4QFY16 - TOP Picks

13 April 2016
The first quarter of the calendar year witnessed a lot of volatility in the first two months, falling by 14% (CNX NIFTY). Buoyed by a fiscally prudent budget and hopes of
a rate cut, the broader market indices posted strong gains of 10.7% (CNX NIFTY) for March, 2016. In a broad sense the market seems to be flat with a reversal trend.
Due to the monetary policy action and liquidity easing measures taken by the RBI; we believe the interest rates are set to decrease further and boost interest-rate
sensitive sectors, such as Auto, Real Estate and consumer durables. Moreover, the introduction of the MCLR system linking banks base rate to their marginal cost of
funding would improve the transmission of any change in the policy rates. IT sector earnings for 4QFY16E are expected to grow, largely driven by better seasonality
and lack of one off impacts, such as Chennai Floods. The banking sector is witnessing a reasonably healthy credit growth of 11.3% which would boost NIM during the
following quarter; however the sector is also witnessing a multi-decade low in deposit growth. On higher provisioning due to AQR, net profit for PSU banks is likely to
decline. Moving forward; the markets are highly dependent on the ensuing monsoon session, Skymet Weather Services predicted showers during the four-month rainy
season starting in June will probably be 105% of the average of about 89 centimeters (35 inches) as the El Nino weather phenomenon that brings dry weather
weakens.
Consensus earnings growth forecast for the CY16 and CY17, revised upwardly by 15.3% (MoM) and 15.8% (MoM), respectively. NSE Nifty is currently trading at
reasonable valuations of 15.5x CY2016E earnings (vs. historical average of 13.3x). BSE-Bankex is trading at ~1.42x CY2016E P/BV (vs. historical average of 1.6x
P/BV), with PSU banks trading well below BV (~0.56x). We remain positive selectively on Private Banks, NBFCs, high quality capital good and Mid-cap Cement
stocks with low leverage. We recommend investing in Emami, Yes Bank, Lakshmi Vilas Bank, KEC International and Persistent Systems as these are our top
investment picks
52 Week High/Low

INR 1,368/875

Bloomberg / Reuters

HMN IN /EMAM.BO

Mkt. Cap in bn

213.7

2016E

2017E

2018E

26.1

31.4

36.3

EBIDTA

6.8

8.5

9.9

Adj PAT

3.7

4.1

5.3

Adj EPS*

16.1

18.1

23.4

% growth

-24.5

12.4

28.7

PE

60.0

53.4

41.5

P/ BV

15.4

13.4

11.4

EV/EBIDTA

33.3

26.3

21.7

EV/Sales

8.7

7.1

5.9

Div Yield (%)

0.7

0.7

1.0

27.6

26.8

29.7

0.4

0.2

0.0

Revenue

ROE (%)
Net Debt/Equity

INR 220.1/ $ 3.23

Avg. Daily Vol. (000)

Valuation Summary (INR bn)
Y/E March

Price: INR 977

52 Week High/Low

INR 897/590

Bloomberg / Reuters

Emami

BUY

as antiseptic cream, fairness cream, talcum powder, cooling oil, pain balm and pain reliever.

Emami sales, EBITDA and PAT have grown at a CAGR of 15.9%, 21.8% and 9.9% (lower due to higher
Kesh Kings amortization) respectively (FY11-16E). Geographical breakup of sales: North (29%), West
(27%), South (23%) and East (21%). Export contributes ~10.4% of total revenue. Company has 2,800+
distributors, 640,000+ retail outlets and brand reach of 4mn outlets. Most of the domestic sales are on
cash basis.

In 4QFY16, we expect Emamis to post revenue of INR 6.6bn (+19% YoY) aided by low double digit
volume growth; given benign raw material prices (LLP & Menthol), we expect EBITDA margin to expand
170bps YoY; however, we expect PAT margins to be lower on account of higher interest cost &
amortization and lower other income due to Kesh King acquisition.

We expect Emamis Revenue/ PAT to grow at a CAGR of 17.8% & 20.3% respectively (FY16-18E).

At CMP, Emami is trading at a P/E multiple of 60XFY16E, 53.4XFY17E and 41.5XFY18E. In terms of
EV/Sales, Emami is quoting at 8.7XFY16E, 7.1XFY17E and 5.9XFY18E. We have valued Emami at
EV/Sales of 7XFY18E to arrive at a target price of INR 1,138 with a BUY rating. Risk: Sharp rise in the
menthol price & crude derivatives could adversely impact the margin.

Price: INR 869

Target Price: INR 980

OUTPERFORMER

Yes Bank

YES IN /YESB.BO

Mkt. Cap in bn

INR 351.2/ $ 5.28

Avg. Daily Vol. (000)

3703.24
Valuation Summary (INR bn) Consensus Est
Y/E March

Target Price: INR 1,138

Emami is the niche FMCG player and the market leader on relatively under penetrated segments such

2016E

2017E

Yes Banks successful track record has largely been attributed to its rapidly expanding corporate book,
fee income, lower credit cost and aggressive branch expansion (750 branches as of Q3FY16).

2018E

Net Interest Inc

45.6

56.4

70.6

Non Interest Inc

26.2

32.4

40.5

Pre Prov Profit

39.3

47.6

58.7

PAT

24.9

30.4

38.11

EPS

59.7

71.8

89.8

EPS growth (%)

21.2

20.3

25.0

PE

14.5

12.1

9.7

P /BV

2.6

2.2

1.8

Div Yield (%)

1.3

1.5

1.9

ROA (%)

1.6

1.6

1.7

ROE (%)

19.5

19.8

21.0

CAR (%)

14.3

13.8

12.8

Yes Bank Limited is a major private commercial bank in India, headquartered at Mumbai, Maharashtra.

It has a diversified and well built corporate portfolio, with almost 75% of its corporate book rated A and
above. Its retail segment is showing robust growth as well witnessing retail loan growth around 40%.

Yes Bank has calibrated its loan book and increased its exposure to highly rated credit substitutes which
reduces their risk towards interest rate fluctuations.

The Bank was negligibly affected by the AQR (Asset Quality Review) performed by the RBI. The bank
has not sold any accounts to ARCs in the last five quarters and has not refinanced any loan through the
5/25 and SDR pipeline.

The stock trades at 1.8X FY18E P/BV and 9.7X P/E FY18E. With interest trajectory down; YES Bank will
be a major beneficiary of reduction in interest rates, given its relatively high wholesale funding and credit
substitutes. We maintain an OUTPERFORMER rating, with a target price at INR 980/share, implying a
FY18E P/BV of 2.0X.

Risks: Longer-than-expected build-up of retail liabilities; asset quality risks.

52 Week High/Low

INR 111/63

Bloomberg / Reuters

LVB IN / LVLS BO

CUBK IN / CTBK.BO

INR 14.8/ $ 0.22

INR 125.65/ $ 2.33

Mkt. Cap in bn
Avg. Daily Vol. (000)
Valuation Summary (INR bn)
Y/E March

INR 61.3/39.1
Price: INR
82
Target Price: INR 106

OUTPERFORMER

Lakshmi Vilas Bank

Lakshmi Vilas Bank Limited (LVB) is an old-gen private bank predominantly lending in South India
especially
in the state of Tamil Nadu. Deposits are largely retail dominated comprising Retail TD 75% &
2249.93

474.84

CASA 17.2%, with a working capital focused loan book (~66%).

2016E

2017E

2018E

Net Interest Inc

6.6

7.8

9.3

Non Interest Inc

3.1

3.6

4.0

The Bank continues to report healthy balance sheet growth with its business growth pegged at 24%
largely driven by the wholesale and SME segments. Its network entails 439 branches with 820+ ATMs &
3300+ employees as of 3QFY16.

The bank maintains a stable NIM (Net Interest Margin) of 2.78% amidst a recent decline in the cost of

Pre Prov Profit

4.3

5.2

6.1

PAT

1.7

2.3

3.1

EPS

9.8

12.3

15.8

EPS growth (%)

7.2

25.4

28.7

PE

8.3

6.6

5.2

P /BV

1.0

0.9

0.8

Div Yield (%)

2.2

2.5

2.7

for eight consecutive quarters. The bank maintains an improving return profile and with the new

ROA (%)

0.6

0.7

0.8

management taking over, we expect the banks performance to increase. We maintain an

ROE (%)

11.2

13.2

14.7

CAR (%)

10.7

10.6

10.3

funds on the back of reduction in deposit rates.

LVBs asset quality continues to improve for the eighth consecutive quarter as Gross NPA and Net NPA
ratios of the bank decreased 7 bps and 21 bps sequentially to 1.82% and 0.80%. Moreover, the bank did
not sell any accounts to ARCs in Q3FY16.

The stock trades at 0.8X FY18E P/BV and 5.2X P/E FY18E. LVBs headline asset quality has improved

OUTPERFORMER rating, with a target price at INR 106/share, implying a FY18E P/BV of 0.9X.

Risks: Weakness on the asset quality from the SME division and lower than expected recoveries in the
corporate book.

52 Week High/Low

INR 164/82

Price: INR
INR61.3/39.1
131
Target Price: INR 165

Bloomberg / Reuters

KECI IN / KECI.BO

CUBK IN / CTBK.BO

Mkt. Cap in bn

INR 32.0/ $ 0.007

INR 125.65/ $ 2.33

Avg. Daily Vol. (000)

Valuation Summary (INR bn)
Y/E March

643

BUY

KEC International

KEC international, the flagship company of RPG group, is a leading player in T&D space. KEC has 7
manufacturing facilities spread across India, Brazil and Mexico.

2249.93

KECs order book in India has been increasing led by power grid and selected SEBs such as Karnataka,
Tamil Nadu, Andhra Pradesh, West Bengal and Rajasthan. Companys order backlog remains healthy

2016E

2017E

2018E

Revenue

86.7

95.2

105.6

EBIDTA

6.7

7.7

8.7

Adj PAT

1.8

2.4

3.0

company is witnessing a turnaround from Mexico where there has been less number of orders. KEC is

Adj EPS*

7.1

9.5

11.8

witnessing healthy order intake from the railway segment. It has increased its ticket size to minimum of

% growth

14.4

32.7

23.3

PE

18.2

13.7

11.1

P/ BV

2.2

1.9

1.7

EV/EBIDTA

8.2

7.1

6.3

EV/Sales

0.6

0.5

0.5

position in domestic T&D market. KEC has exhibited strong order inflow trends in 9MFY16 (up 26%YoY)

Div Yield (%)

0.8

1.0

1.2

coupled with a strong pipeline, going ahead. At CMP, the stock trades at P/E of 13.7X and 11.1X of

13.0

15.4

16.7

FY17E & 18E earnings respectively. We upgrade to a BUY (earlier outperformer) rating on KEC with a

ROE (%)

at INR 104bn, with L1 status for orders worth INR 45bn.

Pricing in North America seems improving; company expects SAE business to break even in FY17. The

INR 1bn which will lead to an improvement in the profitability.

Margin improvement is on track, led by lower losses in SAE business, with EBITDA turning positive but
with a marginal loss at PBT level for 9MFY16.

KEC has maintained steady growth in topline with help of geographical diversification and leading

target price of INR 165 based on 14X FY18E EPS. Risks: Delay in project execution, political unrests.
52 Week High/Low

INR 817/562

Bloomberg / Reuters

PSYS IN /PSYS.BO

Mkt. Cap in bn

2016

2017E

2018E

22566

28213

32659

EBIDTA

4266

5159

6121

Adj PAT

2972

3507

4164

Adj EPS*

37.1

44.0

52.0

% growth

1.1

18.0

18.2

19.5

16.4

14.0

3.6

3.2

2.7

12.3

10.1

8.6

EV/Sales

2.3

1.8

1.6

Div Yield (%)

1.4

1.7

2.0

ROE (%)

19.6

20.4

21.1

Net Debt/Equity

-0.2

-0.2

-0.2

P/ BV
EV/EBIDTA

Target Price: INR 806

OUTPERFORMER

Persistent Systems

Persistent System is one of the leading outsourced product development (OPD) companies in India with
revenues of INR 5920.7mn in 3QFY16. Company has workforce of 8,966. In 2QFY16, EBITDA grew by

119.7

Revenue

PE

INR 58.2/ $0.87

Avg. Daily Vol. (000)

Valuation Summary (INR mn)
Y/E June

Price: INR 720

9.1% QoQ to INR 1,110mn, while EBITDA margin remained flat at 18.76%.

Persistent has signed an alliance with IBM for whole Watson IOT ecosystem. Company with more than
1,000 engineers dedicated to IBM platform, will offer specialized services to help customers. Persistent
will add 500 people from IBM to execute the deal. We expect company should be able to drive 20%
revenue growth CAGR over the next five years as the deal provides a strong revenue maximizing
potential.

The deal is revenue accretive (15-20% of the companys FY16 revenue to be added to FY17E revenues);
however it is expected to be margin dilutive the extent of 200bps in FY17E. EBITDA margin is likely to be
weighed down by the integration of the deal. EBITDA margin to shrink by 25-30bps to 18.5% in 3QFY16.
We expect flat margin from this deal in FY18E but if revenues from this deal grow in FY19E-20E then it
would be margin accretive.

We expect healthy growth, led by the Enterprise segment and addition of revenue from recently
announced IBM Watson deal. At current market price Persistent is trading at a P/E of 16.4X and 14.0X its
FY17E and FY18E earnings respectively. We assign a target P/E of 15.5X to its FY18E EPS to arrive at a
target price of INR 806 and an OUTPERFORMER rating. Risks: Delay in integration of deal.

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