA and provision coverage ratio


Gross NPA - LHS
Provision coverage ratio - RHS
2.5%
80%
70%
2.0%
60%
50%
1.5%
40%
1.0%
30%

FY06

5%

FY06

Source: Company, Ambit Capital research

FY05

0.50%

FY14

FY13

FY12

FY11

FY10

FY09

FY08

FY07

FY06

FY05

0%

10%

FY05

0.5%
0.0%

15%

FY13

10%

1.00%

FY12

20%

2.0%
1.5%
1.0%

20%

FY11

30%

1.50%

25%

FY10

40%

3.0%
2.5%

RoE - RHS

FY09

50%

2.00%

FY08

60%

4.0%
3.5%

FY07

70%

RoA - LHS

8.9%

Loan growth - LHS

Exhibit 2: RoA and RoE

FY06

Exhibit 1: Loan growth and net interest margins

650

2.97x

550
13.5x

400
8.7x

300

450

2.27x

350

1.56x

250
150

100

50

-50
Jun-06
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
Jun-12
Dec-12
Jun-13
Dec-13
Jun-14

200

Source: Company, Ambit Capital research; Note: Trading band=Mean+1SD

November 17, 2014

Jun-06
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
Jun-12
Dec-12
Jun-13
Dec-13
Jun-14

500

Source: Company, Ambit Capital research; Note: Trading band=Mean+1SD

Ambit Capital Pvt. Ltd.

Page 38

Axis Bank
Exhibit 7: Explanation for our flags
Segment

Score

Comments

Accounting

GREEN

We did not find anything unusual in the accounts of the bank and we believe that the reported numbers are a
true reflection of the profitability of the bank. The bank has made adequate disclosures of its ESOP accounting
and revenue recognition norms.

Predictability

GREEN

The bank has one of the best track records of long-term profitability. Going forward, whilst credit cost could be
elevated, the bank has built buffers in its operating profitability and capital position.

Treatment of
minorities

GREEN

We did not find any material example of unfair treatment to minorities.

Source: Bloomberg, Ambit Capital research

Exhibit 8: Axis Bank - Three quarters of the pie on our STAR* framework
Criteria

Score (%)

Competitive advantage

Comment
Solid roots in corporate banking; efficient retail network

Accounting quality

Nothing unusual in the accounting

Capital allocation

Efficient investment in building an organic retail network

Centrality of political connect

Axis Bank is not part of Ambits Connected Companies Index and does not appear to have any
questionable political connections.

Treatment of minorities

No material instance of unfair treatment of minorities.

Succession planning

Likely to be a smooth professional process

Total (%)
Source: Company, Ambit Capital research. Note:

November 17, 2014

= rating of 4/4;

= rating of 3/ 4 and so on. *STAR: Sustainable and Tenable Advantages Rank.

Ambit Capital Pvt. Ltd.

Page 39

Axis Bank
Balance sheet
Year to March (` mn)
Networth
Deposits
Borrowings
Other Liabilities
Total Liabilities
Cash & Balances with RBI & Banks

FY13

FY14

FY15E

FY16E

FY17E

331,079

382,205

438,798

507,422

591,202

2,526,136

2,809,446

3,230,862

3,812,418

4,613,025

439,511

502,909

593,687

722,352

879,435

165,467

198,560

238,272

108,881

137,889

3,405,607

3,832,449

4,428,814 5,240,752 6,321,934

204,350

282,387

333,522

394,108

475,889

Investments

1,137,375

1,135,484

1,267,735

1,495,607

1,803,972

Advances

1,969,660

2,300,668

2,740,395

3,269,846

3,981,787

87,162

81,191

60,285

Other Assets

94,222

113,910

Total Assets

3,405,607

3,832,449

FY13

FY14

FY15E

FY16E

FY17E

Interest Income

271,826

306,412

349,164

404,112

476,371

Interest Expense

175,163

186,895

213,656

243,994

284,958

96,663

119,516

135,509

160,118

191,413

4,428,814 5,240,752 6,321,934

Source: Company, Ambit Capital research

Income statement
Year to March (` mn)

Net Interest Income


Total Non-Interest Income

65,511

74,052

81,069

93,546

107,589

162,174

193,569

216,578

253,664

299,001

69,142

79,008

91,072

105,962

122,293

Employees expenses

23,770

26,013

29,598

34,038

38,142

Other Operating Expenses

45,373

52,994

61,473

71,924

84,151

Pre Provisioning Profits

93,031

114,561

125,507

147,703

176,709

Provisions

17,501

21,070

21,712

23,235

25,308

PBT

75,531

93,490

103,795

124,468

151,401

Tax

23,736

31,310

33,733

40,452

49,205

PAT

51,794

62,181

70,061

84,016

102,196

FY13

FY14

FY15E

FY16E

FY17E

Credit-Deposit (%)

78.0%

81.9%

84.8%

85.8%

86.3%

CASA ratio (%)

47.0%

47.4%

46.8%

46.3%

45.7%

Cost/Income ratio (%)

42.6%

40.8%

42.1%

41.8%

40.9%

23,934

31,464

33,061

45,916

49,157

1.20%

1.36%

1.20%

1.39%

1.23%

Net NPA (` mn)

7,041

10,246

9,918

18,366

22,121

Net NPA (%)

0.36%

0.45%

0.36%

0.56%

0.56%

Provision coverage (%)

70.6%

67.4%

70.0%

60.0%

55.0%

NIMs (%)

3.18%

3.40%

3.36%

3.37%

3.35%

Tier-1 capital ratio (%)

12.2%

12.6%

12.5%

12.1%

11.6%

Total Income
Total Operating Expenses

Source: Company, Ambit Capital research

Ratio analysis
Year to March

Gross NPA (` mn)


Gross NPA (%)

Source: Company, Ambit Capital research

November 17, 2014

Ambit Capital Pvt. Ltd.

Page 40

Axis Bank
Du-pont analysis
Year to March

FY13

FY14

FY15E

FY16E

FY17E

NII / Assets (%)

3.1%

3.3%

3.3%

3.3%

3.3%

Other income / Assets (%)

2.1%

2.0%

2.0%

1.9%

1.9%

Total Income / Assets (%)

5.2%

5.3%

5.2%

5.2%

5.2%

Cost to Assets (%)

2.2%

2.2%

2.2%

2.2%

2.1%

PPP / Assets (%)

3.0%

3.2%

3.0%

3.1%

3.1%

Provisions / Assets (%)

0.6%

0.6%

0.5%

0.5%

0.4%

PBT / Assets (%)

2.4%

2.6%

2.5%

2.6%

2.6%

31.4%

33.5%

32.5%

32.5%

32.5%

Tax Rate (%)


ROA (%)

1.7%

1.7%

1.7%

1.7%

1.8%

Leverage

11.2

10.1

10.1

10.2

10.5

ROE (%)

18.5%

17.4%

17.1%

17.8%

18.6%

Source: Company, Ambit Capital research

Valuation parameters
Year to March

FY13

FY14

FY15E

FY16E

FY17E

EPS (`)

22.1

26.5

29.8

35.8

43.5

8%

20%

13%

20%

22%

EPS growth (%)


BVPS (`)

141.5

162.7

186.8

216.0

251.7

P/E (x)

21.5

18.0

16.0

13.3

11.0

P/BV (x)

3.37

2.93

2.55

2.21

1.90

Source: Company, Ambit Capital research

November 17, 2014

Ambit Capital Pvt. Ltd.

Page 41

Axis Bank

This page has been intentionally left blank

November 17, 2014

Ambit Capital Pvt. Ltd.

Page 42

Asian Paints
SELL
APNT IN EQUITY

November 17, 2014

Transition of control from second to third generation of promoters


Members from the second generation of the promoter families stepped down
from executive roles on the board in FY10, leaving the non-promoter
executives - Mr. P.M. Murty and then Mr. K.B.S. Anand - as the CEO & MD.
Since then, several incremental responsibilities have been awarded to the
senior members of the third generation of the promoter family who have a
proven track record in executive roles at Asian Paints. However, there remains
a risk of capital misallocation, as the third generation drives inorganic growth.

`622/US$10.1
`835/US$13.6
`649
`559
14

Flags
Accounting:
Predictability:
Treatment of minorities:

GREEN
GREEN
AMBER

Catalysts

Capital misallocation on account of


acquisitions being RoCE-dilutive

Disclosures on RoCEs of Sleek, Ess


Ess and the Ethiopian paints business

Announcement of large acquisitions


in India and abroad over the next 13 years

Performance
28,000

700
650
600
550
500
450
400

25,500
23,000
20,500
18,000

Sensex

Oct-14

Capital misallocation likely to be an overhang on RoCEs


The firm has stated that the home improvement division is likely to be larger
than the paints division in the longer term, even though home improvement is
a lower RoCE business than paints. Also, the de-listing of Berger International
is intended to help the firm explore more options with regards to international
expansion despite the business generating sub-par returns historically. This
comes at a time when the firm is beginning to generate surplus capital amidst
an inter-generational shift amongst promoters.

Mcap (bn):
6M ADV (mn):
CMP:
TP (12 mths):
Downside (%):

Jul-14

Distinct sustainable competitive advantages in the paints division


Focus on supply chain efficiencies (including the use of technology to accurately
forecast demand and track the performance of dealers) enables Asian Paints to
outperform its peers around product availability in shops whilst expanding its
product portfolio and distribution network. Further, thanks to scale-related
benefits around a larger marketing budget, Asian Paints benefits most from
premiumisation of consumer demand. Sustainability of these competitive
advantages is driven by retention of a high-quality middle management team.
These advantages have led to RoCEs sustaining at 35% over FY05-14.

Recommendation

Apr-14

Asian Paints controls ~50% share of organised decorative paints


Founded in 1942, Asian Paints now has ~50% market share in the organised
decorative paints industry. Market share gains over the last decade have
resulted in 17% revenue CAGR and 23% earnings CAGR. The firm has
diversified into home dcor, with the recent acquisitions of Sleek (kitchen
fittings) and Ess Ess (bathroom fittings).

Consumer Discretionary: Paints

Jan-14

Asian Paints best-in-class supply chain is the biggest driver of its


competitive advantage in the paints sector. This, backed by the highquality middle-management team and scale advantages around
distribution expansion and advertisement spends, will allow the firm to
continue gaining market share from its peers in the future. We expect
18% revenue CAGR and 23% EPS CAGR over FY14-19. However, we see
a risk to its RoCE from capital misallocation through M&A.

Oct-13

COMPANY INSIGHT

Asian Paints (RHS)

Source: Bloomberg, Ambit Capital research

Initiatives taken to further strengthen the franchise


Recent initiatives by Asian Paints including installing GPS tracking on vehicles in
the supply chain and bar-coding of all stocks at a depot level should further
improve supply chain efficiency, a key strength which will enable the firm to
sustain its market leadership. Moreover, the firm continues to extend its
consumer connect with upgraded branding initiatives, expansion of experience
stores and expansion of its home solutions network.
Key financials consolidated (` mn)
Year to March
Net Sales
EBITDA
EBITDA (%)
EPS (`)
RoE (%)
RoCE (%)
P/E (x)

FY13
109,707
17,319
15.8%
11.6
36.3%
35.3%
55.9

Source: Company, Ambit Capital research

FY14
127,148
19,979
15.7%
12.8
33.1%
30.7%
43.5

FY15E
148,609
25,060
16.9%
16.5
36.1%
34.7%
39.3

FY16E
175,904
30,405
17.3%
20.4
38.0%
36.7%
31.9

FY17E
208,240
36,665
17.6%
24.5
38.9%
37.7%
26.4

Analyst Details
Rakshit Ranjan, CFA
+91 22 3043 3201
rakshitranjan@ambitcapital.com
Aditya Bagul
+91 22 3043 3264
adityabagul@ambitcapital.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.

Asian Paints
Exhibit 1: EBITDA margins and revenue growth over the
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%
FY14

FY13

FY12

FY11

FY10

FY09

FY08

FY05

FY14

FY13

FY12

FY11

FY10

FY09

FY08

FY07

FY06

FY05

10%

FY07

FY06

12%

Source: Company, Ambit Capital research

Source: Company, Ambit Capital research

Exhibit 3: Sources of funds over the last ten years

Exhibit 4: Utilisation of funds over the last ten years

Debt
raised, 4%

Interest Dividend
received, received,
1%
4%

Debt
repayment,
3%

Increase in
cash and
cash
equivalents,
9%

Dividend
paid, 36%

Purchase of
Investments
, 10%

Net Capex,
38%

Interest
paid, 4%

CFO, 92%
Source: Company, Ambit Capital research

Source: Company, Ambit Capital research

Exhibit 5: Forward P/E evolution over the past ten years

Exhibit 6: Forward P/B evolution over the past ten years

45
40
35
30
25
20
15
10
5
-

14
12
10
8
6
4

APNT P/E

6 Yr Avg

Source: Company, Ambit Capital research

November 17, 2014

Apr-05
Oct-05
Apr-06
Oct-06
Apr-07
Oct-07
Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
Oct-10
Apr-11
Oct-11
Apr-12
Oct-12
Apr-13
Oct-13
Apr-14
Oct-14

Apr-05
Oct-05
Apr-06
Oct-06
Apr-07
Oct-07
Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
Oct-10
Apr-11
Oct-11
Apr-12
Oct-12
Apr-13
Oct-13
Apr-14
Oct-14

4 Yr Avg

APNT P/B

6 Yr Avg

4 Yr Avg

Source: Company, Ambit Capital research

Ambit Capital Pvt. Ltd.

Page 44

Asian Paints
Exhibit 7: Explanation for our flags
Segment

Score

Comments

Accounting

GREEN

Asian Paints has, in the past, reported high cash conversion, efficient management of working capital and low levels of
loans and advances and contingent liabilities. Consequently, we give a high rating to the quality of its accounting.

Predictability

GREEN

Due to a combination of high pricing power, presence across products, categories and SKUs, and predominant exposure to
consumer-activity-led sectors of the economy, we expect earnings to remain stable for Asian Paints.

Treatment of
minorities

AMBER

Our accounting analysis does not raise any major red flags with respect to dubious transactions by promoters. However,
we raise concerns around Asian Paints capital allocation, as the firm pursues its inorganic growth aspirations with recent
acquisitions like Sleek and Ess Ess. These along with increasing contribution of overseas business will be RoE-dilutive.

Source: Company, Ambit Capital research

Exhibit 8: Asian Paints Three-quarters of the pie on our STAR* framework


Criteria

Score (%)

Comment

Competitive advantage

Sustained advantage around product portfolio, supply chain and brand recall

Accounting quality

Highly cash generative , efficient working capital management

Capital allocation

Key risk as new acquisitions and overseas business are RoCE dilutive,
Asian Paints is not part of Ambits Connected Companies Index and does not
appear to have any questionable political connections
Risk of capital misallocation could lead to lower FCF and compressed RoCE in
future
3rd generation promoter family members occupying managerial positions.
However day to day operations run by professional management team.

Centrality of political connect


Treatment of minorities
Succession planning
Total (%)
Source: Company, Ambit Capital research. Note:

November 17, 2014

= rating of 4/4;

= rating of 3/ 4 and so on. *STAR: Sustainable and Tenable Advantages Rank.

Ambit Capital Pvt. Ltd.

Page 45

Asian Paints
Balance sheet (standalone)
Year to March (` mn)
Shareholders' equity

FY13

FY14

FY15E

FY16E

FY17E

959

959

959

959

959

Reserves and surpluses

32,884

39,433

46,281

54,594

64,667

Total net worth

33,843

40,392

47,241

55,553

65,626

2,377

2,400

2,400

2,400

2,400

Debt
Deferred tax liability

1,544

1,878

1,878

1,878

1,878

Total liabilities

39,371

47,131

54,507

63,452

74,285

Gross block

33,851

36,621

38,621

40,621

42,621

Net block

23,967

24,202

23,568

22,795

21,881

592

716

1,000

1,000

1,000

Investments (non-current)

2,807

7,212

4,000

4,000

4,000

Cash & cash equivalents

7,520

9,317

19,231

27,978

38,573

CWIP

Debtors

9,809

11,103

12,214

14,458

17,116

18,303

20,699

24,836

29,398

34,802

Loans & advances

3,211

3,767

4,886

5,783

6,846

Total current assets

40,058

46,829

62,796

79,544

99,618

Current liabilities

23,101

26,563

31,350

37,108

43,930

Inventory

Provisions

5,394

6,679

6,922

8,193

9,699

Total current liabilities

28,495

33,242

38,272

45,301

53,629

Net current assets

11,562

13,587

24,524

34,243

45,989

Total assets

39,371

47,131

54,507

63,452

74,285

Source: Company, Ambit Capital research

Income statement (standalone)


Year to March (` mn)
Net Sales
% growth

FY13

FY14

FY15E

FY16E

FY17E

109,707

127,148

148,609

175,904

208,240

14%

16%

17%

18%

18%

Operating expenditure

92,388

107,169

123,550

145,499

171,575

EBITDA

17,319

19,979

25,060

30,405

36,665

14%

15%

25%

21%

21%

1,546

2,457

2,633

2,773

2,913

16,919

18,864

24,037

29,564

36,071

366.5

422.2

336.042

336.042

336.042

Non-operating income

1145.2

1342.2

1610.64

Adjusted PBT

16,552

18,442

23,701

29,228

35,735

4,957

5,715

7,347

9,061

11,435

11,595

12,727

16,353

20,167

24,299

-99.6

11,139

12,188

15,826

19,534

23,540

% growth
Depreciation
EBIT
Interest expenditure

Tax
Adjusted PAT
Extraordinary expense/(income)
Reported PAT after minority interest

1932.768 2319.3216

Source: Company, Ambit Capital research

November 17, 2014

Ambit Capital Pvt. Ltd.

Page 46

Asian Paints
Cash flow statement (standalone)
Year to March (` mn)

FY13

FY14

FY15E

FY16E

FY17E

16,552

18,442

23,701

29,228

35,735

Depreciation

1,546

2,457

2,633

2,773

2,913

Others

(259)

(415)

336

336

336

(4,385)

(4,802)

(7,347)

(9,061)

(11,435)

Net profit before tax

Tax
(Incr)/decr in net working capital

(1,587)

(1,682)

(1,022)

(972)

(1,152)

Cash flow from operations

11,868

14,000

18,301

22,305

26,397

Capex (net)

(6,367)

(2,336)

(2,284)

(2,000)

(2,000)

(Incr)/decr in investments

973

(4,113)

3,212

Other income (expenditure)

551

421

Cash flow from investments

(4,843)

(6,029)

928

(2,000)

(2,000)

Net borrowings

(1,016)

(369)

Interest paid

(371)

(423)

(336)

(336)

(336)

Dividend paid

(4,621)

(5,467)

(8,978)

(11,222)

(13,467)

Cash flow from financing

(6,007)

(6,259)

(9,314)

(11,558)

(13,803)

Net change in cash

1,018

1,712

9,915

8,746

10,595

Closing cash balance

7,515

9,267

19,231

27,978

38,573

Free cash flow

5,501

11,664

16,017

20,305

24,397

FY13

FY14

FY15E

FY16E

FY17E

EBITDA margin (%)

15.8%

15.7%

16.9%

17.3%

17.6%

EBIT margin (%)

15.4%

14.8%

16.2%

16.8%

17.3%

Net prof. margin (%)

10.2%

9.6%

10.6%

11.1%

11.3%

Dividend payout ratio (%)

46.3%

48.4%

56.7%

57.4%

57.2%

(0.2)

(0.2)

(0.4)

(0.5)

(0.6)

Working capital turnover (x)

9.5

9.4

6.1

5.1

4.5

Gross block turnover (x)

3.2

3.5

3.8

4.3

4.9

48.5%

46.1%

50.4%

53.2%

55.5%

RoIC (%)

46.4%

39.2%

48.4%

61.9%

73.9%

RoE (%)

36.3%

33.1%

36.1%

38.0%

38.9%

Year to March

FY13

FY14

FY15E

FY16E

FY17E

Diluted EPS (`)

11.6

12.7

16.5

20.4

24.5

Book value per share (`)

35.3

42.1

49.2

57.9

68.4

Dividend per share (`)

45.0

5.3

8.0

10.0

12.0

P/E (x)

55.9

51.1

39.3

31.9

26.4

P/BV (x)

18.4

15.4

13.2

11.2

9.5

EV/EBITDA (x)

33.8

29.3

23.4

19.3

16.0

EV/EBIT (x)

36.9

33.1

26.0

21.1

17.3

Source: Company, Ambit Capital research

Ratio analysis (standalone)


Year to March (%)

Net debt: equity (x)

RoCE (pre-tax) (%)

Source: Company, Ambit Capital research

Valuation parameters (standalone)

Source: Company, Ambit Capital research

November 17, 2014

Ambit Capital Pvt. Ltd.

Page 47

Asian Paints

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November 17, 2014

Ambit Capital Pvt. Ltd.

Page 48

Godrej Consumer
SELL
GCPL IN EQUITY

November 17, 2014

Recommendation
Mcap (bn):
6M ADV (mn):
CMP:
TP (12 mths):
Downside (%):

`337/US$5.5
`135/US$2.2
`944
`722
24

Flags
Accounting:
Predictability:
Earnings Momentum:

AMBER
AMBER
AMBER

Catalysts
Integration issues in its acquisitions in
Africa and LatAm

Increased competitive intensity in the


domestic HI and soaps category

Performance (%)

Sensex

Nov 14

Sep 14

Jul 14

1180
1080
980
880
780
680
May 14

30,000
28,000
26,000
24,000
22,000
20,000
Mar 14

26% sales CAGR target presents more risks than rewards around M&A
GCPLs 26% sales CAGR target over FY11-21 is likely to include substantial
capital allocation for M&A. However, with the international portfolios RoCEs
declining from 16% in FY08 to 7% in FY14, we see the risk of a sustained drag
on ROCEs, due to challenges around management bandwidth, integration
expertise and incentive to consolidate the existing portfolio before further
acquisitions are pursued. Inorganic growth ambitions are expected to keep
dividend payout ratio at the current level of ~25%.
Family-owned and professionally managed
GCPL is a professionally managed company with Vivek Gambhir as the MD. The
promoter, Adi Godrej, serves as the Chairman and oversees longer term
strategy including inorganic plans for the company. Mr. Godrejs younger
daughter, Nisaba, is actively involved in the business and serves as the
Executive Director looking at the innovation function at GCPL. We expect her to
assume greater responsibilities in GCPL after Mr.Godrej retires.
Headwinds for existing business, acquisition ambitions a key risk
Changes in the product portfolio include: (a) recent relaunch of Cinthol
branded soaps; and (b) cross pollination of HI portfolio from Indonesia and hair
color portfolio from LatAm. However, we forecast only 14%/16% sales/EPS
CAGR over FY14-18 due to the headwinds around market share saturation in HI
and macro/integration issues in the international business. Due to overseas
acquisitions, RoCEs should remain at ~18-20% over FY14-18.

Consumer

Jan 14

Godrej Consumer (GCPL) has a strong domestic franchise built around


its market leadership in household insecticides (HI), hair color and the
second largest soaps business in India. However, the series of overseas
acquisitions made since FY05 have faced serious issues resulting in
reduction in overall RoCE from ~130% in FY05 to ~15% in FY14. In the
domestic business GCPL faces market share saturation in HI and high
competitive intensity in soaps and hair color. With its continued focus on
acquisitions, RoCE deterioration remains a risk for the company.
GCPL has made several international acquisitions over FY08-14
Godrej Consumer (GCPL), the flagship company of the Godrej Group, is a
household and personal care products company. It is a leader in the domestic
insecticides space with key brands such as Good Knight and HIT (Insecticides),
Cinthol and Godrej No.1 (Soaps) and Expert (hair care). Through ten overseas
acquisitions since FY05, the company now has ~50% of its revenues coming
from Africa, Latin America, Indonesia and the UK.
Expect GCPL to face significant headwinds with regards to growth
GCPL has a strong domestic franchise in the HI and soaps category with almost
60% and 10% market share respectively. However, in HI we believe GCPLs
share is reaching saturation and the firm faces intense competition from global
HI majors like SC Johnson and Reckitt Benckiser. In the fully penetrated soaps
category where premiumisation is the only growth driver, GCPL is losing share
as it lacks a strong premium portfolio. In the international portfolio, Indonesia is
the best performer but faces slowing growth due to market share saturation.
Africa and LatAm have generated sub-optimal return ratios so far for GCPL.

Nov 13

COMPANY INSIGHT

GCPL (RHS)

Source: Bloomberg, Ambit Capital Research

Key financials Consolidated (` mn)


Year to March
Operating income (` mn)

FY13

FY14

FY15E

FY16E

FY17E

64,074

76,024

87,994

100,668

114,398

EBITDA (` mn)

9,824

11,503

12,972

14,942

17,208

EBITDA Margin (%)

15.3%

15.1%

14.7%

14.8%

15.0%

19.6

22.2

25.8

30.4

35.3

15.1%

16.1%

17.5%

20.3%

21.9%

48.1

42.6

36.6

31.0

26.8

Adjusted EPS (`)


RoCE (%)
P/E (x)

Analyst Details
Rakshit Ranjan, CFA
+91 22 3043 3201
rakshitranjan@ambitcapital.com
Ritesh Vaidya
+91 22 3043 3246
riteshvaidya@ambitcapital.com

Source: Company, Ambit Capital research


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.

Godrej Consumer

EBITDA margin (%), RHS


21%

130.0%

20%

110.0%

70.0%

Source: Company, Ambit Capital research

Exhibit 4: has been utilized to fund inorganic growth


Increase in
cash and
cash
equivalents
10%

Interest
received,
5%

Proceeds
from
shares,
18%
Source: Company, Ambit Capital research

Exhibit 6: GCPL EV/EBITDA band chart for the last 7 years

14x

350

350

8x

Nov-07

Nov-14

Nov-13

Nov-12

50
Nov-11

50
Nov-10

200
Nov-09

200
Nov-08

13x

500

Nov-14

20x

500

18x

650

Nov-13

26x

650

23x

800

Nov-12

32x

800

28x

950

Nov-11

950

1100

Nov-10

38x

Nov-08

1100

Nov-07

Interest
paid
5%

Source: Company, Ambit Capital research

Exhibit 5: GCPL P/E band chart for the last 7 years

November 17, 2014

Dividend
paid
17%
Net Capex
(incl.
acquisition
s)
68%

CFO, 57%

Source: Company, Ambit Capital research

FY14

Source: Company, Ambit Capital research

Exhibit 3: CFO over the last ten years..

Debt
raised,
21%

FY13

FY05

FY14

FY13

FY12

FY11

10.0%

FY10

14%
FY09

4,000
FY08

30.0%

FY07

15%
FY06

14,000
FY05

16%

FY12

50.0%

24,000

FY11

17%

34,000

FY10

44,000

90.0%

FY09

18%

FY08

19%

54,000

RoE (RHS)
200%
180%
160%
140%
120%
100%
80%
60%
40%
20%

FY07

64,000

RoCE

Nov-09

Revenues (Rs mn)


84,000
74,000

Exhibit 2: Return ratios have deteriorated rapidly due to


low yielding overseas acquisitions

FY06

Exhibit 1: Revenue has grown at a CAGR of 34% over FY0514 due to series of acquisitions since FY06

Source: Company, Ambit Capital research

Ambit Capital Pvt. Ltd.

Page 50

Godrej Consumer
Exhibit 7: Explanation for our flags
Segment

Score

Comments

AMBER

In the past, Godrej Consumer has reported excellent cash conversion, efficient management of working capital
in the domestic business, and reasonable levels of loans and advances and contingent liabilities. However, its
working capital management in its international business has been weak. Working Capital days have kept
fluctuating from a low of 7 in FY06 days to 51 days in FY12. Due to lack of disclosures, it is difficult to get a
handle on the the debt level at each of its overseas businesses.

Predictability

AMBER

Whilst the company has seen strong performance in its domestic business, its increased focus on overseas
businesses in Africa and Latin American has led to volatility in its reported numbers at the EBITDA margin level.
EBITDA margin for the international have moved in a range of ~5% in FY06 to ~16% in FY12 and are currently
down to ~11%. This variability in the margins makes the predictability of international business earnings
difficult.

Treatment of
minorities

AMBER

GCPL has financed a slew of acquisitions by cutting back on dividend payouts since FY06. By and large, these
acquisitions have faced slowing growth, lower profitability and integration issues. This has resulted in a dip in
GCPLs RoE from ~190% in FY05 to 23% in FY14.

Accounting

Source: Bloomberg, Ambit Capital research

Exhibit 8: GCPL Half pie on our STAR* framework


Criteria

Score (%)

Comment
Due to the scale of GCPLs household insecticide business, it is one of the first
companies globally to acquire the latest Active ingredient. It is the domestic
market leader in hair colour and #2 in soaps. However, it faces headwinds
around market share saturation and higher competitive intensity for its domestic
and overseas business, which have diluted its competitive advantages.
In the past, Godrej Consumer has reported excellent cash conversion, efficient
management of working capital in the domestic business, and reasonable levels
of loans and advances and contingent liabilities. However, its working capital
management in its international business has been weak.
GCPL has financed a slew of acquisitions by cutting back on dividend payouts
since FY06. Slowing growth, lower profitability and integration issues for these
acquisitions has resulted in a dip in GCPLs RoCE from ~130% in FY05 to 17% in
FY14.
GCPL is not part of Ambits Connected Companies Index and does not appear to
rely on political connections.
GCPL has cut down on its dividend pay-out in order to finance acquisitions which
have deteriorated the RoEs from ~170 in FY05 to 23% in FY14
GCPL is a family owned but professionally managed company. There are slight
concerns over the leadership capabilities of the next generation of the promoter
family, but the presence of a professional management team gives some
comfort.

Competitive advantage

Accounting quality

Capital allocation

Centrality of political connect


Treatment of minorities

Succession planning
Total (%)
Source: Company, Ambit Capital research. Note:

November 17, 2014

= rating of 4/4;

= rating of 3/ 4 and so on. *STAR: Sustainable and Tenable Advantages Rank.

Ambit Capital Pvt. Ltd.

Page 51

Godrej Consumer
Balance Sheet (` mn)
Year to March
Shareholders' equity

FY13

FY14

FY15E

FY16E

FY17E

340

340

340

340

340

Reserves & surpluses

32,790

37,414

43,019

49,410

56,660

Total net worth

33,130

37,754

43,359

49,750

57,000

2,095

2,251

2,966

3,824

4,853

19,486

17,017

9,517

3,017

517

Minority Interest
Debt
Other long term liabilities

273

294

294

294

294

(140)

(203)

(203)

(203)

(203)

54,844

57,113

55,933

56,682

62,461

Gross block

21,575

22,511

23,411

24,311

25,211

Net block

15,876

15,689

15,710

15,730

15,748

Deferred tax liability


Total liabilities

CWIP
Goodwill
Investments
Cash & equivalents
Debtors

1,409

1,671

1,671

1,671

1,671

29,085

35,525

35,525

35,525

35,525

343

343

343

343

8,688

8,068

4,132

5,069

11,056

7,288

7,113

8,438

9,653

10,970

10,471

10,821

12,536

14,342

16,298

3,995

3,769

4,822

5,516

6,268

Total current assets

30,441

29,771

29,927

34,581

44,592

Current liabilities

21,381

25,326

26,519

30,338

34,476

585

559

723

827

940

21,967

25,885

27,242

31,166

35,416

8,475

3,886

2,685

3,415

9,175

54,844

57,113

55,933

56,682

62,461

Inventory
Loans & advances
Other current assets

Provisions
Total current liabilities
Net current assets
Total assets
Source: Company, Ambit Capital research

Income statement (` mn)


Year to March
Operating income
% growth
Operating expenditure

FY13

FY14

FY15E

FY16E

FY17E

64,074

76,024

87,994

100,668

114,398

31.7%

18.6%

15.7%

14.4%

13.6%

54,251

64,521

75,022

85,727

97,190

EBITDA

9,824

11,503

12,972

14,942

17,208

% growth

14.8%

17.1%

12.8%

15.2%

15.2%

770

819

879

880

882

9,054

10,685

12,093

14,061

16,326

Interest expenditure

775

1,074

531

251

Non-operating income

678

627

690

759

835

Adjusted PBT

8,957

10,238

12,252

14,569

17,161

Tax

1,792

2,104

2,757

3,351

4,119

Adjusted PAT/ Net profit

7,165

8,134

9,496

11,218

13,042

% growth

15.2%

14.3%

19.7%

18.9%

17.8%

Extraordinaries

1,289

59

Reported PAT / Net profit

8,454

8,193

9,496

11,218

13,042

Minority Interest

(493)

(596)

(715)

(858)

(1,029)

7,961

7,597

8,781

10,360

12,013

Depreciation
EBIT

Share of associates
Adjusted Consolidated net profit
Source: Company, Ambit Capital research

November 17, 2014

Ambit Capital Pvt. Ltd.

Page 52

Godrej Consumer
Cash Flow statement (` mn)
Year to March

FY13

FY14

FY15E

FY16E

FY17E

EBIT

9,732

11,312

12,783

14,820

17,161

Depreciation

770

819

879

880

882

Others

282

(960)

184

607

1,029

(1,792)

(2,104)

(2,757)

(3,351)

(4,119)

Tax
(Incr) / decr in net working capital

4,613

3,969

(2,735)

208

226

Cash flow from operations

13,604

13,036

8,354

13,165

15,179

Capex

(9,845)

(7,334)

(900)

(900)

(900)

(Incr) / decr in investments

(343)

Others

(9,845)

(7,676)

(900)

(900)

(900)

717

(2,469)

(7,500)

(6,500)

(2,500)

Cash flow from investments


Net borrowings
Interest paid
Dividend paid
Others
Cash flow from financing
Net change in cash

(775)

(1,074)

(531)

(251)

(1,984)

(2,083)

(3,175)

(3,969)

(4,763)

572

(354)

(184)

(607)

(1,029)

(1,470)

(5,979)

(11,390)

(11,327)

(8,293)

2,289

(620)

(3,936)

938

5,986

Closing cash balance

8,688

8,068

4,132

5,069

11,056

Free cash flow

3,759

5,702

7,454

12,265

14,279

Source: Company, Ambit Capital research

Ratio Analysis
Year to March

FY13

FY14

FY15E

FY16E

FY17E

Gross margin (%)

53.9%

53.2%

53.0%

53.1%

53.2%

EBITDA margin (%)

15.3%

15.1%

14.7%

14.8%

15.0%

EBIT margin (%)

15.2%

14.9%

14.5%

14.7%

15.0%

Net profit margin (%)

11.2%

10.7%

10.8%

11.1%

11.4%

Dividend payout ratio (%)

27.7%

25.6%

33.4%

35.4%

36.5%

0.3

0.2

0.1

(0.0)

(0.2)

(301.0)

NA

(60.8)

(60.8)

(60.8)

Net debt: equity (x)


Working capital turnover (x)
Gross block turnover (x)

3.0

3.4

3.8

4.1

4.5

RoCE (%)

15.1%

16.1%

17.5%

20.3%

21.9%

RoE (%)

23.4%

23.0%

23.4%

24.1%

24.4%

Year to March

FY13

FY14

FY15E

FY16E

FY17E

EPS (`)

19.6

22.2

25.8

30.4

35.3

Source: Company, Ambit Capital research

Valuation Parameter

Diluted EPS (`)

19.6

22.2

25.8

30.4

35.3

Book value per share (`)

97.4

110.9

127.4

146.2

167.5

Dividend per share (`)

5.0

5.3

8.0

10.0

12.0

48.1

42.6

36.6

31.0

26.8

9.7

8.5

7.4

6.5

5.6

EV/EBITDA (x)

33.8

28.7

25.2

21.4

18.1

Price/Sales (x)

5.0

4.2

3.7

3.2

2.8

P/E (x)
P/BV (x)

Source: Company, Ambit Capital research

November 17, 2014

Ambit Capital Pvt. Ltd.

Page 53

Godrej Consumer

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November 17, 2014

Ambit Capital Pvt. Ltd.

Page 54

Marico
BUY
MRCO IN EQUITY

November 17, 2014

Recommendation
Mcap (bn):
3M ADV (mn):
CMP:
TP (12 mths):
Upside (%):

`201/US$3.3
`97/US$1.6
`314
`313
0

Flags
Accounting:
Predictability:
Treatment of Minorities:

AMBER
AMBER
AMBER

Catalysts

Increase in dividend payout ratio

Strong volume growth with


market share gains in VAHO and
Saffola

Lower input cost inflation


especially for copra

Performance

Sensex

Nov 14

Sep 14

Jul 14

350
320
290
260
230
200
May 14

30,000
28,000
26,000
24,000
22,000
20,000
Mar 14

A strong player in hair oils and premium edible oils markets


Since 1990, Marico has been operating in the niche coconut hair oil (27% of
sales) and premium edible oil (15% of sales) category under the Parachute and
Saffola brand names respectively. It holds 50%+ market share in each of these
categories. Over the last decade, it has entered the high-growth Value added
hair oil (VAHO) category (18% of sales) through a mix of organic & inorganic
initiatives. Marico currently has a market share of 30% in this category.
Strong brands and robust systems and processes give it the edge
Through 40 years of investment in brands Marico has developed Parachute and
Saffola into strong brands which hold more than 50% market share in their
respective product categories despite severe competitive pressures. Marico has
a robust pan-India distribution outreach of 4mn outlets backed by best-in-class
technical support and processes, making it one of the most-preferred business
partners across distributors. Using professional HR systems and processes that
are superior to its domestic peers, Marico has fostered a competitive and
meritocratic culture amongst employees. This is a key intangible asset and
helps underpin the firms high-quality middle management team.
Renewed focus on driving improvement in RoCE
After a series of overseas acquisitions and the acquisition of Paras in India,
Maricos RoCEs halved to 17% in FY13 from 41% in FY08. However, since
FY14, the management has realigned its focus on improving RoCEs through
prudent capital allocation. Following the demerger of the capital consumptive
Kaya business, Marico plans to use surplus cash to increase the dividend
payout ratio (which has already been increased to 50% in FY14 from 18% in
FY13). We expect RoCE to increase to 43% by FY18 from 17% in FY13.
Professional management to lead the company
In March 2014, Harsh Mariwala stepped down as the MD, handing over the
control to a professional management team led by Saugata Gupta. Mr.
Mariwalas focus on operating Marico in a professional manner since its
inception has helped create a senior management team capable of driving the
next phase of growth for Marico even in the promoters absence.

Consumer

Jan 14

Maricos outstanding performance over the last decade was supported


by its market-leading brands, strong distributor relationships and
superior HR policies. Since FY14, the company has made changes
around: (a) shift in control to a professional management team; (b) a
focus on organic expansion to deliver growth; and (c) a new bonus
structure for the management team focused on long-term goals. We
believe Marico will deliver 17% sales CAGR and 22% EPS CAGR over
FY14-18E due to market share gains in Saffola and value added hair
oils. RoCE is likely to expand from 17% in FY13 to 43% by FY18E.

Nov 13

COMPANY INSIGHT

Marico (RHS)

Source: Bloomberg, Ambit Capital research

Changes implemented to drive the next leg of growth


Since FY14, changes have been made around: (a) shift in control from a
promoter-led management team to professionals; (b) management incentive
structures, giving greater weightage to long-term growth drivers; and (c)
capital deployment focus on organic growth. This should drive 22% EPS CAGR
over FY14-18E with RoCE expansion from 17% in FY13 to 43% in FY18E.
Key financials
Year to March

FY13

FY14

FY15E

FY16E

FY17E

45,962

46,865

53,985

62,760

73,148

EBITDA (` mn)

6,258

7,480

8,809

10,555

12,668

EBITDA Margin (%)

13.6%

16.0%

16.3%

16.8%

17.3%

5.6

7.5

9.2

11.1

13.4

17.1%

21.5%

31.5%

36.6%

41.0%

45.0

33.6

27.5

22.8

18.9

Operating income (` mn)

Adjusted EPS (`)


RoE (%)
P/E (x)

Analyst Details
Rakshit Ranjan, CFA
+91 22 3043 3201
rakshitranjan@ambitcapital.com
Ritesh Vaidya
+91 22 3043 3246
riteshvaidya@ambitcapital.com

Source: Company, Ambit Capital research


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.

Marico

45.0%
35.0%
25.0%

FY14

FY13

FY12

FY11

FY10

FY09

FY08

FY07

FY06

15.0%

RoE

Source: Company, Ambit Capital research

Exhibit 3: Cash generated from operations for Marico


(FY05-13)
Dividend
received,
1%

Interest
received,
2%

55.0%

RoCE

Source: Company, Ambit Capital research

FY05-08 but
a series of

65.0%

FY14

FY13

FY10

FY09

FY08

FY07

FY06

FY05

FY12

EBITDA margin (%) RHS


17.0%
16.0%
15.0%
14.0%
13.0%
12.0%
11.0%
10.0%
9.0%
8.0%
FY11

Revenues (Rs mn)


53,000
48,000
43,000
38,000
33,000
28,000
23,000
18,000
13,000
8,000

Exhibit 2: Return ratios expanded over


contracted sharply thereafter due to
acquisitions

FY05

Exhibit 1: Revenue has recorded a CAGR of 19% over FY0514 with EBITDA margin expansion of 720bps

Exhibit 4: has gone to fund low-margin international


expansion
Increase in
cash and
cash
equivalents
5%

Purchase of
Investments
Subsidiaries
& Others
4%

Debt
raised, 21%

Dividend
paid
10%
Interest
paid
6%

Net Capex
(incl.
internation
al
acquisitions
72%

CFO, 62%

Proceeds
from
shares,
14%

Debt
repayment
3%

Source: Company, Ambit Capital research. Note: Size of the pie represents
cumulative funds raised (through various sources such as CFO, equity, debt,
etc) and spent (on capex, debt repayment, interest, dividend paid, etc) over
FY04-13.

Source: Company, Ambit Capital research. Note: Size of the pie represents
cumulative funds raised (through various sources such as CFO, equity, debt,
etc) and spent (on capex, debt repayment, interest, dividend paid, etc) over
FY04-13.

Exhibit 5: Marico P/E band chart for the last 7 years

Exhibit 6: Marico EV/EBITDA band chart for the last 7 years


350

14x

November 17, 2014

8x

Nov-07

Nov-14

Nov-13

Nov-12

0
Nov-11

0
Nov-10

50
Nov-09

50
Nov-08

100

Nov-07

100

Source: Company, Ambit Capital research

12x

150

Nov-14

150

16x

200

Nov-13

22x
18x

Nov-12

200

20x

250

Nov-11

250

24x

300

Nov-10

300

Nov-09

30x
26x

Nov-08

350

Source: Company, Ambit Capital research

Ambit Capital Pvt. Ltd.

Page 56

Marico
Exhibit 7: Explanation for our flags
Segment

Accounting

Predictability

Treatment of
minorities

Score

Comments

AMBER

In the past, Marico has reported strong cash conversion, effective management of working capital and low levels
of loans and advances. But it still ranks lower than the overall FMCG average, as it runs the risk of contingent
liabilities related to excise duty evasion on its coconut oil sales (representing ~30% of total equity) working
against it.

AMBER

Marico is strongly influenced by commodity price volatility which largely impacts the growth rate of its coconut oil
portfolio. However, with improving inventory management and strong brand equity for Parachute, Marico has
over the years improved its ability to manage copra price volatility. This has improved its volume and margin
predictability particularly for the domestic business. Predictability of the international business performance
(~25% of sales) still remains poor.

AMBER

In the past, Marico has done capital misallocation by pursuing unprofitable overseas acquisitions and
diversifying into the Kaya Skin Clinic business in 2002. During this period, return ratios were impacted, as RoEs
came down from 63% in FY08 to only 23% in FY13. However, during our recent discussions, the management
clearly said that it would avoid acquisitions in the near term and drive growth through the organic route. This
should drive a pickup in RoEs to ~46% by FY18.

Source: Bloomberg, Ambit Capital research

Exhibit 8: Marico Limited Three-quarters of the pie on our STAR* framework


Criteria

Score (%)

Comment

Competitive advantage

Marico has competitive advantages around: a) strong brand equity of Parachute and Saffola,
b) 4mn widespread distribution and is seen by distributors as one of the most preferred
business partner and c) Superior HR policies which have fostered a competitive and
meritocratic work culture.

Accounting quality

Maricos accounting quality is poorer than its FMCG peers. Specifically, we have concerns
around the companys low cash conversion ratio ratios, poor FCF, higher proportion of
contingent liabilities and lower proportion of auditor fees as a percentage of sales vs its
FMCG peers.

Capital allocation

Increasing focus on organic growth and higher dividend payout ratio is a step in the right
direction for capital allocation. However, previous low RoCE acquisitions continue to depress
the consolidated RoCE.

Centrality of political connect

Marico is not part of Ambits Connected Companies Index and does not appear to rely on
political connections.

Treatment of minorities

Marico has a strong track record in corporate governance.

Succession planning

The promoter recently stepped down in favour of a professional CEO. Harsh Mariwalas son
Rishabh is independently pursuing his venture and is not involved with Marico. Though, at a
later stage, Rishabhs involvement with Marico cannot be ruled out.

Total (%)
Source: Company, Ambit Capital research. Note:

November 17, 2014

= rating of 4/4;

= rating of 3/ 4 and so on *STAR: Sustainable and Tenable Advantages Rank.

Ambit Capital Pvt. Ltd.

Page 57

Marico
Balance sheet (consolidated) (` mn)
Year to March
Shareholders' equity

FY13

FY14

FY15E

FY16E

FY17E

645

645

645

645

645

Reserves & surpluses

19,170

12,961

14,953

17,533

20,727

Total networth

19,815

13,606

15,598

18,177

21,372

Minority Interest

351

358

508

658

808

7,907

5,259

3,259

1,259

58

96

96

96

96

Total liabilities

28,131

19,319

19,461

20,190

22,276

Gross block

17,009

9,634

10,634

11,634

12,634

Net block

12,748

6,334

6,616

6,858

7,062

Debt
Deferred tax liability

CWIP

1,477

44

44

44

44

Goodwill

3,955

2,543

2,543

2,543

2,543

Investments

1,516

3,105

3,105

3,105

3,105

Cash & equivalents

2,667

4,064

3,358

3,233

4,390

Debtors

1,966

2,232

2,733

3,174

3,695

Inventory

8,627

7,962

9,110

10,581

12,318

Loans & advances

2,555

1,474

1,822

2,116

2,464

Other current assets

1,562

1,892

2,278

2,645

3,080

Total current assets

17,376

17,624

19,300

21,749

25,947

Current liabilities

7,727

9,473

10,628

12,344

14,371

Provisions
Total current
liabilities
Net current assets

1,214

857

1,518

1,763

2,053

8,941

10,330

12,147

14,107

16,424

8,435

7,294

7,153

7,641

9,523

28,131

19,319

19,461

20,190

22,276

Total assets

Source: Company, Ambit Capital research

Income statement (consolidated) (` mn)


Year to March
Operating income
% growth
Operating expenditure

FY13

FY14

FY15E

FY16E

FY17E

45,962

46,865

55,419

64,365

74,935

14.7%

2.0%

18.3%

16.1%

16.4%

39,704

39,385

46,598

53,540

61,958

EBITDA

6,258

7,480

8,822

10,825

12,977

% growth

29.2%

19.5%

17.9%

22.7%

19.9%

Depreciation

866

769

718

758

796

5,392

6,711

8,104

10,067

12,182

Interest expenditure

580

345

256

136

38

Non-operating income

375

579

599

547

576

5,187

6,946

8,447

10,478

12,720

EBIT

Adjusted PBT
Tax

1,462

1,905

2,365

2,986

3,752

Adjusted PAT/ Net profit

3,725

5,041

6,082

7,492

8,967

% growth

15.0%

35.3%

20.6%

23.2%

19.7%

332

4,057

5,041

6,082

7,492

8,967

98

187

150

150

150

4,854

5,932

7,342

8,817

4,854

5,932

7,342

8,817

Extraordinaries
Reported PAT / Net profit
Minority Interest

Share of associates
Adjusted Consolidated
3,959
net profit
Reported Consolidated
3,959
net profit
Source: Company, Ambit Capital research

November 17, 2014

Ambit Capital Pvt. Ltd.

Page 58

Marico
Cash flow statement (consolidated) (` mn)
Year to March

FY13

FY14

FY15E

FY16E

FY17E

EBIT

5,767

7,290

8,703

10,614

12,757

Depreciation
Others
Tax
(Incr) / decr in net
working capital
Cash flow from
operations
Capex
(Incr) / decr in
investments
Others
Cash flow from
investments
Net borrowings

866

769

718

758

796

(295)

(487)

(256)

(136)

(38)

(1,462)

(1,905)

(2,365)

(2,986)

(3,752)

(201)

2,538

(566)

(613)

(724)

4,675

8,205

6,234

7,637

9,039

(10,072)

7,078

(1,000)

(1,000)

(1,000)

1,440

(176)

(8,632)

6,902

(1,000)

(1,000)

(1,000)

278

(2,648)

(2,000)

(2,000)

(1,259)

Interest paid

(580)

(345)

(256)

(136)

(38)

Dividend paid

(749)

(2,632)

(3,458)

(4,280)

(5,140)

Others
Cash flow from
financing
Net change in cash

6,088

(8,086)

(226)

(346)

(444)

5,036

(13,711)

(5,940)

(6,762)

(6,881)

1,079

1,397

(706)

(125)

1,158

Closing cash balance


Free cash flow

2,667

4,064

3,358

3,233

4,390

(5,397)

15,284

5,234

6,637

8,039

Source: Company, Ambit Capital research

Ratio analysis (consolidated)


Year to March

FY13

FY14

FY15E

FY16E

FY17E

Gross margin (%)

51.9%

48.8%

48.8%

49.7%

50.1%

EBITDA margin (%)

13.6%

16.0%

15.9%

16.8%

17.3%

EBIT margin (%)

12.5%

15.6%

15.7%

16.5%

17.0%

7.9%

10.4%

10.7%

11.4%

11.8%

Net profit margin (%)


Dividend payout ratio (%)

18.9%

54.2%

58.3%

58.3%

58.3%

Net debt: equity (x)

0.3

0.1

(0.0)

(0.1)

(0.2)

Working capital turnover (x)

8.0

14.5

14.6

14.6

14.6

Gross block turnover (x)

2.7

4.9

5.2

5.5

5.9

RoCE (%)

17.1%

21.5%

31.5%

37.5%

41.7%

RoE (%)

23.2%

29.0%

40.6%

43.5%

44.6%

FY13

FY14

FY15E

FY16E

FY17E

5.6

7.5

9.2

11.4

13.7

Source: Company, Ambit Capital research

Valuation parameters (consolidated)


Year to March
EPS (`)
Diluted EPS (`)
Book value per share (`)
Dividend per share (`)

5.6

7.5

9.2

11.4

13.7

32.2

22.1

25.4

29.6

34.8

1.0

3.5

4.6

5.7

6.8

55.8

41.7

34.1

27.6

23.0

9.7

14.2

12.4

10.6

9.0

EV/EBITDA (x)

33.2

27.2

22.9

18.5

15.3

Price/Sales (x)

4.4

4.3

3.7

3.1

2.7

P/E (x)
P/BV (x)

Source: Company, Ambit Capital research

November 17, 2014

Ambit Capital Pvt. Ltd.

Page 59

Marico

This page has been intentionally left blank

November 17, 2014

Ambit Capital Pvt. Ltd.

Page 60

Berger Paints
SELL
BRGR IN EQUITY

November 17, 2014

Mcap (bn):
3M ADV (mn):
CMP:
TP (12 mths):
Downside (%):

`126/US$2.0
`125/US$2.0
`362
`269
26

Flags
Accounting:
Predictability:
Treatment of Minorities:

AMBER
AMBER
GREEN

Catalysts

Positive impact of recent marketing


and distribution initiatives

Improvement in FCF generation in


FY15

Performance
28,000

500

25,500

400

23,000
300

20,500
18,000

Sensex

Oct-14

200
Jul-14

Professionally-run organisation with limited promoter involvement


The promoter group follows a hands-off approach and is involved in only
strategic decision-making. Strategy execution at the ground level is completely
managed by professionals and this has helped nurture an entrepreneurial
management team over the past 20 years. Whilst members of the promoter
family occupy certain junior managerial positions, we believe that operational
control will remain in the hands of professionals.

Recommendation

Apr-14

Initiatives taken to bridge the gap with Asian Paints


Bergers competitive advantages include: (a) a strong focus on product
innovation (like Designer Finishes, Easy Clean, and Weathercoat All Guard)
with Berger being the first company to launch tinting machines; (b) several
decades old relationships with institutional buyers and dealers for economy
products; and (c) focused IT investments to drive supply chain efficiencies.
Whilst these competitive advantages are sustainable against its peers like
Kansai Nerolac and Akzo Nobel, we expect Asian Paints to outperform Berger
in supply chain efficiencies.
Prudent capital allocation
Bergers capital allocation over the past decade has either been used to
expand core capacities, pay dividends or de-leverage the balance sheet. The
firm has refrained from making large non-core acquisitions which could have
jeopardised longer-term RoCEs. We believe RoCEs will revive to 27% by FY18
from an average of 18% over FY09-14 due to an increase in asset turns from
2.2x in FY14 to 3.0x in FY19.

Consumer discretionary: Paints

Jan-14

Berger has retained its #2 position in a highly competitive paints


industry over the past five years through: (a) expansion of
dealer/depot network; (b) increased width and depth of its product
portfolio; (c) renewed focus on premiumising its product portfolio; and
(d) IT investments to improve distribution efficiencies. We expect Berger
to deliver 17% revenue CAGR and 24% EPS CAGR over FY14-18, with
market share gains from Kansai and Akzo.
Berger establishes itself as Indias #2 paints player
Berger Paints is the second-largest manufacturer of decorative paints in India,
with a market share of ~17%. The firm was established in 1923 and has gone
through several ownership changes since then. However, since 1991, a
majority stake in the company has been owned by UK Paints Group led by the
Delhi based Dhingra brothers. The companys key sub-brands include Luxol,
Bison, Rangoli, Weathercoat, Silk and Breathe Easy.

Oct-13

COMPANY INSIGHT

Berger Paints (RHS)

Source: Bloomberg, Ambit Capital research.

What is being done to strengthen the franchise further?


The company is implementing the following initiatives to strengthen its
franchise: (a) a better incentivised sales team to help expand the dealer
network; (b) IT-related investments to enable centralised MIS, which will help
improve supply chain efficiencies; and (c) branding investments in premium
products like Berger Silk. These initiatives will help Berger gain market share
from Akzo and Kansai in the future.
Key financials standalone (` mn)
Year to March
Net Sales

FY13

FY14

FY15E

FY16E

FY17E

33,464

38,697

44,753

52,672

61,986

EBITDA

3,712

4,314

5,206

6,180

7,458

EBITDA (%)

11.1%

11.1%

11.6%

11.7%

12.0%

EPS (`)

6.3

7.2

8.7

11.0

13.9

RoE (%)

22.9%

24.1%

24.7%

26.5%

28.1%

RoCE (%)

18.6%

17.4%

18.3%

21.1%

24.5%

57.4

50.3

41.8

33.0

26.0

P/E (x)

Analyst Details
Rakshit Ranjan, CFA
+91 22 3043 3201
rakshitranjan@ambitcapital.com
Aditya Bagul
+91 22 3043 3264
adityabagul@ambitcapital.com

Source: Company, Ambit Capital research


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.

Berger Paints
Exhibit 1: EBITDA margins and revenue growth over the
last ten years
Revenue (Rs mn)

EBITDA Margin (% RHS)

50,000

13%

40,000

12%

30,000

11%

20,000

10%

10,000

9%

Exhibit 2: RoCE

and

RoE

over

RoCE

29%

the

last

ten

RoE (% RHS)

40%

27%
35%

25%
23%

30%

21%
19%
15%
FY14

FY13

FY12

FY11

FY10

FY09

FY08

FY07

FY06

FY05

Source: Company, Ambit Capital research

Exhibit 3: Sources of funds over the last ten years

Debt
raised,
29%

20%

FY14

FY13

FY12

FY11

FY10

FY09

FY08

FY07

FY06

FY05

Source: Company, Ambit Capital research

Dividend
received,
0%

25%

17%

8%

years

Exhibit 4: Utilisation of funds over the last ten years


Increase in
cash and
cash
equivalents
, 8%

Interest
received,
4%

Debt
repayment,
3%

Purchase
of
Investment
s , 4%

CFO, 60%
Proceeds
from
shares,
7%

Dividend
paid, 17%

Interest
paid, 10%

Net Capex,
58%

Source: Company, Ambit Capital research

Source: Company, Ambit Capital research

Exhibit 5: Forward P/E evolution over the past ten years

Exhibit 6: Forward P/B evolution over the past ten years

30
25
20
15
10
5
Apr-05
Oct-05
Apr-06
Oct-06
Apr-07
Oct-07
Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
Oct-10
Apr-11
Oct-11
Apr-12
Oct-12
Apr-13
Oct-13
Apr-14
Oct-14

BRGR P/E

6 Yr Avg

Source: Company, Ambit Capital research

November 17, 2014

Apr-05
Oct-05
Apr-06
Oct-06
Apr-07
Oct-07
Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
Oct-10
Apr-11
Oct-11
Apr-12
Oct-12
Apr-13
Oct-13
Apr-14
Oct-14

8
7
6
5
4
3
2
1
-

35

BRGR P/B

4 Yr Avg

6 Yr Avg

4 Yr Avg

Source: Company, Ambit Capital research

Ambit Capital Pvt. Ltd.

Page 62

Berger Paints
Exhibit 7: Explanation for our flags
Segment

Score

Comments

Accounting

AMBER

Whilst Berger scores well on cash conversion, related party advances and return on surplus cash, its working
capital cycle (65-70 days) and RoEs (~25%) are inferior relative to Asian Paints (working capital cycle of 12-14
days and RoEs of 38-40%).

Predictability

AMBER

Although the macro demand for paints in India is not very volatile across economic cycles, the low pricing power
of Berger Paints in the industry results in volatility of EPS growth over time.

Treatment of
minorities

GREEN

Our accounting analysis does not raise any major concerns around dubious transactions by promoters. Berger
has been in a capex mode for the last four years and has allocated surplus cash towards its core operations.

Source: Bloomberg, Ambit Capital research

Exhibit 8: Berger Paints Three-quarters of the pie on our STAR* framework


Criteria

Score (%)

Comment

Competitive advantage

Product innovation, relationships with institutional buyers and dealers is the key
strength. However the supply chain benefits lag Asian Paints.

Accounting quality

Whilst Berger scores well on cash conversion, related party advances and return
on surplus cash, its working capital cycle and RoEs are inferior relative to Asian
Paints.

Capital allocation

Prudent capital allocation for core capex, payment of dividends or deleveraging


company

Centrality of political connect

Berger is not part of Ambits Connected Companies Index and does not appear
to have any questionable political connections

Treatment of minorities

No major concerns around dubious transactions by promoters and capital


allocation.

Succession planning

Promoters follow hands off approach. Members of promoter family occupy


managerial positions, however operational control to remain with professional
management team.

Total (%)
Source: Company, Ambit Capital research. Note:

November 17, 2014

= rating of 4/4;

= rating of 3/ 4 and so on. *STAR: Sustainable and Tenable Advantages Rank.

Ambit Capital Pvt. Ltd.

Page 63

Berger Paints
Balance sheet (standalone)
Year to March (` mn)
Shareholders' equity

FY13

FY14

FY15E

FY16E

FY17E

693

693

693

693

693

Reserves and surpluses

8,839

10,514

12,377

14,881

18,081

Total net worth

9,532

11,207

13,070

15,574

18,774

Debt

5,497

6,235

5,835

4,235

2,235

Deferred tax liability

408

538

538

538

538

15,436

17,980

19,444

20,347

21,547

Gross block

9,795

13,220

14,220

15,220

16,220

Net block

6,040

8,638

8,792

8,992

9,173

CWIP

1,674

1,333

500

500

500

Total liabilities

Investments (non-current)

108

907

907

907

907

Cash & cash equivalents

2,270

1,841

3,544

3,528

3,751

Debtors

4,114

4,857

5,617

6,466

7,440

Inventory

6,364

6,957

8,045

9,325

10,804

Loans & advances

1,194

1,301

1,504

1,770

2,083

Total current assets

14,050

15,071

18,832

21,233

24,247

5,514

6,887

8,337

9,813

11,548

Current liabilities
Provisions

922

1,081

1,250

1,472

1,732

Total current liabilities

6,436

7,968

9,588

11,284

13,280

Net current assets

7,614

7,103

9,245

9,949

10,967

15,436

17,980

19,444

20,347

21,547

FY13

FY14

FY15E

FY16E

FY17E

33,464

38,697

44,753

52,672

61,986

Total assets

Source: Company, Ambit Capital research

Income statement (standalone)


Year to March (` mn)
Net Sales
% growth
Operating expenditure
EBITDA

14%

16%

16%

18%

18%

29,752

34,384

39,547

46,492

54,528

3,712

4,314

5,206

6,180

7,458

% growth

22%

16%

21%

19%

21%

Depreciation

567

707

845

801

819

3,145

3,607

4,360

5,379

6,640

377

466

480

400

257

EBIT
Interest expenditure
Non-operating income

314

360

403

451

505

3,082

3,500

4,283

5,430

6,888

898

1,006

1,285

1,629

2,066

Adjusted PAT
2,184
Extraordinary
0
expense/(income)
Reported PAT after minority
2,184
interest
Source: Company, Ambit Capital research

2,494

2,998

3,801

4,821

2,494

2,998

3,801

4,821

Adjusted PBT
Tax

November 17, 2014

Ambit Capital Pvt. Ltd.

Page 64

Berger Paints
Cash flow statement (standalone)
Year to March (` mn)

FY13

FY14

FY15E

FY16E

FY17E

Net profit before tax

3,082

3,500

4,283

5,430

6,888

Depreciation
Others

567

707

845

801

819

(1,222)

(1,315)

(1,364)

(1,772)

(2,185)

(843)

(1,022)

(1,285)

(1,629)

(2,066)

(2,049)

(2,049)

(2,049)

(2,049)

(2,049)

Tax
(Incr)/decr in net working
capital
Cash flow from
operations
Capex (net)

1,206

3,084

3,805

4,138

4,982

(2,179)

(2,431)

(167)

(1,000)

(1,000)

(Incr)/decr in investments

(92)

(803)

Other income (expenditure)


Cash flow from
investments
Net borrowings

230

220

(2,041)

(3,014)

(167)

(1,000)

(1,000)

2,080

525

(400)

(1,600)

(2,000)

Interest paid

(327)

(424)

(400)

(257)

(138)

Dividend paid

(484)

(619)

(1,135)

(1,297)

(1,622)

1,281

(499)

(1,935)

(3,154)

(3,760)

446

(429)

1,703

(16)

223

Closing cash balance

2,270

1,841

3,544

3,528

3,751

Free cash flow

(974)

653

3,638

3,138

3,982

Cash flow from financing


Net change in cash

Source: Company, Ambit Capital research

Ratio analysis (standalone)


Year to March (%)

FY13

FY14

FY15E

FY16E

FY17E

EBITDA margin (%)

12.0%

12.1%

12.5%

12.6%

12.8%

EBIT margin (%)

10.3%

10.2%

10.6%

11.1%

11.5%

Net prof. margin (%)

6.5%

6.4%

6.7%

7.2%

7.8%

33.4%

35.8%

37.9%

34.1%

33.6%

Net debt: equity (x)

0.3

0.4

0.2

0.0

(0.1)

Working capital turnover (x)

4.4

5.4

4.8

5.3

5.7

Gross block turnover (x)

3.4

2.9

3.1

3.5

3.8

RoCE (pre-tax) (%)

26.2%

24.4%

26.2%

30.1%

35.0%

RoIC (%)

23.9%

21.5%

22.1%

25.7%

29.8%

RoE (%)

25.0%

24.1%

24.7%

26.5%

28.1%

Dividend payout ratio (%)

Source: Company, Ambit Capital research

Valuation parameters (standalone)


Year to March
Diluted EPS (`)
Book value per share (`)
Dividend per share (`)
P/E (x)
P/BV (x)

FY13

FY14

FY15E

FY16E

FY17E

6.3

7.2

8.7

11.0

13.9

137.6

161.7

188.6

224.7

270.9

1.8

2.2

2.8

3.2

4.0

57.4

50.3

41.8

33.0

26.0

2.6

2.2

1.9

1.6

1.3

EV/EBITDA (x)

32.5

28.2

23.4

19.6

16.0

EV/EBIT (x)

37.8

33.2

27.6

22.2

17.9

Source: Company, Ambit Capital research

November 17, 2014

Ambit Capital Pvt. Ltd.

Page 65

Berger Paints

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November 17, 2014

Ambit Capital Pvt. Ltd.

Page 66

Page Industries
BUY
PAG IN EQUITY

November 17, 2014

Recommendation
Mcap (bn):
3M ADV (mn):
CMP:
TP (12 mths):
Downside (%):

`109/US$1.8
`88/US$1.4
`9,796
`9,265
5

Flags
Accounting:
Predictability:
Treatment of Minorities:

GREEN
GREEN
GREEN

Catalysts

Robust sales growth during FY15


despite a weak macro for demand

Successful rollout of new products

New advert campaign on TV/ print


media

Performance
8000

24,000

7000

22,000

6000

20,000

5000

18,000

4000

Sensex

Oct-14

9000

26,000

Jul-14

28,000

Apr-14

Dominated Indias mid-premium innerwear over 1995-2014


Page Industries commenced operations in India in 1995 in the mid and premium
category of the innerwear segment under the brand name, Jockey. The company
has market share of ~20% in men's mid/premium innerwear and ~4% in women's
mid/premium innerwear segments. It is the largest player in the organised innerwear
space in India.
Competitive advantages include manufacturing, distribution and brand
Page has generated revenue CAGR of 36% & earnings CAGR of 38% over FY06-14
with an average RoE of 58% over this period through a combination of three key
competitive advantages. Firstly, its backward-integrated manufacturing process gives
it better control on the quality and commerciality of product development. This is
difficult to replicate as it is highly labour-intensive and calls for regular hiring,
training and retention of a skilled workforce. Secondly, an aggressive distribution
franchise, built over 20 years, enables Page to create push-based demand. And
thirdly, its aggressive advertising focuses on maintaining an aspirational brand recall
for Jockey.
Prudent capital allocation approach adopted historically
Given the long-term growth potential in innerwear, the management does not intend
to invest in non-core businesses over the foreseeable future. The surplus capital
generated is utilised for core capex (41% of cash generated) and the rest has been
returned to shareholders (49% of cash generated) through an average dividend
payout ratio of 56% over FY05-14.
Promoters son is actively involved in R&D and strategic decision-making
Although Pages promoters are a part of the executive senior management team,
decision-making at a functional level is carried out in an independent and
professional manner. Mr. Sunder Genomal, Managing Director, is 60 years old and
his son, Mr. Shamir Genomal, is the Chief Strategy Officer and he also heads the
R&D and product innovation function.
Initiatives underway to strengthen R&D, distribution and branding
To strengthen Pages R&D capabilities, the company recently hired two senior
executives, Ms. Shelagh Margaret Commons (experienced in global innerwear
industry) and Mr. Nihal Rajan (ex-Levi Strauss & Co). Two key initiatives are underway
in distribution: (a) rapid expansion of exclusive brand outlets to help push new SKUs
into multi-brand outlets; and (b) IT investments to help track sales of products from
distributors to retailers. The firm is also stepping up its investment behind
advertisements (spends to record 30% CAGR in FY14-18 vs 16% CAGR over FY10-14)
to expand its presence into new categories like leisurewear. The firm is also working
on expanding the e-commerce sales channel.

Consumer Discretionary

Jan-14

Over the last 20 years, Page Industries has successfully transformed the
Jockey brand into a market leader in the fast-growing, organised
innerwear segment. Jockeys highly aspirational brand image has been built
by consistent delivery of comfortable, durable and affordable products. Page
is likely to outperform its peers over FY14-20 amidst a strong macro tailwind
for
mid-premium
innerwear
through:
(a)
backward
integrated
manufacturing (delivering high-quality product at affordable prices); and (b)
aggressive distribution expansion along with an aspirational brand recall for
Jockey. We build in 28% revenue CAGR and 29% earnings CAGR over FY1420E with RoEs of ~60% over this period.

Oct-13

COMPANY INSIGHT

Page Industries (RHS)

Source: Bloomberg, Ambit Capital research.

Key financials standalone (` mn)


Year to March
Net Sales
EBITDA
EBITDA (%)
EPS (`)
RoE (%)
RoCE (%)
P/E (x)

FY13
8,758
1,766
20.2
100.9
59.3
42.4
96.8

FY14
11,876
2,511
21.1
137.8
61.2
41.9
70.8

FY15E
15,567
3,323
21.3
182.5
60.8
44.8
53.5

FY16E
20,267
4,358
21.5
243.5
61.5
49.4
40.1

FY17E
26,177
5,647
21.6
318.7
61.0
51.1
30.6

Analyst Details
Rakshit Ranjan, CFA
+91 22 3043 3201
rakshitranjan@ambitcapital.com
Aditya Bagul
+91 22 3043 3264
adityabagul@ambitcapital.com

Source: Company, Ambit Capital research


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.

Page Industries
Exhibit 1: EBITDA margins and revenue growth over the
last ten years
Revenue (Rs mn)

Exhibit 2: RoCE

15,000

EBITDA Margin (% RHS)


22%

60%

12,000

20%

50%

and

RoE

over

RoCE

the

last

ten

RoE (% RHS)

120%

90%

18%

9,000

16%
6,000

14%

3,000

years

40%
60%
30%

12%

Source: Company, Ambit Capital research

FY14

FY13

FY12

FY11

FY10

FY09

FY08

FY07

FY06

30%
FY05

20%

FY14

FY13

FY12

FY11

FY10

FY09

FY08

FY07

FY06

10%
FY05

Source: Company, Ambit Capital research

Exhibit 3: Sources of funds over the last ten years


Dividend
received,
0%

Exhibit 4: Utilisation of funds over the last ten years


Increase in
cash and
cash
equivalents,
1%

Interest
received,
2%

Debt
raised,
23%

Debt
repayment,
1%

Purchase of
Investments
, -1%

Dividend
paid, 49%

Net Capex,
43%

Proceeds
from
shares,
9%

CFO, 67%

Interest
paid, 7%
Source: Company, Ambit Capital research

Source: Company, Ambit Capital research

Exhibit 5: Forward P/E evolution over the past ten years


40
35
30
25
20
15
10
5
-

Exhibit 6: Forward P/B evolution over the past ten years


25
20
15
10
5

4 Yr Avg

PAG P/B

6 Yr Avg

Apr-14

Oct-14

Apr-13

Oct-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

Apr-14

Oct-14

Oct-13

Apr-13

Oct-12

Apr-12

Apr-11

6 Yr Avg

Source: Company, Ambit Capital research

November 17, 2014

Oct-11

Oct-10

Apr-10

Apr-09

PAG P/E

Oct-09

Oct-08

Apr-08

Apr-07

Oct-07

4 Yr Avg

Source: Company, Ambit Capital research

Ambit Capital Pvt. Ltd.

Page 68

Page Industries
Exhibit 7: Explanation for our flags
Segment

Score

Comments

Accounting

GREEN

Page Industries' cash conversion has remained healthy, resulting in cumulative CFO (pre-tax)/EBITDA of more than
72% in FY05-14. Page has maintained effective control on the working capital cycle, and hence despite high sales
growth, working capital days have increased marginally from 63 days in FY09 to 69 days in FY14.

Predictability

GREEN

The underpenetrated nature of the industry, the growth of the middle class and continued efforts by management
have enabled Page (with its strong brand franchise) to deliver consistent performance. Page has delivered growth
of above 25% YoY consistently in both revenues and net profits over the last eight years.

Treatment of
minorities

GREEN

Our accounting analysis does not raise any major red flags with respect to dubious transactions by promoters.
Also, with the high levels of cash generation, the company has returned the excess cash to the shareholders.

Source: Bloomberg, Ambit Capital research

Exhibit 8: Page Industries gets a Full pie on our STAR* framework


Criteria

Score (%)

Comment

Competitive advantage

Near monopoly within its segment, with efficient inhouse manufacturing despite
it being labour intensive and complete control over product development, strong
brand and well-incentivised dealer network.

Accounting quality

Superior accounting quality as compared to peers.

Capital allocation

Cash-generative business; management has maintained financial discipline and


a high dividend payout.

Centrality of political connect

Page is not part of Ambits Connected Companies Index and does not appear to
have any questionable political connections.

Treatment of minorities

Promoters have a very small and non-competing apparel business in India, but
good overall track record of corporate governance.

Succession planning

Promoter family members occupying managerial position alongside professional


management team. Although no formal succession plan is formulated the
function specific control is likely to be with the professional management

Total (%)
Source: Company, Ambit Capital research. Note:

November 17, 2014

= rating of 4/4;

= rating of 3/ 4 and so on. *STAR: Sustainable and Tenable Advantages Rank.

Ambit Capital Pvt. Ltd.

Page 69

Page Industries
Balance sheet (standalone)
Year to March (` mn)
Shareholders' equity

FY13

FY14

FY15E

FY16E

FY17E

112

112

112

112

112

Reserves and surpluses

2,024

2,778

3,695

4,917

6,517

Total net worth

2,135

2,890

3,806

5,028

6,628

Debt

1,007

1,632

1,162

1,322

1,262

Deferred tax liability

57

95

95

95

95

3,199

4,617

5,063

6,445

7,985

Gross block

1,860

2,404

3,125

3,917

4,712

Net block

1,322

1,728

2,272

2,845

3,377

138

36

36

36

36

Total liabilities

CWIP
Investments (non-current)

10

Cash & cash equivalents

46

35

34

39

34

Debtors

581

727

853

1,111

1,434

2,350

3,626

3,796

4,942

6,383

130

328

426

555

717

Total current assets

3,248

4,932

5,382

6,985

8,990

Current liabilities

1,302

1,838

2,371

3,087

3,987

Inventory
Loans & advances

Provisions

216

241

256

333

430

Total current liabilities

1,518

2,079

2,627

3,420

4,418

Net current assets

1,730

2,853

2,755

3,565

4,572

Total assets

3,199

4,617

5,063

6,445

7,985

FY13

FY14

FY15E

FY16E

FY17E

8,758

11,876

15,567

20,267

26,177

Source: Company, Ambit Capital research

Income statement (standalone)


Year to March (` mn)
Net Sales
% growth

26%

36%

31%

30%

29%

Operating expenditure

6,992

9,365

12,244

15,909

20,530

EBITDA

1,766

2,511

3,323

4,358

5,647

% growth

21%

42%

32%

31%

30%

Depreciation

114

139

176

219

262

1,652

2,372

3,147

4,138

5,384

80

104

140

124

129

EBIT
Interest expenditure
Non-operating income
Adjusted PBT
Tax
Adjusted PAT
Extraordinary expense/(income)
Reported PAT after minority interest

85

66

78

101

131

1,657

2,334

3,085

4,115

5,386

531

797

1,049

1,399

1,831

1,125

1,537

2,036

2,716

3,555

1,125

1,537

2,036

2,716

3,555

Source: Company, Ambit Capital research

November 17, 2014

Ambit Capital Pvt. Ltd.

Page 70

Page Industries
Cash flow statement (standalone)
Year to March (` mn)

FY13

FY14

FY15E

FY16E

FY17E

Net profit before tax

1,657

2,335

3,085

4,115

5,386

114

139

176

219

262

74

67

62

23

(2)

Tax

-516

-750

-1,049

-1,399

-1,831

(Incr)/decr in net working capital

-457

-1,051

98

-805

-1,012

871

740

2,372

2,154

2,803

Depreciation
Others

Cash flow from operations


Capex (net)

-449

-473

-721

-792

-795

(Incr)/decr in investments

19

Other income (expenditure)

13

-419

-441

-643

-691

-664

238

543

-470

160

-60

Cash flow from investments


Net borrowings
Interest paid

(80)

(97)

(140)

(124)

(129)

Dividend paid

(596)

(756)

(1,120)

(1,494)

(1,955)

Cash flow from financing

-438

-310

-1,730

-1,458

-2,144

Net change in cash

14

-11

-5

Closing cash balance

46

35

34

39

34

430

280

1,729

1,463

2,139

FY13

FY14

FY15E

FY16E

FY17E

EBITDA margin (%)

20.2%

21.1%

21.3%

21.5%

21.6%

EBIT margin (%)

18.9%

20.0%

20.2%

20.4%

20.6%

Net prof. margin (%)

12.8%

12.9%

13.1%

13.4%

13.6%

Dividend payout ratio (%)

57.6%

50.9%

55.0%

55.0%

55.0%

0.5

0.6

0.3

0.3

0.2

Working capital turnover (x)

6.0

5.2

5.6

6.4

6.4

Gross block turnover (x)

5.2

5.6

5.6

5.8

6.1

62.5%

63.6%

68.0%

74.9%

77.5%

RoIC (%)

42.8%

41.4%

43.5%

48.1%

49.8%

RoE (%)

59.3%

61.2%

60.8%

61.5%

61.0%

Free cash flow


Source: Company, Ambit Capital research

Ratio analysis (standalone)


Year to March (%)

Net debt: equity (x)

RoCE (pre-tax) (%)

Source: Company, Ambit Capital research

Valuation parameters (standalone)


Year to March

FY13

FY14

FY15E

FY16E

FY17E

Diluted EPS (`)

100.9

137.8

182.5

243.5

318.7

Book value per share (`)

191.4

259.1

341.2

450.8

594.2

Dividend per share (`)

50.0

60.0

85.8

114.5

149.8

P/E (x)

96.8

70.8

53.5

40.1

30.6

P/BV (x)

51.0

37.7

28.6

21.7

16.4

EV/EBITDA (x)

62.2

44.0

33.1

25.3

19.5

EV/EBIT (x)

66.5

46.6

35.0

26.6

20.5

Source: Company, Ambit Capital research

November 17, 2014

Ambit Capital Pvt. Ltd.

Page 71

Page Industries

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November 17, 2014

Ambit Capital Pvt. Ltd.

Page 72

IPCA Laboratories
BUY
IPCA IN EQUITY

November 17, 2014

IPCA has built an enviably profitable and growing franchise in the India
and export market by playing to its strengths. The companys sustainable
competitive advantage is around innovation and cost management. It
has innovated around manufacturing processes and formulations such
that the product is more cost-efficient and patient-friendly. This has
aided IPCA in building brand equity in front of Indian doctors. At the
same time, IPCA has managed costs efficiently, as reflected by its
consistent RoCE. Brand IPCA is showcased through various publications in
medical journals like Lancet and through its dominance in therapy areas
like malaria and pain in India.
Market domination in segment like malaria and rheumatology
IPCA currently manufactures 350 formulations and 80 APIs across various
therapeutic segments and sells in India (38% of sales in FY14), regulated markets
(20%) and emerging markets (25%). IPCA is an emerging player in most
geographies and it dominates in segments like malaria (34% market share) and
rheumatology (46% market share) in India.
Innovation and established brand - the key competitive advantages
IPCAs excellence in process re-engineering, innovation in formulations,
established brand in front of doctors, relationship with regulators and cost
leadership are its key competitive advantages. Its cost competitiveness may
decline over time, but as the company scales up the value chain, the other
factors are likely to sustain (the key factor being brand). IPCA has been able to
sustain RoCE and RoE of >15% led by high cash generation and rational capital
allocation owing to tight working capital investment and low capex.
Prudent capital allocation as evidenced by strong EBITDA margins
Rational capital allocation has been IPCAs forte, as evidenced by its comparable
gross and EBITDA margins vs its peers despite owning plain-vanilla products. The
company has spent 60.3% of its cash on capex aimed at increasing
manufacturing capacity and vertical integration. The gross block turnover has
remained stable at ~1.9x over the last decade, indicating that investments in
capex have yielded sales. IPCA pays ~15% of its profits (at par with peers) as
dividend, consistently ploughing back most of the profits.
No management transition in sight
IPCA has not hired any external talent in the top management in the past decade
and continues to be a promoter-run business. The first-generation entrepreneur,
Mr. Premchand Godha, still plays an active role in execution whilst his sons, Mr.
Pranay Godha (Head of exports) and Prashant Godha (Head of domestic
business), are now well entrenched in the company. We believe a management
transition is not in sight.

Healthcare
Recommendation
Mcap (bn):
3M ADV (mn):
CMP:
TP (12 mths):
Upside (%):

`86/US$1.4
`217/US$3.5
`684
`949
39

Flags
Accounting:
Predictability:
Treatment of Minorities:

GREEN
AMBER
GREEN

Catalysts

Award of tenders in Africa in the


near term
Progress on 505(b)(2) projects in
FY16
Progress on resolution of FDA issues
by FY16

Performance
29,000
27,500
26,000
24,500
23,000
21,500
20,000

900
850
800
750
700
650
600
Nov-13
Dec-13
Jan-14
Mar-14
Apr-14
May-14
Jun-14
Jul-14
Sep-14
Oct-14

COMPANY INSIGHT

Sensex

Ipca, RHS

Source: Bloomberg, Ambit Capital research

Higher focus on R&D spend and innovation through 505(b)2 ventures


Whilst it continues to strengthen its regulatory ties and maintains its intense cost
focus, IPCA has become more growth-oriented since the second generation of
the Godha family has taken over. We see higher focus on R&D spend and scaling
up the value chain and an end to the legacy of vertical integration in every
product. The companys 505(b)2 ventures in the US also show that it is looking to
derive more out of its innovation capabilities.
Key financials consolidated (` mn)
Year to March (` mn)

FY13

FY14

FY15E

FY16E

FY17E

28,131

32,818

35,387

42,185

50,098

Operating Profits

4,876

6,575

7,154

8,931

10,304

Net Profits

3,686

5,333

5,226

6,573

7,615

Diluted EPS

29.2

42.3

41.4

52.1

60.3

RoE (%)

23.0

27.2

24.1

24.8

23.6

P/E (x)

25.0

17.3

17.7

14.0

12.1

Net Revenues (` mn)

Analyst Details
Aditya Khemka
+91 22 3043 3272
adityakhemka@ambitcapital.com
Paresh Dave, CFA
+91 22 3043 3212
pareshdave@ambitcapital.com

Source: Company, Ambit Capital research


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.

IPCA Laboratories
Exhibit 1: EBITDA margins and revenue growth over the
last ten years

Exhibit 2: RoCE and RoE over the last ten years


40%

40%

35%

35%

25.0%

30%

30%

20.0%

20.0%

25%

25%

15.0%

15.0%

20%

20%

10.0%

10.0%

35.0%

35.0%

30.0%

30.0%

25.0%

Revenue growth

FY14

FY13

FY12

FY11

FY10

FY09

FY08

RoCE

RoE, RHS

Source: Company, Ambit Capital research

Exhibit 3: Sources of funds over the last ten years (FY03-14)

Debt
raised,
26.1%

FY07

FY06

FY05

Operating margins, RHS

Source: Company, Ambit Capital research

Proceeds
from
shares,
0.0%

FY04

FY03

FY14

FY13

FY12

FY11

10%

FY10

10%

FY09

0.0%
FY08

0.0%
FY07

15%

FY06

15%

FY05

5.0%
FY04

5.0%

Exhibit 4: Utilisation of funds over the last ten years (FY0314)

Interest
received,
1.8%
Dividend
received,
0.2%

CFO,
71.8%

Dividend
paid,
12.0%

Increase in
cash and
cash
equivalent,
2.1%

Debt
repayment
, 15.9%
Purchase
of
investment
, 1.6%

Source: Company, Ambit Capital research

Interest
paid, 8.2%

Net
Capex,
60.3%

Source: Company, Ambit Capital research

Exhibit 5: Forward P/E evolution over the past ten years


25

Exhibit 6: Forward P/B evolution over the past ten years


6.0
5.0

20

4.0

15

3.0
10

2.0

0.0

IPCA P/E

6 yr avg

Source: Company, Ambit Capital research

November 17, 2014

Mar-05
Sep-05
Mar-06
Sep-06
Mar-07
Sep-07
Mar-08
Sep-08
Mar-09
Sep-09
Mar-10
Sep-10
Feb-11
Aug-11
Feb-12
Aug-12
Feb-13
Aug-13
Feb-14
Aug-14

1.0
Mar-05
Sep-05
Mar-06
Sep-06
Mar-07
Sep-07
Mar-08
Sep-08
Mar-09
Sep-09
Mar-10
Sep-10
Feb-11
Aug-11
Feb-12
Aug-12
Feb-13
Aug-13
Feb-14
Aug-14

IPCA P/B

4 yr avg

6 yr avg

4 yr avg

Source: Company, Ambit Capital research

Ambit Capital Pvt. Ltd.

Page 74

IPCA Laboratories
Exhibit 7: Explanation for our flags
Segment

Score

Comments

Accounting

GREEN

In our forensic analysis of 360 companies, IPCA scores above the pharma industry average (comprising 26
companies). IPCA scores high on ratios of: (a) cash yield; (b) fixed asset turnover; (c) contingent liabilities and (d)
change in depreciation rates. However, IPCA has weaker scores on: (a) CFO / EBITDA; and (b) provisioning for
debtors outstanding for more than six months.

Predictability

AMBER

Overall, the management has made appropriate disclosures in its earnings calls, meetings and interviews
regarding product filings, acquisitions and business outlook. However, the unpredictability of the institutional
generics, US business (post Ratlam and Indore FDA Form 483s) and API business makes us assign AMBER on
predictability.

Treatment of
GREEN
We have no evidence of IPCA mistreating the minorities.
minorities
Source: Bloomberg, Ambit Capital research

Exhibit 8: IPCA Labs Full pie on our STAR* framework


Criteria

Score (%)

Comment

Competitive advantages

Excellence in innovation in formulations, established brand and cost leadership

Accounting quality

IPCA is in the top quartile among peers on this criteria.

Capital allocation

Rational capital allocation has been IPCAs forte, as evidenced by its comparable gross and
EBITDA margins vs its peers despite owning plain-vanilla products

Centrality of political connect

IPCA is not part of Ambits Connected Companies Index and does not appear to rely on political
connections.

Treatment of minorities

We have no evidence of IPCA mistreating the minorities.

Succession planning

The first-generation entrepreneur still plays an active role in execution whilst his sons are now
well entrenched in the company.

Total (%)

Sustainable low cost advantage and high focus on brand equity and cash flow
generation

Source: Company, Ambit Capital research. Note:

November 17, 2014

= rating of 4/4;

= rating of 3/ 4 and so on. *STAR: Sustainable and Tenable Advantages Rank.

Ambit Capital Pvt. Ltd.

Page 75

IPCA Laboratories
Balance sheet (consolidated)
Year to March (` mn)

FY13

FY14

FY15E

FY16E

FY17E

Total Assets

26,970

32,103

37,234

43,554

50,783

Fixed Assets

12,334

15,185

18,902

22,321

23,015

Current Assets

14,545

16,827

18,240

21,142

27,676

90

92

92

92

92

26,970

32,103

37,234

43,554

50,783

252

252

252

252

252

Investments
Total Liabilities
Shareholders' equity
Reserves and Surplus

15,285

19,344

23,592

28,935

35,124

Total net worth

15,538

19,597

23,844

29,187

35,377

Total debt

6,170

6,026

6,026

6,026

6,026

Current liabilities

3,828

4,847

5,731

6,708

7,747

Deferred tax liability

1,433

1,633

1,633

1,633

1,633

FY13

FY14

FY15E

FY16E

FY17E

28,131

32,818

35,387

42,185

50,098

19.3%

16.7%

7.8%

19.2%

18.8%

Source: Company, Ambit Capital research

Income statement (standalone)


Year to March (` mn)
Net revenues
% growth
Operating Expenditure

21,899

24,712

27,276

32,164

38,063

Core EBITDA

6,232

8,106

8,111

10,020

12,035

% growth

21.4%

30.1%

0.1%

23.5%

20.1%

Depreciation

867

1,031

1,283

1,581

1,805

Interest expense

334

269

262

262

262

Adjusted PBT

5,031

6,806

6,565

8,176

9,967

Tax

1,345

1,472

1,339

1,603

2,352

Reported net profit

3,686

5,333

5,226

6,573

7,615

Source: Company, Ambit Capital research

Cash flow statement (consolidated)


Year to March (` mn)

FY13

FY14

FY15E

FY16E

FY17E

PBT

4,543

6,306

6,891

8,668

10,041

867

1,031

1,283

1,581

1,805

916

1,305

1,665

2,095

2,427

(1,444)

(1,041)

(158)

(1,779)

(2,169)

Depreciation
Tax
Net Working Capital
CFO
Capital Expenditure

3,445

5,346

6,479

6,505

7,475

(2,993)

(3,924)

(5,000)

(5,000)

(2,500)

250

Investment
Other investments
CFI

119

111

134

134

38

(2,624)

(3,813)

(4,866)

(4,866)

(2,462)

Issuance of Equity
Inc/Dec in Borrowings
Net Dividends

442

(282)

(468)

(661)

(978)

(1,230)

(1,425)

Other Financing activities

(339)

(306)

(262)

(262)

(262)

CFF

(361)

(1,361)

(1,241)

(1,493)

(1,688)

Net change in cash

460

171

372

146

3,326

Free Cash Flow

452

1,422

1,479

1,505

4,975

Source: Company, Ambit Capital research

November 17, 2014

Ambit Capital Pvt. Ltd.

Page 76

IPCA Laboratories
Ratio analysis (consolidated)
Year to March

FY13

FY14

FY15E

FY16E

FY17E

Revenue growth

19.3

16.7

7.8

19.2

18.8

Core EBITDA growth

21.4

30.1

0.1

23.5

20.1

APAT growth

16.3

44.7

(2.0)

25.8

15.8

EPS growth

16.2

44.6

(2.0)

25.8

15.8

Core EBITDA margin

22.2

24.7

22.9

23.8

24.0

EBIT margin

17.3

20.0

20.2

21.2

20.6

Net profit margin

13.1

16.3

14.8

15.6

15.2

ROCE (%)

26.6

27.2

30.6

25.6

27.3

Reported RoE (%)

23.0

27.2

24.1

24.8

23.6

Debt Equity ratio (X)

0.4

0.3

0.3

0.2

0.2

Current Ratio

3.8

3.5

3.2

3.2

3.6

CFO/EBITDA (x)

0.6

0.7

0.8

0.6

0.6

Gross Block turnover (x)

1.8

1.7

1.5

1.5

1.6

Working Capital Turnover (x)

2.6

2.7

2.8

2.9

2.5

Source: Company, Ambit Capital research

Valuation parameters (consolidated)


Year to March

FY13

FY14

FY15E

FY16E

FY17E

EPS

29.2

42.3

41.4

52.1

60.3

123.1

155.3

188.9

231.3

280.3

25.0

17.3

17.7

14.0

12.1

5.9

4.7

3.9

3.2

2.6

Book Value ( per share)


P/E (x)
P/BV (x)
EV/EBITDA(x)

15.7

12.0

12.0

9.7

8.1

EV/Sales (x)

3.5

3.0

2.8

2.3

1.9

EV/EBIT (x)

20.0

14.8

13.6

10.9

9.5

Source: Company, Ambit Capital research

November 17, 2014

Ambit Capital Pvt. Ltd.

Page 77

IPCA Laboratories

This page has been intentionally left blank

November 17, 2014

Ambit Capital Pvt. Ltd.

Page 78

GRUH Finance
NOT RATED
GRHF IN EQUITY

November 17, 2014

Succession planning would be driven by its parent HDFC


The current term of GRUHs Managing Director, Mr. Sudhin Choksey, ends in
FY18. Given that GRUH enjoys strong management support from HDFC (HDFCs
vice chairman and managing director are GRUHs Chairman and non-executive
director respectively), HDFC would ensure a competent successor to Mr. Choksey.

`85/US$1.4
`80/US$1.3
`233
NA
NA

Flags
Accounting:
Predictability:
Treatment of Minorities:

GREEN
GREEN
GREEN

Catalysts

Successful diversification into newer


geographies of Rajasthan, MP,
Karnataka,
Tamil
Nadu
and
Chhattisgarh

Performance
200

20,000

150

15,000

100

10,000

50

Sensex

Nov-14

250

25,000

Sep-14

30,000

Jul-14

A prudent and well-calibrated diversification into non-home states


GRUHs credit costs and opex/AUM have remained benign at an average of
20bps and 104bps respectively over the past ten years, despite venturing away
from its home states of Gujarat and Maharashtra in FY04-09 into newer
geographies (such as Rajasthan, MP, Karnataka, Tamil Nadu and Chhattisgarh).
Its RoEs have averaged ~33% in the past four years, implying that it has not
raised capital despite recording 30% CAGR over the same period. It has
sustained a generous dividend payout of ~40% over FY05-14.

Mcap (bn):
3M ADV (mn):
CMP:
TP (12 mths):
Upside (%):

May-14

Parentage and deep penetration drive competitive advantages


GRUHs competitive advantages are built on: (i) HDFCs parentage which
enables it to get a better rating and hence lower cost of funding, and (ii) Local
area knowledge through deep penetration (~80-95% of talukas in Maharashtra
and Gujrat over past 20 years) have enabled superior sourcing of low ticket
customers (whilst ~86% of GRUHs loan book consists of ticket sizes below `3mn,
credit costs have been minimal, averaging at ~20bps over past ten years).
Sourcing of low ticket customers in hinterland consequently helps GRUH to
secure low cost financing from NHB and lower risk weights on assets. High RoEs
(average RoEs of ~28%) along with robust loan growth (average growth of
~28%) over the past ten years demonstrate GRUHs competitive advantages.

Recommendation

Mar-14

Play on the rural mortgage opportunity


Set up in 1986, GRUH is a subsidiary of HDFC (which owns 59% in GRUH). It
provides housing loans in rural and semi-urban areas, operating primarily in the
Gujarat and Maharashtra, which account for 72% of its loan book. With a
modest loan book of ~`79bn, GRUH accounts for less than 1% market share in
mortgages and has averaged loan growth of ~28% over FY05-14, making it a
promising play on the rural mortgage opportunity in India.

BFSI

Jan-14

HDFCs parentage and GRUHs deep hinterland penetration underpin


GRUHs access to lower cost of funding, superior sourcing of low ticket
customers, lower credit costs and low opex. High profitability (average
RoEs of ~28%) along with a robust loan growth (average growth of
~28%) over the past ten years demonstrates the strength of GRUHs
competitive advantages.

Nov-13

COMPANY INSIGHT

Gruh Finance

Source: Bloomberg, Ambit Capital research

Diversification would drive sustainable growth over the long term


A well-calibrated and judicious diversification would bear fruit in the long term in
terms of a more sustainable growth and lower asset quality geographical risks.
With low penetration and lower capacity utilisation in newer geographies
(penetration at ~10-30% and new branches under-utilised by ~35-60%), its
newer branches offer considerable room for growth and operating leverage.
Analyst Details

Key financials (` mn)


Year to March

FY10

FY11

FY12

FY13

FY14

Total income

1,270

1,570

1,960

2,400

2,980

690

920

1,200

1,460

1,770

RoA (%)

2.7%

3.1%

3.2%

3.0%

2.8%

RoE (%)

28.4%

31.6%

34.1%

33.3%

32.2%

1.9

2.5

3.3

4.0

4.9

PAT

EPS (`)
BVPS (`)

7.3

8.8

10.6

13.5

16.7

P/E (x)

122.2

91.6

70.2

57.7

47.6

P/B (x)

31.8

26.5

21.8

17.2

13.9

Aadesh Mehta, CFA


+91 22 3043 3239
aadeshmehta@ambitcapital.com
Pankaj Agarwal, CFA
+91 22 3043 3206
pankajagarwal@ambitcapital.com
Ravi Singh
+91 22 3043 3181
ravisingh@ambitcapital.com

Source: Company, Ambit Capital research


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.

GRUH Finance
Exhibit 2: RoA and RoE over the past ten years

4.1%

25%

3.8%

20%

3.5%

24%

15%

3.2%

22%

Loan growth (%) (LHS)

3.5%
3.1%

32%
30%

2.7%

28%

2.3%

26%
1.9%

NIMs (%) (RHS)

RoE (%) (LHS)

FY14

FY13

FY12

FY11

FY10

FY09

FY08

FY07

1.5%
FY05

FY14

FY13

30%

FY12

4.4%

FY11

35%

FY10

34%

FY09

4.7%

FY08

40%

FY07

36%

FY06

5.0%

FY05

45%

FY06

Exhibit 1: NIMs and loan growth over the past ten years

RoA (%) (RHS)

Source: Company, Ambit Capital research

Source: Company, Ambit Capital research

Exhibit 3: Sources of funds FY14

Exhibit 4: Geographical mix of loan book FY14


2%

9%

2%

5%

Maharashtra

7%

16%

Gujarat

NHB
46%

37%

Bank loans

Madhya Pradesh

12%

Public deposits

Karnataka

Others

Rajasthan
Chhatisgarh

30%
36%

Source: Company, Ambit Capital research

Source: Company, Ambit Capital research

Exhibit 5: Forward P/E evolution over the past five years


5 yr avg

37
34
31
28
25
22
19
16
13
10

Tamil Nadu

One year fwd PE

Exhibit 6: Forward P/B evolution over the past five years


5 yr avg

10.0
33x

One year fwd PB

9.0
8.9x

8.0
7.0
6.0
19x

5.5x

5.0
4.0
3.0

Source: Company, Ambit Capital research

November 17, 2014

Oct-14

Apr-14

Oct-13

Apr-13

Oct-12

Apr-12

Oct-11

Apr-11

Oct-10

Apr-10

Oct-14

Apr-14

Oct-13

Apr-13

Oct-12

Apr-12

Oct-11

Apr-11

Oct-10

Apr-10

2.0

Source: Company, Ambit Capital research

Ambit Capital Pvt. Ltd.

Page 80

GRUH Finance
Exhibit 7: Explanation for our flags
Segment

Score

Comments

Accounting

GREEN

We do not find anything unusual in the accounts of the company and we believe that the reported numbers are
a true reflection of the profitability of the company.

Predictability

GREEN

Increasing diversification along with deeper penetration into newer geographies augur well for GRUHs
profitability and growth given that it currently has a modest loan book of `79bn.

Treatment of
minorities

GREEN

Despite its parent HDFCs domination of the Board of the company by virtue of its majority shareholding, there is
a negligible risk to mistreatment of minorities given the clean track record of the HDFC management. We have
not come across any instances wherein the HDFC management has mistreated the minority shareholders of its
other subsidiaries or associate companies (HDFC Bank).

Source: Bloomberg, Ambit Capital research

Exhibit 8: Gruh Finance Three-quarters of the pie on our STAR* framework


Criteria

Score (%)

Competitive advantage

Comment
HDFCs parentage and deep rural penetration are its competitive advantages.

Accounting quality

Nothing unusual in the accounting

Capital allocation

Well calibrated and judicious diversification into newer geographies.

Centrality of political connect

GRUH is not part of Ambits Connected Companies Index and does not appear to have any
questionable political connections.

Treatment of minorities

Negligible risk to mistreatment of minorities given the clean track record of the HDFC
management.

Succession planning

Support of HDFCs management would ensure a competent successor.

Total (%)
Source: Company, Ambit Capital research. Note:

November 17, 2014

= rating of 4/4;

= rating of 3/ 4 and so on. *STAR: Sustainable and Tenable Advantages Rank.

Ambit Capital Pvt. Ltd.

Page 81

GRUH Finance
Balance sheet
Year to March (` mn)

FY10

FY11

FY12

FY13

FY14

Stockholders Equity

2,650

3,180

3,860

4,910

6,070

Borrowed Funds

23,230

29,660

38,330

49,150

64,470

Total liabilities

25,880

32,840

42,190

54,060

70,540

Loan Assets

24,490

31,720

40,670

54,380

70,090

Other assets

1,390

1,120

1,520

(320)

450

Total assets

25,880

32,840

42,190

54,060

70,540

Source: Company, Ambit Capital research

Income statement
Year to March (` mn)

FY10

FY11

FY12

FY13

FY14

Net Interest Income

1,150

1,430

1,790

2,180

2,710

Fees & Other Charges

120

140

170

220

270

1,270

1,570

1,960

2,400

2,980

250

320

390

460

560

1,030

1,270

1,590

1,980

2,460

80

10

(40)

10

20

Profit Before Tax

940

1,260

1,630

1,970

2,440

Tax

250

340

430

510

670

Profit After Tax

690

920

1,200

1,460

1,770

Year to March (%)

FY10

FY11

FY12

FY13

FY14

Capital Adequacy Ratio (%)

16.6

13.3

14.0

14.6

16.4

Debt Equity Ratio (times)

9.0

9.0

10.0

10.0

11.0

Gross NPAs (%)

1.1

0.8

0.5

0.3

0.3

0.1

Net Interest Margin (%)

4.6

4.9

4.8

4.5

4.3

Opex to Avg Assets (%)

1.0

1.1

1.0

1.0

0.9

Total income
Operating Cost
Operating Profit
Provisions & Write Offs (net)

Source: Company, Ambit Capital research

Ratio analysis

Net NPAs (%)

Cost to Income Ratio (%)

20.0

20.0

20.0

19.0

19.0

RoAs (%)

2.7

3.1

3.2

3.0

2.8

RoEs (%)

28.4

31.6

34.1

33.3

32.2

FY10

FY11

FY12

FY13

FY14

1.9

2.5

3.3

4.0

4.9

Source: Company, Ambit Capital research

Valuation parameters
Year to March
Diluted EPS (`)
Book value per share (`)
P/E (x)
P/BV (x)

7.3

8.8

10.6

13.5

16.7

122.2

91.6

70.2

57.7

47.6

31.8

26.5

21.8

17.2

13.9

Source: Company, Ambit Capital research

November 17, 2014

Ambit Capital Pvt. Ltd.

Page 82

Balkrishna Industries
BUY
BIL IN EQUITY

November 17, 2014

Flags
Accounting:
Predictability:
Treatment of Minorities:

AMBER
AMBER
GREEN

Catalysts

Continued recovery in demand for


OHT across geographies

Improving capacity utilisation and


benign rubber prices

Improvement in FCF generation over


FY15-17

Performance
30,000

900
700

25,000

500
20,000

300
100

Sensex

Nov-14

15,000
Sep-14

Second generation in charge; third generations role increasing


BKT is a promoter-driven company. Whilst there is no explicitly stated succession
plan, it appears that Rajiv Poddar (Managing Director and Arvind Poddars son), who
joined the company in January 2009 and recently became a Joint Managing Director,
will take over as the third generation promoter to run the company. Note, however
that Arvind Poddar is just 57 years old.

`67/US$1.1
`105/US$1.7
`691
`800
16

Jul-14

Capital primarily allotted to core business


BKT narrowed its focus on the niche OHT segment in 1995. Since then management
has maintained its focus on OHT. Nearly 80% of cash flow from operations
generated and debt raised over FY05-14 have been invested as capex in the OHT
business. However, BKT has never pushed its balance sheet beyond net debt:EBITDA
of 2.7x. Given the high capex requirements, the payouts to shareholders have been
relatively low at 5.4% over FY10-14 and we expect the same to sustain in the future
as well.

Mcap (bn):
3M ADV (mn):
CMP:
TP (12 mths):
Upside (%):

May-14

Sustainable low cost advantage


BKTs primary competitors in the global OHT business are tyre majors like Michelin
and Bridgestone. Despite not commanding the same brand equity as the global
majors, we believe BKT is poised to gain market share in the global OHT business
driven by: (a) its low cost advantage (BKTs employee costs are 5-7% of sales vs 2530% for its peers) which enables it to price its products nearly 15-30% cheaper than
its peers; (b) increasing defocus of the global majors on the OHT space; (c) the
niche nature of the OHT business (BKT has >2,000 SKUs) which has kept Chinese
competition away; and (d) the high capex-intensive nature of the business (which
restrains the domestic conventional tyre makers from focussing on OHT). BKT enjoys
better RoICs than its domestic and global peers driven by its higher operating margin.

Recommendation

Mar-14

Extensive OHT business built over the years


BKT is the leading exporter of off-highway tyres (OHT) such as farm,
industrial/construction and mining tyres from India. BKT has succeeded in building an
extensive global OHT business due to Indias low cost manufacturing advantage and
lack of focus by other domestic manufacturers. The company primarily caters to
Europe (54% of total volumes) and the Americas (19%). It has about ~4% market
share in the global OHT market.

Auto and Auto ancillaries

Jan-14

Balkrishna Industries (BKT) has built a substantial export business over the
years in the niche area of off-highway tyres (OHT) by successfully leveraging
Indias low cost of manufacturing. Its current global OHT market share of 4%
would likely increase, due to: (1) higher capacities from the new Bhuj facility
(total achievable capacity of 300k MT by FY16 vs 220k MT in FY14) for
product portfolio expansion into industrial and mining tyres; (2) OEM tie-ups;
and (3) entry into newer geographies.

Nov-13

COMPANY INSIGHT

Balkrishna (Rs)

Source: Bloomberg, Ambit Capital research

Increasing focus on OTR tyres


Whilst BKTs competitive advantages will help it grow in the farm tyre business, it has
also been increasing its focus in industrial/construction and mining tyres (known as
off the road or OTR tyres), which account for nearly two-thirds of the total OHT
market but where BKT has less than 2% market share. The new Bhuj facility would
help BKT bridge the gaps in its OTR offerings particularly in the large/ultra large
mining and radial OTR tyres. The company is also increasing its marketing efforts by
establishing sales offices, strengthening its sales team and establishing warehouses
in the export markets.
Key financials standalone (` mn)
Year to March
Net Sales
EBITDA
EBITDA (%)
EPS (`)
RoE (%)
RoCE (%)
P/E (x)

FY13

FY14

FY15E

FY16E

FY17E

31,906
6,644
20.8%
36.8
28%
19%
18.8

35,767
8,938
25.0%
50.5
30%
20%
13.7

38,963
9,532
24.5%
47.0
22%
17%
14.7

45,117
10,822
24.0%
53.6
20%
19%
12.9

51,363
12,270
23.9%
65.9
20%
23%
10.5

Analyst Details
Ashvin Shetty, CFA
+91 22 3043 3285
ashvinshetty@ambitcapital.com
Ritu Modi
+91 22 3043 3292
ritumodi@ambitcapital.com

Source: Company, Ambit Capital research


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.

Balkrishna Industries
Exhibit 1: Strong revenue growth and EBITDA margin over
the years
40,000

28.0%

35,000

26.0%

Exhibit 2: Improving profitability led to an improvement


in return ratios
40%
35%

24.0%

30,000

22.0%

25,000

20.0%

20,000

18.0%

15,000

30%
25%
20%

16.0%

10,000

14.0%
12.0%

5,000
FY09

FY10

FY11

FY12

FY13

Revenues (Rs mn)

15%
10%
FY09

FY14

FY10

EBITDA margin (RHS)

FY11

FY12

RoCE

FY13

FY14

RoE

Source: Company, Ambit Capital research

Source: Company, Ambit Capital research

Exhibit 3: Geographical spread

Exhibit 4: BKT uses funds mainly for capex to fund its


strong underlying growth

Others,
15%
India, 12%
Europe,
54%
America,
19%

Source: Company, Ambit Capital research

Source: Company, Ambit Capital research. Note: Size of the pie represents
cumulative funds raised (through various sources such as CFO, equity, debt,
etc) and spent (on capex, debt repayment, interest, dividend paid, etc) over
FY05-14.

Exhibit 5: On P/E, Balkrishna trades at a premium of 73%


to its historical four-year average

Exhibit 6: On EV/EBITDA, Balkrishna trades at a premium


of 134% to its historical four-year average

BKT P/E

6 year average

Source: Company, Ambit Capital research

November 17, 2014

Nov-08
Mar-09
Jul-09
Nov-09
Mar-10
Jul-10
Nov-10
Mar-11
Jul-11
Nov-11
Mar-12
Jul-12
Nov-12
Mar-13
Jul-13
Nov-13
Mar-14
Jul-14
Oct-14

Jul-14

Oct-14

Mar-14

Jul-13
Nov-13

0
Mar-13

2
Nov-12

Jul-12

Jul-11

Nov-11
Mar-12

Mar-11

Nov-10

10

Mar-10
Jul-10

10

Jul-09

12

Nov-09

12

Mar-09

14

Nov-08

14

4 year average

EV/EBITDA

6 year average

4 year average

Source: Company, Ambit Capital research

Ambit Capital Pvt. Ltd.

Page 84

Balkrishna Industries
Exhibit 7: Explanation for our flags
Segment

Score

Comments

Accounting

AMBER

The company has significantly higher debtor days and operating working capital cycle as compared to its peers.
However, this is primarily due to its global customer base alongside its centralised manufacturing structure (in
India) which results in significant transit time in delivering the goods to the customers (exports account for nearly
90% of overall revenues).

Predictability

AMBER

Given the high nature of fixed costs (including depreciation and interest expenses), any marginal
outperformance/underperformance at the top-line level tends to have a magnified impact at the net earnings
level. However, this is an industry-wide phenomenon.

Treatment of
minorities

GREEN

We have not come across any instances where the interests of the minority shareholders have been violated. A
significant portion of the companys capital has been allocated in the core business and the promoters do not
seem to have any business interests outside of BKT.

Source: Bloomberg, Ambit Capital research

Exhibit 8: Balkrishna Industries Three-quarters of the pie on our STAR* framework


Criteria

Score (%)

Comment

Competitive advantage

BKT operates in a niche segment where its core competitive advantage is its low-cost
structure/locational advantage. Despite not commanding the same brand equity as global
majors like Michelin and Bridgestone, we believe BKT is poised to gain market share in the
global OHT business driven by: (a) its cost advantage; (b) increasing de-focus of the global
majors on the OHT space; (c) high variety low volume business, which discourages the entry
of Chinese players; and (d) high capex-intensive nature of business restraining the domestic
conventional tyre makers from focussing on the OHT segment.

Accounting quality

BKT is in the third quartile as compared to its peers on accounting quality. A significantly
higher working capital cycle is the primary reason for BKT having a relatively modest score on
accounting quality. That said, BKTs cash generation is best-in-class and the company is ranked
1 on pre-tax CFO/EBITDA among its peers.

Capital allocation

Given the capital-intensive nature of the tyre business and BKT's ambitious expansion plan
(new plant at Bhuj), nearly 88% of CFO has been reinvested in capex. This and the consequent
low pay-outs to shareholders adversely impact BKT's scoring on capital allocation.

Centrality of political connect

BKT is not part of Ambits Connected Companies Index and does not appear to rely on political
connections for its profitability.

Treatment of minorities

Our study of BKTs annual report suggests that BKT has refrained from transactions that could
impact minority shareholder interests.

Succession planning

BKT is a promoter-driven company. It is run by the second generation of the Poddar family and
the third generation has also joined the ranks.

Total
Source: Company, Ambit Capital research. Note:

November 17, 2014

= rating of 4/4;

= rating of 3/ 4 and so on. *STAR: Sustainable and Tenable Advantages Rank.

Ambit Capital Pvt. Ltd.

Page 85

Balkrishna Industries
Balance sheet (standalone)
Year to March (` mn)
Shareholders' equity

FY13

FY14

FY15E

FY16E

FY17E

193

193

193

193

193

Reserves and surpluses

13,996

18,652

22,958

27,896

34,008

Total net worth

14,190

18,845

23,151

28,089

34,202

Debt

20,744

23,500

23,500

20,000

14,500

Deferred tax liability

999

1,722

1,722

1,722

1,722

35,933

44,067

48,373

49,811

50,424

Gross block

17,842

30,014

39,686

40,133

41,150

Net block

12,777

23,294

30,597

28,329

26,583

CWIP

11,810

6,172

500

500

500

Total liabilities

329

615

615

615

615

Cash & cash equivalents

Investments (non-current)

2,663

3,748

5,506

7,432

7,984

Debtors

5,045

6,185

6,737

7,801

8,881

Inventory

4,326

5,291

5,763

6,674

7,598

Loans & advances

2,938

3,432

3,734

4,315

4,904

Total current assets

14,971

18,656

21,740

26,222

29,368

3,740

4,394

4,787

5,543

6,310

Current liabilities
Provisions

215

276

291

311

331

3,955

4,670

5,078

5,854

6,641

Net current assets

11,017

13,985

16,663

20,368

22,727

Total assets

35,933

44,067

48,375

49,813

50,425

FY13

FY14

FY15E

FY16E

FY17E

31,906

35,767

38,963

45,117

51,363

Total current liabilities

Source: Company, Ambit Capital research

Income statement (standalone)


Year to March (` mn)
Net Sales
% growth

13%

12%

9%

16%

14%

25,262

26,829

29,430

34,295

39,093

6,644

8,938

9,532

10,822

12,270

31%

35%

7%

14%

13%

Depreciation

1,077

1,650

2,370

2,714

2,764

EBIT

5,567

7,288

7,163

8,108

9,506

257

253

554

634

431

Operating expenditure
EBITDA
% growth

Interest expenditure
Non-operating income

37

138

121

151

159

Adjusted PBT

5,347

7,174

6,730

7,626

9,234

Tax

1,794

2,293

2,187

2,440

2,863

Adjusted PAT

3,553

4,880

4,543

5,186

6,371

(5)

3,558

4,880

4,543

5,186

6,371

Extraordinary expense/(income)
Reported PAT after minority interest
Source: Company, Ambit Capital research

November 17, 2014

Ambit Capital Pvt. Ltd.

Page 86

Balkrishna Industries
Cash flow statement (standalone)
Year to March (` mn)

FY13

FY14

FY15E

FY16E

FY17E

Net profit before tax

5,352

7,177

6,730

7,626

9,234

Depreciation

1,077

1,650

2,370

2,714

2,764

191

387

554

634

431

(1,410)

(1,758)

(2,187)

(2,440)

(2,863)

Others
Tax
(Incr)/decr in net working capital
Cash flow from operations
Capex (net)

291

(1,518)

(930)

(1,791)

(1,818)

5,501

5,937

6,536

6,742

7,749

(9,605)

(8,581)

(4,000)

(446)

(1,017)

(Incr)/decr in investments

(7)

(3,936)

3,650

Other income (expenditure)

19

110

Cash flow from investments

(9,593)

(12,407)

(350)

(446)

(1,017)

Net borrowings

3,610

4,325

(3,500)

(5,500)

Interest paid

(261)

(251)

(554)

(634)

(431)

Dividend paid

(169)

(170)

(226)

(237)

(248)

3,181

3,904

(780)

(4,370)

(6,179)

Net change in cash

(911)

(2,565)

5,407

1,926

552

Closing cash balance

2,662

99

5,506

7,432

7,984

(4,104)

(2,643)

2,536

6,296

6,732

Year to March (%)

FY13

FY14

FY15E

FY16E

FY17E

EBITDA margin (%)

20.8%

25.0%

24.5%

24.0%

23.9%

EBIT margin (%)

17.4%

20.4%

18.4%

18.0%

18.5%

Net prof. margin (%)

11.1%

13.6%

11.7%

11.5%

12.4%

Cash flow from financing

Free cash flow


Source: Company, Ambit Capital research

Ratio analysis (standalone)

Dividend payout ratio (%)

4.1%

4.0%

4.5%

4.1%

3.5%

Net debt: equity (x)

1.3

1.0

0.8

0.4

0.2

Working capital turnover (x)

3.6

3.8

3.6

3.7

3.7

Gross block turnover (x)

2.1

1.5

1.1

1.1

1.3

RoCE (pre-tax) (%)

19.4%

20.0%

17.4%

19.2%

22.6%

RoIC (%)

12.9%

13.6%

11.7%

13.1%

15.6%

RoE (%)

28.4%

29.5%

21.6%

20.2%

20.5%

Year to March

FY13

FY14

FY15E

FY16E

FY17E

Diluted EPS (`)

36.8

50.5

47.0

53.6

65.9

Book value per share (`)

147

195

240

291

354

Dividend per share (`)

1.5

2.0

2.1

2.2

2.3

18.8

13.7

14.7

12.9

10.5

4.7

3.5

2.9

2.4

2.0

Source: Company, Ambit Capital research

Valuation parameters (standalone)

P/E (x)
P/BV (x)
EV/EBITDA (x)

12.8

9.5

8.9

7.8

6.9

EV/EBIT (x)

15.2

11.6

11.8

10.5

8.9

Source: Company, Ambit Capital research

November 17, 2014

Ambit Capital Pvt. Ltd.

Page 87

Balkrishna Industries

This page has been intentionally left blank

November 17, 2014

Ambit Capital Pvt. Ltd.

Page 88

City Union Bank


BUY
CUBK IN EQUITY

November 17, 2014

Flags
Accounting:
Predictability:
Treatment of Minorities:

GREEN
GREEN
GREEN

Catalysts

Recovery of loan growth in FY16


Decline in stressed assets accretion
during 2HFY15 and FY16

Rising productivity of new branches

Performance

Sensex

City Union Bank

Source: Bloomberg, Ambit Capital research

Well primed for a macro-economic recovery


CUBK is likely to continue focusing on its home market in Tamil Nadu due to
the banks small size and better opportunities within the state itself. The bank
has historically been proactive in upgrading its technology and has invested in
expanding its branch network to strengthen its liability base. A strong capital
base, steady profitability and expanded branch network (number of branches
up 73% in the last three years) place the bank well to benefit from any recovery
in the macro-economic climate.
Analyst Details

Key financials standalone (` mn)


Year to March

FY13

FY14

FY15E

FY16E

FY17E

Net Revenues (` mn)

8,976

10,606

12,583

14,608

17,859

Operating Profits (` mn)

5,234

5,810

6,992

7,955

9,853

Net Profits (` mn)

3,220

3,471

4,033

4,834

6,037

6.8

6.4

6.8

8.2

10.2

RoA (%)

1.56%

1.45%

1.51%

1.55%

1.59%

RoE (%)

22.3%

18.9%

17.1%

16.7%

18.0%

2.62

2.43

1.97

1.72

1.48

EPS (`)

P/B (x)

Nov-14

210
190
170
150
130
110
90
Sep-14

Stable management in place for long term


Dr. N. Kamakodi was appointed as the MD & CEO of the bank in 2011. He is
40 years old and runs the bank with the support of many families that have a
stake in the bank. Earlier, his father, Mr. V. Narayanan, was the MD & CEO of
the bank over 1980-2004. The bank has a highly diffused ownership held
across a large number of families.

`54/US$0.9
`68/US$1.1
`91
`90
-1

Jul-14

Strongly capitalised with tier-1 ratio of 15.5%


A significant share of gold loans (16% of loan book), which carries nil risk
weight, has allowed CUBK to optimise its capital consumption, as risk-weighted
assets to total assets is low at ~55%. Having historically used a rights issue to
raise capital, the bank raised capital through a QIP in July 2014. This makes
the bank well-funded for a recovery in loan book growth in FY16-17E and to
meet the rising capital requirement under Basel-III. Currently, the bank has
among the highest tier-1 capital ratios, at 15.5%, as compared to its peers.

Mcap (bn):
3M ADV (mn):
CMP:
TP (12 mths):
Upside (%):

May-14

Long-term track record of conservative lending with pricing power


The banks competitive advantage is its business model that is based on its
long-term relationships in a state which offers relatively lucrative opportunities
on the credit side. A long-term track record in MSME/trade-based lending and
a conservative focus on collateralised lending have allowed the bank to deliver
superior net interest margins along with stable asset quality. On the back of
these factors, CUBK has delivered stable RoAs of ~1.5% and RoEs of ~20% in
the last ten years.

Recommendation

Mar-14

A Tamil Nadubased specialist lender


City Union Bank (CUBK) is a 110-year-old bank based in Tamil Nadu, from
where ~73% of the banks business originates. The bank has ~3% branch
market share in Tamil Nadu. MSME/trade accounts for 49% of its loan book.
Gold loans (agri and personal loans) account for 16% of the banks loan book.

BFSI

Jan-14

City Union Bank has a long-term track record of superior profitability


due to its focus on its niche in MSME/trade-based and conservative
collateralised lending. A strong capital base, steady profitability,
presence in a relatively lucrative geography (Tamil Nadu) and
expanded branch network have placed the bank well to benefit from a
recovery in the macro-economic climate.

Nov-13

COMPANY INSIGHT

Ravi Singh
+91 22 3043 3181
ravisingh@ambitcapital.com
Pankaj Agarwal, CFA
+91 22 3043 3206
pankajagarwal@ambitcapital.com
Aadesh Mehta, CFA
+91 22 3043 3239
aadeshmehta@ambitcapital.com

Source: Company, Ambit Capital research


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.

City Union Bank

Net interest margins - RHS

14.4%

13.3%

11.7%

FY14

FY13

Source: Company, Ambit Capital research

Exhibit 5: Forward P/E evolution over the long term


100
90
80
70
60
50
40
30
20
10
0

FY12

2%
0%

FY14

FY13

FY12

FY11

FY10

FY09

FY08

Source: Company, Ambit Capital research

11.8%

0%

0.0%

FY11

10%

12.4%

1.0%

6%
4%

FY10

20%

11.5%

30%

FY09

2.0%

11.2%

40%

12%
10%
8%

FY08

3.0%

Tier-1 capital ratio


16%
14%

10.9%

50%

Exhibit 4: Tier-1 capital ratio

FY07

60%

4.0%

FY07

0%

Source: Company, Ambit Capital research

Exhibit 3: Gross NPA and provision coverage ratio


Gross NPA - LHS
Provision coverage ratio - RHS
5.0%
70%

FY06

5%

10.8%

Source: Company, Ambit Capital research

Exhibit 6: Forward P/B evolution over the long term

8.5x
6.7x

90
80
70
60
50
40
30
20
10
0

1.59x
1.26x
0.93x

Jun-06
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
Jun-12
Dec-12
Jun-13
Dec-13
Jun-14

Jun-06
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
Jun-12
Dec-12
Jun-13
Dec-13
Jun-14

4.9x

Source: Company, Ambit Capital research. Note: Trading band=Mean+1SD

November 17, 2014

10%

FY06

FY14

FY13

FY12

FY11

FY10

FY09

FY08

FY07

FY06

0.0%

15%

FY14

1.0%

5%
0%

20%

FY13

2.0%

25%

FY12

20%
15%
10%

30%

FY11

3.0%

1.75%
1.70%
1.65%
1.60%
1.55%
1.50%
1.45%
1.40%
1.35%
1.30%
FY10

4.0%

30%
25%

RoE - RHS

FY09

5.0%

FY08

40%
35%

RoA - LHS

FY06

Loan growth - LHS

Exhibit 2: RoA and RoE

FY07

Exhibit 1: Loan growth and net interest margins

Source: Company, Ambit Capital research; Note: Trading band=Mean+1SD

Ambit Capital Pvt. Ltd.

Page 90

City Union Bank


Exhibit 7: Explanation for our flags
Segment

Score

Comments

Accounting

GREEN

We did not find anything unusual in the accounts of the bank and we believe that the reported numbers are a
true reflection of the profitability of the bank. The bank has made adequate disclosures of its ESOP accounting
and revenue recognition norms.

Predictability

GREEN

The banks conservative approach towards growth and asset quality imparts sufficient predictability to its
financial performance.

Treatment of
minorities

GREEN

Whilst its practice of capital-raising only through rights issue has been questioned in the past, the bank has
recently shown flexibility by opting for a QIP. We did not find any material example of unfair treatment to
minorities.

Source: Bloomberg, Ambit Capital research

Exhibit 8: City Union Bank - Three quarters of the pie on our STAR* framework
Criteria

Score (%)

Competitive advantage

Comment
A business model with pricing power yet conservative lending

Accounting quality

Nothing unusual in the accounting

Capital allocation

Strong capital position; made investments in network expansion

Centrality of political connect

City Union Bank is not part of Ambits Connected Companies Index and does not appear to
have any questionable political connections.

Treatment of minorities

Except for last QIP, the bank has raised capital through rights

Succession planning

CEO has support of promoter families and has a long tenure ahead

Total (%)
Source: Company, Ambit Capital research. Note:

November 17, 2014

= rating of 4/4;

= rating of 3/ 4 and so on. *STAR: Sustainable and Tenable Advantages Rank.

Ambit Capital Pvt. Ltd.

Page 91

City Union Bank


Balance sheet (standalone)
Year to March (` mn)

FY13

FY14

FY15E

FY16E

FY17E

Networth

16,407

20,249

27,024

30,961

36,101

Deposits

203,048

220,169

246,589

295,907

369,884

4,767

3,050

3,050

3,580

4,216

Borrowings
Other Liabilities

5,549

6,470

7,441

9,152

11,257

229,771

249,938

284,104

339,600

421,458

Cash & Balances with RBI & Banks

17,705

21,796

26,976

32,074

39,670

Investments

52,668

59,536

71,805

86,185

107,662

Total Liabilities

Advances

152,461

160,968

177,208

213,057

266,401

Other Assets

6,937

7,638

8,115

8,284

7,725

Total Assets

229,771

249,938

284,104

339,600

421,458

FY13

FY14

FY15E

FY16E

FY17E

Interest Income

21,888

25,459

27,702

31,632

37,942

Interest Expense

15,647

17,865

19,214

21,521

25,490

6,240

7,594

8,488

10,111

12,452

Source: Company, Ambit Capital research

Income statement (standalone)


Year to March (` mn)

Net Interest Income


Total Non-Interest Income

2,736

3,012

4,095

4,498

5,407

Total Income

8,976

10,606

12,583

14,608

17,859

Total Operating Expenses

3,742

4,796

5,592

6,653

8,005

Employees expenses

1,509

1,856

2,211

2,698

3,259

Other Operating Expenses

2,233

2,940

3,381

3,956

4,747

Pre Provisioning Profits

5,234

5,810

6,992

7,955

9,853

Provisions

1,204

1,674

1,950

1,913

2,308

PBT

4,030

4,136

5,041

6,042

7,546

Tax

810

665

1,008

1,208

1,509

3,220

3,471

4,033

4,834

6,037

FY13

FY14

FY15E

FY16E

FY17E

Credit-Deposit (%)

75.1%

73.1%

71.9%

72.0%

72.0%

CASA ratio (%)

16.8%

17.8%

18.6%

19.1%

19.6%

Cost/Income ratio (%)

41.7%

45.2%

44.4%

45.5%

44.8%

Gross NPA (` mn)

1,731

2,931

3,852

4,652

5,603

Gross NPA (%)

1.16%

1.84%

2.16%

2.16%

2.08%

PAT
Source: Company, Ambit Capital research

Ratio analysis (standalone)


Year to March

Net NPA (` mn)

964

1,973

2,388

2,698

3,082

Net NPA (%)

0.63%

1.23%

1.35%

1.27%

1.16%

Provision coverage (%)

46.0%

33.9%

38.0%

42.0%

45.0%

NIMs (%)

3.11%

3.27%

3.28%

3.33%

3.34%

Tier-1 capital ratio (%)

13.3%

14.4%

16.8%

15.8%

14.7%

Source: Company, Ambit Capital research

November 17, 2014

Ambit Capital Pvt. Ltd.

Page 92

City Union Bank


Du-pont analysis (standalone)
Year to March

FY13

FY14

FY15E

FY16E

FY17E

NII / Assets (%)

3.0%

3.2%

3.2%

3.2%

3.3%

Other income / Assets (%)

1.3%

1.3%

1.5%

1.4%

1.4%

Total Income / Assets (%)

4.3%

4.4%

4.7%

4.7%

4.7%

Cost to Assets (%)

1.8%

2.0%

2.1%

2.1%

2.1%

PPP / Assets (%)

2.5%

2.4%

2.6%

2.6%

2.6%

Provisions / Assets (%)

0.6%

0.7%

0.7%

0.6%

0.6%

PBT / Assets (%)

2.0%

1.7%

1.9%

1.9%

2.0%

20.1%

16.1%

20.0%

20.0%

20.0%

Tax Rate (%)


ROA (%)

1.6%

1.4%

1.5%

1.5%

1.6%

Leverage

14.3

13.1

11.3

10.8

11.3

ROE (%)

22.3%

18.9%

17.1%

16.7%

18.0%

FY13

FY14

FY15E

FY16E

FY17E

Source: Company, Ambit Capital research

Valuation parameters (standalone)


Year to March
EPS (`)

6.8

6.4

6.8

8.2

10.2

EPS growth (%)

-1%

-6%

7%

20%

25%

BVPS (`)

34.6

37.3

45.9

52.5

61.3

P/E (x)

12.2

14.2

13.2

11.0

8.8

P/BV (x)

2.62

2.43

1.97

1.72

1.48

Source: Company, Ambit Capital research

November 17, 2014

Ambit Capital Pvt. Ltd.

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City Union Bank

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November 17, 2014

Ambit Capital Pvt. Ltd.

Page 94

eClerx
UNDER REVIEW
ECLX IN EQUITY

November 17, 2014

Competitive advantages to sustain in the long term


eClerx has built superior knowledge management processes, domain
knowledge and automation capabilities which enable it to offer faster
deployment and better quality of service to customers vs most peers as well as
most captives. These competitive advantages are difficult to replicate especially
since peers prefer to focus on low-volume, simpler processes. This is evidenced
in its sticky customer franchise, ability to mine clients and superior returns vis-vis peers (FY14 RoE of 50% vs 20% for peers).
Proven track record of good capital allocation
eClerxs dividend payout ratio has remained consistently high in the last three
years (average of 47% vs 32% for Indian IT mid-caps). Thus a significant
portion of the companys profits not allotted towards capex has been returned
to shareholders. The cash on books is high (42% of net worth), possibly to
provide for an acquisition. The company is not very acquisitive, with only one
acquisition made (Agilyst) since it listed. The acquisition was successful and
added to the companys growth and reduced customer concentration.
Expect continuity in management team
eClerxs promoters, Anjan Malik and PD Mundhra, are young (in their 40s) and
hence, the company has no stated succession policy. Senior management like
Mr. Mistry (Principal, Digital) and Mr. Gupta (CFO) have been with the
organisation for more than 10 years. Our discussions with the management
suggest that the company is making an effort to promote talent internally.
Further improving the franchise
eClerx has focused on reducing client concentration risk by pursuing non-top-5
clients business more aggressively (29% of LTM revenues). It has a new HR
policy to reduce attrition, boost collaboration as it prepares to move up the
value chain, and tackle more complex processes. Further, the management has
indicated that it is likely to make an acquisition in the near future. An
acquisition may provide an additional growth engine and also reduce customer
concentration risk.

Recommendation
Mcap (bn):
3M ADV (mn):
CMP:
TP (12 mths):
Upside (%):

`39/US$0.6
`58/US$0.9
`1,290
UR
UR

Flags
Accounting:
Predictability:
Treatment of Minorities:

GREEN
AMBER
GREEN

Catalysts

Revenue

acceleration

driven

by

client-specific issues getting resolved


over the next three quarters

Potential EPS-accretive acquisition in


the next 12 months

Performance
27,000

1,500

24,000

1,200

21,000
900

18,000
15,000

600

Sensex (LHS)

Jun-14
Aug-14

A unique knowledge process outsourcing company


eClerx specialises in providing middle and back office support to companies
across the world, including many Fortune 500 companies. Almost all delivery
employees are based offshore. The company has recorded 34% revenue CAGR
over FY09-14 whilst sustaining RoCEs in excess of 40%. It has three segments
financial services (~40% of revenues), digital marketing services (~40%) and
cable and telecom (~20%).

Technology

Sep-13
Nov-13
Dec-13
Feb-14
Mar-14
May-14

eClerxs competitive advantages include its niche focus, strong


knowledge management system, sticky customer franchise and proven
ability to mine clients. These are not easily replicable as evidenced by
the companys industry-leading RoCEs. It has a strong capital allocation
track record with a high dividend payout ratio and a conservative
acquisition strategy. Our BUY stance and estimates are under review.

Aug-13

COMPANY INSIGHT

eClerx (Rs) (RHS)

Source: Bloomberg, Ambit Capital research.

Key financials (` mn)


Year to March

FY10

FY11

FY12

FY13

FY14

Net Revenues (` mn)

2,570

3,420

4,729

6,605

8,410

EBIT (` bn)

933

1,254

1,770

2,291

3,204

EBIT margins

36%

37%

37%

35%

38%

Diluted EPS (`)

25.1

41.1

53.0

56.9

83.7

Analyst Details
Sagar Rastogi
+91 22 3043 3291
sagarrastogi@ambitcapital.com

RoE

40%

61%

55%

44%

50%

P/E

51.4

31.4

24.3

22.7

15.4

Utsav Mehta
+91 22 3043 3209

EV/EBITDA

36.1

26.9

19.1

14.2

10.2

utsavmehta@ambitcapital.com

Source: Company, Ambit Capital research


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.

eClerx
Exhibit 1: eClerxs margins have been steady in the last
five years
160

60%

140

50%

120

Exhibit 2: Its return ratios have not dipped below 40%


since listing
210%
160%

40%

100

30%

80
60

20%

40

110%
60%

10%

Revenue(US$mn) (LHS)

EBIT margins (RHS)

Source: Company, Ambit Capital research

FY14

FY13

RoCE

Exhibit 4: Utilisation of funds over the last ten years

Cumulative funds raised (FY05-14)

Cumulative funds spent (FY05-14)

Non opincome
6%

Capex
14%
Dividend
paid
38%

Increase in
cash
24%

Acquisitions
24%

CFO
84%

Source: Company, Ambit Capital research

Source: Company, Ambit Capital research

Exhibit 5: Forward P/E evolution over the past five years


18

FY12

FY11

FY10

RoE
Source: Company, Ambit Capital research

Exhibit 3: Sources of funds over the last ten years

Proceeds
from IPO in
2008
10%

FY09

10%

FY14

FY13

FY12

FY11

FY10

FY09

FY08

FY07

FY06

0%

FY08

FY07

20

Exhibit 6: Forward EV/EBITDA evolution over the past five


years
16

P/E

16

EV/ EBITDA

14

14

12

12

10

10

ECLX P/E
Source: Company, Ambit Capital research

November 17, 2014

4 yr avg

ECLX EV/ EBITDA

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

Jan-10

Sep-14

Jan-14

May-14

Sep-13

May-13

Jan-13

Sep-12

May-12

Jan-12

Sep-11

May-11

Jan-11

4
Sep-10

4
May-10

6
Jan-10

May-10

4 yr avg

Source: Company, Ambit Capital research

Ambit Capital Pvt. Ltd.

Page 96

eClerx
Exhibit 7: Explanation for our flags
Segment

Accounting

Predictability

Treatment of
minorities

Score

Comments

GREEN

The company has a lean working capital cycle (receivable + unbilled revenue days at 79), lower than the
average of 93 for mid-sized IT vendors), and strong cash flow generation (five year FCF/ NI of 74% vs 47% peer
average). Further, the company has carried marginal related party transactions in the last five years. As a result,
the company ranks in the top quartile within the Indian IT universe in our accounting framework.

AMBER

The company does not provide specific annual or quarterly guidance on revenues or margins. It provides a
qualitative outlook on its business. eClerx surprises regularly on its quarterly EPS with an average surprise of 9%
(positive or negative) in the last eight quarters on consensus expectations Over these eight quarters, the
company had a positive surprise on EPS five times. However, its sales figures have been largely in-line with
consensus expectations (revenue surprise of 1% over the same period).

GREEN

There have been no significant related party transactions made by the company in the last five years. Further,
both promoters hold their stake in the company in their individual names and the holding structure is
transparent. Lastly, the companys dividend payouts are high (47% average in the last three years) and it had
proposed a buyback in 2013 (which failed). The share price moved significantly above the proposed buyback
price and hence did not garner interest. The company has not indicated another buyback in the future.

Source: Bloomberg, Ambit Capital research

Exhibit 8: eClerx Full pie on our STAR* framework


Criteria

Score (%)

Comment

Competitive advantage

eClerx scores on technology processes and strong relationships with clients but is vulnerable to
competition from large IT companies.

Accounting quality

The company is in the top quartile among peers on this criteria. It has a lean working capital
cycle, strong cash flow generation and has marginal related party transactions in the last five
years.

Capital allocation

Its business model generates high RoCEs and dividend payout has been high. Further, the
company is conservative on acquisitions.

Centrality of political connect

eClerx is not part of Ambits Connected Companies Index and does not have any questionable
political connection.

Treatment of minorities

The promoters hold shares in their individual names and there have been no anti-minority
transactions so far.

Succession planning

Promoters are relatively young (under 45 years of age) and have a professional background.
Further, the senior management have been with the company for over 10 years providing an
able second in-line command.

Total (%)
Source: Company, Ambit Capital research. Note:

November 17, 2014

= rating of 4/4;

= rating of 3/ 4 and so on. *STAR: Sustainable and Tenable Advantages Rank.

Ambit Capital Pvt. Ltd.

Page 97

eClerx
Balance sheet
Balance sheet (` mn)
Net Worth
Other Liabilities
Capital Employed
Net Block
Other Non current Assets
Curr. Assets
Debtors

FY11

FY12

FY13

FY14

2,384

3,432.0

4,383.3

5,890

1.7

9.9

19

2,384

3,433.7

4,393.2

5,908

370

488.7

1,355.2

1,559

70

88.4

144.8

216

3,088

4,038.8

4,521.3

6,138

659

421.8

654.8

996

Cash & Bank Balance

1,794

2,685.4

2,700.1

3,560

Other Current Assets

635

931.5

1,166.5

1,581

Current Liab. & Prov

1,144

1,182.2

1,628.2

2,005

Net Current Assets

1,943

2,856.6

2,893.2

4,133

Application of Funds

2,384

3,433.7

4,393.2

5,908

FY11

FY12

FY13

FY14

76

98

122

138

Revenue

3,420

4,729

6,605

8,410

EBITDA

1,345

1,899

2,546

3,535

91

129

256

331

Source: Company, Ambit Capital research

Income statement
Income statement (` mn)
Revenue (US$ mn)

Depreciation
EBIT

1,254

1,770

2,291

3,204

EBIT Margin

36.7%

37.4%

34.7%

38.1%

Other Income
PBT
Tax

240

223

(181)

110

1,494

1,993

2,109

3,314

166

394

393

759

Reported PAT

1,328

1,599

1,716

2,555

PAT Margin

38.8%

33.8%

26.0%

30.4%

Diluted EPS

41.1

53.0

56.9

83.7

DPS

29.0

23.0

25.0

35.0

In ` mn

FY11

FY12

FY13

FY14

PBT

1,392

1,992

2,109

3,316

Cash for Working Capital

(324)

113

(348)

(791)

Taxes

(166)

(384)

(403)

(767)

Net Operating CF

1,020

1,721

1,533

1,950

Net Purchase of FA

(240)

(251)

(267)

(212)

332

(832)

(349)

(1,117)

25

33

70

85

Dividend Payments

(335)

(758)

(597)

(911)

Cash Flow from Fin.

(310)

(725)

(527)

(825)

780

1,469

1,266

1,734

Source: Company, Ambit Capital research

Cash flow statement

Net Cash from Invest.


Proceeds from Equity & other

Free Cash Flow


Opening cash balance

472

1,515

1,687

2,349

Net Cash Flow

1,042

163

658

Closing Cash Balance

1,515

1,686

2,349

2,406

Source: Company, Ambit Capital research

November 17, 2014

Ambit Capital Pvt. Ltd.

Page 98

eClerx
Financial ratios
FY11

FY12

FY13

FY14

Revenue (US$)

37%

29%

25%

14%

EPS

64%

29%

7%

47%

RoE

61%

55%

44%

50%

RoCE

51%

49%

48%

48%

Receivable days (Days)

71

31

36

44

Fixed Asset Turnover (x)

9.9

11.0

7.2

5.8

Growth

Return Ratios (%)

Turnover Ratios

Source: Company, Ambit Capital research

Valuations
FY11

FY12

FY13

FY14

P/E

31.4

24.3

22.7

15.4

EV/EBITDA

26.9

19.1

14.2

10.2

EV/Sales

10.6

7.7

5.5

4.3

Price/Book Value

16.7

11.6

9.1

6.7

Dividend Yield (%)

2.2%

1.8%

1.9%

2.7%

Source: Company, Ambit Capital research

November 17, 2014

Ambit Capital Pvt. Ltd.

Page 99

eClerx

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November 17, 2014

Ambit Capital Pvt. Ltd.

Page 100

V-Guard Industries
BUY
VGRD IN EQUITY

November 17, 2014

`27/US$0.4
`39/US$0.6
`910
`1,009
11

Flags
Accounting:
Predictability:
Treatment of Minorities:

AMBER
GREEN
GREEN

Catalysts

Improvement in revenue share of


non-south to 50% by FY17

Strong festive demand in FY15 to


result in strong growth for V-Guard

Performance
950

25,000

750

22,000

550

19,000

350

16,000

V-Guard

Oct-14

28,000

Aug-14

1,150

Jun-14

Judicious capital allocation reflected in robust RoCEs


V-Guard scores well on capital allocation: (a) V-Guards RoCE has been strong
at 27% over the past 10 years; (b) the company has not diversified into lowmargin businesses for the sake of growth; (c) capex on electrical cables (largest
capex item over the past ten years) has led to cables and wires becoming the
largest product in its portfolio; (d) expansion outside the south has already
achieved breakeven; and (e) V-Guards dividend payout has remained healthy at
33% of profit since listing.
Second generation in charge
V-Guard does not have an explicitly stated succession plan. Mr. Mithun
Chittilappilly (son of Kochouseph Chittilappilly, V-Guards founder) who joined in
FY06 is only 33 years old. In FY12, Mithun took over from his father as the
Managing Director. Since he joined in FY06, V-Guard's revenues have grown at
a robust 37% CAGR. V-Guard has also attracted talent from leading companies
in the consumer durables and light electrical space.
What is being done to strengthen the franchise further?
To strengthen the franchise further the company has done the following: (a) It
has consistently added new products to its portfolio and grown them successfully.
The latest successful addition is fans, which has reached a turnover of `1bn in
FY14 (launched in FY10). (b) It has a consistently high spend on advertisement.
V-Guards FY14 advertisement spends to sales at 3.9% in FY14 was higher than
Havells 2.4% and Bajajs 2.2%. Consequent to an ad spend CAGR of 29% over
FY11-14, V-Guard has gained market share in all the products under its portfolio
over FY12-14. (c) It recruited senior marketing employees from leading
competitors to attain a smooth expansion of the franchise into non-South market.

Mcap (bn):
3M ADV (mn):
CMP:
TP (12 mths):
Upside (%):

Apr-14

Asset-light business model a sustainable competitive advantage


V-Guard has an asset-light business model with an average gross block turnover
of 4.9x and consistently strong pre-tax RoCE of 27% over FY05-14. This is driven
by V-Guard's meticulously built supplier network (small-scale manufacturing units
of stabilisers) which we believe is scalable. The capacity of these units can be
expanded by 50% through the introduction of semi-automated machines with
minimal additional capex.

Recommendation

Feb-14

Transformation from a regional player to a national player


Founded in 1977 with the stabiliser as its flagship product, V-Guard is the market
leader in light electricals in Kerala and is amongst the top-3 brands in the other
four south states. In the past six years, it has graduated from a regional to a panIndia player (non-south revenue share at 30% in FY14 vs 5% in FY08).

Capital Goods

Dec-13

V-Guard has grown from a regional player in south India to a successful


pan-India player through product portfolio expansion, competitive
pricing and expansion of distribution network. We expect the companys
sustainable competitive advantage around the scalability of its assetlight manufacturing model to continue as the capacity expansion of
vendors is not a challenge. To further strengthen its franchise the
company is making huge investments in advertising.

Oct-13

COMPANY UPDATE

Sensex on RHS

Source: Bloomberg, Ambit Capital research

Key financials standalone (` mn)


Year to March
Net Sales
EBITDA
EBITDA (%)

FY13

FY14

FY15E

FY16E

FY17E

13,602

15,176

18,342

22,194

25,967

1,099

1,226

1,651

2,108

2,532

8.1

8.1

9.0

9.5

9.8

EPS (`)

21.1

23.6

33.0

42.5

53.8

RoE (%)

26.7

24.3

27.8

29.6

30.1

RoCE (%)

20.6

19.9

24.4

27.0

28.4

P/E (x)

42.7

38.3

27.3

21.2

16.7

Analyst Details
Bhargav Buddhadev
+91 3043 3252
bhargavbuddhadev@ambitcapital.com
Deepesh Agarwal
+91 3043 3275
deepeshagarwal@ambitcapital.com

Source: Company, Ambit Capital research


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.

V-Guard Industries
Exhibit 1: Strong revenue CAGR of 31% over FY05-14
alongside robust average EBITDA margin of 10.3% over
FY05-14
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
-

13.0
12.0

Exhibit 2: led to V-Guard achieving pre-tax RoCE and RoE


of 27.1% and 31.3% respectively over FY05-14
60
50

11.0
10.0
9.0

30

8.0

20

7.0
FY14

10

Pre-tax ROCE (%)

FY14

FY13

FY12

ROE (%)

Source: Company, Ambit Capital research

Source: Company, Ambit Capital research

Exhibit 3: CFO forms the largest component of funds raised


over the past decade (FY05-14)
Investmen
ts (net),
3%

Debt, 25%

FY11

FY10

FY09

FY08

FY07

EBITDA margin (%) on RHS

FY06

FY05

FY13

FY12

FY11

FY10

FY09

FY08

FY07

FY06

FY05

6.0

Sales (Rsmn)

40

Exhibit 4: High spend on capex to fund rising growth


momentum (FY05-14)

Others, 5%

Dividend,
25%

CFO, 56%

Interest,
dividend
recd, 2%

capex,
45%

Capital
raised,
17%

Source: Company, Ambit Capital research. Note: Size of the pie represents
cumulative funds raised (through various sources such as CFO, equity, debt,
etc) and spent (on capex, debt repayment, interest, dividend paid, etc) in
the past 10 years

Exhibit 5: Forward P/E evolution over the past ten years


1,200

29x

1,000

24x

800

19x

600

14x

Interest,
25%

Source: Company, Ambit Capital research. Note: Size of the pie represents
cumulative funds raised (through various sources such as CFO, equity, debt,
etc) and spent (on capex, debt repayment, interest, dividend paid, etc) in
the past 10 years

Exhibit 6: Forward P/B evolution over the past ten years


1,200

7.0x

1,000
5.5x
800
4.0x

600

November 17, 2014

Sep-14

Mar-14

Sep-13

Mar-13

Sep-12

Mar-12

Sep-11

Mar-11

Sep-14

Sep-13

Mar-14

Mar-13

Sep-12

Sep-11

Mar-12

Mar-11

Sep-10

Sep-09

Mar-10

Mar-09

Sep-08

Mar-08

Source: Company, Ambit Capital research

Sep-10

Mar-10

1.0x

Sep-09

200
Mar-09

200

Sep-08

2.5x

9x

Mar-08

400

400

Source: Company, Ambit Capital research

Ambit Capital Pvt. Ltd.

Page 102

V-Guard Industries
Exhibit 7: Explanation for our flags
Segment

Score

Comments

Accounting

AMBER

In our accounting analysis of light electrical companies, V-Guard scores low due to its poor working capital cycle
and low CFO/EBITDA. Expansion in the non-south market has been the reason for V-Guards poor cash
conversion. However, its working capital cycle has improved from 96 days in FY11 to 61 days in FY14.

Predictability

GREEN

Given its detailed disclosure (this is the only company in the sector which gives product-wise disclosures) and
transparency of the management guidance, the predictability over topline and bottomline performance is strong.

GREEN

Whilst V-Guard remains the largest company for the Chittilapilly family, it is also involved in other businesses such
as theme parks (Wonderla Holidays, which was listed in May 2014) and garments (V-Star Creations). So far, there
have been no incidences of mistreatment of minorities by the promoters. The Chittilapilly family holds a 66% stake
in the company and this stake is held in their individual names.

Treatment of
minorities

Source: Bloomberg, Ambit Capital research

Exhibit 8: V-Guard Industries gets three-quarters of the pie on our STAR (Sustainable and Tenable Advantages Rank)
framework
Criteria

Score (%)

Comment

Competitive advantage

Whilst V-Guard is ranked 1 in light electricals in Kerala, it is still not ranked among the top-five players
in the non-south market. Competition in the sector remains tough.

Accounting quality

V-Guard is in the second quartile; expansion beyond south India has kept its CFO/EBITDA low.

Capital allocation

V-Guard is a cash-generative company with low capex and high RoCEs; the management has
maintained healthy payout ratios (average ~33% since listing in 2008).

Centrality of political connect

V-Guard is not part of Ambits Connected Companies Index and does not appear to have any
questionable political connections.

Treatment of minorities

The promoter family has other unrelated businesses; no major anti-minority transactions so far.

Succession planning

Business remains promoter driven, with the second generation currently in charge.

Total (%)
Weaknesses
Source: Company, Ambit Capital research. Note:

November 17, 2014

Use of stabilisers could become redundant in the future, and beyond stabilisers, V-Guards newer
products are more competitive. V-Guard remains a regional player.
= rating of 4/4;

= rating of 3/ 4 and so on

Ambit Capital Pvt. Ltd.

Page 103

V-Guard Industries
Balance sheet (standalone)
Year to March (` mn)
Cash

FY13

FY14

150

28 -

FY15E

FY16E

FY17

150

19

424

Debtors

1,988

2,121

2,513

2,919

3,344

Inventory

2,486

2,525

3,216

3,770

4,269

454

381

612

741

867

Other Current Assets

Investments

Fixed assets

1,470

1,662

1,794

2,051

2,209

6,549

6,718

7,986

9,500

11,113

Current liabilities & provisions

2,282

2,473

3,278

4,088

4,926

Debt

1,574

992

700

400

Loans & advances

Miscellaneous
Total assets

Other liabilities - Deferred Tax Liability


Total liabilities
Shareholders' equity

79

95

95

95

95

3,935

3,560

4,074

4,584

5,021

298

298

298

298

298

Reserves & surpluses

2,315

2,859

3,614

4,618

5,794

Total networth

2,613

3,158

3,912

4,917

6,092

Net working capital

2,646

2,554

3,063

3,341

3,553

Net debt (cash)

1,425

964

850

381 -

424

Source: Company, Ambit Capital research

Income statement (standalone)


Year to March (` mn)

FY13

FY14

FY15E

FY16E

FY17

13,602

15,176

18,342

22,194

25,967

36.9

11.6

20.9

21.0

17.0

12,503

13,950

16,691

20,086

23,435

EBITDA

1,099

1,226

1,651

2,108

2,532

% growth

(10.3)

11.5

34.7

27.7

20.1

Operating income
% growth
Operating expenditure

Depreciation

114

120

168

193

216

EBIT

985

1,106

1,482

1,915

2,315

Interest expenditure

200

211

154

88

Non-operational income / Exceptional items


PBT

36

48

37

42

52

822

943

1,366

1,869

2,368

Tax

193

241

382

561

710

Reported PAT

629

702

983

1,308

1,657

Adjustments
Adjusted PAT
% growth

629

702

983

1,308

1,657

(21.2)

11.6

40.1

33.1

26.7

Source: Company, Ambit Capital research

November 17, 2014

Ambit Capital Pvt. Ltd.

Page 104

V-Guard Industries
Cash flow statement (standalone)
Year to March (` mn)

FY13

FY14

FY15E

FY16E

FY17

822

943

1,366

1,869

2,368

Depreciation

114

120

168

193

216

Interest

180

191

154

88

Tax

(255)

(189)

(382)

(561)

(710)

(Incr) / decr in net working capital

(772)

(23)

(509)

(278)

(212)

16

66

PBT

Others
Cash flow from operating activities
(Incr) / decr in capital expenditure
(Incr) / decr in investments
Others
Cash flow from investing activities
Issuance of equity

105

1,108

797

1,311

1,661

(253)

(324)

(300)

(450)

(375)

25

19

(253)

(280)

(300)

(450)

(375)

(2)

560

(567)

(292)

(300)

(400)

(310)

(359)

(383)

(392)

(481)

Cash flow from financing activities

248

(926)

(674)

(692)

(881)

Net change in cash

100

(98)

(177)

169

405

Incr / (decr) in borrowings


Others

Source: Company, Ambit Capital research

Ratio analysis (standalone)


Year to March (%)

FY13

FY14

FY15E

FY16E

FY17E

EBITDA margin

8.1

8.1

9.0

9.5

9.8

EBIT margin

7.2

7.3

8.1

8.6

8.9

Net profit margin

4.6

4.6

5.4

5.9

6.4

Return on capital employed

20.6

19.9

24.4

27.0

28.4

Return on equity

26.7

24.3

27.8

29.6

30.1

Current ratio (x)

2.2

2.0

1.9

1.8

1.8

Year to March

FY13

FY14

FY15E

FY16E

FY17E

EPS (`)

21.1

23.6

33.0

42.5

53.8

Book value per share (`)

87.7

106.0

131.3

159.6

197.8

P/E (x)

42.7

38.3

27.3

21.2

16.7

Source: Company, Ambit Capital research

Valuation parameters (standalone)

P/BV (x)

10.3

8.5

6.9

5.6

4.6

EV/EBITDA (x)

25.3

22.7

16.9

13.2

11.0

EV/Sales (x)

2.0

1.8

1.5

1.3

1.1

EV/EBIT (x)

28.3

25.2

18.8

14.5

12.0

Source: Company, Ambit Capital research

November 17, 2014

Ambit Capital Pvt. Ltd.

Page 105

V-Guard Industries

This page has been intentionally left blank

November 17, 2014

Ambit Capital Pvt. Ltd.

Page 106

Mayur Uniquoters
NOT RATED
COMPANY INSIGHT

MUNI IN EQUITY

November 17, 2014

Mayur Uniquoters scale, focus on quality, innovation and wellestablished relationship with domestic footwear manufacturers and
domestic/global auto OEMs set it apart in a fragmented synthetic leather
industry. The companys stellar capital allocation track record and
consistent RoCE expansion is a testament of its well-entrenched
competitive advantages which are sustainable over the long term.
The largest Indian synthetic leather manufacturer
Mayur Uniquoters, Indias largest synthetic leather manufacturer has built: (a)
strong manufacturing capabilities (five Italian coating lines, sixth line to be
commissioned in FY15); and (b) strong relationships with large auto OEMs and
footwear manufacturers in the last two decades. Mayur reported revenue/EBITDA
CAGR of 32%/51% and its RoCE averaged 43% over FY09-14. Exports recorded
55% CAGR over FY08-14 (23% of sales in FY14 vs 9% in FY10).

Industrials
Recommendation
Mcap (bn/mn):
3M ADV (mn):
CMP:

`19/US$312
`27/US$0.4
`442

Flags
Accounting:
Predictability:
Treatment of Minorities:

GREEN
GREEN
GREEN

Catalysts

Margin improvement in 2HFY15 with


falling crude prices and rising
premium sales

Addition of auto OEM clients in the


US and rising supplies to the
furnishing industry in Europe

Performance
500

29,000

400

26,000

300
23,000

200

MUNI (LHS)

Nov-14

Sep-14

Jul-14

20,000
May-14

100
Mar-14

First-generation promoter but developing a second line of management


Mayur is a first-generation promoter-driven company, wherein the business is
largely built by Mr Suresh Poddar. The promoters son Mr Manav Poddar, and
son-in-law, Mr Arun Kumar Bagaria, have been inducted into the Board and they
manage the marketing and production functions. The company has started hiring
senior leather industry professionals at key functions such as production, sales,
and distribution, to develop a second line of management.

Strong
volume
growth
post
commissioning of the new coating
line in 3QFY15

Jan-14

Textbook capital allocation in the past decade


Mayurs scale increased 5x (to ~30mn metres in FY14 from 6mn metres in
FY04). This was supplemented by an increase in asset turnover (to 3.5x over
FY08-14 vs 2.4x over FY04-08) and expansion in EBITDA margin (to 16.6% over
FY09-14 vs 11% over FY04-08), thus leading to sharp RoCE improvement (to
40% in FY14 vs 10% in FY05). Mayur has concertedly maintained moderate
dividend payouts (10% of CFO over FY05-14), as it re-invested 64% of the cash
accruals for enhancing scale, which in turn drove the sharp sales growth.

Nov-13

Scale, product and relationshipsthe key competitive advantages


Mayur has built its competitive advantage by: (a) continuously adding scale, (b)
maintaining its focus on product quality/innovation, and (c) forging strong
relationships with footwear and auto OEMs in India and now global auto OEMs.
Product quality and innovation has helped Mayur expand its clientele and gain
market share from unorganised competitors. Its track record of consistent RoCE
improvement (40% in FY14 vs 10%/21% in FY05/FY09) and strong growth (10year sales CAGR: 30%) are a testament of its strong competitive advantages.

SENSEX

Source: Bloomberg, Ambit Capital research

Expanding clientele; entering new product segments


Alongside consistent scale elevation in PVC (sixth coating line to be
commissioned in November 2014; seventh line planned already), the company is
setting up the largest Indian polyurethane leather plant (to be commissioned by
end-FY16). Furthermore, it is expanding its presence in North America (has set
up a marketing subsidiary) and reaching out to new markets in Europe to supply
synthetic leather to the furnishing industry. Moreover, the company has increased
supplies to premium auto OEM clients to ensure higher realisations.
Key financials - standalone
Y/E Mar (` mn)
Revenues
Adjusted EBITDA
EBITDA margin (%)
Adjusted EPS (`)
ROCE (%)
ROIC (%)
P/E (x)

FY10
1,647
282
17.1%
3.0
64.0%
59.9%
151.6

Source: Company, Ambit Capital research

FY11
2,486
410
16.5%
4.7
68.4%
77.1%
97.2

FY12
3,109
533
17.1%
6.2
64.9%
66.1%
73.6

FY13
3,692
690
18.7%
4.0
62.9%
57.6%
112.7

FY14
4,556
932
20.5%
13.1
58.7%
51.9%
34.5

Analyst Details
Achint Bhagat
+91 22 3043 3178
achintbhagat@ambitcapital.com
Nitin Bhasin
+91 22 3043 3241
nitinbhasin@ambitcapital.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.

Mayur Uniquoters
Exhibit 1: Sharp revenue growth and margin expansion

Exhibit 2: translated into sharp RoCE and RoE expansion


over the last ten years

(` mn)
5,000

25%

4,000

20%

60%

3,000

15%

40%

2,000

10%

1,000

5%

0%

60%

80%

40%

20%

20%

Revenue (LHS)

RoCE (LHS)

FY14

FY13

FY12

FY11

FY10

FY09

FY08

FY07

FY06

FY05

FY04

EBITDA margin (RHS)

Source: Company, Ambit Capital research

RoE (RHS)

Source: Company, Ambit Capital research

Exhibit 3: CFO accounted for 79% of the cash source over


the last ten years

Interest,
dividend
recd, 4%

0%

FY14

FY13

FY12

FY11

FY10

FY09

FY08

FY07

FY06

FY05

FY04

0%

Exhibit 4: Almost two-thirds of cash generated/raised was


deployed for capacity expansions
Purchase
of
Investment
s 5%

Debt
Proceeds,
16%

Increase in
cash/ cash
equivalents
, 4% Dividend
paid, 19%
Interest
paid, 4%

Proceeds
from
shares, 1%
Net Capex
, 68%

CFO, 79%

Source: Company, Ambit Capital research

Source: Company, Ambit Capital research

Exhibit 5: P/E multiples have re-rated several times over


the last three years

Exhibit 6: Mayur

is

trading

at

peak

(X)
5

(X)
30
25

20

15

10

One-yr fwd P/B

5-yr average P/E

Nov-14

Aug-14

May-14

Feb-14

Nov-13

Aug-13

May-13

Feb-13

Nov-12

Aug-12

May-12

Feb-12

Aug-11

Nov-11

Nov-14

Aug-14

May-14

Feb-14

Nov-13

Aug-13

May-13

Feb-13

Nov-12

Aug-12

May-12

Feb-12

Nov-11

Aug-11

May-11

One-yr fwd P/E

May-11

3-yr average P/B

Source: Company, Ambit Capital research


Source: Company, Ambit Capital research

November 17, 2014

Ambit Capital Pvt. Ltd.

Page 108

P/

Mayur Uniquoters
Exhibit 7: Explanation for our flags
Segment

Score

Comments

GREEN

On our forensic accounting screener of 127 mid-cap stocks, Mayur ranks 11th due to its high CFO/EBITDA (80%
conversion ratio), low audit fees and no material unclassified loans or contingent liabilities.

Predictability

GREEN

The management has made timely announcements regarding expansion and has usually met its guided targets
both in terms of capacity commissioning and utilisation-level ramp-up. Moreover, margins have been stable and
have not been susceptible to unpredictable operating cost (raw material, power and fuel, fixed expenses)
volatilities.

Treatment of
minorities

GREEN

The company does not have any major unlisted subsidiaries (held partly by the promoter) nor does it carry out
any related party transactions to the detriment of the minority shareholders. The promoter does not hold any
shares in the company through unlisted subsidiaries.

Accounting

Source: Bloomberg, Ambit Capital research

Exhibit 8: Mayur Uniquoters Full pie on our STAR* framework


Criteria

Score (%)

Comment

Competitive advantages

Capacity leadership and relationships with domestic/Global auto OEMs and Indian footwear
manufacturers

Accounting quality

Ranks 11th amongst 127 mid-cap companies with a market capitalization of `5bn-20bn.
CFO/EBITDA conversion ratio of 80% in the last 10 years.

Capital allocation

Re-invested 80% CFO for capacity expansion. Strong sales growth and material RoCE expansion
in the last decade.

Centrality of political connect

Mayur is not part of Ambits Connected Companies Index and does not have any questionable
political connection.

Treatment of minorities

No instance of anti-minority transactions in the past decade; uncomplicated holding structure


and no material insider transactions.

Succession planning

Promoter-led business with no explicit succession plan.

Total (%)
Source: Company, Ambit Capital research. Note:

November 17, 2014

= rating of 4/4;

= rating of 3/ 4 and so on. *STAR: Sustainable and Tenable Advantages Rank.

Ambit Capital Pvt. Ltd.

Page 109

Mayur Uniquoters
Balance sheet (standalone)
Year to March (` mn)
Share capital

FY10

FY11

FY12

FY13

FY14

54

54

54

108

108

Reserves and surplus

366

556

805

1,076

1,503

Total Networth

421

610

859

1,185

1,611

44

78

29

46

157

Sources of funds

482

708

918

1,266

1,827

Net block

231

313

451

547

977

Capital work-in-progress

34

40

189

266

Investments

Cash and bank balances

196

228

190

107

134

Sundry debtors

256

316

406

565

671

98

146

307

442

638

Loans

Inventories

27

40

34

68

125

Total Current Assets

Loans and advances

586

742

1,072

1,351

1,741

Current liabilities and provisions

338

382

667

869

1,177

Net current assets

248

360

405

482

564

Application of funds

482

708

918

1,266

1,827

FY10

FY11

FY12

FY13

FY14

1,647

2,486

3,109

3,692

4,556

43%

51%

25%

19%

23%

1,366

2,076

2,642

3,115

3,764

282

410

533

690

932

136%

46%

30%

30%

35%

Source: Company, Ambit Capital research

Income statement (standalone)


Year to March (` mn)
Revenue
yoy growth
Total expenses
EBITDA
yoy growth
Net depreciation / amortisation
EBIT
Net interest and financial charges
Other income
PBT
Provision for taxation
Adjusted PAT
yoy growth
Reported PAT
EPS (`)

22

27

39

52

70

266

394

511

666

879

13

19

20

24

43

11

17

27

18

252

375

492

642

836

90

122

158

206

269

162

253

334

436

568

163%

56%

32%

31%

30%

162

253

334

436

568

13

Source: Company, Ambit Capital research

November 17, 2014

Ambit Capital Pvt. Ltd.

Page 110

Mayur Uniquoters
Cash flow statement (standalone)
Year to March (` mn)
Net profit before tax
Depreciation
Others
Tax
(Incr)/decr in net working capital

FY10

FY11

FY12

FY13

FY14

252

375

492

642

836

22

27

39

52

70

(3)

(2)

(4)

43

(83)

(141)

(153)

(194)

(269)

17

(89)

(91)

(213)

(109)

216

172

281

272

555

Capex (net)

25

130

127

365

506

(Incr)/decr in investments

10

(117)

(19)

38

14

(34)

34

(23)

181

111

Cash flow from operations

Other income (expenditure)


Cash flow from investments
Net borrowings
Issuance/buyback of equity

(28)

(45)

(69)

(96)

(46)

(6)

(7)

(8)

(9)

(43)

Cash flow from financing

(69)

(18)

(99)

77

22

Net change in cash

138

32

(50)

(10)

126

Free cash flow (before investments)

191

42

154

(93)

48

Year to March

FY10

FY11

FY12

FY13

FY14

EBITDA margin (%)

17.1

16.5

17.1

18.7

20.5

EBIT margin (%)

16.1

15.9

16.5

18.0

19.3

Net prof. (bef min int) margin (%)

9.8

10.2

10.7

11.8

12.5

RoCE (pre-tax) (%)

64

68

65

63

59

RoIC (%)

60

77

66

58

52

RoE (%)

49

51

48

46

42

FY12

FY13

FY14

Interest paid
Dividend paid

Source: Company, Ambit Capital research

Ratio analysis (standalone)

Source: Company, Ambit Capital research, Note: * excluding revaluation reserve

Valuation parameters (standalone)


Year to March

FY10

FY11

P/E (x)

152

97

74

113

35

P/B(x)

46.6

32.1

22.8

16.6

12.2

0.1

0.1

0.0

0.0

0.1

Debt/Equity(x)
Net debt/Equity(x)

-0.4

-0.2

-0.1

0.0

0.1

EV/EBITDA(x)

68.8

47.3

36.4

28.1

20.8

Source: Company, Ambit Capital research, Note: * excluding revaluation reserve

November 17, 2014

Ambit Capital Pvt. Ltd.

Page 111

Mayur Uniquoters

Institutional Equities Team


Saurabh Mukherjea, CFA

CEO, Institutional Equities

(022) 30433174

saurabhmukherjea@ambitcapital.com

Research
Analysts

Industry Sectors

Desk-Phone E-mail

Nitin Bhasin - Head of Research

E&C / Infra / Cement / Industrials

(022) 30433241

nitinbhasin@ambitcapital.com

Aadesh Mehta, CFA

Banking / Financial Services

(022) 30433239

aadeshmehta@ambitcapital.com

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

ashvinshetty@ambitcapital.com

Bhargav Buddhadev

Power Utilities / Capital Goods

(022) 30433252

bhargavbuddhadev@ambitcapital.com

Dayanand Mittal, CFA

Oil & Gas / Metals & Mining

(022) 30433202

dayanandmittal@ambitcapital.com

Deepesh Agarwal

Power Utilities / Capital Goods

(022) 30433275

deepeshagarwal@ambitcapital.com

Gaurav Mehta, CFA

Strategy / Derivatives Research

(022) 30433255

gauravmehta@ambitcapital.com

Karan Khanna

Strategy

(022) 30433251

karankhanna@ambitcapital.com

Krishnan ASV

Real Estate

(022) 30433205

vkrishnan@ambitcapital.com

Pankaj Agarwal, CFA

Banking / Financial Services

(022) 30433206

pankajagarwal@ambitcapital.com

Paresh Dave, CFA

Healthcare

(022) 30433212

pareshdave@ambitcapital.com

Parita Ashar

Metals & Mining / Oil & Gas

(022) 30433223

paritaashar@ambitcapital.com

Rakshit Ranjan, CFA

Consumer / Retail

(022) 30433201

rakshitranjan@ambitcapital.com

Ravi Singh

Banking / Financial Services

(022) 30433181

ravisingh@ambitcapital.com

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

ritumodi@ambitcapital.com

Sagar Rastogi

Technology

(022) 30433291

sagarrastogi@ambitcapital.com

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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

tanujmukhija@ambitcapital.com

Utsav Mehta

Technology

(022) 30433209

utsavmehta@ambitcapital.com

Sales
Name

Regions

Desk-Phone E-mail

Sarojini Ramachandran - Head of Sales

UK

Deepak Sawhney

India / Asia

(022) 30433295

deepaksawhney@ambitcapital.com

Dharmen Shah

India / Asia

(022) 30433289

dharmenshah@ambitcapital.com

Dipti Mehta

India / USA

(022) 30433053

diptimehta@ambitcapital.com

Hitakshi Mehra

India

(022) 30433204

hitakshimehra@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

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

+44 (0) 20 7614 8374

sarojini@panmure.com

Production

E&C = Engineering & Construction

November 17, 2014

Ambit Capital Pvt. Ltd.

Page 112

Mayur Uniquoters

Explanation of Investment Rating


Investment Rating

Expected return
(over 12-month period from date of initial rating)

Buy

>5%

Sell

<5%

Disclaimer
This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Ambit Capital. AMBIT Capital Research is disseminated and available primarily electronically, and,
in some cases, in printed form.

Additional information on recommended securities is available on request.


Disclaimer
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Copyright 2014 AMBIT Capital Private Limited. All rights reserved.

November 17, 2014

Ambit Capital Pvt. Ltd.

Ambit Capital Pvt. Ltd.


Ambit House, 3rd Floor
449, Senapati Bapat Marg, Lower
Parel, Mumbai 400 013, India.
Phone: +91-22-3043 3000
Fax: +91-22-3043 3100
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